Saturday, May 5, 2012

Inflation or Hyperinflation?

Whilst discussing the demise of the Canadian penny in front of a Congressional panel, Fed Chairman Ben Bernanke demonstrates that "transactional currency is simply a notional, purely symbolic token medium of exchange, much more replaceable, resource-efficient and environmentally friendly than mining stupid metals for stupid coins."
(NotReal News)

Remember my post around this same time last year titled Deflation or Hyperinflation? At that time, the debate between deflation and hyperinflation was all the rage, and so I wrote a post to a prominent and long-time deflationist named Rick Ackerman, who later stopped by in the comments. In fact, most of my hyperinflation posts have been written in the context of the deflationists' arguments.

I can't say that the debate has shifted from deflation to inflation over the last year, but it sure seems that the arguments coming across my desk these days are for rising inflation with the exclusion of hyperinflation. My position hasn't changed. But this does give me the opportunity to present my position against a different premise, that of inflation without currency collapse. I would guess that some of you will have a completely different view of hyperinflation by the time you finish this post. If so, please let me know in the comments.

But first I need to make it clear once again that this hyperinflation discussion is not about timing. It’s about how it all ends, and it’s better (for a saver) to be a decade too early than a minute too late. The other side (whoever it may be) often tries to make the debate about timing. It is not about timing and I don't do timing, but that doesn't mean the end is far away. If anything, it's overdue in the same way a big earthquake can be overdue. In 'Deflation or Hyperinflation?' I wrote:

The whole point of the [hyperinflation] debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life's necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.

Here is FOA on timing, from a post in which he specifically predicted dollar "hyper price inflation":

Timing?

We, and I, as physical gold advocates, don't need timing for this position! Timing is for poor, paper traders. We are neither and our solid, long term, one call over several years to hold physical gold will confirm our reasoning. There is no stress for me to own this ancient asset as it is in a good proportion to all my other wealth.

There is no trading an economic system whose currency is ending its timeline. Smart, quick talking players will joke at our expense until fast markets and locked down paper gold positions block their "trading even" move into physical at any relative cheap price. Mine owners will see any near term profits evaporate into a government induced pricing contango that constrains stock equity with forced selling at paper gold prices.

My personal view

They will, one day in the future, helplessly watch their investments fall far behind a world free market price for physical gold. Further into the future, one day, mines will make money on the last thousand per ounce price for gold; only the first $XX,000.00 of price will not be available to them.


Yup, that was back in October of 2001. Bad timing? How have your mining stocks done lately? I know of one FOA reader who went "all in" with gold coins that year to the tune of somewhere around $400K. He had just retired from his previous life as a trader. Today his golden nest egg is worth $2 million, and he has been living off of it for most of that time! So much for bad timing, eh?

My argument for hyperinflation is FOA's argument. So you'll see me use FOA's terms. You'll see me quote a lot of FOA. And you'll see me restate the same call he made back in 2001. His call was clear and unchanging. His argument wasn't wrong then and it is even more pressing today, which I will explain. And just to be clear about FOA's call, here it is from that same post:

"While others call, once again, for a little bit of 5, 10, 15% price inflation, that lasts until the fed can once again get it under control,,,,,,,,, I call for a complete, currency killing, inflation process that runs until the dollar resembles some South American Peso!"

"Complete, currency killing" hyperinflation is a one-time event. In a moment I'll explain the reasoning behind this call and why it still stands. But first, let's take a look at a couple of the "inflation but not hyperinflation" arguments that have come into my sights.

"An Adult Approach"

In An Adult Approach – II (Defining Relative Real Value) Lee Quaintance and Paul Brodsky of QB Asset Management (or QBAMCO) laid out a nice argument for what sounds a lot like FOA's front lawn dump but without the "complete, currency killing" hyperinflation. In it, they explained that the process of "re-collateralizing unreserved credit" which began in 2008 will likely end with all of the assets backing today's bank money being replaced with new base money.

In other words, US dollar monetary base (today at around $2.6T) will be increased to cover and replace today's US bank assets (almost $20T). But they aren't predicting that the entire money supply will become base money, as happens during hyperinflation. Instead, they think that as credit money has all but been replaced with base money, "bank animal spirits will once again take over and we will have a new leveraging cycle." They provided the following conceptual illustration to help us visualize what they are projecting:


Then they ask (and answer), "Will the lines meet or cross? We don’t believe so…" I'm going to give you a longer excerpt, but I wanted to highlight this point first, because it is where my view differs from their view. The lines meeting and crossing is exactly what it looks like during hyperinflation, when bank credit disappears (because price inflation is running too hot to issue credit at any practical interest rate) and the entire money supply becomes base money in amounts which overtake the previous amount of credit money. The lines meeting and crossing could look something like this conceptual illustration (by DP):


Here is part of FOA's famous front lawn dump:

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed… hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!"

So their thesis is that the Fed buys almost all of today's bank assets (debt) for cash, but then during this process the banks, now almost fully reserved, start lending again and a new credit cycle begins without a systemic collapse. And what this will do to prices is deliver "a higher General Price Level" and "a CPI rate higher than the rate at which the GPL rises." I emailed with Paul about this call being much more tame than some things he has written in the past and he wrote back that he thinks my hyperinflation projection is "a very fat-tailed event" while they are "trying to be much more moderate in [their] projections."

I hope to show in this post that avoiding this "fat-tailed event" is the most unlikely scenario. It is not just about the gap between unreserved deposits and base money and bank levering/de-levering cycles. It is about a currency that has reached the end of its timeline when the removal of structural support (an FOA term) meets the largest spending/dollar-emitting machine the world has ever known. But first, here's a more complete excerpt from their paper, or you can read the whole thing at the link:

Magnitude of the Problem

Central bankers struck a match under the global economy in 1981 and it continues to burn. The match began to burn their fingers in 2008 when the process of “re-collateralizing” unreserved credit got underway.


The familiar graph above shows the increase in USD base money that began to de-lever the US banking system in 2008. Though we have written in the past about total dollar-denominated debt exceeding $50 trillion, all of that debt does not have to be paid down. (Most of it is fully-reserved because its creditors are not levered.) But there is an identifiable portion of dollar–denominated debt issued by highly levered creditors – banks.

We believe the debt-to-money gap that must and will be greatly reconciled in short order is the ratio of bank assets to the monetary base. As the graph below shows, the US Monetary Base was only 13% of US Bank Assets on December 31, 2011.The banking system is the source of unreserved credit and is on the hook to use its collective balance sheet to be the transfer mechanism for economic stimulation through monetary policy. And as they have already demonstrated repeatedly, monetary policy makers feel the need to de-lever the banking system today so it may then extend credit to the rest of the economy tomorrow.


Of course, the US banking system is not alone. According to the Financial Stability Board, worldwide bank assets (including US bank assets) were approximately $95 trillion in October 2011 (USD terms). Meanwhile the IMF reported that as of December 2010 the global supply of base money was approximately $12 trillion (USD terms). These figures put the worldwide proportion of base money-to-bank leverage roughly in line with the US.

Given: 1) the exorbitant leverage currently in the global banking system, 2) current negative real output growth in developed economies, 3) current negative real interest rates, 4) uniformly poor monetary, fiscal and demographic conditions across most developed economies, and 5) already wary populations beginning to get restless; we have difficulty imagining that global banks, labor, savers, politicians and investors will be able to endure current conditions much longer before demanding the financial reset button be pressed to complete bank de-levering.

We provide the graph below merely to make it easier to conceptualize the nature of such a de-levering, as we see it. (This is not necessarily a prediction of timing or magnitude.) The takeaway is that base money (in the form of physical currency in circulation) and bank deposits will have to rise at a much steeper rate than bank assets until the banking system is more fully reserved. (At some point we think bank animal spirits will once again take over and we will have a new leveraging cycle.)


The graph above illustrates the forces behind a high-tech jubilee. The burden of repaying past systemic debt will have been greatly reduced through base money inflation, (that shifts the GPL [General Price Level] higher, including revenues and wages), while the integrity of systemic debt remains intact (nominally). The integrity of the banking system will also remain intact, as would the creditworthiness of most debtors.

So we anticipate the sum of physical currency and bank deposits to continue to rise to stimulate nominal GDP growth and the ratio of bank credit-to-base money to contract further. Will the lines meet or cross? We don’t believe so but we do think the gap will narrow substantially before bank assets can grow materially again. Thus, we expect the rate of change of the General Price Level to equal the rate of change of the sum of physical currency and bank credit LESS some accommodation for productivity gains. It is reasonable to expect:

1) A higher General Price Level

2) A CPI rate higher than the rate at which the GPL rises

3) Levered asset inflation rates that very likely will be nominally positive but negative in GPL terms and, even more so in CPI terms

"Merely Strong Inflation"

Another "inflation but not hyperinflation" post which crossed my path the other day was Get Ready for 'Hot' Inflation by Gregor Macdonald. In it he writes:

Ideological deflationists and inflationists alike find themselves both facing the same problem. The former still carry the torch for a vicious deflationary juggernaut sure to overpower the actions of the mightiest central banks on the planet. The latter keep expecting not merely a strong inflation but a breakout of hyperinflation.

Neither has occurred, and the question is, why not?

The answer is a 'cold' inflation, marked by a steady loss of purchasing power that has progressed through Western economies, not merely over the past few years but over the past decade. Moreover, perhaps it’s also the case that complacency in the face of empirical data (heavily-manipulated, many would argue), support has grown up around ongoing “benign” 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.

After reading his post, I asked Gregor in a comment and a tweet:

"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”?"

Here was Gregor's reply:

"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"


There are three good points in Gregor's reply which I want to address, so I'll just list them out right here:

1. A psychological tipping point must be present in all hyperinflations. Me: But is this mass-psychological tipping point the cause, or simply a visible effect (symptom) that is sometimes mistaken as the cause? A loss of consciousness is also present in all deaths.

2. A social-psychological shift is a large and heavy object that needs a collapse in confidence to move from its current state of inertia. Me: Is it really so large and heavy to move? Or is it, as I wrote in this post, something that "can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item"?

3. "Wake me when the managers of trillions of OECD pension assets panic out of their own currencies, and their own sovereign bonds." Me: They may well panic out at some point, but again, will that be a cause or an effect? I will show that it is 100% effect and that, if that's what you're waiting for until you're willing to entertain the risk of hyperinflation, you will be a day late and a dollar short to make any preparations that were contingent upon entertaining the risk.

There's one other item that I want to mention because it also contributed to my decision to write this post. And that is this "no hyperinflation" wager offered up by someone in the MMT camp:

The United States will not experience hyperinflation (defined by 3 consecutive months of 6% Month over Month inflation according to the Billion Prices Project measurement of MoM inflation) from April 17th 2012 to April 17th 2017.

Many people claim the United States will experience hyperinflation, because of a massive increase in the monetary base. The monetary base has shown a huge increase as you can see at FRED under BASE, http://research.stlouisfed.org/fred2/series/BASE

The bulk of the increase in the monetary base happened in late 2008. This prediction gives nearly 9 years for hyperinflation to occur in the United States - many times any reasonable "long and variable delays" between monetary base increases and inflation could logically be linked.

Other people point to so called Quantitative Easing as a trigger for hyperinflation. The first rounds of QE happened in early 2009. This prediction gives 8 full years for the hyperinflationary impacts of QE to manifest in the United States.

Modern Monetary Realism (www.monetaryrealism.com) and Modern Monetary Theory (www.moslereconomics.com) both say there will be no hyperinflation due to the increase in the monetary base. MMR and MMT claim inflation is not likely at all. High inflation might be caused by either vastly higher energy commodity prices due to supply constraints or increases in the notional value the government pays for goods and services. The large increase in the cost of oil has not caused runaway inflation as of April 25, 2012, simply because it was not large and sustained enough. There has been no large increases in the values paid by the U.S. government through April 2012.

Since neither of these two circumstances has happened or are likely to happen in the U.S. during the next 5 years, there will be no hyperinflation in the U.S. as defined by the above prediction for the next 5 years.

Aside from the fact that it would be silly to take the hyperinflation side of a dollar-denominated bet, as I wrote in the comments, I am also not interested in taking this bet because it is a timing bet and I think that sends the wrong message. But I did want to mention it because it makes some specific points which are relevant to this post.

1. That "high inflation" might be caused by supply constraints (similar to the effect of resource scarcity which Gregor mentioned) or increases in the notional value (I think he meant price) the government pays for goods and services.

2. That because there have been no large price increases from 2008 through 4/25/2012, they are unlikely during the next five years.

I will show you that he is looking at the wrong things in saying that if base money creation in 2008 didn't cause price inflation yet, then it won't for the next five years. There are some important differences between today and 2008. For example, the federal budget deficit in 2008 was "only" $438B while the trade deficit was much larger at $698B. And in 2007 the federal budget deficit was even smaller, at 23% of the trade deficit. The 2007 budget deficit was only $162B while the trade deficit was $696B. Today that situation is reversed. So prior to 2009, the foreign sector was supporting the sum total of both the US private and government sector deficits, leaving some room for the private sector and foreign support to contract while the government sector expands. And that is exactly what happened.

Today the federal budget deficit is more than twice the trade deficit, and the foreign sector is supporting less than half while Fed printing supports the rest. Additionally, there are signs today that foreign support is waning even more. I will get to those later, but this is the very recipe for hyperinflation which FOA described, only an order of magnitude worse than in 2001 when he was writing. So anyone who wants to take that silly bet will only lose because the dollars they'll win will be virtually worthless.

A/FOA's Call

In his final month of full posts, from 10/3/01 through 11/3/01, FOA countered both the deflationists and the inflationists (who he grouped as the "hard money thinkers") in his drive to explain how the dollar reserve system will end in hyperinflation. Here's a quick sampling from that last month to show you what I mean:

FOA 10/3/01 - For decades hard money thinkers have been looking for "price inflation" to show up at a level that accurately reflects the dollar's "printing inflation". But it never happened! …

That "price inflation" never showed up because the world had to support its only money system until something could replace it. We as Americans came to think that our dollar, and its illusion of value, represented our special abilities… Oh boy,,,,,, do we have some hard financial learning to do.

FOA 10/25/01 - Somewhere in the 1970s era I was exposed to the thinking of several different deflationists. It seemed that all of their conclusions came to the same end: that dollar deflation would rule the day, no matter what... Deflation was always the final outcome.

FOA 10/3/01 - The relatively small goods "price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.

FOA 10/9/01 - Dollar hyperinflation and super high gold prices are closer than many think.

FOA 11/2/01 - The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of their last 30 years of hard money success.


Get the point? Good. Now one other thing is that, as I am explaining what I learned from FOA, FOA was explaining what he had learned from Another:

FOA 10/3/01 - A number of years ago, I began to learn from some smart people about the real political game at hand and how that would, one day, produce the final play in our dollar's timeline. Indeed, you are hiking that trail with us today; us meaning Euro / gold / and oil people. All of us Physical Gold Advocates that have an understanding about gold few Americans have ever been exposed to.

Now that you know the A/FOA position (hyperinflation camp, not inflation, not deflation), the A/FOA call ("hyper inflation from where we will not return. That is our call."), and the pedigree of the A/FOA message ("us meaning Euro / gold / and oil people… few Americans have ever been exposed to"), let's get on with the details.

Structural Support

FOA 10/3/01 - Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

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

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained… Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.


If our dollar is going to fall so fast and so far in value that it will be called "hyperinflation", then the dollar must be tremendously overvalued today, right? In fact, and these are FOA's words, "Dollars have no value at all except for our associating remembered trading value with them." A barrel of crude oil isn't worth $100 because a one hundred dollar bill has a value equal to a barrel of oil; rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 100 units. Money is an associated value in our heads. It's not a physical item.

Yet for the last 30+ years, the fully fiat dollar, a purely symbolic token currency, has been behaving as if it actually is an item of value equal to the real goods and services the US has received through its perpetual trade deficit. Understanding how this was even possible is the only way to understand how it will end.

FOA 10/25/01 - I mean that our whole dollar landscape has now become just a trading asset arena: it's now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

FOA 10/5/01 - The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!


And here we find the key to the kingdom: "supporting foreign dollar settlement with CB storage."

All currencies have the value of whatever they can buy. In a sense, they get their value from price tags offering prices denominated in their unit. But this MoE (medium of exchange) usage demand is not enough for the dollar. It is not enough that foreign goods are priced in dollars. The dollar requires another kind of usage demand: SoV (store of value) usage.

The reason for this is simple. The US is the only originator of new dollars and the US has run an unending trade deficit for 37 years, so the US has been exporting an unending stream of dollars for 37 years. To some extent, that pool of external dollars can circulate outside of the US as long as some foreign goods, like oil, carry a dollar price tag. But that is not enough.

Without foreign CBs supporting this system of foreign dollar settlement by mopping up the unending glut of dollar emissions, the market price mechanism would collapse the US trade deficit in a heartbeat.

Now I've got to make an important point about stock and flow here. We need not be concerned about the stock of dollars held by these foreign CBs, which today stands at more than $5T. The real danger is the unstoppable flow of dollars. No one needs to dump their dollar holdings to collapse the dollar. In fact, they won't dump and I don't expect them to dump, at least not until collapse is well underway.

All they need to do is to slow down mopping up the gushing, unending flow. Here's how fragile the dollar actually is. It is supremely overvalued because its SoV arena, its "trading asset arena" as FOA termed it, simply dwarfs the MoE arena where all currencies get their value. But what threatens the dollar's massive overvaluation most clearly and presently today is only that tiny, marginal portion of the flow: the deficit portion or the unstoppable net-emission of dollars.

Trillions of dollars circulate (change hands) every day, and orders of magnitude more sit idle in investments. But the real threat to all of it is the net-emission of dollars which must be mopped up (stored) by someone. This is the structural support that holds the whole system together: foreign CBs perpetually gorging themselves on Treasuries. It's not that they might sell their stock of Treasuries. The real threat is that they might slow or stop their rate of accumulation relative to our rate of emission.

Big Danger in a Little Marginal Flow

What do I mean by "marginal flow"? Well, first there's something you need to understand about flow. Stock and flow are not directly comparable because while stock is a measure of units, flow is a measure of units per time. We can look at the ratio of stock to flow over a period of time, but I'm not even interested in that in the case of the dollar. With dollar flows, we have the prices of goods and services which are far more relevant to the marginal (deficit) flow of dollars than any measure of the total stock of dollars.

I'm also not really interested in the flow of dollars within the monetary plane of "investments". Investments within the monetary plane change price regularly, sometimes with great volatility, yet without crashing the entire global monetary and financial system. But that real stuff in the physical plane, stuff like food, energy, medicine and industrial inputs, is (remarkably) relatively stable on its dollar price tags over time (at least compared to currencies going through hyperinflation). So we don't need to picture the dollar flow as a portion of the entire dollar stock, we can instead picture it as a flow of real goods and services as long as we focus on the goods and services portion of the BOP. And we also know that government spending (the federal budget) is all on goods and services in the physical plane, not on "investments" in the monetary plane.

So what do I mean by "marginal flow"? The US is the dollar's home, its creator and its legal tender zone. Most everything here carries a dollar price tag. But the US also trades with the world outside of its own currency zone, and in so doing it emits dollars. Last year the US spent $2.66T abroad, but we also took back most of those dollars by selling our stuff abroad. In fact, we took back $2.1T of the $2.66 we sent out. So netting it out, we net-emitted $560B last year. That's 560B dollars created here in the dollar creation zone and sent out into the non-dollar (homeless dollar) zone. That's marginal (deficit) flow. But there's more.

Before I get to the "more", let's reduce this to an easier time-frame. In a stable currency (like the dollar), the prices of necessities like food, energy, medicine and industrial inputs don't change much over a one-year time period. But prices can change overnight, and that's what I'm predicting. So I'm going to start quoting these annual statistics in daily flow amounts, by dividing the annual number by 365. That, of course, includes weekends and holidays. And while our beloved monetary plane closes down for weekends and holidays, the physical plane of necessities runs 24/7.

So looking at it as a daily flow, last year the US in aggregate emitted about $7.3B per day to the world outside of its boundaries and took back in only $5.8B. So the US is a net-emitter of about $1.5B per day. But there's more. In 2009, the federal budget deficit overtook our trade deficit in dramatic fashion. As I said earlier, in 2007 the federal budget deficit was only 23% of the trade deficit. In 2008 it was 63%. And in 2009 it jumped to 367% of the trade deficit. In 2010 the federal budget deficit was 259% of the trade deficit, and in 2011 it was 232%.

You don't see this comparison very often, budget deficit to trade deficit. And the actual percentages don't really matter much. What matters is that it went over 100%. What matters is that, since 2009, the US government (USG) is a net-emitter of more dollars than the US in aggregate emits to the outside world.

Photobucket

So what? Well, the USG emits about $9.8B per day while it takes in revenue of only about $6.2B. So the USG is a net-emitter of $3.6B per day. That's the marginal flow I'm talking about. And there's big danger in that daily flow of $3.6B.

In 2008, the US in aggregate (private sector and public sector combined) net-emitted $1.9B per day to the outside world. This is like a broken water main that cannot be shut off, and must be mopped up by someone. But that year the USG only gushed $1.2B per day. So the foreign mess we created was only 63% attributable to the USG. The other 37% came from private sector deficit spending. But ever since 2008, that broken water main gushing dollars abroad is 100% attributable to the USG alone. And not only that, but it's now spilling out here at home, on our own front lawn!

The USG today is spending $3.6B more than it is taking in, each and every day. That's a big mess of dollars flooding out of the USG. $1.5B per day is flooding outside of our zone while $2.1B is staying right here on our front lawn. This is all flow. It is ongoing and unstoppable. And it all must be mopped up by someone. And by someone, I mean either the foreign sector, the domestic private sector or the Fed buying up US Treasuries. $3.6B per day, an unstoppable, unending broken water main gushing out dollars. Marginal flow!

Don't be fooled by the misdirection. QE, twist, whatever; it's not about interest rates or helping the economy recover. It's 100% about disguising and managing this uncontrollable, unstoppable mess. It's more like a broken sewer line than a water main now that I think about it.

Sure, the Fed needs to keep interest rates from rising. Because what happens when interest rates rise? The value of the entire $35T bond market starts to collapse and bond holders panic. The Fed doesn't want that, so don't bet on them letting interest rates rise. But as I said, I'm not worried about the stock of dollars. I'm worried about this broken sewer line we call the federal budget deficit which means no one has to sell a single bond. In fact, someone has to continuously buy $3.6B more each and every day, including weekends and holidays.

And if prices start to rise as they do in a 'hot' inflation, I propose to you that the USG will not cut back in real terms. So if prices were to rise by, say, 10%, the USG net-emittance of dollars would rise by 10% to $3.96B per day. And because the trade deficit is 100% attributable to the USG ever since 2008, the trade deficit would also rise 10% to $1.65B per day. The USG will not be outbid for goods priced in dollars. Price is what determines who gets a scarce good, and the USG will not be deprived. They even said so in a recent Executive Order! And where are goods and services prices discovered? In the minds of investors with pensions and IRAs, or at the margin where dollars flow?

"Supporting foreign dollar settlement with CB storage"

For decades up until today, foreign dollar settlement has been supported by foreign CBs storing the glut of dollars emitted by the United States, just as FOA said. And by "support", he meant keeping dollar prices stable in the face of a glut of dollars coming out of the US, but to the detriment of the living standard of their own population.

This lack of dollar price inflation to match the monetary expansion of the dollar over the last 30 years has fostered many crazy economic theories to explain how the dollar can't collapse. In fact, most all economic theories today have some explanation or another describing the miracle of the magical dollar. But what they all miss is the political component which supported the dollar for all these years by mopping up that marginal (deficit) flow.

CB storage works, surprisingly, by duplicating the glut of dollars abroad. The CB mops up the dollars and then duplicates them by sending them back to the US public and private sectors (in proportion to each sector's deficit attribution, today 100% USG, 0% private sector) so they can be spent again, and also keeping those same dollars in CB reserves as a debt of the United States. Since 2009, it's all attributable to the USG, so every day, as a billion-plus dollar glut piles up, the foreign CB sends it back to the USG and also stores it in its own vault with a new billion-plus in Treasuries.

But in order to do this, that foreign CB needs to duplicate it again in its own currency. So the foreign CB prints an amount of its own currency needed to buy up the dollar glut, thereby transferring the monetary inflation to its own population and keeping the dollar price tags from changing. No (or low) dollar price inflation. Foreign dollar settlement continues. Support!

Not understanding the political element of foreign CB support is why low dollar price inflation has confounded an entire generation of hard money thinkers. And yet, again today, having finally given in to the miracle of the magical dollar theories, they will be once again confounded as the dollar collapses in hyperinflation upon the removal of that support. But fear not. FOA and I are here to help!

FOA 10/3/01 - For decades, hard money thinkers have been looking for "price inflation" to show up at a level that accurately reflects the dollar's "printing inflation". But it never happened! Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles. We gasped in horror at these numbers, but these rates never came close to reflecting the total dollar expansion if, at that moment, it could actually be represented in total worldwide dollar debt. That creation of trillions and trillions of dollar equivalents should have, long ago, been reflected in a dollar goods "price inflation" that reached hyper status. But it didn't.

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

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

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

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

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

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained; with its IMF agenda intact, gold polices followed and foreign central bank support all being part of that structure. Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.

Now that the Euro block is passing a point where the Euro currency is viable; this same past dollar support that built America's illusion wealth will now fall away. In its place we will see the beginnings of a currency war like no other in our time.

This very change in structural dollar support is the same change that has been impacting our fed's actions for over a year now. This change is the difference between my call for super price inflation and the endless calls past hard money thinkers have made. Their on again / off again goods "price inflation" outlook is based on the same failed analysis that expects price rises because the fed was into another "printing money faster" cycle. I point out that that cycle has come and gone many times without a price inflation anything close to our total, long term, dollar creation.

Further

To this end, I have been calling for a hyper inflation that is being set free to run as a completed Euro system alters Political perceptions and support. That price inflation will be unending and all encompassing. While others call, once again, for a little bit of 5, 10, 15% price inflation, that lasts until the fed can once again get it under control,,,,,,,,, I call for a complete, currency killing, inflation process that runs until the dollar resembles some South American Peso!

[…]

Greenspan will not embark on a dollar building policy again! Even if he changes his mind about leaving. Unlike our past inflation cycles, he has only one act to follow because he must support the internal economic dynamics of this country as its dollar falls from reserve status. There will be no inflation "cycle" on this go around. The creation of a competing Euro currency block has changed his policy dynamic.

The fed has cut rates below perceived price inflation levels already and will cut again and again; even in the face of real, published, soaring, official statistical CPI. The die has been cast and the game is in process.


That was written in October, 2001. So what happened? It's simple really. From my post, Moneyness, the black dividing line is right around October, 2001:


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

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

So if China has backed off from supporting the dollar today, in the same way that the European CBs had backed off right when FOA wrote these posts, well then perhaps they are more relevant today than the day they were written.
Here is Ben Bernanke from a speech in 2005 noticing the shift in dollar support from "industrial countries" (Europe) to "developing countries" (China) which took place sometime "between 1996 and 2004":

The collective current account of the industrial countries declined more than $441 billion between 1996 and 2004, implying that, of the $548 billion increase in the U.S. current account deficit, only about $106 billion was offset by increased surpluses in other industrial countries. As table 1 shows, the bulk of the increase in the U.S. current account deficit was balanced by changes in the current account positions of developing countries, which moved from a collective deficit of $90 billion to a surplus of $326 billion--a net change of $416 billion-- between 1996 and 2004.
Of course in 2005 the federal budget deficit was only $317B while the trade deficit was $708B. So the foreign sector was still supporting the sum total of the US public and private deficits by mopping up the entire glut of dollar net-emissions to the tune of $708B per year, or $1.94B per day. And this would be a good time for me to put down a common myth propagated by Ben Bernanke as well as, well, everyone else.

It is a myth that QE is a result of the Fed's concern for the economic outlook or even about keeping interest rates down. That's just what they want you to be focused on, rather than the real reason for QE. Notice that QE began at the same time as the federal budget deficit overtook and surpassed the trade deficit. Not only that, but the amount of QE matches close enough for government work the difference between the budget deficit and the trade deficit.

It is also a myth that QE is sterile money creation because (as they like to say) it is all just sitting on the banks' balance sheets as excess reserves held at the Fed rather than circulating in the economy. In fact, it is ALL circulating in the economy because the USG spends that money into the economy. Government dollar emissions simply come with bank reserves. If you don't understand this, please go back and review my banking system model in Peak Exorbitant Privilege.

So if you're watching "economic indicators" and Treasury market figures and interest rate curves trying to guess if there will be more printing, aka QE3, you should instead ask yourself if the USG will cut a quarter of all its spending habits this year, or ever. That would be roughly equivalent to cutting all of Medicare, or all of Social Security, or all of defense spending, or a third of each, just to give you an idea of how much they are printing.

What we have today, in essence – nay, in reality – is the USG running a daily deficit of $2.1B against its own economy and another $1.5B per day against the rest of the world. FOA explained that what this means in essence – in reality (when you are the printer of the global reserve currency) – is the fleecing of the standard of living of someone else:

FOA 2/26/00 - So, dollar hyper inflation never arrived and gold did not make its run because world CBs bet your productive efforts on supporting the dollar reserve. In the process, the US standard of living was raised tremendously on the backs of most of the worlds working poor. But this is not about to last!

FOA 3/10/00 - My point was that their actions can only be justified from a position of "buying time"… Their Central Banks support polices were a decision to waste their citizen's productive efforts in a process that held together a failing currency system.

FOA 4/19/01 - What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living… We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an overvalued dollar that we spent without the pain of work.

FOA 7/16/01 - The American dollar has bought its makers a lifestyle that is at odds with this new thrust in money use. A reserve currency today must allow its value to be set solely upon its money function [MoE arena], not its function of retaining wealth [SoV arena]. Use trends today are forcing money creation policy and money values to be determined by wealth outside the official money realm. All the while the dollar holders are fighting to stop this from happening.

FOA 7/20/01 - For years American lifestyles encouraged its political system to protect their banking /debt credibility at all costs; so we could buy others' real goods without sending real wealth to pay for it. We did this in the only way we knew how; in body, mind and spirit, our political economic purpose promoted the dollar and its debt to be as good as gold and a substitute for real wealth holdings. Even a substitute for real wealth to be held in reserve behind other currencies!

FOA 10/5/01 - Even the third world didn't want to hear it. They figured that any return to a hard money system would hark back to a time they remembered well. These guys suffered during the early century and no one was going to tell them that the gold standard wasn't at fault. The US is today, and was then, robbing them blind but the situation seemed, to them, that this new dollar standard was building them up. Looking at it all,,,,, we robbed the Japan life style standards the most. All to buy us an almost free standard and they loved it.

FOA 10/8/01 - We managed this threat with help from our Euro friends; somehow thinking they enjoyed and wanted our fleecing their lifestyle to the same degree we did it to the rest of the world. Their cooperation, we will find out, was but a structural policy that bought time; time for a dollar replacement to be made.

FOA 10/26/01 - Again; this all works as long as the world "buys into" using our dollars. As I said; an expanding fiat works to grow the economy thru expanding credit buying power because the fed can support the system with credit creation that has no "inflation premium". That lack of premium only exists as long as Americans can exchange free credit for real physical goods. Once this perception changes it's over. Once the world understands that it's not local US goods that stands behind dollar growth, but less expensive foreign goods,,,,,,,,,, the stage is set for our "supporters" to sell to themselves! Making themselves
"lifestyle rich". All they need is Another currency unit.


Here's the bottom line, and the absolute correct way to view the USG's deficit spending today. Starting in 2009, the US private sector was no longer "fleecing lifestyle" from the rest of the world through the exorbitant privilege of its currency (a privilege which began in 1922 and peaked in 2005). Beginning in 2009 the USG started fleecing lifestyle from its own economy (in addition to the rest of the world) while ironically calling it "economic stimulus". This is the meaning behind these shocking images from 2009, which I first used in my 2009 post, No Free Lunch:



Global resources are being fleeced by the USG at the rate of $1.5B per day, while American resources, above and beyond the normal "internal revenue service," are being fleeced at the rate of $2.1B per day. The foreign resource fleecing is being enabled by foreign CBs (mostly China up until recently) buying Treasuries, and the local resource fleecing is enabled mostly by QE, but also partly by your pension fund manager buying you some of those tasty yield-free Treasuries.

It is no wonder at all that the stock market is doing relatively well given the unstoppable domestic sewage – I mean dollar – leak that is the USG's deficit spending. Unfortunately (for everyone) the stock market doesn't sterilize the sewage against goods and services price inflation the way the Treasury market does. The dollars just flow right through the stock market to the sellers.

But as I wrote above, it doesn't really matter what percentage of the trade deficit the budget deficit is, just that it's over 100%. As long as it's over 100%, the entire trade deficit is 100% nominally attributable to the USG, which means if we get some "hot inflation" either the USG will have to give up some of its consumption in real terms, or else defend its "lifestyle" with the printing press, right there at the margin where prices are discovered.

I don't expect this inflation to originate inside the US. In fact, as long as foreign CBs are structurally supporting the dollar reserve system by mopping up our $1.5B per day outflow, the American people are getting a pretty good deal on their own fleecing. I mean, even though we are being fleeced of $2.1B per day in "lifestyle" by our own government (in addition to taxes), for that fleecing we are actually receiving $3.6B per day back in government. ROI! So even though government is terribly wasteful, our wasteful government is still being subsidized by y'all! "Life is so fucking good I can taste it in my spit."

And because the US private sector deficit spending in aggregate has contracted to well below zero since 2008, I have a hunch that a lot of the fat has been cut out of the "basket" of US imports. The trade deficit has dropped from $698B in both 2007 and 2008 to $500B in 2010 and $560B in 2011. I bet all of that ~$130B drop has come from private sector consumption reduction (private sector crashing its living standard). In fact, the "private sector consumption drop" is probably greater than ~$130B and the USG has made up some of it by expanding its consumption. But the USG doesn’t consume cheap consumables from Walmart. The USG consumes important stuff… stuff we generally call necessities.

Looking at the top imports from 2008 as well as the fastest growing imports of significance (say, over $5B per year at least), the top "necessities" are oil, medicinal preparations, petroleum products, coal, fertilizers and pesticides, food oils, oil field equipment, feedstuff and foodgrains, unmanufactured steelmaking materials, industrial organic chemicals, and semifinished iron and steel.

Again, this is just a hunch, but that's probably a good list of things to watch for price increases that could quickly turn hyper when the USG refuses to be outbid… if and when the foreign CB "structural support" slows down and the rest of the world stops exporting necessities to the USG for nothing but paper that will soon be worthless. So now that we know what to watch for, let's take a look at the state of that "structural support" today.

The US Treasury puts out a list of Foreign Holders of Treasury Securities. The latest update, which was put out on April 30th, covers Treasury holdings through February 2012 and shows each month for a whole year, in this case beginning in February 2011. The top row is China because China has the most Treasuries. And looking across for the year we can see that China's holdings are pretty flat, except that they peaked at $1.3T in July and then dropped all the way to $1.178T in February.

It looks like Japan (line 2) really picked up the slack though, buying $205B in Treasuries from February to February. I guess we better hope that Japan keeps running a trade surplus! Oops…

Japan Swings to Trade Deficit

4/19/12—Japan swung back into a trade deficit in March as a steady rise in energy imports outweighed a rebound in automobile exports after last year's flooding in Thailand.

But fear not! Zero Hedge is on the case:

2/29/12 - Best advice: keep a track of that Chinese trade surplus. If it becomes a deficit (just like Japan did recently), that is the first signal that things are changing dramatically from an international flow of funds perspective. It also means that unless the US finds subtitute demand, most likely from within, the only remaining buyer will be the entity that already has the largest holding of US paper - the Federal Reserve.

That last year of Treasury data, from Feb. to Feb., shows that the increase in foreign Treasury holdings covered the trade deficit for that year. If we look down at the last line, grand totals, and subtract Feb. 2011's total from Feb. 2012's we come up with an increase in "structural support" of $633.3B. And if we add up the monthly trade deficit for those same months we come up with $565.5B. Once again, close enough for government work. So I guess it's a good thing someone's still propping up the dollar. But wait! Here's another one from Zero Hedge only ten days later:

China Posts Biggest Trade Deficit Since 1989

3/10/12 - In addition to all the US election year propaganda and delayed after effects of central banks injecting nearly $3 trillion in liquidity to juice up the US stock market, something far more notable yet underreported has happened in 2012: the world stopped exporting. Observe the following sequence of very recent headlines: "Japan trade deficit hits record", "Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports", "Brazil Posts First Monthly Trade Deficit in 12 Months " then of course this: "[US] Trade deficit hits 3-year record imbalance", and finally, as of late last night, we get the following stunning headline: "China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil."

[…]

China total imports and exports - whoosh:

China trade balance by region - whoosh:

China trade with the US - whoosh:

China trade with the EU - whoooooooooooooooooosh:

However, definitely no whoosh here:

Oh, and let's not forget this particular whoosh:

...Is it starting to make sense now?

You can nitpick that data all you want, but one thing is as clear as an azure sky of deepest summer. This is a very different picture from the China of 2002 embarking on a "parabolic rise" in US dollar "structural support". In fact, even though it is true that some combination of Japan, oil exporters, Caribbean banking center, Taiwan, Switzerland, Russia, Luxembourg, Belgium and Ireland (to name a few) managed to cobble together the necessary support last year, the dollar is now living off of a willy-nilly support system rather than the "structural support" it enjoyed for the last 30 or so years. If FOA was here, he'd probably say something like this:

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

Of course "hot inflation" is coming! But how long will it last? How long can it last without the structural support of foreign CBs mopping up the dollars the USG will be printing in order to defend its own "lifestyle" in real terms? How far can prices rise without hitting that hyper feedback loop at the margin where prices are discovered? The USG is net-emitting $3.6B per day today, and the problem is that the USG is not an economy. It is a consumer and a printer. So the daily net-emission of global dollars is now backed, not by an economy, but by the largest consuming entity ever known to man!

Lee and Paul are correct that the commercial banking system will soon be fully reserved. But I don't think those new reserves will come directly from the Fed in exchange for bank assets. Now that the government deficit has surpassed the trade deficit, all foreign support is Treasury buying, not private sector debt like MBS. The crossing of this Rubicon means that maintaining the Treasury market takes structural precedence over all other assets. It also means that every new dollar the USG decides to spend puts new reserves into the private sector banking system, raising its ratio of reserves to deposits. So the new reserves coming into the banks will be coming from domestic USG deficit spending via QE or whatever they decide to call it next time. And I believe that those bank assets and "unreserved credit" will simply die on the vine of worthless tokens as the USG crushes its own currency defending its lifestyle.

Gregor is correct about the "benign" inflation we've had, not just for the past decade, but for the past three or four. This is what FOA was talking about. "Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles." But hyperinflation "never showed up because the world had to support its only money system until something could replace it." The euro was born, then came China, and my call is that hyperinflation "is now being 'structurally' set free to run."

If you print enough money, you can get the price of everything to rise. Just look at Zimbabwe if you don't believe me. But printing doesn't make all prices rise in unison. Gregor makes a good case for the "Middle Class Squeeze" combined with asset price deflation, an inflation/deflation double whammy, as well as resource scarcity-driven subsistence inflation leaving no discretionary spending room for the poor or those in developing countries. And from the "Executive Summary" of his part 2: "Rising wages in the developing world create upward price pressure everywhere globally." I agree with Gregor on all counts!

So yes, I agree with Gregor that "hot inflation" is coming and it's a real risk. But inflation generally suppresses consumption in real terms. As Gregor says, "it quickly begins to drive out spending for discretionary goods in favor of true basics." But this doesn't apply to the USG who can "spend" infinitely in extremis. Gregor concludes his part 1 with this:

The United States currently enjoys reserve currency status, which enables it to borrow cheaply, and which keeps capital circulating through our government bond markets, which are the largest in the world. Given the backdrop to our post-credit-bubble environment, it is now the consensus view that we will cut a path similar to Japan’s as we oscillate from weak growth back to the stimulative rescue policies of the Federal Reserve.

There is therefore a sense of complacency about an escalation in prices.

That highlighted portion is the premise on which virtually everyone in America is operating, without even understanding what it really means. It is the miracle of the magical dollar theories laid as the solid foundation under any and every discussion. One of my readers, Michael, a medical doctor, was attending a conservative "Tea Party-ish" meeting in California yesterday. The meeting included US Senators and Representatives, and they were totally operating on the premise of the miracle of the magical dollar theories. You can read his interesting report here.

The point is that the premise rests on 90 years of history which only makes sense if viewed properly. It rests on 50 to 60 years of political support followed by 20 years of structural support from Europe and another 8 or 9 years of structural support from China. Today both political and structural support are gone, and the "solid foundation under any and every discussion" of monetary matters in America is what I am generously terming the "willy-nilly support" of the rest of the world. In other words, we have no say in the matter. Our fate is in their hands. Which kind of renders the premise invalid, doesn't it?

I agree with Gregor that "hot inflation" is coming whether you like it or not, for all the reasons he explains and more. My only disagreement is that Congress will take it more hyper than we've seen in all of fiat history, so fast it will peel the skin off your face, because they are operating on a false premise. The miracle of the magical dollar theory premise is a false premise because it completely misses what's going on. And anyone who's waiting for those operating under a false premise to panic out of their dollar holdings before even entertaining this reality is like someone waiting for the loss of consciousness before entertaining the possibility of death.

The dollar is so vastly overvalued today because the rest of the world has kept it on life support for 30 years past its expiration date. It is the stability of dollar prices at that small marginal flow that sustains the illusion of wealth in the entire, massive monetary plane. And yet the modern "hard money thinkers" think that we can somehow retain this level in real terms by simply devaluing the dollar against gold and then managing that new "gold value". I wish all the modern hard money thinkers – you know who they are so I don't need to mention any names – would just take a few minutes and listen to FOA and maybe, just maybe, see how wrong they are. It's all in that last page of The Gold Trail, but I tried to make it bite-sized in a recent blast of Tweets. #HMS means Hard Money Socialist which describes all of these guys. If you don't understand, go see for yourself. These are all FOA quotes from that last page (edited for Twitter):

"Truly, to this day, #HMS think their ideas are the saving grace of the money world. It isn't now and never was then." #FOA

"This political process of fixing money to gold has ruined more economies, governments and societies than anything." #FOA

"It just flies right past them that the ECB wants gold as a dollar replacing *asset*, not local money backing." #FOA

"#HMS call for "official money gold" as the only way governments can go. That will not ever be allowed again." #FOA

"These are the same people that hold free markets on a high plateau as the goal for everyone. Yet, they talk a story of gold control." #FOA

"Fortunately for the majority of world physical gold owners, the hard money socialist game has ended." #FOA

"Late comers to this understanding will encounter a true free market, but their buy in price will be at a much higher natural level." #FOA

"In the late 60s, #HMS seemed so natural. However, even then, I had some serious people pointing me in a different direction." #FOA

"This is all happening while Western style Hard Money Socialists are defending their stance by saying Euro is just another fiat. Ha!" #FOA

"Western thought is gold=money. This simple picture from the middle ages banking renaissance is used to bastardize the gold story to this day." #FOA


Please go read that last page of The Gold Trail after reading this post. Start at the bottom and read up. It's in reverse order, unlike the first five parts. There's so much more there than the little bits I included here. It's the very last words he wrote before he stopped writing. I know that some people think I approach these A/FOA archives somewhat religiously. Well, I do!! Look at the subtitle at the top of this blog! Not in any way similar to spiritual faith, but My God, has anyone – and I do mean ANYONE – explained what's going on today better than these guys?

Sincerely,
FOFOA

PS. If you appreciate this blog and my efforts here over the past 3 ½ years, 360 posts and more than 32,000 comments, please consider making a donation to support my continuation of this project. These donations are my only source of income.

Thank you!



829 comments:

1 – 200 of 829   Newer›   Newest»
Dr. Peter T said...

I raise a glass to toast the genius that is Another/FOA/FOFOA. Thank you.

Aaron said...

For years now, "politically", the dollar system has had no support! Once again, for effect,

"Politically NO", "Structurally Yes"!

costata said...

FOFOA,

Exceptional post. A real feast for those who have the appetite for facts and reasoned arguments.

Bravo!

PS. Count me in for a donation but it will be delayed for a few weeks. We need some time to recover from Mrs. costata's generous efforts to reflate the EU economy single handed and the fallout on the AUSD.

Aquilus said...

After an post of this caliber, I'm afraid my (small) donation just now does not do it justice...

To many more FOFOA!

Beer Holiday said...

Thanks again FOFOA, can't read enough of your writing.

Blondie said...

A tour de force. Bravo.

For anyone willing and able to set down their mental baggage to survey the vista unimpeded at last, the view you present is unparalleled, and on their behalf and mine I thank you for your efforts.

It is so much easier to see with the lights on.

Jonathan said...

"But is this mass-psychological tipping point the cause, or simply a visible effect (symptom) that is sometimes mistaken as the cause? A loss of consciousness is also present in all deaths."
"And anyone who's waiting for those operating under a false premise to panic out of their dollar holdings before even entertaining this reality is like someone waiting for the loss of consciousness before entertaining the possibility of death."

Impressive work here.

If there is only one electricity company, time to build another to provide the (infra)structure for change from tyranny. The interest rate cycle has flatlined. But who will cut the ribbon and flick the switch?

Pain d'Or said...

Great piece FOFOA, thx !

Just try to figure out how the impact would be (in the light of this post) if some of the OTC-Derivatives (off-balance) would start to topple (and start reflecting on balance)

http://www.flickr.com/photos/70983337@N06/6988742412/lightbox/

Would you think that could have impact on the numbers in this piece...?

Motley Fool said...

Excellent as always. :)

Woland said...

I can't tell you how important your instruction to to re-read
the last page of "The Gold Trail" was. I never fully understood
the purpose and function of the "paper gold markets" in their
role as insurance or hedge for $ denominated global asset
holdings until today, or how their ultimate demise will be
managed. Thanks. paper $$ to follow shortly.

Subhash said...

Brilliant, as always.

On a spiritual note. Consciousness is never - NEVER - lost, only the body and its organs die. Your consciousness is the eternal self.

sean said...

Another great post which corrects some widely held assumptions, eg: “No one needs to dump their dollar holdings to collapse the dollar. In fact, they won't dump and I don't expect them to dump, at least not until collapse is well underway.”
It really drives home the point that hyperinflation is not “inflation on steroids”.
This is a timely reminder to finalize preparations!
It’s easy to become complacent, when material inflation does not yet seem to be excessive. Though having said that, I'm sure I'm not alone in finding my own BOP struggling a little recently! Happy to offer whatever small help I can though...

Mike said...

fofoa great article once again.

but just a off topic question to ask to everyone.

i have been trying to search through the BIS and BCBS about gold being used as a Tier 1 capital asset in Basel III but to no avail. does anyone have any links to get status updates or more info?

Edwardo said...

There are a few items I'd like to discuss in response to this excellent post. I'll stick to just one, namely the critical issue of structural support for the dollar. At present, with China scaling back (permanently, one presumes) their dollar structural support, and Japan's slack taking support already under threat, well, the dollar is down to, as FOFOA put it, willy-nilly" structural support. In short there wouldn't appear to be a lot of there there where structural support for the dollar is concerned.

I realize timing isn't an area that our host cares
to delve into, but, is it fair to say that the structural support is so tenuous now that we shouldn't be surprised if things go south at any time? This isn't to say that we should expect anything imminent, on the other hand, the idea that HI can be avoided for some large expanse of time, let alone indefinitely, seems fanciful if not downright delusional.

yardy said...

My oh my, FOFOA. That post is not only a truly aimed dart piercing the bullseye in the belly of the beast it is a pure aesthetic and intellectual joy to read. Beware lest the wrong eyes land here. Your apparently passive reflections on the state of things can become a catalyst of lost confidence in the wrong hands. The truth is subversive.

somanyroadsinvesting said...

Great post as usual! Thank you!

In the tone of talking about hyper inflation I was curious how it would develop in the US in comparison to places in South America. I spend considerable time in SA and its weird to me people seem to just have gotten used to it. Its like oh yeah everything goes up 10-25% per yr. Obviously the people on the st don't really understand why they just think that is the way it is. I just don't get why once you get above 10-15% you don't move to 50-100% very quickly. Why does it just hover at this more 'modest' range.

One comment on the tenuous support for the USD. Doesn't it seem we are sort of in a mutual assured destruction(MAD) economic structure like we were w the USSR w/ nukes? Doesn't the world need to keep supporting the USD or at least manage its decline slowly or else they crash their own economies at the same time?

Thanks again.

bryan-x said...

In the Treasury's Major Holders of Treasury Securities (http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt), There is an anomaly for the UK and Canada in June, 2011. Anyone have ideas what that was?

somanyroadsinvesting said...

I wonder how the Shale, fracking, Nat Gas etc resources of the US may play in the future trade balance. Some reports say we may become energy independent in 10 yrs. I have no idea if this is feasible but I am curious is this a game changer?

Aquilus said...

@somanyroadsinvesting

to me it just confirms the oil story that Another/FOA hinted to.

Current (conservative) predictions for amount of oil and gas production in North America alone are enough to give us "cheaper" oil. Not in dollars mind you, but cheaper. Just North Dakota itself is supposed to ramp up to (conservatively) 2 million barels Oil - North Dakota, with Ohio (yes Ohio!!!) adding another half a million Ohio Oil.

And that's just scratching the surface for right now. I never much paid attention initially to FOA/Another oil predictions, but I see their wisdom more and more every day...

Jeff said...

Somanyroads,

Above FOFOA points out the fastest growing imports include oil, coal, etc. So if we are going to become energy independent we are going the other way, as of now.

FOFOA,

Thanks for a great article. Face ripping inflation to come, oh my. The dollar ain't magical, it's just a magic trick!

http://www.youtube.com/watch?v=vGj9WPf3QwY

somanyroadsinvesting said...

Aquilas,Jeff thank for your responses. Aquilas not sure I followed your pt. If a large part of our imports are energy related (I dont know the % i need to research this) then if we become more energy independent would that not reduce our trade deficit and at least delay the demise of the dollar?

Aquilus said...

@somanyroadsinvesting

No,no, it's not like flipping a switch! That oil won't be online until 2020-2035, plus you need a lot of pipelines + infrastructure and the right kind of refineries for that kind of oil.

So, no worries on the deficit short-term. My point is simply that there is plentiful oil that can come online and reset the gold/oil ratio (remember I said not the dollar one) in the future. Just as FO/FO/A were describing.

JR said...

Hi somanyroadsinvesting,

"One comment on the tenuous support for the USD. Doesn't it seem we are sort of in a mutual assured destruction(MAD) economic structure like we were w the USSR w/ nukes? Doesn't the world need to keep supporting the USD or at least manage its decline slowly or else they crash their own economies at the same time?"

That was a big part of the thrust to create the Euro. From above:

For another currency block to be built over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained; with its IMF agenda intact, gold polices followed and foreign central bank support all being part of that structure. Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.

Now that the Euro block is passing a point where the Euro currency is viable; this same past dollar support that built America's illusion wealth will now fall away. In its place we will see the beginnings of a currency war like no other in our time.

[...]

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

So if China has backed off from supporting the dollar today, in the same way that the European CBs had backed off right when FOA wrote these posts, well then perhaps they are more relevant today than the day they were written.
Here is Ben Bernanke from a speech in 2005 noticing the shift in dollar support from "industrial countries" (Europe) to "developing countries" (China) which took place sometime "between 1996 and 2004":

[...]

Gregor is correct about the "benign" inflation we've had, not just for the past decade, but for the past three or four. This is what FOA was talking about. "Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles." But hyperinflation "never showed up because the world had to support its only money system until something could replace it." The euro was born, then came China, and my call is that hyperinflation "is now being 'structurally' set free to run."

[...]

The point is that the premise rests on 90 years of history which only makes sense if viewed properly. It rests on 50 to 60 years of political support followed by 20 years of structural support from Europe and another 8 or 9 years of structural support from China. Today both political and structural support are gone, and the "solid foundation under any and every discussion" of monetary matters in America is what I am generously terming the "willy-nilly support" of the rest of the world. In other words, we have no say in the matter. Our fate is in their hands.

Carl said...

Two things: Who owns and ultimately controls the issue of Federal Reserve Notes? (Hint: It's not the Federal Government.)

How can hyperinflation occur with a digital currency, which is nothing more than markers indicating a promise to pay FRNs "DEBT" that the Federal Reserve is under no obligation to make good by printing FRNs?

As an aside; it seems to me that, to suggest there can be hyperinflation based in digital promises to pay, is the same as saying that the government, as well as the entire banking structure, maintains an infinite line of credit which everyone will continue to accept in lieu of payment.

Jaqship said...

Hi FOFOA

Gripping post. I've just donated again.

How do you think the UK Pound will fare in this HI for the US$?

JR said...

The federal reserve is "owned" by its memebr banks. It is ultimately Controlled by Congress, as it exists because Congress passed a law saying it exists - http://en.wikipedia.org/wiki/Federal_Reserve_Act

Stop worry about the FED, congress is the spender. As explored in Moneyness, the FED and the issuance of debt is not necessary:

But then a reasonable person might point out that the USG still issues Treasuries equal in amount to all its deficit spending. And if we and the Chinese aren't buying them, then the Fed has to, so it makes up a cool name like QE2 to disguise the real purpose of the purchases. Not so fast, MMT says. The Treasury does not need to issue debt in order fund its spending. When it spends, it simply credits private sector accounts with new credit money and the banks with new base money. There is no direct connection between sales of Treasuries and money spent other than a myth in our confused minds.
http://fofoa.blogspot.com/2011/11/moneyness.html

And from above on the myth about sterilized bank reserves - the G already spent it into existence:

It is also a myth that QE is sterile money creation because (as they like to say) it is all just sitting on the banks' balance sheets as excess reserves held at the Fed rather than circulating in the economy. In fact, it is ALL circulating in the economy because the USG spends that money into the economy. Government dollar emissions simply come with bank reserves. If you don't understand this, please go back and review my banking system model in Peak Exorbitant Privilege.

[...]

Lee and Paul are correct that the commercial banking system will soon be fully reserved. But I don't think those new reserves will come directly from the Fed in exchange for bank assets. Now that the government deficit has surpassed the trade deficit, all foreign support is Treasury buying, not private sector debt like MBS. The crossing of this Rubicon means that maintaining the Treasury market takes structural precedence over all other assets. It also means that every new dollar the USG decides to spend puts new reserves into the private sector banking system, raising its ratio of reserves to deposits. So the new reserves coming into the banks will be coming from domestic USG deficit spending via QE or whatever they decide to call it next time. And I believe that those bank assets and "unreserved credit" will simply die on the vine of worthless tokens as the USG crushes its own currency defending its lifestyle.


==========

Yeah, the HI won't end, aka the dollar won't be stable again, until the ship final payment aka gold.

They may well lop 12 zeros off the dollar before making a market for it. Exchanging one trillion old dollars for one new dollar. But gold will still be at Freegold prices (e.g. 55,000 new dollars/ounce) and they will have to make a market for that new dollar or it will continue to plunge like the old one.

That's the choice. You can collapse your currency against the non-economic good gold, killing the paper gold market and driving up the price of physical in advance of hyperinflation by buying it up. This gives you some hope of avoiding the worst of hyperinflation by providing a real outlet for unwanted surplus dollars.

Or you can wait until your currency collapses against economic goods and then you will have to buy back your own currency with your gold, also at Freegold prices. Even if you start a new currency you will still have to make a market for it because your credibility will be shot by that point.

http://fofoa.blogspot.com/2011/04/forum-201.html?showComment=1303039555087#c6805182165543728758

Carl said...

JR, the Federal Reserve is a private corporation chartered by congress. The currency, FRNs, it issues are private issue notes. Congress borrows against and spends our nation's credit, only a very tiny fraction of the credit it spends is converted into FRNs. http://carl-random-thoughts.blogspot.com/

Book keeping entries are not money. They are not FRNs, USDs, EUROs or any other circulating Fiat, they are a promise to pay in those fiats. 98% of the currency circulating throughout the global economy are book keeping entries a.k.a. CREDIT/DEBT and those book keeping entries will only continue to function as currencies for as long as enough people believe they have value as expressed via redemption or convertibility into their local fiat currency.

If the past five years have taught you anything, one of the very first lessons you should've learned is that "credit is not money", and it can disappear faster than it was created leaving nothing behind but devastated economies and debt. One day everyone is swimming in credit, fat, dumb and happy, the very next day they a broke and rioting in the streets.

All of the QEs were/are meant to keep the illusion that "Credit Is Money" alive, but the reality will eventually win out as it will be proved that they were nothing more than a hyper-expansion of debt with very little economically usable credit created.

M said...

Question for JR, Costata, VTC et al..

The printing of money by the Fed to buy bonds causes false demand for oil. This has been happening since 2008 and Canada has been a huge beneficiary of it.

Now as FOFOA says,during the major collapse, the COMEX price of paper gold could crash to around zero. Will the NYMEX price of paper oil not crash to zero then too ?

About the penny.. It was such a bloody joke that the Canadian govt used cost of production as a reason to stop making the penny. It ws only costing a measly 11 million dollars a year. Since when did the Canadians stray away from Keynesianism ? With Keynes logic, they should have introduced a half penny.

costata said...

FOFOA citing QBAMCO in this post (my emphasis):

In other words, US dollar monetary base (today at around $2.6T) will be increased to cover and replace today's US bank assets (almost $20T). But they aren't predicting that the entire money supply will become base money, as happens during hyperinflation. Instead, they think that as credit money has all but been replaced with base money, "bank animal spirits will once again take over and we will have a new leveraging cycle."

Carl citing Carl:

...98% of the currency circulating throughout the global economy are book keeping entries...

How long ago did that proposal emerge from BNY Mellon to charge clients storage fees on currency? At least a year (if not longer)?

I have posted links to MSM articles discussing the record rise in US bank deposits versus loans outstanding. This trend took hold so long ago that I am hard pressed to even remember which threads the links are in.

Then we have OBA's well-supported theory about money sitting in short duration USG paper being the "dash for cash" by those whose wealth exceeds the FDIC guarrantees on bank deposits.

A recent thread was devoted to discussing the executive order giving USG departments the authority to purchase anything they need at any price.

FOFOA in this post:
As long as it's over 100%, the entire trade deficit is 100% nominally attributable to the USG, which means if we get some "hot inflation" either the USG will have to give up some of its consumption in real terms, or else defend its "lifestyle" with the printing press, right there at the margin where prices are discovered.

I don't expect this inflation to originate inside the US....


As recently as the past few weeks we have Timothy Geithner testifying before Congress reminding the budget committee that debt ceilings are meaningless to the Fed. Confirming it will supply whatever amounts of FRNs Congress demands. In other words the "debt ceiling", if any, is determined by Congress not the Fed.

Last (and by no means least) in this very post we have a straightforward, simple description of how the USG can bypass attempts to sterilize QE.

There is more than enough currency in circulation to fuel a HI event at a high enough velocity of turnover even if the US wasn't dependent on the US dollar prices on the "price tags" of ROW exports remaining both cheap and plentiful. Meanwhile this giant consumption machine, called the USG, stands ready to do whatever it takes to maintain its internal and external lines of supply.

I suppose we should ignore this statement from this very post:

...bank credit disappears (because price inflation is running too hot to issue credit at any practical interest rate) and the entire money supply becomes base money in amounts which overtake the previous amount of credit money.

Despite all of the data, despite the in depth analysis presented here, once again it appears we are about to be given a patronizing lecture about the incredible, disappearing book-entry credit money magic trick (at some point it just goes "poof" according to Carl) and the unique monetary properties of Federal Reserve Notes which it is alleged the Fed can withold in defiance of a spendthrift Congress to put them on a crash diet.

Can't wait.

JR said...

M,

The $IMFS collapse will lead oil market participants desire a stable MoE -> the Euro.

$ paper will burn and the USG will ship it's gold abroad

somanyroadsinvesting said...

Aquilas, thanks for the comments.

"So, no worries on the deficit short-term. My point is simply that there is plentiful oil that can come online and reset the gold/oil ratio (remember I said not the dollar one) in the future. Just as FO/FO/A were describing."

Not sure I fully got this. If there is a lot more oil out there and therefore in general less valuable than previously thought then how would this help gold? When you talk of resetting the oil/gold ratio in what terms where you talking? Thanks

RJPadavona said...

FOFOA,

Another great post!
Is there anyone's dogmatic misconceptions you haven't destroyed? I guess the Annunaki are the only ones left ;)

IMO, the most important part of this post was explaining how the USD hasn't had international political support for many years. Only structural support. If this is the first time someone is reading your work, I think that distinction will be an eye-opener and cause them to rethink everything they thought they knew.

The timing of the end of the $IMFS is of course, on everyone's mind. Once it's understood that the structural support is crumbling, we know the end can't be too far off. That being said, nothing will surprise me when it comes to how long this system can continue. I liken it to a cancer patient who is receiving the best medical treatment money can buy. They might hang on for several decades, but eventually they meet their maker.

"Time don't got nothin' to do with how high you can count"

RJP

two_bushels said...

I tried to summarize this post for my brother. Below is what I produced, with a closing question:

US dollars flowing into the global economy are attributable to US government spending, which is in deficit, and to foreign trade, which is also in deficit. Between the two, "in 2007 the federal budget deficit was only 23% of the trade deficit. In 2008 it was 63%. And in 2009 it jumped to 367% of the trade deficit. In 2010 the federal budget deficit was 259% of the trade deficit, and in 2011 it was 232%." In other words, deficit spending on social entitlements, infrastructure, defense, etc., is more responsible for the net emission of US dollars into the economy than is trade. Most new US dollars that flow into the global economy ($3.6b per day) are now used to pay for goods and services desired and purchased by the US government.

Since private-sector domestic spending is falling, those new dollars are not absorbed by the private-sector domestic economy. And since the trade surpluses of US trade partners including China, Japan and Brazil, have lately been falling, there is weak demand from the foreign market for US Treasuries. This leaves the US Federal Reserve to buoy dollar demand by buying US Treasuries. Treasury-buying by the Fed is commonly perceived as an effort to lower interest rates in order to boost the private-sector economy, but is in fact a rescue operation to mop up the new $3.6b that flow into the global economy each day. This preserves the value of the monetary instrument used by the US government to pay for the goods and services it wants.

This might continue indefinitely, but at the same time other entities (foreign governments, corporations) will want to purchase many of the same things purchased by the US government, and they will do so using alternatives to a currency that they are no longer stockpiling. This will require the US to bid however many dollars it needs to bid in order to offer the highest price against whatever dollar alternatives are accepted in the marketplace. Therefore, assuming that US politicians will be unwilling to significantly curtail deficit spending, prices, particularly on goods of particular importance to the US government, like oil and food, should rise in dollar terms. And there is no natural limit on how high they rise except the whim of US policymakers to spend fewer dollars on desirable goods and services each and every day.

That's it for the summary. The view is interesting to me because as stated it makes deflation seem unlikely. The flow must go on. But might there be a scenario under which the US government needs to pay fewer dollars, not more, for what it wants? Couldn't global demand for scarce resources still at some point drop precipitously, due to economic or political collapse in a competitor country such as China? Are there any other viable deflationary scenarios that would fit within this inflationary thesis? That's about as far as I can think at the moment. Any thoughts?

costata said...

SMRI et al,

Let's look at oil and gold from the perspective of commodities for a moment. The price of oil has a ceiling. At some price it would be simply too expensive to consume it in the same quantities as it has been (demand destruction). High oil prices are strongly correlated to recessions in recent decades.

After the onset of recession oil has typically fallen in price. The oil producers offset their falling profits by increasing volume where they are able to do so. To paraphrase that old line about gold "you cannot eat sand". ME oil producers need to import commodities such as food and they need to export oil to pay for those imports.

Now despite the recessionary conditions, demand destruction and so on since the GFC began oil was only cheap for a very short period of time. This is an anomaly that demands explanation. Some argue that this is evidence of Peak Oil or Peak Cheap Oil and this may, or may not, be true.

However we don't need to enter into this PO/PCO debate in discussing the gold:oil ratio. We can say with absolute certainty that there are price levels which gold can travel to where oil cannot follow. For example if gold is $5,000 per ounce can oil hit $300+ per barrel? Not without collapsing the global economy and demand for oil well before reaching that price.

Gold has no ceiling arising either from its investment qualities or use in industry. (Industrial demand for gold is small and inelastic.) Conversely gold demand from CBs and the price a currency issuer can pay has no objective limit.

Gold is the senior partner in this gold:oil relationship not oil. At present they appear to be somewhat equal. The gold:oil ratio has stubbornly remained within historic norms as the price of gold rose. But I would argue that this is an illusion created by paper gold, market manipulation and geopolitics. Oil is a very important commodity but a commodity nonetheless. Gold is not.

In response to an earlier comment let's revisit the needs of the oil sellers for currency. If the US dollar price of oil prices every buyer out of the market what will the oil producers do? Perhaps use currency swaps to facilitate bi-lateral trade with partners who have something they want. But what about multi-lateral trade? For that you need currency in this day and age.

There is a currency waiting in the wings to step on stage in the event that the US dollar collapses. It is already held in worldwide CB currency reserves. There are sufficient amounts of it available (around 25% of FX reserve holdings) to fill in for much of the dollar oil trade in a pinch. This currency is of course the Euro.

Michael said...

definitive FOFOA
puts a fine point on Peak Exorbitant Privilege and rams home the #2 topic of his blog

Carl said...

costata, quoting baseless assumptions as if they are preordained fact is not conducive to arriving at the truth of the matter.

There is no historical evidence available that supports the notion that the Fed will increase the supply of FRNs to cover and replace today's US bank assets (almost $20T), none. There is evidence that they will throw the entire private banking system along with the economy under the bus in order to preserve their position. See: 1930.

There are core facts of the matter that should inform all arguments on this subject prior to extrapolating a plausible outcome and they are provided in the Fed's very own H.6 MONEY STOCK MEASURES. The key figure to look at is the supply of FRNs in circulation, which conclusively refutes the notion that the Fed is printing FRNs with wild abandon. From 2007 to date, the supply of FRNs have increased by about $400 billion but that increase is not some nefarious plot to monetize government debt or to put cash in billionaire's pockets, the increase is from public demand for cash and is in line with historical norms.

As for Timmy and the debt ceiling, meaningless politicking rhetoric. Congress can spend all the credit it wants, it's just more debt. And calling that credit "FRNs" does not make it so, as the H.6 report clearly demonstrates.

My blog explains what the the Fed and the Law considers to be money and credit, regardless of who is generating it, is not on that list.

costata said...

two_bushels,

I was drafting a comment about deflation when your question came up. More to follow.

Couldn't global demand for scarce resources still at some point drop precipitously, due to economic or political collapse in a competitor country such as China?

If there is one word that is more important than any other in this post from FOFOA it is this one: structural

These deficits and surpluses are not simply a result of policy. The economies of these countries are structured to produce them. Restructuring an economy under benign conditions is a huge challenge. With the stresses the $IMFS is under, the political issues and so on I think we can rule out voluntary reform any time soon.

So if there are collapses elsewhere they are likely to play out in fairly predictable ways - following tendencies that are structural in nature. The present structure of the US economy indicates HI as the most likely kind of collapse. (I imagine that there will be a lot of discussion here about what other countries can expect to experience.)

The cards have been dealt and the hand will have to be played out IMHO.

Are there any other viable deflationary scenarios that would fit within this inflationary thesis?

Yes if you are talking about prices. We are seeing that now with the housing bubbles bursting around the world.

Let's focus on housing in the USA. In the process we can take a look at the myopia of the debt deflationists. Prices have fallen, have they not? The price of what precisely? The price of the land component. The replacement cost of houses has barely moved.

We had a massive bubble in the price of the asset component of housing - the land. That's the "real property" component of housing. The built elements are a consumption item. People, time, change and the elements consume dwellings. That's why we have depreciation factor allowances. They are a recognition of reality.

Interest rates played their part as well. Artificially low rates make even relatively low rental yields appear more attractive. But in a game being played for capital gain its the land component that drives prices not cash flow.

So, yes, we can have both inflation and deflation in prices in an asset class simultaneously. The Mona Lisa could sell for a world record price for a work of art while the price of paint, canvass and wood are dropping like a stone. And we can have some asset classes rising in price while others fall.

Obviously the general price level can rise without every item you count in the basket of goods you monitor rising in price.

If you view inflation and deflation exclusively as a currency issue, under a fiat currency regime it is a matter of policy and politics whether you have deflation or inflation - either but not both at the same time.

Cheers

Aaron said...

"There is no historical evidence available that supports the notion that the Fed will increase the supply of FRNs to cover and replace today's US bank assets (almost $20T), none."

Carl, you are in the deflation camp. We get it. Your position has been duly noted.

costata said...

..quoting baseless assumptions as if they are preordained fact is not conducive to arriving at the truth of the matter.

Hold that thought Carl.

they (the Fed) will throw the entire private banking system along with the economy under the bus in order to preserve their position.

Are you referring to their position as the guardian Angel of the money centre banks they're supposedly going to throw under the bus?

(BTW I agree about the economy being thrown under the bus but it will be a communal effort with Washington.)

The key figure to look at is the supply of FRNs in circulation, which conclusively refutes the notion that the Fed is printing FRNs with wild abandon.

Who here is arguing that "the Fed is printing FRNs with wild abandon"? That comes later in the description of hyper-inflation which has been a central theme of this blog for 3.5 years. HI first then the wheelbarrows - not the other way around.

Congress can spend all the credit it wants, it's just more debt. And calling that credit "FRNs" does not make it so, as the H.6 report clearly demonstrates.

See above.

My blog explains what the the Fed and the Law considers to be money and credit, regardless of who is generating it, is not on that list.

Are you proposing to expand the lecture series to include legal tender law? Here? At this blog, forsooth.

costata said...

The All-You-Can-Eat Bank Reserve Buffet

One of the key economic insights that the MMT folks trumpet is the observation that most money is lent into existence by banks. Now I realize that calling bank credit money "money" is going to upset Carl but that's merely a bonus. I want to focus on something important - why the banks tend to get what they want.

Steve Keen and other debt deflationists are fond of saying that the banks lend first and look for reserves later. True enough (the empirical evidence and math support this claim) but I think an enquiring mind should extend that observation with this question:

Why do the banks always get those reserves when they want them?

I think the explanation may be fairly simple. It's partly a legacy issue. When Nixon closed the gold window bank credit money was already the bulk of the circulating money supply. Nixon simply withdrew the gold collateral partially (fractionally) backing the money supply pool.

In order for this money supply pool to remain fungible, by definition, it all needs to be accepted equally as money. All of the "perfect money substitutes" along with the FRNs, Pounds, Yen etcetera. If that bank credit money component of the money pool ceases to be accepted in trade or commerce it's game over for the currency itself.

Think about that. If the bank credit money customer balances are doubted then we have bank runs. People will attempt to exchange those promises for physical currency.

I think we can also pinpoint where those bank credit money fungibility crises arise as well. They show up first in the inter-bank market. Crises in this market are often described as a liquidity crisis or liquidity crunch. In my opinion these terms are misleading. These events are better understood as collateral crises.

The fear stems from concerns about the liquidity of pledged collateral and unsecured loans. So the banks demand more and/or better collateral from each other. Obviously the most liquid collateral is cash and government bonds. Now this would be hilarious if it wasn't such a serious matter.

None of them have enough cash or "risk free" bonds to cover their obligations to each other because they are all leveraged right up the wazoo. This leverage in turn created the bank credit money they loaned into existence (and they know that) but these scamps demand cash and government bonds (which they don't have enough of) from each other anyway.

So they go running home to Mummy. The CB lender of last resort (and ultimately the currency issuer who backstops the lender) steps in with a guarrantee of some description. This guarrantee could be a repurchase agreement for temporarily illiquid securities or a deposit guarrantee or some other combination of guarrantees. In extremis the government may step in and nationalize a failed bank. Putting it's currency issuer status and balance sheet behind that failed bank.

Gotta keep that money supply pool fungible right down to the last piece of fiduciary media which the CB/government currency issuer has permitted (by granting a banking license) to be perceived to be identical in spending power to the base money.

So Carl the historical record may not offer you any evidence as Aaron has duly noted above. How about we run with common sense instead? They will promise to print and then, when necessary, they will print.

costata said...

PS.

So the banks demand more and/or better collateral from each other.

I should have added "or they refuse to lend to each other" although this has the same effect.

Desperado said...

I know that some people think I approach these A/FOA archives somewhat religiously. Well, I do!

The EMU is coming appart at the seams as the PIIGS citizens are clearly rejecting austerity. Socialism, in its nationalistic form (better known as fascism), is spreading like fire across the Meds. As Stalin once said, "The Pope! How many divisions has he got?". Replace the "Pope" with EMU, and you will discover one massive hole in the aurguments of the € faithful.

The US not only has 11 aircraft carriers, but also fleets of satellites, drones, cruise missiles, F-22's, anti-missile systems, harm-missiles, urban assault vehicles and now even detention centers spread around the country. Throw in control of SWIFT and the world's reserve currency clearing system. This is the big stick that allows the US to herd the $IMFS cats. Look what happened to Hussein and Gadaffy and what is now facing Assad. Even Switzerland is completely cowed. Meanwhile, Britain is in the co-pilot's seat, the Saudi's, who control oil prices through their control of marginal oil flows, are also firmly on board. Louis XVI made not accepting the assignat punishable by death, this is what the US is doing with the $IMF. And it appears that the UN is part of this scam too. How many countries does the US and the UN have to bully in order to keep this system going?

And what does the EMU have? Von Rumpoy and Barroso and Draghi and a disintegrating currency union with 0 military force are going replace the $ reserve currency with the €? Gimme a break. They have just about lost Greece and by all appearances France is not far behind. The EU is like a large polygamist marriage where every member loathes all the others.

So yes, the dollar will go down in a heap of hyper-inflated ashes, but it won't be the € that replaces it. Far more likely it will be the death of the € that finally sparks the $-HI. If enough EU countries elect fascists like Hollande who will bite the hand of the Fed and the US military, then the jig will finally be up. This is just one reason why the EU is desperate to get some kind of EU-army going, but it will never work.

50sQuiff said...

Apropos of nothing, I was listening to a presentation at work last week where an as-yet unfilled role was to be held by "A N Other". I thought nothing of this as it's a popular English colloquialism for a person unknown.

Then it dawned on me that ANOTHER is not actually called "another" but "A N Other". Do you have this idiom in the US? It strikes me as a very British thing. If I was an older British gentleman trying to choose an anonymous internet moniker in the 90s, the initials and name "A N Other" would probably have sprung to mind.

tintin said...

Desperado, you are putting up too much faith in the US military might. They can't even fix Iran.

Also, how much is the EU deficits, trade deficit and government spending, as a whole? If my memory is right then the Euro zone is largely balanced in term of external trade. Thus the question of whether the Euro will survive rests in the hands of the European people.

China for one seems to be very willing to use/accept Euros.

John said...

Greetings Friends.....another excellent post FOFOA....and another signpost the the trail ahead leads to a certain point. There is one question that I would like to pose to the many gifted thinkers that populate this forum...
My question has to do with the level of Post Freegold Purchasing Power (PFPP)....with some of the numbers postulated here post reset, it would infer a purchasing power parity for Freegold on the plane of physical things that have never heretofor been seen....even during the millenia in which gold was money, fiat merely a gleen in the banker's eye, and paper gold non existent. How can this be so? What conditions now warrant a relationship to other physical things never before seen in human monetary times? Your thoughtful comments are most appreciated.

50sQuiff said...

John, this is FOA quoted in "Moneyness":

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

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

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

John,

Gold can reach new heights because we aren't going back to the past, undervaluing gold as MoE; gold is taking on a new function.

FOFOA: Gold's function in society is evolving into something new. It is being spread out among millions and millions of savers, to perform this new function. Only the SAVERS need gold!...

Stefan brings up a recurring topic of discussion here at FOFOA. He asks, "How could gold ever be worth more than $10,000 in today's dollars?" And I reply, "How could it not?"...

I don't think it is as simple as pouring a hundred cups of water into one large beaker and noting the total volume....

You see, time is the factor most ignored in the concept of "stored purchasing power". It is ignored because it is relatively irrelevant to most people...

The future amount of time is infinite, therefore "stored purchasing power" is theoretically limitless. The only thing that limits its potential is a faulty storage medium, which limits the collective confidence in its ability to preserve wealth over time....

So, quickly cutting to the chase, the logical conclusions we can deduce from this conceptual line of Thought are that:

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

I say this is the rough limit because it represents the emergency exit from said flawed medium.

So the next step is to ask ourselves the obvious question. How much "stored purchasing power" exists in the world today? This is a good question, yes? But how could we possibly know? Today it is all denominated in worthless paper!...

...This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued...

Bjorn said...

Great post as always, thanks!

I´m still a bit confused on how the "structural support" works though. If someone could break down the actual CB actions for me I would be grateful. The passage I would like to see expanded upon is:

CB storage works, surprisingly, by duplicating the glut of dollars abroad. The CB mops up the dollars and then duplicates them by sending them back to the US public and private sectors (in proportion to each sector's deficit attribution, today 100% USG, 0% private sector) so they can be spent again, and also keeping those same dollars in CB reserves as a debt of the United States. Since 2009, it's all attributable to the USG, so every day, as a billion-plus dollar glut piles up, the foreign CB sends it back to the USG and also stores it in its own vault with a new billion-plus in Treasuries.

But in order to do this, that foreign CB needs to duplicate it again in its own currency. So the foreign CB prints an amount of its own currency needed to buy up the dollar glut, thereby transferring the monetary inflation to its own population and keeping the dollar price tags from changing. No (or low) dollar price inflation.


So the CB prints it´s own currency to buy the necessary dollars (how and from whom? where does the domestic currency end up?) and then sends those dollars back to the USG by buying treasuries and storing them. The USG then proceeds to spend those dollars (again). Why is the inflationary effect transferred as opposed to duplicated by this?

John said...

Jeff and 50sQuiff...

Thank you both....I am however still confused if you don't mind some further indulgence. I understand and accept $IMF and fiat/debt as a flawed store of value that is disappearing at some rate....but at the end of the day we have one planet with a given number of economic actors/persons and a finite number of goods and services on that planet that represents the physical plane of "real" things.
Surely there must be some logical relationship to the aggregate of those real world goods and services in the planetary physical plane and physical gold as a storage medium par excellence....so then, does not our existing stock of physical (approx 170,000 metric tons)
get reconfigured to equate to some reasonable percentage of that aggregate real world stuff? and if so, what should be that plausible percentage and does that number equate to those assumptions being made here?? Gues I am trying to "work backward" to see if we can independently arrive at the same range of post-Freegold valuation. Thanks for your help.

Carl said...

Costata, my blog is not a "lecture series", it's a simple statement of the facts that should allow anyone the ability to sort the attendant fictions from their beliefs and the rhetoric surrounding this issue.

http://carl-random-thoughts.blogspot.com/2011/04/all-money-is-currency-but-not-all.html

The entire HI argument is built upon the premise that the Fed is already printing with wild abandon, supported by quotes from the likes of Timmy, Ben and other banking, government, business and celebrity persons to bolster that perspective. If this is not true then why bother quoting their rhetoric, then attaching commentary to that effect? Even in your attempt to disavow my observation of this point, you iterate it again with the wheelbarrow comment.

"They will promise to print and then, when necessary, they will print."

What's the point of printing FRNs when credit is still working as a medium of exchange?

What's the point of printing FRNs after credit fails, taking the value of the FRN as a replacement medium with it?

When, do you believe, the Fed will start printing, before or after credit, as a medium of exchange, collapses and how, do you suppose, they are timing this printing scheme?

Please consider these points while pondering the notion that the Fed "will print":

1.) Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives.

2.) Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.

How do you square your assumption that the Fed "will print" when they have every incentive not to?

Onward...

It makes little sense to ask "Why do the banks always get those reserves when they want them?" Banks don't "get" reserves from the Fed, they "deposit" reserves with the Fed as required. Reserves are not a gift to the banks, as your question implies, banks have to purchase every instrument held as a reserve by the Fed.

Motley Fool said...

Carl

"The entire HI argument is built upon the premise that the Fed is already printing with wild abandon,"

No, it's not.

"What's the point of printing FRNs after credit fails, taking the value of the FRN as a replacement medium with it?"

Inflation is not instantaneous, it is a process. So printing when credit fails is a means to get real goods. A cyclic process that works every time, even while destroying the currency.

Also, if you don't mind, a simple minded question.

Say we have a country with no central bank, and we set one up. How do they deposit reserves?

TF

Sarah said...

I just came across the FOFOA blog for the first time and read: Open Letter to EMU Heads of State. I don't understand one thing though - when the membrane referred to breaks and the public is allowed to buy and sell gold to the central banks, how would your average American Joe do so?

Right now I buy my physical gold from Gainesville Coins. And I figure that since I'm still in college/ in my early 20s, if I buy a little from them every year, I'll build up my base enough that by the time when that membrane does break, I'll sell my gold and make out well (granted that barrier breaks in my lifetime). But I don't know how I would do this at the much higher prices above $5K or $6K. Would small retail shops along 47th Street, Manhattan NY and others like Gainseville Coins then also HAVE to offer to buy and sell gold at those higher prices?

Sarah

JR said...

John,

"Surely there must be some logical relationship to the aggregate of those real world goods and services in the planetary physical plane and physical gold as a storage medium par excellence....so then, does not our existing stock of physical (approx 170,000 metric tons) get reconfigured to equate to some reasonable percentage of that aggregate real world stuff?"

==========

Two ideas on why its about more than just all the real stuff in existence now:

1) From Jeff's link to http://fofoa.blogspot.com/2010/06/how-can-we-possibly-calculate-future.html:

You see, time is the factor most ignored in the concept of "stored purchasing power". It is ignored because it is relatively irrelevant to most people...

The future amount of time is infinite, therefore "stored purchasing power" is theoretically limitless.


also

The chain of settlement amongst savers which I described in this comment is like a battery system for the storage of economic power. It gains its power and its storage ability from its perpetual nature. Economic power can be deployed or discharged at any time by any saver because there are always new net producers working to join the chain. Without this system of reserves, the surplus production of savers simply gets distributed and used up by whatever activity the debtors are up to at that time, or wherever the central planners want to allocate it. With the Freegold system, the allocation of stored purchasing power becomes a matter of the individual decisions of billions of savers with no reason to hurry.
http://fofoa.blogspot.com/2012/03/sushi-island-savers-saga-part-2.html

and

2) Human capital. Its real valuable. Go Go Superorgansim!
http://fofoa.blogspot.com/2012/02/superorganism-open-forum.htmlhttp://fofoa.blogspot.com/2012/03/savings-capital-theory-open-forum.html

http://www.youtube.com/watch?v=RCD14IrOcIs

JR said...

Hi Sarah,

It is like anything else a merchant sells. Can I sell a new I-pads for $10 bucks? It comes down to how much you can replenish your stock for, yes? If you can buy it for x, you can sell it for (x + your profit margin). If you sell it for less than x you go broke.

Maybe this on "restocking price" will help you think about it:

Hello jaxville,

Thank you for your comment. I can confirm your observations with my own personal experience from October 2008, specifically the 9th and 10th.

Many people don't understand how a gold dealer works in a volatile market. The dealer's stock is not necessarily his own gold. In some cases it is obtained with credit. But in any case, the dealer wants to replace his stock as soon as possible after a large sale. So on busy days he will be in constant contact with his supplier locking in a price to replenish whatever he sells.

When I buy gold from my dealer, it is not the difference between what he bought that specific piece of gold for and what I paid that he calls a profit. It is the spread between what I paid and what he can lock in right after I leave.

During normal times he will often have an equal number of buyers and sellers coming into the store and will not have to call his supplier very often for quotes. But when the sellers stop coming in, then he relies heavily on whatever price his wholesale supplier is quoting him over the phone; a price that can change dramatically during a single day.

On October 9th, 2008, I remember that my dealer only had gold Eagles in stock and he would not let them go for less than $1116 because his restocking price was something like $1066 from his supplier if I recall correctly. There were several of us in there at that time, so he was not just quoting this to one sucker. Then on the next day, October 10th, 2008, he wouldn't sell his Eagles for less than $1,259. Again, there were several people in the store.

I've never seen anything like it before or since. It came completely out of the blue. On October 9th the PM gold fix was $883.50. And not only that, but it had just FALLEN $20 from the 8th! On the 10th it went back up $20 and then on Monday the 13th it dropped $70 to $831.50 and continued on down into the mid and low $700's!!

It is my suspicion that the next time this happens it will not revert back to normalcy the way it did in 2008.

Sincerely,
FOFOA
February 1, 2010 2:20 PM

http://fofoa.blogspot.com/2010/01/living-in-powder-keg-and-giving-off.html?showComment=1265062805529#c283346469573096808

Jeff said...

John, the price of gold is arbitrary; it can achieve such a high value precisely because it doesn't interfere with the physical goods and services that economies need. There will be a huge rise in the purchasing power of gold relative to everything else. Think of gold for saving, across time.

Here is a costata partial comment:

costata: "7. The reason that services, human + ecosystem + extractable resources, cannot satisfy the debt is because they are either already pledged as collateral or the future output of labour (that's what a 20 year mortgage is!) for the existing debt or they are not available as a surplus. Human beings and other species MUST retain a certain portion of their productive output for their own consumption and sustenance or they quite simply die.

8. Gold is neither consumed nor does it detract from the necessary consumption of other goods and services. It can re-capitalize this bankrupt system easily. It cannot do this by expanding in quantity BUT it can do this by expanding in price. "

Gold is just for savers.

FOFOA: So that whole gold section of the top pyramid is like an exclusive country club for savers, like the men-only clubs of yesteryear, where we savers all sit around smoking cigars, practicing secret handshakes and agreeing that we'll only buy gold with the excess left over from our net-production and deferred consumption...

So we can have a physical plane whose total net value is much greater than the total amount of cash. That’s because "The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things."...

Same goes for gold. All the gold can be worth many multiples of all the currency. There is no need for any correlation. Gold (in size) circulates slower than homes. It circulates on a generational time scale...

John said...

Jeff and JR....

Thank you....there is a nuance here I'm starting to grasp but not fully there....so gold is our wealth reserve. Is it not also a marker and claim check on all the other planetary stuff?
Could the aggregate of all those markers (gold) exceed the value of all that stuff? And is it because it's supposed to take into account future accreted value? In other words it's present "high" value equates to its future stored value...this is a hard concept to get if I'm on the right track. I'm used to a world where 1 + 1 is supposed to equal 2...what am I missing?

M said...

@ Desperado

"The US not only has 11 aircraft carriers, but also fleets of satellites, drones, cruise missiles, F-22's...."

^Also commonly known as the US consumption monster. The Soviet Union had a big military too. Its a liability. Whatever the EMU or the does have (France has a nuclear aircraft carrier) is bought and paid for. (The EU as a whole is a net creditor)

Allot of people seem to think that the US uses its military for its own interests alone. Iraq being a prime example. Remember UN Resolution 1441....

United Nations Security Council on 8 November 2002, offering Iraq under Saddam Hussein "a final opportunity to comply with its disarmament obligations".

^Thats not my words, that's the resolution as it is written. How did the vote go ? To quote Wiki..

On 8 November 2002, the Security Council passed Resolution 1441 by a unanimous 15–0 vote; Russia, China, France, and Arab countries such as Syria voted in favor, giving Resolution 1441 wider support than even the 1990 Gulf War resolution.

It looks like the creditors wanted to use that military for the good of themselves while conveniently hanging the blame on the good ol US and George W Bush. They were paying for it anyway.

JR said...

There is an amount of stuff out there now.

But there are also lots of smart people with "know-how" and neat tools and such that allow us to make more/better stuff in the future.

If I save, I am not consuming now, but instead I am deferring consumption until later in the future, yes?

The future will be different than today, yes?

Why am I limited to saving what exists now?

What about the chain of settlement - I buy gold now but there are always new net producers working to join the savers chain of settlement - its what these net producers will make that I will consume in the future when I choose to "cash in" my savings, yes?

John said...

Thank you JR....

Beginning to see the nuance....and I can see it would be difficult to quantify in any precise terms. It would also imply a vision for the future in terms of its productivity levels. A world constrained by resource availability, plentiful cheap energy would necessarily impact the reserve's present value. And I would imagine there is some implied value that's been partially contrived by the illusory world of fiat/debt creation to the extent that this has falsely buoyed human productivity and wealth.

e_r said...

FOFOA - Bravo!

Costata - in full form ;)

Carl,

The entire HI argument is built upon the premise that the Fed is already printing with wild abandon, supported by quotes from the likes of Timmy, Ben and other banking, government, business and celebrity persons to bolster that perspective.

You are focusing on the effect, not the cause. Wheelbarrows is the effect, not the cause . If you spend more time reading through the archives here, you will come to appreciate the nuances of the HI argument presented here.

It is the mark of an educated mind to entertain a thought without accepting it. Entertain the thoughts of FOFOA, then you can choose to accept/reject it.

Banks don't "get" reserves from the Fed, they "deposit" reserves with the Fed as required.

How do you square that statement with this information from a working paper from the BIS:

The underlying premise of the first proposition, which posits a close link between reserves expansion and credit creation, is that bank reserves are needed for banks to make loans. Either bank lending is constrained by insufficient access to reserves or more reserves can somehow boost banks’ willingness to lend.

An extreme version of this view is the text-book notion of a stable money multiplier: central banks are able, through exogenous variations in the supply of reserves, to exert a direct influence on the amount of loans and deposits in the banking system.

In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans.


It is critical to recognize that the injection of reserves is not the cause of greater loan issuance, it is the consequence. In other words, the Fed is following the expansionary activities of the banks, rather than leading them. - Full paper.

Dr. Octagon said...

The past few articles have been building on an interesting theme, looking at the ratio of budget deficit to trade deficit. I understand the concept that without the support of foreign central banks, this can lead to hyperinflation, and I can see the reasoning behind the discussion of "Supporting foreign dollar settlement with CB storage".

But what I don't understand, is the suggestion that the United States is only able to sustain this trade deficit to budget deficit ratio of over 100% because of the Dollar's special status. There are many countries with ratios over 100%. Looking at the handy tables in the back of the Economist, I see that this is also true for Canada, Britain, India, Pakistan, Mexico, Egypt, Israel, South Africa, and many others.

Let's just look at Britain for a moment. Their current-account balance is -1.5% of GDP, and their budget balance is -7.7% of GDP, or over 5x the size, much worse than the United States. Like the US, Britain has resorted to Quantitative Easing. While I can see a case for the United States avoiding hyperinflation by receiving support from other central banks, I don't see how other countries, such as Britain, have also been able to avoid hyperinflation. Who is absorbing all those pounds sterling? Which central banks are loading up on Indian Rupees?

The argument that a ratio over 100%, coupled with a lack of central bank support, leads to hyperinflation is missing some critical piece, otherwise Britain, or India, or some other country living without the Dollar's exorbitant privilege, and with this ratio, would have gone through hyperinflation by now. But they haven't. I am working on the assumption that any central bank today still prefers holding dollars over these other currencies, so any issues brought on by this ratio will show up in these other countries well before showing up in the US dollar. So why hasn't it happened to them yet, and which central banks are loading up on all of these other currencies?

Aquilus said...

@somanyroads

I believe Costata (thank you) articulated the answer perfectly in the direction you were interested in.

@e_r

Nice post!

jojo said...

Bjorn- I think you need to read the article from a few weeks ago FOFOA did called Peak Exorbitant Privledge. I think that addresses your question directly.

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

Dr. Octagon

The argument is not that this will be the direct cause, but rather the mechanism or method by which the USG reaction will translate into hyperinflation, once there has been a loss of confidence.

One can say that hyperinflation is the loss of confidence/the credibility deflation/the demand side drop. This is the spark, all that remains is effect and method.

It is difficult to separate all these conflated concepts.

At this stage all it will take is a large enough shock. The world financial system is quite fragile, like the very much overdue earthquake in San Francisco.

That is my reading anyhow.

TF

Carl said...

Motley Fool, nearly every argument made in support of HI infers or outright states that the Fed is "expanding the money supply" or "printing money". You may deny it as you like, but the evidence of the notion that the Fed is already printing is the prevailing theme of FOFOA's blog.

"Inflation is not instantaneous, it is a process. So printing when credit fails is a means to get real goods. A cyclic process that works every time, even while destroying the currency."

Your statement appears to ignore the fact that credit is our primary medium of exchange, "the currency", it's not just something you get with a good credit score or lose with a bad one. If the government destroys the U.S.'s credit, garnered through the issuance of Treasuries, it destroys the value of those Treasuries, which destroys the capital structure of banks across the globe and, in turn, our primary medium of exchange, all at the very same time.

So when credit fails, all commerce comes to a screeching halt because there are no banks or medium available to conduct business.

As for "depositing reserves", fair catch...they deposit unencumbered securities which are held by the Fed as reserves.

Aquilus said...

@Dr Octagon,

IMHO you're missing a critical piece: yes, those conditions lead to inflation.

The road to hyperinflation is caused by the USG not being able to curtail its own "standard of living" and increasing it's budget and thus making the vicious circle into a spiral that's out of control. USG can do that DIRECTLY as it creates USD that is the reserve currency accepted international settlements

The other governments have to acquire a settlement currency first. They do not have the Exhorbitant Priviledge, and thus cannot create that spiral effect.

Aquilus said...

@Carl

Look, it's simple: when credit starts failing, credit is replaced by base money in order to save the system.

No crazy printing until then. So far Fed has introduced only enough base money to stabilize the system so far.

Of course they won't do more than they need. They will only do that when forced.

Aquilus said...

Grammar is a bitch (LOL) "its" not "it's" in Dr Octagon response.

Motley Fool said...

Hi Carl

You seem to think that FOFOA supports every argument made in favour of hyperinflation. Just because a lot of other foolish people scream 'the Fed is printing and this will lead to doom and hyperinflation!' , doesn't mean that is the argument presented or agreed with here.

My statement does not ignore that credit is the primary means of exchange. Your question was in the situation where credit collapses.

Your scenario is not quite accurate. Banks and producers may not extend credit in that scenario, and that will surely mess things up, but they will still be obliged to accept paper fiat, by law.

People don't simply go sit on the pavement and starve when a economy, and specifically credit, collapses. ;)

TF

Dr. Octagon said...

Aquilus said: "The other governments have to acquire a settlement currency first. They do not have the Exhorbitant Priviledge, and thus cannot create that spiral effect."

This isn't how I read it. My understanding is that this article isn't about the use of dollars in trade (the medium of exchange, or normal flow). It's about what FOFOA calls the marginal flow, the "mopping up" of dollars leaving the US. I personally would phrase it as "the ongoing conversion of dollars from flow to stock". Whether or not the currency leaving a currency zone needs to be converted into another for trade settlement is irrelevant - it's the fact that they get absorbed by central banks outside of the currency zone that matters.

Motley Fool - you say "The argument is not that this will be the direct cause, but rather the mechanism or method by which the USG reaction will translate into hyperinflation, once there has been a loss of confidence.". I am of the opinion that FOFOA is explicitly stating that he IS talking about this as the trigger when he says: Now I've got to make an important point about stock and flow here. We need not be concerned about the stock of dollars held by these foreign CBs, which today stands at more than $5T. The real danger is the unstoppable flow of dollars. No one needs to dump their dollar holdings to collapse the dollar. In fact, they won't dump and I don't expect them to dump, at least not until collapse is well underway.

All they need to do is to slow down mopping up the gushing, unending flow.


So I'm still questioning why this doesn't apply to other countries.

Aquilus said...

Dr Octagon,

First: yes, if a country stubbornly continues to have its currency debased, of course they will have hyperinflation.

But my point is that for the other countries, there is a 2 step process, there is the FX market to consider in addition to how much extra currency they issue.

Look at India, and the ever-shrinking rupee. They cannot buy anything in rupees outside of their borders, they have to go through FX to get dollars to settle trades in. Now, so far they've stubbornly printed and maintained their deficits. My point is that the FX market MIGHT make them think twice about that BEFORE they get into hyperinflation territory.

The USG/USD does not have that check, it's all about the direct prices of real stuff.

Does that make sense to you? I'm not argue that it CANNOT happen, I'm arguing that is much LESS LIKELY that it will happen.

Motley Fool said...

Dr. Octagon

Cause and effect are such difficult things.

Why would confidence be lost? It certainly wouldn't happen in a vacuum. It's a mass psychological effect of a currency depreciated at a certain rate that is felt to be too much, the view that it will continue and the knowledge of peer rejection or panic.

The USA has been and is importing a huge amount of goods purely due to their reserve function, the same cannot be said of the pound. As that reserve function support is abandoned by other countries that puts more pressure on the currency and increases the percentage of goods for pure cash. A vicious cycle.

So cause or effect? Tricky judgments. :P

I also would like FOFOA's opinion on the dynamics for other countries.

As Aquilus pointed out however, they have not and cannot sustainably get real goods for their currencies without impacting the exchange rates of their currencies, so their deficits in such regard of of a more temporary nature and of a smaller measure.

TF

Carl said...

e_r, I'm not the one focused upon wheelbarrows, I'm the one attempting to dispel that notion, along with the notion of hyperinflation that's supposed to precede their use. And I have read and have considered FOFOA's arguments, that's why I'm here, your presumption to the contrary notwithstand.

As for squaring my statement with the paper linked; I think it squares itself. If you read past the text you quoted, which is a rendition of prevailing beliefs, you will note that the paper iterates my comment almost exactly.

By the way, thanks for that link, at first glance it appears to be a good read that supports my "No Hyperinflation" position. I'm curious to see if it's for the same reasons.

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

Jon,

Today's $debt is imaginary capital. It can't and won't be repaid in real terms.

Post $collapse/freegold transition, we will gold will see gold carry wealth through to the other side of the waterfall.

How much is up for debate. But one thing we do know is:

The monetary plane exists only to assist the Superorganism in its drive toward sustainability by transmitting information through prices and lubricating the flow of the physical. Savers drive everything. If they are saving, the economy will expand (sustainably or unsustainably). If they are not saving, the economy will contract. The Superorganism's natural drive is toward economic sustainability
http://fofoa.blogspot.com/2012/03/savings-capital-theory-open-forum.html

Yup:

If they are saving, the economy will expand (sustainably or unsustainably).

JR said...

Sorry "John" ;)

Dr. Octagon said...

Aquilus - I think I understand what you are saying. Let me restate it to be sure. Your argument is that countries that must use the FX market for trade, such as India, watch their currency devalue along with their trade deficit. Currency leaving the country competes with currency that left previously, and so the FX market is constantly devaluing the currency. The currency is not supported by other central banks, and the value is set by supply and demand in the FX markets. Because of this, it is not "propped up" in the same way as the US dollar, and so does not experience hyperinflation when that prop of support is removed.

Hmm.... yes.... I think this is a good argument. Other countries can (and do) print and experience "hot inflation", but the US dollar is positioned so that a little "hot inflation" becomes an inferno.

I like this argument, but if it is correct, then I would expect to see the balance of payments and the rate of inflation to be roughly in sync with each other over the years, for each individual country, with the exception of the US, who should show much less inflation relative to the balance of payments deficit. I haven't yet taken the time to see if this is true or not, but I hope to do so soon.

Motley Fool said...

Dr. Octagon

Don't forget to factor in real growth and changes in the velocity of money in your considerations.

Just saying. :P

TF

Jeff said...

Carl says 'credit is our primary medium of exchange, "the currency", it's not just something you get with a good credit score or lose with a bad one. If the government destroys the U.S.'s credit, garnered through the issuance of Treasuries, it destroys the value of those Treasuries, which destroys the capital structure of banks across the globe and, in turn, our primary medium of exchange, all at the very same time.

So when credit fails, all commerce comes to a screeching halt because there are no banks or medium available to conduct business.'

FOFOA: The big secret is that the people's money is simply credit. And by "the people's money," I mean our money, the real producing economy's money. The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies.

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

But there is a fundamental difference between the kind of money that fills the debtors balloon (credit money or balance sheet money) and the kind the Fed is using to prop up the savers balloon (monetary base). This is a critical difference that deflationists can't seem to wrap their heads around (and I'm not sure why).

You see credit money is tied to the functioning of the economy and base money is not. As the debtors balloon deflates, so does the functioning economy, and so does the real world of goods that backs the money supply. Base money does not contract along with the economy like credit money does. And base money is the fuel in all hyperinflations while credit money vanishes!"

See Carl, credit money and base money are not the same.

Jeff said...

FOFOA: And now that you have a little bit of understanding about the difference between economically-tied credit money and base money (cash or its equivalent), as well as the power of fear and velocity, I want you to notice that the hyperinflations of the past have all played out with base money, not credit money, at the helm...

Deflationists often refer to "foreign-denominated debt" as the cause of hyperinflation and also as their ace-in-the-hole reason why the dollar can never experience a Weimar-style hyperinflation. But this is a complete red-herring. The foreign debt was not the cause of the confidence collapse. It was only the fuel that forced the government printing... the second stage boost in hyperinflation. In our case we have a different kind of fuel, the most over-sized federal government the world has ever known!

e_r said...

Carl,

You say: And I have read and have considered FOFOA's arguments, that's why I'm here, your presumption to the contrary notwithstand.

But that does not have coherence with what you also said:

You may deny it as you like, but the evidence of the notion that the Fed is already printing is the prevailing theme of FOFOA's blog.

IMO, you have superficially glazed over some of FOFOA's posts and have jumped to a conclusion that FOFOA's prevailing theme is "Fed printing money". Short answer: Wrong.

There is a lot more depth and breadth in the Hyperinflation argument, if you're willing to consider them (below are a few links):

Big Gap in Understanding weakens Deflationist Argument .

Moneyness .

You also say: I'm the one attempting to dispel that notion, along with the notion of hyperinflation that's supposed to precede their use .

Here's FOFOA: Inflation and deflation are polar opposites, but currency collapse and deflation are practically twins.

It is about the outcome for the dollar as we are in transition.

You say regarding the paper: at first glance it appears to be a good read that supports my "No Hyperinflation" position. I'm curious to see if it's for the same reasons.

You may want to rethink your "No HI" scenario.

To think that humans can measure fat tail outcome probabilities and conclude that it will be zero is a big danger and a folly.

In fact such over-confidence (in humans' ability to measure risk) has wreaked havoc on economies, Housing bubble being a more recent example.

And of course, I am in complete agreement with Jeff's statement regarding the distinction between credit money (banks create) and base money (CB follows it). You are obscuring this distinction to make them mean the same thing, they are definitely not.

Robert LeRoy Parker said...

Hi e_r,

Carl is making the exact arguments that he made well over a year ago in this post:

Link

Here is some of what he said:

"Credit money ALWAYS vanishes” = GLOBAL HYPER-DEFLATION = All Commerce, All Around The Globe, Comes To A Screeching Halt.

And that, almost became our reality in 2007/08, next time they’re not going to be able to stop it.


Why is that?

Yes, the government is going to respond by printing, while in the interim (intervening time), the people will be fully involved in their own response to having their economy collapse from underneath them. What odds would you give on the government and the Fed surviving their response?

I'm not sure where the arguments will go this time but I'm confident that neither side will waiver.

thedeadfauvi said...

I believe I understand what FOFOA says and I have a question:
How can we follow which support the FED still receives from other CBs? Which indicators are to follow?

I understand that the BRICS are no longer constrained to buy the US debt and other economies in recession follow suit. Is this right?

Carl said...

Jeff said...

FOFOA says: "You see credit money is tied to the functioning of the economy and base money is not. As the debtors balloon deflates, so does the functioning economy, and so does the real world of goods that backs the money supply."

As I have pointed out many times.

FOFOA says: "Base money does not contract along with the economy like credit money does. And base money is the fuel in all hyperinflations while credit money vanishes!"

No, base money doesn't contract, neither does it expand without unencumbered assets of equal value to the FRNs needing to be created.

So we have, let's say 1,035 billion in FRNs of which more than half are floating around the globe, 40 billion in U.S. coin and 240 million in USDs out and about (forget those). The rest of the base money supply is comprised of convertible instruments at par denominated value for a grand total potential of about 2.6 Trillion FRNs and 40 billion in coin to service a credit failing, asset tanking 14 Trillion, 50 state, economically diverse economy and spur Hyperinflation.

Yep, I see that happening...

*Oh and, 800 billion in demand deposit, credited accounts that get first dibbs on that 2.6 trillion in FRNs.

This line of FOFOA's argument is little more than a thinly veiled attempt to spin the valid arguments used in support of Deflation into one that supports hyperinflation...FAIL!

Jeff said... See Carl, credit money and base money are not the same.

That's what I've been saying all along...

Motley Fool said...

Carl

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

-FOA

e_r said...

TF,

Excellent and a very relevant FOA quote.

RLP,

LOL Carl is here to convince us that the probability of HI is 0.00. And I don't think he has presented anything to support that.

Edwardo said...

Carl wrote:

"No, base money doesn't contract, neither does it expand without unencumbered assets of equal value to the FRNs needing to be created."

Let me try to help (by way of the following from Philip Bagus): http://mises.org/daily/5575

"There are two ways central banks produce base money. By tradition, the Fed uses the produce-money-and-purchase approach (PMP). Normally, the Fed produces money in their computers and uses it to buy US Treasuries from the banking system. In exchange for the US Treasuries, the Fed creates money on the account that the selling bank holds at the Fed.

The ECB, in contrast, uses the produce-money-and-lend (PML) approach. It produces money and lends it to the banking system for one week or three months. The preferred collateral for these loans to banks is government bonds.[1] As a result of PMP and PML, banks receive new base money. They hold more reserves at their account at the central bank. The additional reserves mean that they can now expand credit and create even more money.

Carl said...

j_r, adding depth to the theme does not change the theme. FOFOA's primary primis is, was and continues to be the expansion of the base money supply, printing.

Your accusation that I am obscuring the distinction between credit money an base money is a flat out lie. It is that very distinction that supports the credit collapse deflationary scenario, more so than any hyperinflation theory.

There isn't enough of a monetary base to catch 200 Trillion in falling knives.

Motley Fool said...

Carl

MV = PQ

What happens when velocity increases?

...and believe me velocity increases if there is a loss of confidence in a currency.

TF

two_bushels said...

costata,

Thanks for your reply to my questions about deflationary scenarios. Below is a follow-up.

You write:

"if there are collapses elsewhere [outside the US] they are likely to play out in fairly predictable ways - following tendencies that are structural in nature. The present structure of the US economy indicates HI as the most likely kind of collapse. (I imagine that there will be a lot of discussion here about what other countries can expect to experience.)"

I like that you invite a structural analysis of the global economy along geographic lines. This strain of analysis should show, for example, that states which lack productive assets, such as energy and farmland, could experience sweeping deflation as fiat development dollars lose their power (presuming HI in the US) and their purpose (as dreams of frontier export markets evaporate).

Subject to fiat-system collapse or recalibration, states that would possess little of value to back winning bids in global resource auctions may include not only an obvious set of drought-ridden African states, etc., but also Japan and many members of the EU. I think I see how a structural basis for HI in the US is not at odds with a temporary price deflation now foreseen, or at least not ruled out, by some prominent Euro- and Japan-centric investors. Does this line of thought seem reasonable?

What was most thought-provoking for me in the original post was understanding inflation as a function of the day-to-day flow of dollars for goods and services purchased by the US, from oil to domestic mail delivery, whereas I had come to think of inflation as a function of backstopping the stock of bad debt. This new perspective need not change one's long-term price outlook for gold, grain futures, etc.; it does provide a more rounded rationale than presumption of the US government's political capacity to bail out financial institutions in the face of popular discontent. Regardless of what becomes of the banks, we the people will still demand fuel and smooth roads, and we (or most of us) still want mail service, no matter the dollar-denominated cost.

Since I'm stretching my thoughts, let alone my forecasting skill, I wonder if I am still in line with the message of the original post.

Carl said...

Motley Fool said...

FOA said.."My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

Pure unadulterated supposition base upon, what I can only assume to be, a total misunderstanding of the Federal Reserve and the process by which FRNs come into existence and the liabilities attached to every note the Fed creates.

http://www.treasury.gov/resource-center/faqs/Currency/Pages/legal-tender.aspx

Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.

e_r said...

Carl,

Nobody is contesting the credit collapse deflationary scenario. Question is: how is the probability of HI 0.00?

Care to demonstrate it?

There isn't enough of a monetary base to catch 200 Trillion in falling knives.

You're talking about the credit created in the past that cannot be meaningfully serviced. Who is contesting here that this past credit cannot be serviced in real terms? Answer: Nobody.

Now, let's stretch that thought to the future:

What happens when the US government spends more than it takes in revenues, but the private sector (foreign or domestic) cannot absorb the non-stop flow of treasuries? ( no structural support )

Motley Fool said...

Carl

You are now straying into pure fantasy, and leaving reality firmly behind.

I do seem to recall the Fed buying up loads of liabilities of the mark-to-unicorn type, from insolvent banks, as these were non-performing loans.

Whatever man.

Trolls' gonna troll.

Haha.

TF

e_r said...

Carl on FOA quote: Pure unadulterated supposition .

Reality: Monetary base graph

What were they doing around October 2008 Carl? Weren't they essentially saving debt at all costs, even buying it outright for cash?

Who is engaging in pure unadulterated supposition now?

Carl said...

Motley Fool said...

"What happens when velocity increases?

...and believe me velocity increases if there is a loss of confidence in a currency."


Velocity increase and a loss in confidence in what, our primary currency, credit, or FRNs?

The base money supply, only half of which is actual legal tender, hasn't increased in any amounts that would warrant a loss of confidence instigated by oversupply. That leaves credit currency to fret over, which has been expanding at the top by leaps and bounds.

Recent history has demonstrated that the only velocity credit achieves when confidence is lost in it, is how fast it goes "!POOF!" when it fails.

Will the FRN be punished for the failure of dollar denominated credit, you bet. There will be dollar devaluation price inflation but nothing that will come close to hyperinflationary levels.

Motley Fool said...

Carl

"Will the FRN be punished for the failure of dollar denominated credit, you bet. There will be dollar devaluation price inflation but nothing that will come close to hyperinflationary levels."

Right. Now.

The last step is to look at the political reaction to this price inflation. Something that FOFOA discussed in detail in his post Moneyness and also in this post.

You are free to hold the position that the USG will crash their lifestyle in real terms...since that is what you imply.

But I have to say, I don't think that is a view oriented towards reality.

TF

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

Motley Fool said...

"The last step is to look at the political reaction to this price inflation. Something that FOFOA discussed in detail in his post Moneyness and also in this post.

The political reaction is irrelevant, politicians do not control the FRN supply, the Federal Reserve does, after all, it is their note, we only use it.

"You are free to hold the position that the USG will crash their lifestyle in real terms...since that is what you imply."

OH, like a good bout of hyperinflation wouldn't crash the USG's lifestyle, please....

Reality is self orienting, it just a matter of facing it.

Motley Fool said...

Carl

"The political reaction is irrelevant, politicians do not control the FRN supply, the Federal Reserve does, after all, it is their note, we only use it."

Don't tell me you are fooled by the official bullshit of independence? The moment the Fed does not comply to the congress, that is the moment they lost their charter and whoever will comply gets appointed.

Of course it will! In the end.

In the meantime do you think they will take it lying down? Give up their power voluntarily? Fire the vast public service sector?

Don't forget the element of time.

The end is certain, but it won't happen overnight, and they will fight their loss of power every step of the way.

TF

RJPadavona said...

Hello Friends,

Sorry to interrupt this deflation vs hyperinflation debate.

But just in case you were wondering if you had enough stock to flow like water.......

How Much Money Do You Need To Realistically Recreate The Scrooge McDuck 'Gold Coin Swim'?

RJP

Carl said...

e_r said...

"What happens when the US government spends more than it takes in revenues, but the private sector (foreign or domestic) cannot absorb the non-stop flow of treasuries? (no structural support)"

Treasuries lose their fiduciary value, banks, dependent upon that value to remain solvent, go insolvent and credit, dependent upon bank solvency in order to remain viable as a medium of exchange, ceases to function.

e_r said...

"What were they doing around October 2008 Carl? Weren't they essentially saving debt at all costs, even buying it outright for cash?"

As far as all data shows, no actual cash was used in any of the rescue events that occured on or after October 2008. Creating new debt to save old debt only increases debt, not the money supply.

Why didn't you address the point I made in that post?

e_r said...

Treasuries lose their fiduciary value, banks, dependent upon that value to remain solvent, go insolvent and credit, dependent upon bank solvency in order to remain viable as a medium of exchange, ceases to function.

Quantitative easing has been going on for quite a while now. Why haven't the Treasuries lost their fiduciary value yet?

no actual cash was used in any of the rescue events that occured on or after October 2008. Creating new debt to save old debt only increases debt, not the money supply.

So if I understand you correctly, you are making a distinction between paper notes and electronic base money (essentially the commercial bank deposits held at the Fed)? Am I right? You are subdividing the money types within M0.

But isn't base money created as good as cash? Can't that base money electronically created be used for settlement purposes? If they can't be, why the heck does the Fed include the base money into M0 (the most narrow definition of money)?

Carl said...

Motley Fool said...
"I do seem to recall the Fed buying up loads of liabilities of the mark-to-unicorn type, from insolvent banks, as these were non-performing loans.

Ah geez please... haven't we gone through the difference between credit and money already?

They were spinding credit and the more of that they spend, the closer to reset we get.

Motley Fool said...
"You are now straying into pure fantasy, and leaving reality firmly behind.

OK, you've made the accusation now support it.

Address the point I made, demonstrate the error in it that induced you to make that comment.

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

Talking about Treasuries and value,

The Treasuries are so overbought that the real yield on the 10 year note is now negative!

That's right, after adjusted for inflation: we have to pay the USG to hold the 10-year note. . They are that valuable right now ;)

Aquilus said...

Dr Octagon,

Yes, in a nutshell, all I was saying is that a non-reserve currency country (like India) will get a warning from the FX market. It can choose to ignore that warning, of course and you get Zimbabwe. Few do.

For the US, there is no FX warning. Just full on direct increases in the prices of real stuff. The US could heed that warning. As shown in this blog, likely it will not.

As for calculations, for rate of inflation vs balance of payments, as Motley pointed out and my Austrian instincts tell me: I would not try to quantify something that has so many variables. That's just me, there are many people smarter than me that could come up with models for this I'm sure.

Wendy said...

hhmmm does it sound like Art in here?

Tony said...

I noticed a few FOFOA regulars following this thread on Chris Martenson. Perhaps this is some good material for FOFOA's next post...quite engaging theory being presented. I'm linking to screwtape's linking/commentary:

http://screwtapefiles.blogspot.com/2012/05/prestige.html#more

Carl said...

e_r said... "Quantitative easing has been going on for quite a while now. Why haven't the Treasuries lost their fiduciary value yet?"

I don't know, Treasuries buyers are really stupid? Your guess is a good as mine or anybody elses.

e_r said... "So if I understand you correctly, you are making a distinction between paper notes and electronic base money (essentially the commercial bank deposits held at the Fed)? Am I right? You are subdividing the money types within M0."

M0 doesn't count credit currency, it can found in M1 and M2.

Electronic or credit currency (it's not money by law) is only valid as a currency for as long as the institutions that maintain it remain solvent and functional and the assets that back it retain their value.

Oh, and it's not my distinction, it's one made in Section 31 U.S.C. 5103 as well as in Fed and Treasury documentation.

Credit currency has no legal standing as money but all debts incurred through its use are legally binding.

Nickelsaver said...

http://youtu.be/BuRNyKf2NWI

e_r said...

I don't know, Treasuries buyers are really stupid? Your guess is a good as mine or anybody elses.

I know Carl so I will tell you. What is going on is called financial repression. Artificially supressing interest rates is hurting savers (both domestic and foreign).

Therefore, should we conclude that Treasuries have value, when they are artificially forced to be in a overbought condition?

Which is why FOFOA does not see a monetary plane crisis in the bond market. While the Fed is busy repressing savers in the monetary plane, the physical plane is a beast of its own where US has an enormous trade deficit .

What do you suspect will happen when there is no structural support for the dollar to keep perennially running the trade deficit?

M0 doesn't count credit currency, it can found in M1 and M2.

Alright Carl, I'll spell it out like A-B-C.

1. Monetary base is same as M0, same as base money supply.

2. M0 includes paper notes in circulation, coins, paper notes held in bank vaults, and more importantly bank reserves . Bank reserves are the commercial bank deposits held at the Federal Reserve.

Therefore working from the above spelled-out basic definitions, we come to understand that electronic deposits can function as money as well and are used in payment settlements.

Credit currency has no legal standing as money but all debts incurred through its use are legally binding.

Of course, but bank reserves are not classified as credit are they?

Now back to the original question: the Fed has saved the banks (who hold the bad debts) by pumping electronic base money into the system in 2008. FOA's quote stands true.

Bjorn said...

Thanks jojo, I did say in that thread that I would have to read it again, but never did...

costata said...

Hi two_bushels,

Does this line of thought seem reasonable?

Broadly yes. I would prefer to respond in detail after giving your comment more thought (and at a time when I'm less tired).

I'm hopeful that we can make analysis along the lines of Dr. Octagon, Aquilus et al's discussion a bigger part of the ongoing dialogue in this forum. Topics such as balance of payments/national accounts, banking systems, trade and related topics.

I think Aquilus and Dr. Octagon have nailed an extremely important point. Non-US dollar currencies with floating exchange rates are in a different position to the US dollar global reserve currency issuer.

The overarching (big picture) themes of this blog will always be central to our discussion here. Having said that over 6 billion of us outside the USA have a vital interest in understanding how the failure of the present $IMFS will affect our national economies, banking systems and so on.

The impact of Freegold-RPG could be quite different in each of our countries. I'm thinking of factors such as debt levels (and composition), whether your country is in deficit or surplus, whether you are a gold producer and a host of other factors that will impact on the process of adjustment.

I look foward to further discussion with all of you about these matters when I can devote the time it deserves.

Right now I need to help Carl out with a brief history lesson.

Cheers

Bjorn said...

So let´s see if I got it now.
The USG buys stuff abroad. The foreign seller of the stuff wants local currency, so a commercial bank in that country exchanges dollars for local currency, then turn to the CB and gets freshly created local cash for the dollars (creating inflation in that country). The CB then uses those dollars to buy Treasuries, and stores them as reserves, counted as “good as gold”, so dollars go back to USG who promptly spends them again (abroad which is why there is no domestic inflation), and the cycle starts over.

Sorry if this seems basic to some of you, I just had to formulate it to understand it...

costata said...

List Of Occasions When The Federal Reserve Defied Congress And Refused To Issue Federal Resserve Notes (FRN) In Exchange For US Government Debt Instruments

My apologies for the lengthy title but this is a matter of the utmost gravity and I would appreciate your undivided attention.

List begins:



End of list.

Cheers

costata said...

Top Three (3) Campaign Fund Donors - Congress, Senate and President (All Parties)

1. Wall Street
2. Wall Street
3. Wall Street

Cheers

costata said...

List Of Occasions When US Politicians Favoured J6P Over Top Campaign Donors

List begins:



End of list.

Cheers

Bosco said...

Thanks FOFOA for another piece of fantastic work.

I've got one point and a question though.

Point - Don't get overexcited by the China trade deficit, when taking together with March data, it's just a Chinese New Year effect (which is why you have to be always careful in looking any Jan-Mar data for China).
China Export & Import data:
Jan 2012 - export $150B, import $123B, BOP +$27.3B
Feb 2012 - export $114B, import $146B, BOP -$31.5B
Mar 2012 - export $166B, import $160B, BOP +$5.3B
Overall for 2012Q1:
export - $430B (QoQ +7.6%)
import - $429B (QoQ +6.9%)
BOP - $0.67B
(some of these data are not totally matched up, but that's the norm in China gov't stats :))
As a comparison, 2011Q1 China has a Trade DEFICIT of $1.02B and also a big deficit month in 2011 Feb!
So nothing has changed, at least YET.


Question - why is USGS deficit/Trade deficit > 100% be that important (similar to Dr. Octagon's line)?
If we not limit ourselves with the recent data from 2007 to 2011 and look, say through to 1971, one will find, from 1971 to 2011, a 41-year period, that we will see, most of the time that ratio is over 100% and can be much bigger than currently at around 250%. Say, from 1976 to 1996, except 1987 at 99%, every single year we have the ratio >100%. Is this ratio really that significant? Or are you saying because of the existence of Euro now, that >100% is becoming significant?

Desperado said...

@tintin "the Euro zone is largely balanced in term of external trade. "

Internal €-zone trade imbalances closely mirror those worldwide imbalances in $-zone trade. Just like the US, Greece (and probably other PIIGS too) is surely running budget deficits in excess of their trade deficits. It is tearing the €-zone apart.

@M "It looks like the creditors wanted to use that military for the good of themselves"

The EMU has no army, but they do have a lot of sway in NATO, which by its involvement in Libya and now Syria has completely broken free of any limits to its mandate (see the many recent Russian sabre-rattling incidents about anti-missile defence as evidence). As long as €-rps can keep their interests aligned with the $IMFS then they could sway Nato for perhaps an intervention in Greece if the slaves get too restless and threaten to force a sovereign default. But the EMU alone has no teeth.

The meme of the moment seems to be collateral, and to paraphrase: "if your country is a part of a sovereign debt crisis and you don't know who the collateral is, then you are it". In the recent Paul vs. Paul debate Krugman started blathering about no one knowing what the dollar is really linked to, how it is linked to the economy in general. Well the truth is that the collateral for the $ is the $-taxpayer, and the collateral for the € is the €-taxpayer. And if you are China buying up truckloads of Fed or ECB agency notes one important factor to consider is how reliable the stream of tax revenue is. So lets compare:

€-zone
- No Army, airforce or navy
- No TSA
- No direct taxing authority
- Union of independent countries
- No national identity
- Subset of the EU, dispute is guaranteed
- Democratic legitimacy vacuum

$-zone
- Strongest military on planet
- Long track record of military ruthlessness (Hiroshima, Cambodia, Saddam, Gaddafy, Japanese-American detention camps)
- Control of international finance
- Federal Gov. already fought civil war to get control
- Military trained and equipped with the latest in urban suppression and warfare.
- Vast internet and electronic snooping apparatus
- TSA, end of posse comitatus, NDAA, Nat. Resource presidential order.
- Fed. governement has direct taxing authority
- IRS most feared tax agency on planet, prison for tax resistors
- New laws to allow seizure of passport for non-payment of taxes.
- TSA checkpoints, detention centers, local police subsumed bsy federal agents.

So when it comes to collateral for fiat currency, as in how reliable is the governments stream of revenue from the slaves, the €-zone really sucks. And all this is without mentioning revolution and secession.

The EU-elites have overplayed their hand. The people didn't elect them and don't trust them, and the people are turning to nationalist leaders in order to stop the silent EU-coup of their freedom. If nothing else the €-zone is going to be the trench that splits the EU as the €-outsiders resist being sucked into this blatant elite power-grab. And one only has to look at recent seizures of EU member Spain's assets by Argentina and Bolivia (with impunity) and one can see how toothless the EU and the €-zone are.

So the €-zone has its wagon hitched to the $-zone just like the yen, the won, the swiss franc, the rial, ... When the dollar goes down, all these are going down too because it will only be the death of the $ that eliminates the monopoly of US force and thereby frees these other currencies. As the $ goes down the US will be as dangerous as a wounded tiger and these $IMFS elites will stick together to the bitter end rather than cede power.

Anand Srivastava said...

@Desperado
you are saying that EU has no liabilities and they don't collect taxes either, so IMO a very thin outfit.

While US has enormous liabilities. When the crisis comes the US will be down in the dumps forced to print USDs. While EU will not need to print Euros, and watch the indebted Countries reducing their consumption and increasing their production.

Although I guess it is not as independent as it should have been, and it will be forced to print Euros, but not for supporting itself, but supporting indebted sovereigns. I don't see your point.

Where is your beef?

JR said...

Hi Bosco,

The end of credibility inflation and, as you note, the presence of an alternative big international currency like the Euro make things different. From Credibility Inflation - http://fofoa.blogspot.com/2010/08/credibility-inflation.html

The Setup

Part of the reason the rest of the world did not abandon the dollar in 1971 was that the rate of economic expansion flowing from Middle Eastern oil cheaply priced in U.S. dollars was already exceeding the expansion rate of the money supply. So the switch from a semi-gold-(con)strained monetary system to a much more expandable "balance sheet money system" as I like to call it — or another name I like is "purely symbolic monetary system" — allowed for the non-deflationary addition of many new "quality of life" gadgets, widgets and shipping lanes that the world had never before imagined.

For the next three or four decades we would be able to comfortably afford the new introduction of Betamax VCR's, microwave ovens in every home, personal computers, DynaTAC cell phones, camcorders, digital cameras, LaserDiscs, Compact Discs, DVD's, MP3's, and on and on. Eventually, all of these wonderful products would be built cheaper by someone else on the other side of the world and shipped to us cheaply using the oil purchased from the Middle East with easily available U.S. dollars.

[...]

And thus, in 1980, began the modern era of Credibility Inflation.

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.

[...]

Selling the Salted Mine

Is this not where we are today? Interest rates – and with them, bond valuations – have run their 30 year course from 20% down to 0%.

[...]

The Credibility Waterfall

I think it is fair to say that we have finished our 30-year run of high credibility inflation and we are now in the early stages of credibility deflation. The real question now is, can the credibility of the financial system deflate without tripping a breaker, without causing a credibility waterfall in the currency in which it is denominated?

The difference between today and a few years ago is that a few years ago credibility inflation was being fed by private credit (debt) expansion. Asset values, like homes, were being sustained and driven higher with the arrival of new marks. But today the Ponzi cycle of credibility inflation has peaked, there are no more new marks, and its decline is being managed centrally with the government expansion of new base money to conceal the failures one at a time.


========

A related concept from the above post:

So prior to 2009, the foreign sector was supporting the sum total of both the US private and government sector deficits, leaving some room for the private sector and foreign support to contract while the government sector expands. And that is exactly what happened.

Today the federal budget deficit is more than twice the trade deficit, and the foreign sector is supporting less than half while Fed printing supports the rest. Additionally, there are signs today that foreign support is waning even more.

JR said...

And from above on how structural support for the $ and the rollout of the euro fits in:

Structural Support

FOA 10/3/01 - Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

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

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained… Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.

JR said...

So why is it different now? No more private credit creation (aka no more credibility inflation) as no more political or structural support for US deficits:

And here we find the key to the kingdom: "supporting foreign dollar settlement with CB storage."

All currencies have the value of whatever they can buy. In a sense, they get their value from price tags offering prices denominated in their unit. But this MoE (medium of exchange) usage demand is not enough for the dollar. It is not enough that foreign goods are priced in dollars. The dollar requires another kind of usage demand: SoV (store of value) usage.

The reason for this is simple. The US is the only originator of new dollars and the US has run an unending trade deficit for 37 years, so the US has been exporting an unending stream of dollars for 37 years. To some extent, that pool of external dollars can circulate outside of the US as long as some foreign goods, like oil, carry a dollar price tag. But that is not enough.

Without foreign CBs supporting this system of foreign dollar settlement by mopping up the unending glut of dollar emissions, the market price mechanism would collapse the US trade deficit in a heartbeat.


No more support means things are different, aka the premise based on how things *have worked* is no longer in play:

The point is that the premise rests on 90 years of history which only makes sense if viewed properly. It rests on 50 to 60 years of political support followed by 20 years of structural support from Europe and another 8 or 9 years of structural support from China. Today both political and structural support are gone, and the "solid foundation under any and every discussion" of monetary matters in America is what I am generously terming the "willy-nilly support" of the rest of the world. In other words, we have no say in the matter. Our fate is in their hands. Which kind of renders the premise invalid, doesn't it?

See the importance of support that mops up the USG's flow of dollar emissions to the paper illusion, and hence the consequences to the end of that support:

The dollar is so vastly overvalued today because the rest of the world has kept it on life support for 30 years past its expiration date. It is the stability of dollar prices at that small marginal flow that sustains the illusion of wealth in the entire, massive monetary plane.

Jeff said...

Carl,

Credit money is definitely not 'currency'. Stop mixing up credit and base money.

FOFOA: Deflationists assume that the world of necessary physical goods has already been efficiently priced to the credit money aggregates. And therefore, if credit money disappears and base money expands to take its place, prices will not rise. The money supply will remain constant. But this is simply not the case. Credit money and base money are qualitatively different. One contracts with the real economy, the other expands when the real economy contracts.

The world of PAPER debt assets may be priced into the credit money aggregates, but only based on the value of the reserves, the high powered base money, on which the real value of paper goods is dependent...

Today we have a credit money contraction concurrent with an easily expandable monetary reserve base...

...only one entity remains that is both willing and able to dig itself the infinite debt hole required to keep the system churning...

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

Hyperinflation is always hyperinflation of the bank reserves, the monetary base, not credit money. You can only have hyperinflation if the banking system reserves are hyperinflatable. Gold was not. Dollars are. Look at Weimar and Zimbabwe.

Jeff said...

Desperado, your military argument is completely nonsensical. The USSR had a massive military. Military is a liability, not an asset.

cbritton said...

I'm relatively new here, so please excuse my ignorance.

In regards to FOA's front lawn dump, was this meant to be taken literally? What I mean is, with respect to FOA's point of view, are physical FRN's going to be trucked out to every household at some point in the future? Maybe it's my lack of understanding this situation, but why would the Fed do this instead of say credit my bank account or even transfer my debt to the Fed's balance sheet where it can be monetized?

Nickelsaver said...

The front lawn dump is figurative for - passed onto the private sector.

Speaking of massive US military - can you think of any other part of USG that will require that more? Weren't were talking about his a few "threads" ago in ball of twine?

costata said...

Bjorn,
So let´s see if I got it now.

Correct in what you said, but it gets more complicated from this point onward:

The CB then uses those dollars to buy....

Bjorn said...

Thanks costata

Yes I understand that, but I meant to describe the net effect, and also perhaps I should clarify that I meant to describe the scenario before 2009. Given that, would you agree with my simplification?

JR said...

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.
http://fofoa.blogspot.com/2012/04/peak-exorbitant-privilege.html

JR said...

Here is some good stuff on how this transition plays out in the context of US currency collapse/hyperinflation and electronic credits and physical cash from The 21st Century Bank Run. In this post FOFOA described what the "21st Century Bank Run" - a run on physical gold - is going to look like, and how that will impact the US as we transition from plastic to paper - particularly in the context of the Fed created excess reserves.
http://fofoa.blogspot.com/2010/04/21st-century-bank-run.html

Think back to Exter's pyramid, and how demand collapses downward during a crisis. Think about "commercial bank credit money" as being higher on the pyramid than FRNs, actual physical cash. This is true. As we collapse downward to gold the banks themselves will shun each other's credit receipts in favor of central bank liabilities.

This is where all those excess reserves held at the Fed will finally come into play...

...Not through economic lending, but through interbank clearing preference, as the banks first try to jettison each other's "digits" as fast as possible. Once the bank run on physical gold begins, these banks are going to be very nervous about holding each other's liabilities, even over night. They will only "sleep well" holding Central Bank liabilities.

This is how the transition from plastic to wheelbarrow begins. We may not see a bank run on Fed cash by the people before we see it within the banks themselves, as interbank faith vaporizes during the run on gold.

By this time, the bond will be gone. As the people are running on the Bullion Banks the Fed is going to be very busy monetizing the entirety of US federal spending, from Social Security to Medicare, national defense and even Nancy Pelosi's entourage's per diem. It will all have to be monetized. Meanwhile the Fed will have to keep its remaining banks happy with Fed liabilities to clear the private liabilities, or else they will cease to circulate. Printing dollars and buying up private equity so that each bank only has to hold Fed liabilities.

And as the US Government starts spending its fresh new Fed credit, the Fed will have to supply the banks receiving those trillions in USG payment transfers fresh cash to back the massive inflow of new Fed liabilities...

JR said...

From Just Another Hyperinflation Post - Part 1 on the important distinction between credit money and base money (cash or Fed promises to print cash):

"...First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash).

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

...As FOA said, "As debt defaults, fiat is destroyed." Or another way to say is, "As debt defaults, fiat savings are destroyed."

But what is actually happening is the assets are being papered over with fresh base money. FOA: "hyperinflation is the process of saving debt at all costs, even buying it outright for cash." Or said another way, "hyperinflation is the process of saving debt-backed assets (MBS's etc..) at all costs, even buying them outright for cash."...

You see credit money is tied to the functioning of the economy and base money is not. As the debtors balloon deflates, so does the functioning economy, and so does the real world of goods that backs the money supply. Base money does not contract along with the economy like credit money does. And base money is the fuel in all hyperinflations while credit money vanishes!...

And now that you have a little bit of understanding about the difference between economically-tied credit money and base money (cash or its equivalent), as well as the power of fear and velocity, I want you to notice that the hyperinflations of the past have all played out with base money, not credit money, at the helm.

This is where all those "excess reserves held at the Fed" become very dangerous. You see, those are monetary base reserves, not credit money. They may not be physical cash yet, but they are contractual obligations of the Fed to print actual cash. And if velocity picks up in a panic, that's exactly what the Fed will have to do in order to keep the banking system from collapsing. Deflationists think this is a choice the Fed will have to make, but it is not.

It is already happening to a smaller degree with the Friday bank failures. Ever since the FDIC ran out of "reserves," every failed bank has been propped up with more fresh base money. "Saving the savers' deposits!" Converting them from credit money into base money in whatever amount exceeds the failed bank's marked-to-market assets.

So there is already enough fuel in the system to feed the fire when it starts.

And when it starts, that is when prices start to rise... price hyperinflation. And as prices rise, the government will need more money to pay for the same amount of "governing" in each successive cycle (monthly). This is when the monetary hyperinflation takes over and gives the price hyperinflation its HYPER boost.."

JR said...

From Big Gap in Understanding Weakens Deflationist Argument

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

But no matter what quantity of financial assets are wiped out, the cash in the system will remain. And the obligations for more cash printing will remain. And that's all the cash it will take to spark the most amazing hyperinflation the world has ever seen, as the fear turns from 'running out of dollars' to 'running out of food' in the wake of a devastating financial collapse.

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

JR said...

Hmmm,

And I explained the mechanism by which million dollar Federal Reserve Notes will find their way into the hands of hungry, impoverished and unemployed people on food stamps. Hint: It's not through credit expansion or rising wages! LOL

Sounds like EBT cards may play a role:

http://fofoa.blogspot.com/2012/03/sushi-island-savers-saga-part-2.html?showComment=1332124330978#c8295584147677296112

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

one more from Just Another Hyperinflation Post - Part 2

http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-2.html

The week I'm referring to is the much-ballyhooed "bank holiday," while the Fed scrambles to get fresh cash out to the banks. It will last anywhere from a few days to two weeks in my estimation. And during that time, cash will have more value than plastic.

[...]

So as you can see, "thin air money" is really just the 'physical dollar debt' of the banks that gets shifted around from bank to bank. So imagine if the bank were to write itself a big profit. All it would essentially be doing is saying, "I owe myself a dollar." You should try this. Make a balance sheet and oblige yourself to pay yourself a million dollars. Then go see if you can spend it!

I tried this once. Trust me that it doesn't work!

So all this digital money that everyone thinks has replaced physical cash is actually fundamentally inferior to physical cash in a **SIMILAR** way to how physical dollars were fundamentally inferior to physical gold in 1970.

[...]

If the two banks are in the Federal Reserve system then the unsettled portion is settled by transferring cash held at the Fed. Some of those reserves at the Fed get moved over from Bank A's account to Bank B's. But remember, reserves held at the Fed are the same as cash, because the Fed prints cash. I can't stress this enough. This is what BACKS the whole entire system… that the Fed prints cash. Cash backs the system. Physical cash. It is the reserve, just like gold used to be the reserve. There is NO SUCH THING as digital money that has replaced physical cash. It is an illusion!

[...]

I think your question is, Is a bank holiday inevitable, unavoidable? I believe it is. And here's why.

[...]

Once the time factor begins to present a perceived risk to the institutional banking system, it's all over. The system will need a large infusion of physical cash. Each and every "digital currency unit" is a debt of a physical dollar, backed by a debt, backed by a debt, backed by a debt and so on. It is a very long chain. And like all chains, it is only as strong as its weakest link! And there are a lot of weak links out there. The FDIC says about 800 of them right now if you believe the FDIC.

When one of these weak links breaks, it will not be enough to simply feed the cash to that broken link. The time factor will come into play. The Fed will have to ship physical dollars to ALL the links in the broken chain at once to avoid a panic. This will require a large infusion of physical cash.

Luckily this is possible today! Cash is the reserve, and cash can be created at will!!

[...]

JR said...

cont.

Think about the amount of promises a large grocery chain takes in every day with the confidence that settlement will happen before it needs to pay its obligations. The whole economy is like this. Whether one realizes it or not, the whole economy is operating on the confidence of the ultimate delivery of physical cash in the clearing process.

How about a gas giant like Shell? Think of all the "digital money" promises it takes in with faith in the clearing system to clear all imbalances each night.

There will come a point very quickly after confidence is shaken by some event, that physical cash will start to carry a small premium over digital money. This will be the time factor rearing its ugly head. I know of one cigarette shop that advertises a "cash price" in the window! This store charges less if you pay cash! That's not because of the time factor, of course… yet! But at some point those signs will start showing up at more places.

Today most vendors will eat the 2% it costs them to accept digital money. But what about when that cost rises due to the time factor risk premium? If someone pays you in cash today, you can go to the grocery tonight and buy food with it. If someone pays you with plastic, it will take a couple days before Visa deposits 98% of that amount in your bank account. Will your bank have any physical dollars then? So that you can recoup the lost 2%+ by getting the better cash price at the grocery?

Once this time factor settles in it will spread very quickly. The cigarette seller will prefer cash and will give you a discount for it so that he can go quickly and get the cash discount from the grocer. The banks will need loads of physical cash at this point. And they already have some of what they will need, sitting in excess reserves at the Fed.

Bosco said...

JR,

Let me get this right.

Are you (and FOFOA) suggesting that before the existence of Euro, that this ratio doesn't matter for other CBs have no (good) alternatives but to support $.
Now as there are Euro, then CBs do have a choice to not support $. And the significance of this ratio over 100% is that it virtually means US is not self sustainable (because of the overspending USG) and unplugging foreign CB support will lead to USG competing with private for physical goods and services and thus hyperinflation?

Is that the essence of the argument?

Dave Simone said...

@Bjorn,

Basic or not, your restatement filled in a piece of the puzzle for me. Thanks!

Dave

JR said...

Not bad Bosco!

5/22/98 ANOTHER (THOUGHTS!)

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

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

6/4/98 ANOTHER ( THOUGHTS! )

The last small gold war ended in the early 1980s, as the choice was to use the US$ or go to a gold based economy. No other reserve currency existed, and gold lost the war as all continued to buy dollar reserves.

But by 1980, Europe was working with the BIS to implement a new "reserve currency".

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

5/3/98 ANOTHER (THOUGHTS!)

The urgent drive to create a new "reserve currency" began in the early 80s, after the last small "gold war". The road to making this new Euro did never include gold in large amounts, until the last few years! Even one year ago, the news would say, 5% or less. Today, we speak of a much greater amount! This is interesting, yes? The BIS did "hatch" this deal in a very late fashion! The future of the Euro was found to be "weak", as the Middle East oil imports onto the continent would continue in dollars! This was so, from the dollar being made strong in gold. Gold priced in dollars at near production cost offered a "no switch currency" position, for oil. This position has been unstable for the last year, and the alternative of a switch to gold was in progress! You have read my "Thoughts" before. Now the BIS does offer to "change the rules of engagement", a real reserve currency is offered!

Few do grasp what is happening and why! They think the holding of gold reserves by the Euro is of a little point, as to what good are gold reserves? One cannot use gold as Marks or Yen to intervene in currency market to support the Euro. My friend, the BIS has played the, as you say, "big poker hand"! The holding of large reserves by the ECB and the withholding of sales from the market will not only bring the end of the London paper gold market, it will, thru a high USD gold price, "make the dollar weak in gold"! From this position, the dollar will lose the "oil backing" from the Middle East! At first, all oil for Europe will be in Euro's, then all producers want "strong currency"!

There is more: Many say, how to defend Euro without much currency reserves? If gold go to many thousands US, what will be used to bid for Euro as defense? I say, these persons will find a problem on their computer screens! You see, the Euro will start as "nothing", no holdings of size, anywhere! The dollar is held as reserves as "the stars in heaven"! It is to say, "the dollar will bid for the Euro", not "the Euro will bid for the dollar"! All currencies will "flow into the Euro for trade". But, if the Euro becomes so strong, how to compete in world trade? It will be the price of oil that will make the "trading field" level! The soaring US$ price of gold will make even a 10% Euro reserve be as 100% today, in USD! Oil will become, very, very cheap in Euros and allow that economy to do well! Many other countries will see this and also want to join the new "world reserve currency" that has become"the new world oil currency"!

The politics of the ECB? It is as a "side show". We watch this new market, yes?

JR said...

6/14/98 ANOTHER (THOUGHTS!)

"Your question of Euro gold backing? The Euro will not be backed or fixed in gold. It will, as Michael Kosares (USAGOLD) notes, be the first "modern currency" to hold true "exchange reserves" in gold. It is important to understand that "exchange reserves" of gold are much more powerful a tool for currency defense than gold backing! In this system, gold must be traded in a "public physical market", in that currency, Euros! As such, the Euro can "devalue gold" (Euro price of gold falls) thereby making it strong in gold! In today's world, this will happen as a "strong Euro physical market" displaces and defaults "the old dollar settlement paper gold market"! The dollar will become"weak in gold"!


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

FOFOA from Synthesis:
http://fofoa.blogspot.com/2010/03/synthesis.html

The euro architects were not trying to force a reserve currency on the world. There is a big difference between creating a government product with sovereign-monopoly backing that everyone must use, and creating a product that the marketplace must freely choose. In this case, the marketplace consisted of sovereign nations that chose to give up the privilege of printing their own money in order to join in the benefits of the euro.

[...]

The European plan was to support the $IMFS at least until a new fiat "reserve" currency could be established, one large enough to absorb the shock of a failing reserve currency, to avoid being forced back 100 years into a physical gold-based economy which would have been very traumatic. This effort took 20 years from 1980.

[...]

The Yuan

The yuan will not be the next global reserve currency because it has not only NOT severed its link to the state, it is actually printed by Communists. Those who are predicting this are still viewing the world through $IMFS goggles that see the yuan currently undervalued. They think in dollar terms and conclude that whenever China finally agrees to let the yuan trade on foreign currency exchanges, they would like to buy it! Being undervalued (against other fiats only) they see the opportunity to make fiat profits when it rises. They view it as a "store of value par excellence" compared to other fiats.

Things are not always as they seem.

Conclusion

Freegold is our destination with or without the euro. Even on the outside chance that an SDR or a similar super-sovereign currency is accepted as the new global reserve currency, it would have to contain gold at Freegold valuations in order to be viable, accepted and trusted, in the same vein as Randy's comment about an EMF. So any way you cut it, the future comes to us with really high value gold by today's standards.

Desperado said...

@Anand

"EU will not need to print Euros, and watch the indebted Countries reducing their consumption and increasing their production."

If the ECB doesn't print, then it is either a Fed bailout for Europe (as in $-€ swaps which is back-door printing anyway) or full on austerity for the PIIGS and with it guaranteed unrest, sovereign defaults, breakup of the €-zone and a return to national currencies. The ECB will print rather than see the breakup of their project and their elites loss of power. Both the Fed/Treasury and the US military industrial complex will also make sure the ECB prints, just like the SNB and the JNB. The Saudi's will not demand that all oil sales be settled in € nor will Japan conduct its trade with the US using €.

My "beef" is anyone still believing FOA/Another's decade old prognostications about the € becoming the next worlds reserve currency. IMO it is extremely naive and I listed the reasons above.

Carl said...

e_r said..."2. M0 includes paper notes in circulation, coins, paper notes held in bank vaults, and more importantly bank reserves . Bank reserves are the commercial bank deposits held at the Federal Reserve."

I stand corrected on M0, no problem, point still valid.

e_r said..."Of course, but bank reserves are not classified as credit are they?"

You are correct, the illusion of "bank reserves are cash" waiting in the wings ready to be doled out at a moment's notice continues supporting the notion that hyperinflation is an ever present threat.

A lot of things are called "cash" when they are not. Take, for instence, demand deposits, they have no cash in them nor is there enough cash reserved to service all of them if demand should arise, yet they are counted as such. And we already know there is no cash in, or available for, time deposits.

My whole point is that the underlying reality does not support the rhetoric that is heaped upon it. People get caught up in the rhetoric, the phraseology and terminology, which only serves to obscure the truth.

Take this comment by FOFOA: "Luckily this is possible today! Cash is the reserve, and cash can be created at will!"

A depository institution's reserve requirements vary by the dollar amount of net transaction accounts held at that institution. Effective December 29, 2011, institutions with net transactions accounts:

Of less than $11.5 million have no minimum reserve requirement;
Between $11.5 million and $71.0 million must have a liquidity ratio of 3%;
Exceeding $71.0 million must have a liquidity ratio of 10%

Cash is only a very tiny portion of bank held reserves and reserves, if they are held at all, are only enough to cover a fraction of the promises to pay held in transaction (demand) accounts.

Cash is not created "at will", it is created upon demand and must be paid for out of bank reserves held by the Fed, and what are reserves? Unemcumbered Gold Certificates, Treasuries and other value stable instraments, not cash.

Let me repeat, NOT CASH.

Michael said...

With each new topic a bit of clarity is added. If I had a choice for further elucidation I would pick an explanation for how the paper gold market has been used to hedge the dollar's value. I can see how that could work but I'd like to know more. How big is this thing? What are the mechanics of the hedge? Who uses it? How long has it been used? How is it doing now? Where does it seem to be headed?
...just a suggestion for those long boring days when FOFOA has nothing better to do...

Dr. Octagon said...

Desperado says: My "beef" is anyone still believing FOA/Another's decade old prognostications about the € becoming the next worlds reserve currency. IMO it is extremely naive and I listed the reasons above.

I don't think anyone is saying that the Euro will become the next world reserve currency. What is being said is that the Euro will continue to be a medium of exchange, or transactional currency. Gold will be the reserve. If the world reserves collectively tilt away from US dollars and towards gold, then the Euro is well positioned to not hyperinflate as that transition happens. So it will still be a useful transactional currency, as it is today.

Jeff said...

Carl! I think you may be coming around, a bit. On those demand deposits, remember how the Fed guaranteed them to a larger amount during the GFC?

FOFOA: This is where all those "excess reserves held at the Fed" become very dangerous. You see, those are monetary base reserves, not credit money. They may not be physical cash yet, but they are contractual obligations of the Fed to print actual cash. And if velocity picks up in a panic, that's exactly what the Fed will have to do in order to keep the banking system from collapsing. Deflationists think this is a choice the Fed will have to make, but it is not.

It is already happening to a smaller degree with the Friday bank failures. Ever since the FDIC ran out of "reserves," every failed bank has been propped up with more fresh base money. "Saving the savers' deposits!" Converting them from credit money into base money in whatever amount exceeds the failed bank's marked-to-market assets.

e_r said...

Carl,

Cash is not created "at will", it is created upon demand and must be paid for out of bank reserves held by the Fed, and what are reserves? Unemcumbered Gold Certificates, Treasuries and other value stable instraments, not cash. .

Of course, but on whose demand? The depositors right?

The base money is a contractual obligation of the Fed to print cash, when it is demanded by the depositors.

Jeff's excerpts from FOFOA's posts are spot-on in this regard.

People get caught up in the rhetoric, the phraseology and terminology, which only serves to obscure the truth.

Agreed. But who's getting caught up in rhetoric and terminology here?

I think we are clarified now.

Now, go ahead and present the case for the probability of Hyperinflation to be 0.00. I'm not holding my breath though ;)

Carl said...
This comment has been removed by the author.
e_r said...

Desperado,

My "beef" is anyone still believing FOA/Another's decade old prognostications about the € becoming the next worlds reserve currency. IMO it is extremely naive and I listed the reasons above.

What are you talking about here? When did FOFOA say that Euro will become the next world reserve currency?

Euro has built in its architecture to remain as a transactional medium that is transparent to the market (as far as its value is concerned), because their gold reserves are marked to market.

Carl said...

Jeff said... Carl,

Credit money is definitely not 'currency'. Stop mixing up credit and base money."

Dear Jeff,

Currency is a standardized medium of exchange, it can be dollars, goats, toothpicks and yes even credit. Currencies can be a unit of account or denominated in a unit of account.

The difference between a Currency and Money is that, only Money can be used as a Unit Of Account. In our neck of the woods, that unit of account is the Federal Reserve Note and U.S. Coin.

You have to be careful when slinging about terms such as "base money" because a large portion of what is counted as "base money" is not, by law and definition, money at all, it's just currency.

I hope this helps.

Your friend,

Carl.

Carl said...

e_r said... "The base money is a contractual obligation of the Fed to print cash, when it is demanded by the depositors."

So wrong.

Banks make the contractual obligation with depositors. The Fed is only obligated to provide Notes to a bank at an amount equal to that bank's reserve account held at the Fed. No more, no less.

e_r said...

Carl,

What happens when the depositors want to withdraw cash from the bank and the bank is out of paper notes, but has reserves held at the Fed?

Carl said...

Banks can get the cash from the Fed and the amount is deducted from their reserve account or they can borrow cash from other banks.

Nickelsaver said...

Llamas with Hats

e_r said...

NS - ROTFL!

Let's recap.

e_r said: "The base money is a contractual obligation of the Fed to print cash, when it is demanded by the depositors."

Carl said: So wrong. Banks make the contractual obligation with depositors. The Fed is only obligated to provide Notes to a bank at an amount equal to that bank's reserve account held at the Fed. No more, no less.

To which,

e_r said: What happens when the depositors want to withdraw cash from the bank and the bank is out of paper notes, but has reserves held at the Fed?

Carl replied: Banks can get the cash from the Fed and the amount is deducted from their reserve account or they can borrow cash from other banks.

Epic Fail!

Let's trace the chain of obligation (in Carl's words):

Fed has the obligation to the banks, who in turn have the obligation to the depositors .

Therefore, My original statement is so right . Fed has the obligation to the depositors to print cash when it is demanded.

Carl said...

i think one of the major misunderstandings here is fostered by the notion that the Federal Reserve and the Banking Industry are one in the same, they are not.

The obligations incurred by the banking industry are not the obligations of the Fed.

We are customers of the banks, the banks are customers of the Fed.

You can only withdraw an amount from your bank equal to the amount deposited, banks can only withdraw from the Fed an amount equal to the amount they have deposited.

The bank is not going to give you more than what you have on deposit and the Fed is not going to give a bank more than what it has on deposit.

This notion that the Fed is somehow obligated to make good on the obligations incurred by the private banking sector, is false.

Carl said...

Nickelsaver said... "Therefore, My original statement is so right . Fed has the obligation to the depositors to print cash when it is demanded."

Wrong AGAIN. The Fed is servicing the demands of its depositing customer, THE BANK.

The Fed could give a care less whether or not the bank uses those proceeds to service its customer.

Motley Fool said...

Carl

Just to be sure I understand you.

You are saying that if people develop a need to keep all their money under the mattress, and they have successfully claimed up every single dollar in circulation, the Fed would refuse to create any more?

And therefore hyperinflation is impossible?

TF

Motley Fool said...

Carl

While I'm asking questions, here is some more. How do You define hyperinflation? What do you think causes hyperinflation?

TF

Aquilus said...

Motley,

Carl is just trying to teach you that just like in kindergarten when you have to share your toys, everyone has to learn to share the existing dollars. It's not like the Fed can print more, any more than than kindergarten can conjure up more toys. Wait, er, never mind....

Carry on without me..

e_r said...

LOL, let's set aside this vacuous conversation with Carl and look at something more substantial.

The President of Bundesbank has written an interesting article in Financial Times regarding further easing. (registration required at FT to read the whole piece). h/t to Victor for the link.

It may appeal to politicians to abstain from unpopular decisions and try to solve problems through monetary accommodation. However, it is up to monetary policymakers to fend off these pressures

Very interesting to see him talk about risk-taking and the unintended consequence of further easing to maintain the unsustainable status quo.

An incredibly under-read economist, by the name of Burton Klein writes:

The degree of risk taking is determined by the robustness of dynamic competition, which mainly depends on the rate of entry of new firms. If entry into an industry is fairly steady, the game is likely to have the flavour of a highly competitive sport. When some firms in an industry concentrate on making significant advances that will bear fruit within several years, others must be concerned with making their long-run profits as large as possible, if they hope to survive. But after entry has been closed for a number of years, a tightly organised oligopoly will probably emerge in which firms will endeavour to make their environments highly predictable in order to make their environments highly predictable in order to make their short-run profits as large as possible.

Prof. Klein is talking about risk-taking in the absence of risk insulation from entities such as Central banks or Sovereign governments. But What if, in a dynamic system - Central banks or sovereign governments insulate firms from risk and therefore disable the failure mechanism by which progress is achieved?

Then I would say that as the Propensity to Engage in Risk Taking (PERK - which Prof. Klein refers to) increases, the system becomes more and more unstable (since the firms are insulated from the downside of these risks).

Aristotle said...

Carl

With small apology for my contempt, you are spectacularly wrong from the beginning [May 6, 4:00pm-ish].

It would serve you better at this early stage in your development and education to come forward with questions rather than foisting your faulty assertions. There are many here (not myself among them) with the requisite grace to deal with your toxic combination of self-assurance and unfathomed ignorance. (To be sure, I may very likely be the most arrogant person you'll ever encounter, but to my credit, I actively endeavor to remain fully apprised of my limitations and tread nowhere beyond until those limiting boundaries have been diligently explored and driven outward.)

Broad yet consistent experience in this realm has brought me to the following regrettable observation...

__________ ______________ __________
The insufferable bane of the internet near and wide -- infiltrating every arena of thought and discussion -- is an indomitable cadre of hapless pedants, each wielding a false notion.
__________ ______________ __________


Woe upon us that they, so ill-equiped, deign to commit themselves to our informational salvation. With thick and stubborn skull they hammer restlessly, yearning to replace the various masonry of solid foundations and structures with the particular cancerous notion occupying (singularly, with only personal reverence) the void between their own individual ears.

The sickening thuds of these thumping heads, wasting themselves against well-established bedrock, is an unsettling and unwelcome distraction from a forum of discussants intent upon an intelligent advance of inquiry, hypothesis, assessment, and a general improvement in understanding the ruling physics and working architectures of the real world.

___________ is Golden (for some much more than others.) Carl, get you some. --- Aristotle

Börjesson said...

e_r: "What are you talking about here? When did FOFOA say that Euro will become the next world reserve currency?"

Here's a quote from Synthesis (2010). The first part in italics is FOFOA quoting Another, the non-italic bit is FOFOA himself.

----------

6/4/98 ANOTHER ( THOUGHTS! )

The last small gold war ended in the early 1980s, as the choice was to use the US$ or go to a gold based economy. No other reserve currency existed, and gold lost the war as all continued to buy dollar reserves.

But by 1980, Europe was working with the BIS to implement a new "reserve currency".


The European plan was to support the $IMFS at least until a new fiat "reserve" currency could be established, one large enough to absorb the shock of a failing reserve currency, to avoid being forced back 100 years into a physical gold-based economy which would have been very traumatic. This effort took 20 years from 1980.

---------

Obviously, the euro won't replace the dollar as a store of value, since that part of the function will be filled by gold. But it is supposed to replace the dollar as the transactional currency of choice for oil producers and others. Cut Desperado some slack, that's clearly what he meant.

Now this is exactly the part I still have such trouble getting my head round in FO/FO/A's writings. How could the euro possibly be voluntarily selected by the world at large to fill this role, when it, as of today, has no credibility whatsoever? You may argue all you like that it's cleverly constructed and prepared for the role and all that. But surely, with all the "bad press" the euro is getting right now (and for very good reason, within the confines of the present system), the fact that the vast majority of the world looks at the euro as a failing experiment is reason enough why it won't happen? And that's assuming that it and the EU will even survive its current turmoil long enough to be around when the dollar goes ballistic.

I wish FOFOA's next post would be about this topic, about why the euro crisis and the shambles that is current European politics isn't in fact ruining all the best-laid plans of the EMU founding fathers. I'm obviously far from the only one who could use a clarification on this.

costata said...

Bjorn,

You wrote:
..I meant to describe the net effect

Correct

Carl said...

Love the baseless ridicule, truth sometimes garners that reaction. I understand and I do opologize for assuming the information I conveyed was common knowledge.

Can anyone explain the FDIC?

If it is the Fed's obligation to make depositors whole, then why is there a need for the FDIC?

Could you explain why banks fail?

If the Federal Reserve is responsible for the obligations of the banks and it can print money at will, then there should never be a bank failure, so why do banks fail?

JR said...

OMG thank you Carl,

You got Ari to post!

JR said...

The euro is at least the second most widely used international currency/reserve.

More pot stirring:

Growth for world claims in US dollar is significantly lower than growth for world claims in euros, and continously since 2001. It is even lower than growth for claims in SDR[5] basket currencies in the same period. This trend is observed for advanced economies as well for the Emerging and developing economies (see green cells).

If world claims in dollar represent currently 61% (respectively 26% for Euros) of world total allocated reserves, they represent only 34% of world total foreign exchange holdings (respectively 15% for Euros). This means that the exact composition of currencies into the Unallocated Reserves have a decisive weight to determine the really dominant currency in world reserves (see rose cells). Said differently, it could be possible that today already the dominant currency in reserves would actually be Euro. At least, we can only say that dollar is currently only the supposed dominant currency in world reserves.

The share of claims in Euro in allocated reserves is similar in advanced economies and in Emerging economies, and same for claims in dollar. (see rows "euros / total allocated reserves" )

The difference between claims in dollar and claims in Euros is lower in Emerging economies (64 - 25%) than in Advanced economies (58 – 28%). Said differently, the Emerging economies are willing to report the claims in Euros (instead in dollar) more often than the Advanced economies.

http://conscience-sociale.blogspot.com/2011/06/how-to-replace-world-trade-reference.html

Aaron said...

Börjesson-

Take a look at this response FOFOA wrote to Desperado back in Oct 2010. I believe it may provide you some of the insight you're looking for although it does not directly answer your question.

Carl, I have to admit I find it absolutely hilarious that you'd call Ari's response "baseless ridicule" noting your "truth sometimes garners that reaction". Have you read any of Ari's writing from back in the day? He probably understands more about Central Banking than most Central Bankers! Good luck debating him! I recall him writing a short story about sharks, blood, Ari-Instruments, and Valium around 2002 that would knock your socks off. Well, maybe I made up the part about sharks and blood, but I know Valium was in there somewhere!

A-ha! Here it is.

Aaron said...

Whoops. I was wrong. I didn't make up the sharks and blood part.

"I thought perhaps a little swim, up close and personal-like, with the sharks might convince you that the blood in the water will be your own..."

costata said...

Börjesson,

I think the currency war in progress is confusing the picture. It is partly a war of words as well. Let's not forget that "the first casualty of war is truth".

The separation of function between the role of MoE and SoV has been discussed at length here. Assume for the purpose of discussion that this separation has already taken place. Not just for the Euro but for all currencies including the US dollar. Gold is now the foundation for asset reserves among all CBs and currency issuers instead of the US dollar.

What is the role of FX currency reserves under this new regime? An SoV to be used to defend a currency under speculative attack? Perhaps to some degree but under this regime the ultimate weapon in that kind of battle is gold.

It follows then that the primary role of FX reserves would be as a lubricant for trade (not an asset or SoV). A "reserve" currency would therefore be synonymous with "trade" currency under this new paradigm.

Going back 10 years, in an environment where the US dollar is temporarily unacceptable for trade I would expect the Euro to have been accepted by default. Where else could we (ROW) have gone? To the "moon" as Jelle Zijlstra quipped? Obviously the US$ did not collapse at that time. Another and FOA's assertions were not tested at that time. We have to weigh those assertions in a contemporary context.

Today IMHO the situation has evolved to some degree. Currency swaps have entered into the picture. But this strategy is most useful in bi-lateral trade. For multi-lateral trade you need a currency that can exploit the network effect. There is only one currency that can (partially - only partially) replace the US dollar today - Euro. Because it has the network effect of the EU economy supporting it.

I highlighted the word "temporarily" above for this reason. After the default through HI the revalued US dollar will be a very strong currency. Consider the position of the issuer. Virtually debt free, massive gold reserves, big gold producer, (still) huge economy and so on.

I would like to remind everyone that the USA is only one of the stakeholders here. Even if the average American loses most of their remaining assets it is a drop in the bucket. The ROW will be footing most of the bill for this $IMFS collapse. This is structural to this $IMFS. All of those orphan US dollar reserves and debt instruments outside the USA will have to be written off to the amount that the USG dictates. At the sole discretion of the USG due to their military might.

The Euro Freegold-RPG architecture is designed to survive the transition not to negate this reality. The biggest winner, by far, from this transition will be the USA. I want to drive this point home. This game was won on August 15, 1971 by Richard Milhous Nixon.

If you don't want to be on the losing side:

Gold get you some (just like the winner has already done!)

Börjesson said...

Thanks, Aaron! As you say, not the answer I was looking for, but interesting nevertheless. Sadly, though, it made me lose a little bit of respect for FOFOA. In that comment, he comes across as just another cliché American who doesn't have a clue what a welfare state is. He seems to think it's a synonym for "living beyond your means".

Thanks, costata! Now that was a new and interesting perspective! USA as the main benefactor of the HI? You've really given me something to ponder.

costata said...

Glad to hear that Börjesson.

Cheers

e_r said...

Börjesson,

How could the euro possibly be voluntarily selected by the world at large to fill this role, when it, as of today, has no credibility whatsoever?

Why do you think the Euro has lost all its credibility? It is still accepted as medium of exchange right?

But surely, with all the "bad press" the euro is getting right now (and for very good reason, within the confines of the present system), the fact that the vast majority of the world looks at the euro as a failing experiment is reason enough why it won't happen?

Day-to-day minutiae contains a lot of noise, and the problem with these noise signals is that it can make one lose the forest for the trees.

In my comment above, I referenced a piece by Weidmann talking about the importance of Central bank's role in private sector risk-taking and I also alluded to the fact that dynamic systems have complex feedback loops.

Here's an example of the "bad press" that you are talking about: Paul Krugman critiquing Weidmann.

Is Krugman correct? I would say Krugman cherry picks the data to support his assertions and treats the economy as a static system (with an aggregate demand problem).

Krugman's prescription after the NASDAQ tech bubble burst was to lower interest rates and stimulate demand. How well did that go? One bubble to the next.

Which is why I like the big picture thinking by FOFOA and many other astute readers here.

And that's assuming that it and the EU will even survive its current turmoil long enough to be around when the dollar goes ballistic

Costata nailed it: The Euro Freegold-RPG architecture is designed to survive the transition not to negate this reality.

Sarah said...

After the U.S. dollar collapses, would Americans have to sell and buy gold with the Amero, which is currently being planned between the U.S., Mexico, and Canada?

Carl said...

Aaron said... "Carl, I have to admit I find it absolutely hilarious that you'd call Ari's response "baseless ridicule" noting your "truth sometimes garners that reaction".

First off, it's not "my" truth, it is the truth born from the facts of the matter.

Secondly, a broad declaration of wrongness followed by unrelated prattle that does not serve the conversation marks his comment as, petty ridicule.

costata said...

FOFOA, JR, Ari et al,

I think I may have found the key that unlocks this cypher called Carl. It's here in his comment - May 8, 2012 12:34 PM. Looking over his earlier comments when he discusses the Federal Reserve and FRN he is describing an independent CB that controls a currency which has severed its ties to the nation state.

Whereas the Federal Reserve is (notionally at least) a private institution that is owned by the heavyweights of the banking industry. Likewise his false perception of the latitude that the USG affords the Fed as compared to the ECB under the foundational agreements of the EMU.

Let's try a little substitution in the comment I referenced above every time Carl mentions the Fed.

I think one of the major misunderstandings here is fostered by the notion that the ECB Eurosystem and the Banking Industry are one in the same, they are not.

The obligations incurred by the banking industry are not the obligations of the ECB Eurosystem.

We are customers of the banks, the banks are customers of the ECB Eurosystem.

You can only withdraw an amount from your bank equal to the amount deposited, banks can only withdraw from the ECB Eurosystem an amount equal to the amount they have deposited.

The bank is not going to give you more than what you have on deposit and the ECB Eurosystem is not going to give a bank more than what it has on deposit.

This notion that the ECB Eurosystem is somehow obligated to make good on the obligations incurred by the private banking sector, is false.


For readers confused by Carl's comments an Atlas may help if you haven't shrugged him off already. His convictions place him squarely on the wrong side of the Atlantic Ocean decribing a system that does exist (on the other side of that ocean).

Edwardo said...

Carl, you ask the wrong question. "Why do banks fail?"

All banks are neither created equally-among the many examples attesting to this fact see the speed with which Goldman Sachs was transformed from an investment bank to a bank proper-nor are all banks shut down according to some uniform code impartially administered by a government agency.

If you are suggesting with your question(s) that it's all down to the FDIC with respect to bank failures and making depositors whole you are either delusional, in denial, or just plain stupid.

Nickelsaver said...

Carl, can I get a drop?

Börjesson said...

OK costata, I've thought about it a little. The US currently has a problem with spending far beyond their means, right? After the HI, won't they still have this problem? They'll be debt free, but they, or specifically the US government, will still want to spend more than their productivity really allows - especially if, as you suggest, they retain their vast military. In this new world, won't they have to pay for this spending with their gold? Will 8 000 tonnes buy them enough time to get that spending under control? It might, but I don't think they look so much like obvious winners. In fact, they look more like Greece, forced into harsh austerity because no one is willing to pick up the tab for them anymore.

Woland said...

Aaron;
I guess we all have our favorite Ari posts from the archives, and
yours, which was a bit complex, was certainly a good choice. For
those of simpler tastes, like me, "A New Year's Resolution", 1/2/2000,
msg ID 22052 is a nice intro to his clarity of thought. Enjoy.

Carl said...

Motley Fool said... "You are saying that if people develop a need to keep all their money under the mattress, and they have successfully claimed up every single dollar in circulation, the Fed would refuse to create any more?

And therefore hyperinflation is impossible?"


You're joking right?

No, I am not saying that, you are.

I feel no need to eject my opinions into your extrapolations. If that is the way you wish to interpret it, that is you prerogative.

Motley Fool said... "While I'm asking questions, here is some more. How do You define hyperinflation? What do you think causes hyperinflation?

Hyperinflation is a continuing (and often accelerating) rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services.

Causes can be; A loss of confidence in the currency due to its pervasive presence. A loss of confidence in the issuing government's ability to raise sufficient capital to pay its debts and expenses through taxing or other economic means. A pervasive fear of impending economic collapse and shortages. The dumping of a country's currency into its economy by other nations.

somanyroadsinvesting said...

For a quick diversion; anyone see the clips of Munger,Buffett, Gates dissing gold this weekend. Do you guys think they really don't understand it or is it propaganda to help maintain the status quo and current $IMFS? They seem to talk in such a superficial basic level, perhaps that's their strategy. Just curious what your thoughts are.

Whenever Buffett starts going off on farmland and stocks that pay dividends it really get me going. Like there is some stock with a guarantee of not losing mkt share, going bankrupt etc or land that can be contaminated, taxes etc. Thanks

I don't have much to add to Carl's comments since i feel like there are many others with better insight than me. However, as an observer it reminds me of when Bernanke and Krugman talk; somehow they found the fountain of wealth and no one else understands how they administer it except them.

Aaron said...

Hi Börjesson-

Think of it this way. In a balanced global economy everything has to -- well -- balance. Let's for a moment remove currency from the picture and think of our nations interacting similar to a barter market place minus the dual-coincidence of wants issue. My nation’s imported goods and services should closely match my exports. This won't always be the case as some years my country may run a deficit while other years it may run a surplus, but speaking generally gold will fill the gap for those goods and services as our nations settle trade imbalances. It’s important to point out there isn't a direct connect here as in “my Treasury gives you our gold”-- you have to think through how net-savers in the economy participate in the gold market to get that gold moving.

Because we're talking about Freegold versus a gold standard, the price of gold in a given nation will go up as more and more gold leaves its borders so theoretically speaking a nation will never run out of gold -- but it will be at the expense of their currency becoming worth MUCH MUCH less. An over-consuming nation can still try to over-consume, but as more and more gold leaves that nation's shores and the price of gold in that nation's currency climbs ever higher -- there's a point where confidence is lost and when that time comes you won't see things like foreign investment coming into your economy nor a local labor force working harder -- for what -- a currency they'd rather ditch for barter?

Come Freegold, credibility (access to goods and services) will be kept in-check -- by the market.

Aaron said...

Oh, and Börjesson, I believe Costata means that the US already won given that little trick we pulled in 71. Think of the past 40 years since convertibility from dollars to gold was suspended. The USA has borrowed more than 20% of their imports each year for the past 40 years. That's 20% of our TVs, cookware, and a whole boat load of other stuff -- on loan? As in we'll pay it back?

Not a bad haul I'd say.

jojo said...

Costata-
when you say the US will fare well in HI, I assume you mean the US gov, not all the shrimps who have sold their gold 4 cash long ago, right?

RJPadavona said...

Hello So Many Roads,

I can't speak on Gates, but Buffett and Munger are pure propagandists. OG Warren B definitely knows about the virtues of gold. He learned it at a very young age.

I think one of our resident dummies even commented on it a while back :-)

RJP

costata said...

Börjesson,

Aaron's response was very good IMO in terms of the longer term picture. I'm going to focus on the period immediately after the transition and then look forward aways from there.

To begin with I think you have to break down the USG spend into its component parts and deduct the expenses that will essentially disappear or be greatly reduced. Defaulting through HI means defaulting on all obligations (internal/external) denominated in that currency with one caveat. The USG can selectively make whole anyone or any sector it chooses to make whole.

Think about the executive order that we discussed on an earlier thread. Note the language. It allows those departments to pay as much as they need to in order to maintain their supply lines. I think the discussion on that thread focused on this with an unspoken assumption that this was designed to respond to high prices from, say, HI.

IMO we should also consider that this order allows those departments to keep the US industrial base alive through HI by funnelling as much cash as necessary to critical industries. If they want to keep a supplier, or a whole sector, on life support through HI that excecutive order lets them do it.

Now let's zoom out and take a look at the big picture. Keep the post-default experience of Argentina in mind. (I realize they always find a way to blow up their economy again but history is not destiny.) Look at how quickly their economy rebounded after defaulting.

Think about all of that manufacturing capability that was "off-shored" returning to America. Perhaps to an America with abundant cheap energy sources if the shale oil/gas story has legs.

Also consider the impact of this on China. This is a country with a structural surplus. It is a system that exports (in part) because it cannot at present consume its own output. Now picture a dollar renminbi exchange rate that rises 10x higher overnight and stays there.

Forget about currency pegs and such like. HI will burn any peg or managed float (China) to a crisp. Who is in a world of hurt now? The "customer" who went broke or the "business" that supplies them?

After the transition where will capital flow to? The destination with excess productive capacity painfully reorienting its economy to consumption or the economy with a huge shortage of productive capacity painfully reorienting its economy to produce what it needs because it doesn't have a choice now?

I don't want to minimize the hardship that many Americans will experience during this transition but I think I can sketch out a credible "goldrush" scenario for America after this transition which dwarfs anything that country has ever seen.

So as Uncle costata's old granny used to say "a problem shared is a problem halved". IMVHO now would be a very good time for each of us in countries outside the USA to figure out what our half of the "US problem" is going to look like immediately after the transition.

costata said...

Yes jojo, the USG and those most favoured by them.

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

costata,

I applaud you imaginative interpretation.

Gauged by your comments, let's see if I can extrapolate your point of view;

The Fed and the gov. are a partnership.

The Fed and the U.S. banking industry are one in the same.

The obligations incurred by the banking industry are the obligations of the Fed.

People are customers of their banks and the Fed.

You can only withdraw an amount from your bank equal to the amount deposited, but banks can withdraw any amount that want or need from the Fed.

The bank is not going to give you more than what you have on deposit, banks have no limitations on what they can withdraw from the Fed.

The Fed is obligated to make good all obligations made by the banks.

Is that about right?

costata said...

Hi TMF,

I imagine that you are feeling a little frustrated with Carl right now. (He reminds me of Ash in some ways.) I notice you asked for his definition of HI and he serves this up:

Hyperinflation is a continuing (and often accelerating) rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services.

A (slightly modified) text book definition of inflation. It's a shame the modification damages the usefulness of the definition but that's Carl's way of doing things.

Aquilus said...

Hi Sarah,

"After the U.S. dollar collapses, would Americans have to sell and buy gold with the Amero, which is currently being planned between the U.S., Mexico, and Canada? "

No, no reason for that. As a medium of exchange the dollar will continue (based on inertia alone if nothing else).

Think about all other currencies that hyper-inflated: the mark in Germany, the ruble in Russia, the peso in Argentina, the Zim dollar in Zimbabwe, etc. At the end of Hyper-Inflation, they just chop zeroes from the end, call it the "new" whatever for a while until the "new" moniker is dropped in a little while.

There's no need for an Amero under FreeGold - one could be established I guess, but it would be a waste of time - any local currency as medium of exchange would do - it would all relate back to the price of gold anyway.

costata said...

Carl,

You ask:
Is that about right?

Nope. It's a hair away from being dead wrong but then you know that. Of course you are being facetious. Like I said to TMF you remind me of Ash. Sophistry comes in many styles.

Carl said...

costata said... "A (slightly modified) text book definition of inflation. It's a shame the modification damages the usefulness of the definition but that's Carl's way of doing things."

Could you please explain the modifications you believe were made and the damage the statement incurred by them.

Thanks...

Aaron said...

Sweet Jesus Carl!

"Hyperinflation is a continuing (and often accelerating) rapid increase in the amount of money"

Hyperinflation is not a continuing rapid increase in the amount of money -- accelerating or not.

Costata, I think you need to make some additions to that cypher key. I don't know what you missed -- but whatever it is it seems to keep coming back at us.

NS, I think I need to watch your Carl videos again.

tintin said...

damn, my paper, gold paper (shares), are burning.

Now I am really thinking Fofoa/Foa's words: "all paper will burn".

Damn.

Carl said...

costata said... "Sophistry comes in many styles.

Yes, I'm well aware of your sophist prowess.

Tell me something, why didn't you address my post in a direct manner?

I'm dirrect, why can't you be? I promise that when you rip it apart, I won't be offended.

Feel free to destroy what you believe to be my cherished delusions.

Nickelsaver said...

Carl,

It's not about shimps being able to get dollars at their local bank, or even what the FED is legally allowed to do(are you kidding me, lol?). It's about the USG and it's addiction. An addict it will not be able to maintain if the private sector is allowed to crash.

So you call it what ever you want. The credit money, the digital currency, everything that is on the books that would crash the system if allowed to default, will be supported by a flurry of brand new cash fresh off the presses, because Uncle Sam ain't goin cold turkey - he will keep his supply lines open and flowing.

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