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:

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costata said...

Re: Peak Exorbitant Privilege

I meant to bring up the issue of marginal productivity of debt in the thread of that post. Recall that FOFOA pointed to 2005 as the year PEP peaked. In one of his papers Antal Fekete pointed to 2006 as the year that the marginal productivity of debt went negative in the USA (using Melchior Palyi's methodology presumably).

I note this analysis by TrimTabs prompted by the ZH piece they quote:

http://www.zerohedge.com/news/guest-post-how-long-massive-government-debt-buildup-triggers-another-financial-shock

ZeroHedge reported that while U.S. government debt rose by $359.1 billion in Q1 2012, the U.S. GDP grew only $142.4 billion. Durden noted that, “It now takes $2.52 in new federal debt to buy $1 worth of economic growth.”

The surprising observation prompted us to examine the relationship between growth in debt and growth in GDP from 1975 through 2012. What we found is both astonishing and frightening.

In Q1 2012, GDP rose $142 billion, while debt rose $359 billion. In other words, it took nearly $2.50 in debt to generate $1.00 in GDP. We wanted to understand how this relationship compared to those that prevailed in previous decades. The graph below shows our findings.


It's not good but surprisingly not as bad as I expected looked at over a multi-decade period. In one of the early comments on the post at ZH one commenter asserted a correlation between government spending being above or below 18 per cent of GDP to account for the variation.

I'm not endorsing his claim but it does provide some food for thought.

M said...

@ Costata
"Do you have a timeline for the LNG trade to reach critical mass and provide a competitor to oil?"

I have no idea. I get my info on Nat gas from Dr. Bill Wattenburg. He is a scientist that designed nuclear weapons for the US. He recently wrote an open letter to Obama.

Subject:
In your State of the Union address last night, you said that the U.S. must start using our natural gas. Here is how to start the ball rolling immediately, not years from now. And, you can bring gas prices down to $2 a gallon in a hurry for struggling American workers. Otherwise, they will soon be paying for $5 gas - and blaming your administration.

Mr. President, you must sign a simple executive order tomorrow that says that all federal vehicles (not private cars) purchased after, say, January 1, 2013, must be dual fuel vehicles that run on COMPRESSED NATURAL GAS as well as other fuels such as gasoline, diesel, or ethanol which can be used as a backup. Smart companies and municipalities are already using hundreds of thousands of such natural gas vehicles. Adding federal vehicles will start the ball rolling to replace foreign oil in a big way. We have a 100 years’ supply of natural gas now, and more discovered every month -- more energy than all the oil in the middle east. And twice as much more available in Alaska.

Natural gas is the only significant “alternative transportation fuel” that will be available over the ten to twenty years. And it is available everywhere, right now.
Dual-fuel natural gas+gasoline(or ethanol) cars will suddenly be available to the general public at no increased cost. Car makers now deliver them for utilities and Taxis.
The middle east oil countries know how much natural gas we have. They are terrified that we start using it and less of their oil. They will bring the price of gas down to $2 a gallon and keep it there to discourage our conversion.

M said...

Dr. Bill said he was listening to callers talk
about natural gas and thinks there is some misinformation being spread by some of the environmental groups who don't
want to use any energy source except wind and solar.
The truth is that if we start using natural gas, or any ofour resources more, the price of oil will come down.
Saudi Arabia has three times as much oil to pump as theyare using right now as do other countries. If people in this country would stand up and say we are going to use our own resources and agreed to power just 10% of our cars with natural gas, the price of oil
would plummet.

IEA: Natural Gas Can Supply World For 250 Years
Thursday, 20 January 2011 09:51 United Press International

Supplies of natural gas could last more than 250 years if Asian and European economies follow the U.S. unconventional reserves, the IEA said.

costata said...

M,

Thank you for the detailed reply to my comment.

Cheers

FOFOA said...

Rick Ackerman linked this post in his latest. Sounding a bit like Carl's "poof theory", my only response to his post comes as a reminder from my last one:

"In his latest of several posts on this subject, Rick Ackerman presented two responses that he found "of particular interest." The second one is so ldo that I won't spend much time on it. It is a comment that explains the old truism, "you can't eat your gold." That's right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly."

costata said...

Hi FOFOA,

I think this extract below is the crucial passage in Rick Ackerman's post. He calls this a scenario but for the life of me I can't find a scenario beyond "for reasons of something awful that has occurred".

But here’s a scenario of our own in which the global economy collapses and goes straight to deflation with no hyperinflationary phase: You wake up one morning and, for reasons of something awful that has occurred in Europe, the financial markets are in chaos.

By 10 a.m., there are lines outside most U.S. banks. Unfortunately, all depositors will go home empty handed, since, as we have noted here many times before, banks keep very little cash in their vaults.

By then, it seems entirely likely that credit cards and ATMs will have ceased to function and that credit limits will have been “temporarily” capped. So how will you pay for your groceries, or gas, or…anything?


How can you describe this as a scenario when it is based on an unspecified "something awful" event? Surely you have to offer at least a speculation on what kind of event would cause a total shutdown of the banking system to justify calling this a scenario.

Much as I like Rick I think this is an epic fail as any kind of scenario.

Woland said...

"An epic fail" is a very kindly description of the "reasoning"
demonstrated in that post. The notion that "credit cards would
cease to function" ( I would grant the very temporary shut down
of ATM's) because of some terrible financial event ignores the
fact that USG would COMMAND the issuers to allow, and providers
of essentials to ACCEPT, valid credit transactions (possibly
limited to some maximum amount) UNTIL the Armored vehicles
arrived to re stock the banks and ATM's. Every bank would have
a contingent of national guard or other USG reps there to insure
order, just like California in 2008 when there WERE bank runs
at several institutions. A bank run at the retail level will no more
be allowed than the run on the SHADOW BANK system was. Both
were stopped dead by either managing the flow or changing the
rules. In such a scenario, I would add that gas stations and
food markets would probably also have USG reps in attendance
during the crisis period. Honoring those SNAP cards would be
mandatory as well.

jojo said...
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jojo said...
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Nickelsaver said...

From Rick's comments:

Other Paul writes Rick: “Put yourself in the vendor’s place and you can probably see that he’ll be most comfortable taking the traditional ones, fives and twenties.”

If local merchants won’t accept anything but cash or PMs, cashless customers will not hesitate to take/steal what they want/need. Those customers showing up with “acceptable funds” will be “relieved” of their payment medium before they hit the front door. Think nation-wide 60s Watts riots or “mini-Mad Max.”


In fact, the incentive for the USG, the banks, the merchants, and the consumers is quite clear.

The electronic variety of payment will be the thing that, unlike in the past, may prevent a traditional run on the bank scenario from taking place.

While credit itself may be capped or halted, all those debit/EBT/electronic checks may carry the banks through their shortage of cash.

That is, unless the event in question is an EMP of the grand scale variety.

So I picture a scenario where inflation is kicked into high gear by virtue of access to electronic methods of payment only.

Much in the way some retailer's currently distinguish between point of sale transactions by offering a lower cash price versus a credit/debit price ala ARCO gas. Can you see it?

Also, don't you just love how Rick qualifies his post(s) by saying that only subscriber's have the REAL dirt?

JR said...

FYI if you tweet, there's a bunch of Friends of FOFOA on there carrying on in an unruly and entertaining fashion. And DP created a list of a lot of them :-0)

You can follow it and get invovled here: https://twitter.com/#!/darenpa72/specialgeeks

Vincent Cate said...

I just put up a post on my blog where I am looking at possible ways to tell when hyperinflation is really about to hit.
http://howfiatdies.blogspot.com/2012/05/predicting-timing-of-hyperinflation.html

M said...

@ jojo

This is more about NG taking market share away from oil in a big way. Natural gas has a multitude of industrial uses, including providing the base ingredients for such varied products as plastic, fertilizer, anti-freeze, and fabrics.

RDS, Europe’s largest oil company, said a $19 billion investment in Qatar may prove that abundant natural gas coaxed from shale rocks across the U.S. could be converted into diesel and jet fuel. Shell, which is completing the world’s largest gas-to- liquids plant in Qatar, could use the technology on a smaller scale in the U.S. if capital costs can be reduced, Marvin Odum, head of Shell in the Americas, said in an interview in London. The technology uses catalysts to turn natural gas into jet fuel, diesel and other liquids.

The development of shale fields made the U.S. the world’s largest gas producer in 2009 and caused a slump in prices. Today’s price of $4.18 is equivalent to about $24 a barrel of crude. Oil is trading at about $100 a barrel in New York. (this article was written about 1 year ago and the price of NG has since fallen from 4.18 to 2.50 which is around an equivalent to $14 or $15 a barrel of crude.)

I looks like politics and big oil is going to muck this up because most big oil companies have invested billions into these heavy oil projects in Alberta. Mainly SAGD (Steam Assisted Gravity Drainage is an enhanced oil recovery technology for producing heavy crude oil and bitumen). These projects are unprofitable if crude is under the price of $75 a barrel.

Robert LeRoy Parker said...

Happy weekend everybody.

I'm curious, if Greece were to reintroduce the Drachma and the Greeks continued to hold their savings in Euros (perhaps not leave the Euro at all), would this course of action emulate, but obviously not duplicate, the freegold effect and bring balance to the Greek economy?

As long as a conversion to Drachma denominated savings wasn't forced on savers, they would be relatively okay, correct?

M said...

@ RLP

That would emulate freegold because the store of value function and the medium of exchange would be separate. But it wouldn't balance the economy.

The money still owed on their bonds is denominated in Euro's. So they would go Weimar and print Drachma to buy Euro's and hyperinflation would hit in no time.

Robert LeRoy Parker said...

What if they defaulted on the debt?

costata said...

RLP,

If they are going to default then why leave the Eurozone?

Something the MSM keeps skimming over in the discussion of sovereign debt is that there is a distinction between debt used to fund a current budget deficit and the accumulated debt from previous borrowings.

You could (at a stretch) compare these debts to a stock and a flow. The flow of debt that funds current borrowings can be cut off by lenders. The stock of debt can be made worthless by the borrower.

Do you see the tension here? If the indebted sovereign can achieve a primary budget balance it no longer needs that flow of new debt. At that point the holders of the stock of debt are in a much weaker position.

somanyroadsinvesting said...

The one area that I dont hear discussed much here is plain old supply and demand. I am curious with the falling rupee and potential fx crisis in India as well as perhaps a hard landing in china could this not hurt demand a lot? Thanks

Robert LeRoy Parker said...

I see what you are saying Costata. If Greece can start running a surplus then they should default on their past debts because they are living within their means. If I recall correctly they did run a surplus for one quarter last year, but then fell back into deficit. How long would they need to run surpluses before they would actually default?

----

If they are going to default then why leave the Eurozone?

If they wanted to reinstate the Drachma as legal tender, would they have to leave the Eurozone? I guess the reason would be to separate the medium of exchange and store of value like M pointed out. With the Drachma the government could reinstate the sort of outrageous spending that Germany enabled prior to 2009 and maybe there would be less violence in the streets and less headaches for the Eurozone, at least for a while maybe.

jojo said...
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jojo said...
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FOFOA said...

"With the Drachma the government could reinstate the sort of outrageous spending that Germany enabled prior to 2009 and maybe there would be less violence in the streets and less headaches for the Eurozone, at least for a while maybe."

What is that? Bong economics?

"In short, "This would be the mother of all financial crises," guesses Eichengreen. But no matter, he says; it can't happen. "The decision to join...is effectively irreversible. Exit is effectively impossible."

How come? "**The insurmountable obstacle to exit is neither economic nor political, but procedural**," says the professor. Short of a coup, revolution or state failure, you have to agree.

First, all contracts - both domestic and cross-border - would either be void (which again means revolution, state failure, coup or all three), or they'd be subject to a sweeping redenomination law. That would require long, detailed, co-operative discussion, both internally and with governments, business and private individuals across the European Union and beyond. So no dice there, then.

Then there's the logistical nightmare of re-pricing all goods and services, replacing all those vending machines, and reprogramming all Greece's bank and till systems - a fun project when Euro accession approached, but hardly a laugh as hyperinflation looms. So again, we're back to revolution... if not a coup or failed state...

Since it cannot devalue or exit, something else has to give."


Of Currency Wars

"No good solution

Reading Eichengreen, Buiter, and the five finalists, one thing is clear. As Bootle puts it: “The notion of some clever, technical trick that offers an escape from the nasty choice of external devaluation or internal deflation is a chimera.” In fact:

•EZ exit will be enormously costly,
•The costs will be instantaneous and fall heavily on the exiting nation; but
•The macro benefits will be slow to appear.

As Eichengreen (2007) concludes: **“The implication is that as soon as discussions of leaving the Eurozone become serious, it is those discussions, and not the Eurozone itself, that will end.”**

Erasmus: Call a spade a spade

To paraphrase Krugman, most economists cannot believe that those who write about EZ breakup could be ignorant of basic economics. But many are. Most of their readers are equally innocent of economics, so we cannot rely on market selection to sort out the chaff.

The upside, Krugman notes, is that “it is remarkably easy to make fools of your opponents, catching them in elementary errors of logic and fact. This is playing dirty, and I advocate it strongly.”


Sorry RLP. You can blame Krugman for that bong comment. ;)

The EZ breakup contest: Take ignorance seriously

Sincerely,
FOFOA

Robert LeRoy Parker said...

I am impervious to internet insults. Just ask JR, he called me a purple hot dog or something a while back.

The Eichengreen essay is helpful.

M said...

@ FOFOA

"How come? "**The insurmountable obstacle to exit is neither economic nor political, but procedural**"

The keynesians claim to fame is that the reason Greece is in so much trouble is because they cannot devalue their currency to become "competitive" again.

Couldn't Greece just default and abolish the minimum wage laws to become competitive ?

What is the difference between a Greek person in the tourism or mfg industry getting paid 10,000 Dracma a month or 800 Euro a month ? Earning a small amount of Euro's would obviously be better because wealthier Eurozone tourists or manufacturers wouldn't have to convert their currency.

Robert LeRoy Parker said...

I'm still reading it, but Eichengreen's working paper which that essay summarizes is really great.

JR said...

Purple hot dogs taste the best after bong economics.

Aaron said...

JR, you're one sick mf.

Blondie said...

NYT (emphasis mine): "A blond bombshell and a twisted male figure — classic images by Roy Lichtenstein and Francis Bacon — tied for top price at Sotheby’s on Wednesday night, bringing $44.8 million each.

...

“Great icons make great prices,” Tobias Meyer, director of Sotheby’s contemporary art department worldwide and the evening’s auctioneer, said after the sale. He added, “The market is more global than ever before,” pointing out that the five bidders for Lichtenstein’s “Sleeping Girl,” from 1964, came from China, North and South America and Europe. The price paid by the winner — an unidentified telephone bidder — was a record for the artist..."

costata said...

RLP,

I think they have to be able to demonstrate that they can maintain a primary balance indefinitely in order to have a strong negotiating position.

They would also need to take into account the possibility of a creditor using their political muscle to push them back into deficit through, say, a restriction on a primary export or, say, by blocking a development project that could dramatically improve Greek finances.

jojo,

I haven't studied the detail of any of the Greek austerity programs and I don't feel motivated to invest the time. I wouldn't bet the farm that any of these programs are correctly structured to achieve a primary balance. Junk economics rules!

I think it would also be a big mistake to assume that the intention of these austerity programs is to get the Greeks out of debt. Rather the objective could be (is?) to determine the highest sustainable level of debt and stabilize them at that level. Debt is an asset on some folks balance sheets after all.

Another complicating factor is that crises offer opportunities to push through proposals that would never get off the ground in calmer periods. There are likely to be political currents and commercial interests seeking advantages from this situation for whom the wellbeing of the average citizen is not a consideration.

Desperado said...

Rest of the World. From Greece. You're welcome.

I love the way Mr. Panos twists the current EU and Euro crisis into a Greek drama. Simply brilliant, and sooo true about Germany. If only we could get him to do a clip about all those "us meaning Euro / gold / and oil people". I think Mr Panos would show that €-lovers are really "Friends of the Fascists".

costata said...

Thank you Desperado,

Your latest comment and the link you posted has fulfilled a long term ambition of mine. It provides the readers with clear insights into your thinking and world view. All they need to invest is 5 minutes of their time in order to have the complete Desperado "story".

Every time you make your standard comment, or a variation on it, I'm going to post a link to this comment.

FOFOA, if Desperado ever deletes this comment please put it straight back up again. Thanking you in anticipation Sir.

Motley Fool said...

"Rather the objective could be (is?) to determine the highest sustainable level of debt and stabilize them at that level."

Yup. A plan that methinks does not take into consideration the mass psychology of the situation.

This may amuse some : The Handbook of human ownership

TF

Woland said...

Barry Eichengreen has a piece out today in Project Syndicate
entitled, "Is Europe on a Cross of Gold", in which he revisits
the arguments FOFOA covers in the comment above. Worth
a look.

costata said...

SMI,

You wrote:
I am curious with the falling rupee and potential fx crisis in India as well as perhaps a hard landing in china could this not hurt demand a lot?

The Perth Mint is downbeat. Firstly sales - they fell off a cliff last month (silver more so than gold).

Total ounces of gold and silver sold by The Perth Mint in March 2012 as coins and minted bars:

Gold (Au): 35,957.28oz

Silver (Ag): 590,636.15oz

Total ounces of gold and silver sold by The Perth Mint* in April 2012 as coins and minted bars:

Gold (Au): 17,575.640oz

Silver (Ag): 207,109.91oz

From Bron's latest newsletter commenting on a death cross:

The Fundamental View is more pessimistic, saying that if the $1,535 “level is breached on a closing basis, or if it falls significantly through that level, then the next potential stopping point for gold could be at the $1,300.00 level.” That is not out of the ballpark as $1,300 is just on the bottom range of gold’s 10 year log trendline.

He says that “the inverse head and shoulder pattern is still in play but is admittedly looking uglier and less proportional as each day passes. Although I feel it is unlikely to play out, gold cannot fall below $1,535 if we are to keep that pattern in play.”

But he notes that the death cross - when the 50 day moving average falls under the 200 day moving average, which it did mid-April - “usually implies that the trend has officially reversed indicating that further declines are very likely. Not until the 50 day cross back above the 200 day in what is known as the golden cross, will I be going heavily long.”


This is from an earlier newsletter where Bron picked up on some posts from MineWeb. Bron writes:

"The message – gold demand is not broad based from our viewpoint and hasn’t been for many weeks now. Reviewing the blogs over the past 24 hours confirms the story.

Many blogs picked up on the Bloomberg story that Chinese imports from Hong Kong were up 59% in March (from February) and up quarter-on-quarter, looking for something to help their readers "keep the faith" (TF Metals Report).

No one picked up on the fact that "the volume of gold heading the other way, however, also rose to just under 25 tonnes, leaving net exports at a little over 38 tonnes" (Mine Web) or that "Q1 2012 Hong Kong imports are running well below Q4 2011 figures" (Mine Web again)."


http://www.perthmintbullion.com/blog/blog/12-05-09/Gold_Demand_Not_Broad_Based.aspx

Jim Sinclair's fax and e-mail inbox will be overflowing if gold tests $1,300. And I have read credible analyst's estimates which place the cost of production around the $1,250 to $1,300 area. So this would be a huge test.

Aquilus said...

@Costata

Ah, to be able to buy physical at 1250-1300 again, what an early Christmas present that would be!

I sure hope you've got something there...

Woland said...

"It is easy to become addicted to Technical Analysis, a useful
and powerful market tool. Our "addiction" makes it a useful
and powerful tool for strategic planners whose purpose is NOT
TO MAKE MONEY but rather to successfully execute strategic
plans. Even folks who are not TA devotees are familiar with
'resistance level' and 'support line' on ad infinitum. The gold
market is a very small market to 'influence', particularly when
the goal is simply containment, not profit."

"Have monkey wrenches been flung into the works? Indeed yes.
But be not mistaken about the talents of power. We who have
lived only with peace forget the extraordinary achievements of
misdirection and secrecy accomplished during the second world
war. From D-Day, (a project millions "knew" about but were
ignorant of) to simpler secrets like Enigma and Churchill's
Canterbury Choice, successful governments, (i.e. those that hold
on to their power) are weaned on the liquor of lies. All told, in
the pursuit of noble purposes, of course"

IMHO, those who would influence the "markets" do so most
effectively when they use the participants' own theories of
technical trends against them, so that by triggering trend
reversals, the participants perform by themselves the intentions
of others.

costata said...

Aquilus,

I don't think physical gold will sell at $1,300 again in my lifetime. If spot gold even looks like flirting with $1,300 it will test the link between physical gold and paper to breaking point IMHO.

Here's my prediction: if the spot price is driven close to $1,500 the BIS will smash anyone betting on lower prices in a most emphatic manner. Perhaps by driving the price back to $1,700 so fast it will make your nose bleed.

Aquilus said...

@Costata,

Believe me, after all this FO/FO/A,I know. But it's really good to have it in writing, just in case there's any confusion.

But can't a man dream? Actually, wait, that's a deflation in dollars dream. Well, meet my evil twin from the dark dollar deflation side: Darth Aquilus.

Desperado said...

@costata,

You're quite welcome. Any time. And if you like Mr. Panos's clip so much, then I am sure you will also appreciate this one by Nigel Farage:

"What these guys in the EU are going to try to do is, as this crisis gets worse and descends, there will be an attempt at some point in the next few months for them to set up something that will be very like a dictatorship. I’m not sure now, with the public mood, that they will get away with it ... the similarities (to the 30s) are really rather chilling.”"

Thats right Costata, FOA/Another's central banking pals (oh sorry, "giants") are working with the Fed and other CB's and their controllers to set up worldwide fascist government, likely under nominal control of the UN and/or NATO. This is what Agenda21, ACTA, AGW, and so many other recent memes by the elite are about. And what is even worse, Freegold may well be just another steppingstone in their plan.

Wendy said...

I didn't know that Jamie Dimon was a director on the board of the NY Fed:

http://www.bloomberg.com/news/2012-05-13/elizabeth-warren-calls-for-dimon-to-resign-from-new-york-fed.html

Talk about the fox minding the hen house ...OMG...WTF??

JR said...

There are 12 Federal Reserve Banks located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Each reserve Bank is responsible for member banks located in its district. The size of each district was set based upon the population distribution of the United States when the Federal Reserve Act was passed. Each regional Bank has a president, who is the chief executive officer of their Bank. Each regional Reserve Bank's president is nominated by their Bank's board of directors, but the nomination is contingent upon approval by the Board of Governors. Presidents serve five year terms and may be reappointed.[86]

Each regional Bank's board consists of nine members. Members are broken down into three classes: A, B, and C. There are three board members in each class. Class A members are chosen by the regional Bank's shareholders, and are intended to represent member banks' interests. Member banks are divided into three categories large, medium, and small. Each category elects one of the three class A board members. Class B board members are also nominated by the region's member banks, but class B board members are supposed to represent the interests of the public. Lastly, class C board members are nominated by the Board of Governors, and are also intended to represent the interests of the public

http://en.wikipedia.org/wiki/Federal_Reserve_System#Board_of_Governors


Largest regional Federal Reserve Bank

Since the founding of the Federal Reserve banking system, the Federal Reserve Bank of New York in Manhattan's Financial District has been the place where monetary policy in the United States is implemented, although policy is decided in Washington, D.C. by the Board of Governors of the Federal Reserve System. The New York Fed is the largest in terms of assets of the twelve regional banks. Operating in the financial capital of the U.S., the New York Fed is responsible for conducting open market operations, the buying and selling of outstanding U.S. Treasury securities. The Trading Desk is the office at the Federal Reserve Bank of New York that manages the FOMC Directive to sell or buy bonds.[5] Note that the responsibility for issuing new U.S. Treasury securities lies with the Bureau of the Public Debt. In 2003, Fedwire, the Federal Reserve's system for transferring balances between it and other banks, transferred $1.8 trillion a day in funds, of which about $1.1 trillion originated in the Second District. It transferred an additional $1.3 trillion a day in securities, of which $1.2 trillion originated in the Second District. The New York Fed is also responsible for carrying out exchange rate policy by buying and selling dollars at the discretion of the United States Treasury Department. The New York Federal Reserve is the only regional bank with a permanent vote on the Federal Open Market Committee and its president is traditionally selected as the Committee's vice chairman. The current president is William C. Dudley. The New York Fed opened for business on November 16, 1914, under the leadership of Benjamin Strong Jr., who had previously been president of the Bankers Trust Company. He led the Bank until his death in 1928. The Bank grew rapidly during the early years, bringing about the need for a new home.[6] The New York Fed's three-class Board of Directors, bank membership, and organization and legal status are the same in structure, for the New York region, as those of the other eleven Fed districts, which collectively cover the rest of the country.

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

Wendy said...

I'm gonna guess Dimon is a class A member? But in our twisted world of finance, wouldn't be a bit surprised to learn he is a class B or C member.

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

Class A: http://www.newyorkfed.org/aboutthefed/org_nydirectors.html

Carl said...

Costata, the reserves "created" by the ECB to cover bank generated credit, are created from the deposits that member banks are required to make at the ECB to maintain reserves.

It works the same with the Fed only it is perceived, thanks to idiotic Keynes' teachings, as happening in reverse and policies are guided by that perception. Reserves, along with deposits held by banks, have rarely generated new credit and there are plenty of studies out there that have proven this. One of the primary reasons the Fed's reserves shot up, after they were almost wiped out by the crash, is the realization that banks had become under-reserved, which meant the Fed was under-reserved.

Of course, this was spun by the Keynesians as exactly the opposite, calling the Fed's actions to cover its own exposed ass, "an infusion of capital" to stimulate economic activity.

BTW: "Austerity" is Bank Imposed Depression.

I have my response to Michael H is almost done, I'll post it soon...

Jeff said...

Wow! The original kitco archives are online. And yes, they have the posts to Red Baron by Another, maybe more that the Red Baron didn't pick up. It's like the Dead Sea Scrolls turned up.

Get to work, superorganism.

http://bgmi.us/web/kitco/Kitco1990s.php

Wendy said...

All, I'm having a look at those archives, Apr 1, 2, by "The Writer" (thoughts!) Is this Another, also reference to writings under "WESTLAND"

Of couse it must be another:

"One thing has happened that will "change everything". The PHYSICAL
GOLD MARKET HAS BEEN CORNERED!"

jeb said...

I found the following link in the link provided by Jeff. It is a piece on the relationship between Muslims and gold and includes ideas that are discussed here on the nature of money.
http://www.zpub.com/aaa/dinar.txt

" I, like all the people present, will remember forever the moment when His Excellency Dr. Necmettin Erbakan and my Master, Shaykh Abdalqadir as-Sufi al-Murabit, together by the hand, proclaim from the podium, to the cheerful people of Istanbul and the shocked Turkish media, in the Opening Ceremony of the I International Conference of Islamic Thinking in Istanbul on May of last year, that the dinar was the currency of the Muslims."
"......Entrusting wealth to non-Muslims is not allowed, but furthermore, taking a non-Muslim as a partner outside Dar al- Islam (where we stand over them) is extremely restricted, because they might cheat or might use our wealth in forbidden transactions. Since paper-money is a promise of payment, can it be permitted to trust the issuers while they hold the payment (our property) outside our jurisdiction? History has also demonstrated repeatedly that paper money has been a permanent instrument of default and cheating the Muslims."

Jeff said...

Wendy, apparently there is a 'Writer' who is exchanging emails with someone named GFD, and another copycat 'writer'.

Date: Wed Apr 02 1997 11:49
The Writer ( thoughts! ) :

GFD: I have two email from you, no more.
We are at the end of a long travel. The road now forks, what way
to go? Many will chuse the bad path and the american family will
hurt as the world changes. Another writes, do you think as this?

Understand, that over the past few years physical gold has been
locked to the currencies more so than when it was used to back them.
Western traders have done just what the money printers wanted,
they accepted paper forms as gold. The lure was greed and it worked
very well for the printers. The future was always the key
"someday the metal would rise and a great payoff would be at hand".
The years have come and gone and no payoff, no 500/600/700/ gold.
The truth, there will be no payoff for paper traders.
One thing has happened that will "change everything". The PHYSICAL
GOLD MARKET HAS BEEN CORNERED! Any amount of large physical sales that
come to market can be taken. To a traders eyes this cannot be, why is
the price not going straight up? Why should it, westerners are still
trying to rid themselves of metal and hold forward gold ( that is not
cornered ) and any other form of leveraged gold. There is no shortage
of paper, but there is now a real shortage of gold! Anyone who thinks
that the central banks and their billion ozs of gold are a threat to
this market have no idea how big real on/off market trading is.
So, how do we see when gold will rise in all currencies? A slow fall
in the price of paper gold and a opposite spike in real gold price will
make westerners leave all paper and try to buy real metal. The rush to
make good on forward sales will cause the market to lock, overnight.
No bank failures, no depression, no stock market crash, no war,
no inflation, just a worldwide shutdown of all "on market gold trading".
That includes all forms. The western traders will still own all of their mining stocks
and gold and futures, they just won't be allowed to use them. But don't you see, they didn't
want real gold anyway!
It was always the others that needed it,,,,,,right?


Date: Wed Apr 02 1997 12:38
GFD ( The Writer ) :

The last post by "The Writer" ( 11:49 ) is authentic ( as far as my communication with him ) .

Wendy said...

Yes Jeff, it's really confusing. The actual post was written on June 4, 1997 by Notnick, who haad copied comments into this post beginning Dec 1996.

There's Big Trader, Big Trader (the writer), The writer (Thoughts). References to "Another hand", and 'the trader'.

Sounds like alot of FOA speaking for himself and Another within the same posts.

I'll follow this along for a bit, although it might be the stuff of "crazy-making"

Jeff said...

This is significant; they were posting these things before the LBMA trading volume disclosure. The Writer, Another Writer, Big Trader.

Date: Wed Jun 04 1997 15:23
BIG TRADER ( THOUGHTS! ) :

They will not sell platinum and they will not sell palladium and
now they will not sell gold! That is why the “writer”
( along with more than a few others ) has gone to Europe.
For many months open metal was purchased only as it set
free by falling prices. But the paper contracts are never
made good . People were asked to “stand down” as the
market came to them . It no longer happens now as your
own banks have said no more. The future will now be as
the past! When is a “fact” accepted as real? Only when it
comes from a factual source? Or when it is experienced as
a real life event!
For a time in past “all new supply was spoken for”,
now it is “spoken for times two”.
Germany will not back the writers again. They will revalue
and hold at all costs! The Swiss will sell a very small amount
in the future at a much different price.
The Dutch will “swap” no more. These cowboys have cut
and run. South Africa now will compete with “the Trader”
as a buyer! London has told them!
Then I should think we are done, as people will “stand down”
NO LONGER”.
The Trader is at his cross road, one path and more time
will pass. The other path and the gold market, “as all now
know it” will exist no more.
Uplink off, find me here.

Michael said...

an article from the first of the archives by a Tony Judt explains why the Euro will never get off the ground:
Date: Thu Jun 05 1997 06:16
George S. Cole (EMU dying?):
From today's NEW YORK TIMES

that was the best I could do after an hour of reading. these archives are massive and mostly worthless. The actual writers are obscure. Even when we find what sounds like Another we are not certain.
My conclusion is that I won't be spending much time as part of the Superorganism delving through scores of archives reading hundreds of boring comments about the 1997 movements in the price of paladium.
FOFOA how did you find the gold amongst all the dirt?

costata said...

Here's a link to a good, short piece by the savvy Gillian Tett of the FT. (The original link to the GATA post came from Ed Steer's newsletter.)

http://www.gata.org/node/11351

Consider what has happened with US pension funds. Five years ago, these typically had a 60 per cent equity allocation, with 30 per cent in bonds. But last month, according to the Milliman survey, the top 100 funds placed 41 per cent of their $1,300 billion worth of assets in fixed income -- topping the equities ratio for the first time.

That shift might have looked rational a few years ago; after all, annualised returns for Treasuries in the past decade have been 6.8 per cent, versus 2.9 per cent for the S&P 500....

... I suspect we could see this voluntary (financial) repression prevail for some time; or call it, if you prefer, the era of mass market financial masochism.

Wendy said...

My conclusion agree with yours Michael, I'll poke around a bit. If ever one needed to verify the authenticity of A/FOA (I don't), you'll find that in these archives.

I think for the purpose of these writing "Big Trader" and "Another hand" refers to what who we know as Another, "(the writer)", FOA, and "the trader" asian money.

Wendy said...

Does anyone recall when A/FOA dropped out of the Kitco forum in favor of USAgold?

costata said...

This newsletter on China usually has good information. h/t Macrobusiness blog.

http://www.scribd.com/doc/93432209/er20120514BullPhatDragon

After the promise of March, the April slowdown is quite a jolt, and was unsurprisingly followed with a cut in the RRR over the weekend...

M2 growth slowed to 12.8%yr from 13.4% in March, while deposits slowed to 11.4%, the weakest rate since ... data has been compiled on a monthly basis....


The data indicates a new mood of cautiousness in China and a general slowdown in the economy.

Michael said...

A few days ago there was a suggestion that Another was a British version of John Doe as in A N Other. I saw that one of the entries was by A Another. It was as if the writer was going to sign on as A N but got hurried and just typed what he did...thus lending further credence to the theory that A N Other was the reason for the pseudonym...phew...that make sense?

Bjorn said...

Riksbanken has a couple of days ago announced QE worth 10b SEK from 2:nd half 2012 and 12 months forward.

http://di.se/Default.aspx?pid=267077__ArticlePageProvider&epslanguage=sv&referrer=http%3A%2F%2

Officially to create a reserve fund to be able to take extraordinary measures if it is needed in the future...

My guess is that it is connected to the housing bubble (finally) showing signs of running out of steam...

What does the forum think? Gov budget is more or less balanced at the moment and rates are super low so that´s not it at least.

costata said...

Gold Miners

Interesting article with lots of facts and figures about rising costs affecting miners in general but gold miners in particular. There is also a link to a PriceWaterhouseCoopers report (which I haven't read yet) from which a lot of the data is drawn.

http://goldinvestingnews.com/24829/should-investors-discouraged-cost-inflation-gold-price-stocks-mining.html

Bjorn said...

My bad. I just assumed it was QE, but apparently they will sell foreign currency holdings to finance buying swedish debt. Apparently it is only preparations for being able to quickly implement QE?

DP said...

Which currency(ies?) will they sell..?

Bjorn said...

Doesn´t say...
http://www.riksbank.se/Documents/Beslutsunderlag/2012/besl_%20upprattande_vardepappersportfolj_i_SEK_120510_sve.pdf

Relevant quote:
"Det innebär att Riksbanken gradvis
avyttrar innehav i utländsk valuta i valutareserven till ett värde i svenska kronor som
motsvarar köpen av tillåtna värdepapper i portföljen." Rough translation:" This means that the Riksbank will gradually
sell holdings of foreign currency in foreign exchange reserves so that the value in Swedish kronor corresponds to the amount of allowable securities in the portfolio."

Which is 10b SEK over a year.

It will only be possible to find out after the fact i´m afraid.

Gary said...

Hello all. I've been on holiday for 2 weeks, and have been following this post and comments.

A couple of points I wanted to make, one regarding the post itself, and the other regarding HI potentials for other countries.

Re the post, I think there's an issue ignored by Fofoa, but also by those arguing for high inflation.

We would all agree that pure physical gold is a constant item, one ounce anywhere in the world at any time is the same thing.

I don't believe we can say the same about inflation though, mainly due to the constant changes to the way it is measured, notably in the U.S.

I had a quick look at the Shadowstats site, which maintains inflation rates for the U.S. based on the 1980 and the 1990 methodology. Here are their charts:

http://www.shadowstats.com/alternate_data/inflation-charts

As you will see, using the 1980 measure, inflation has roughly risen from 5% to around 10% since the great reflation began in 2003. That compares to 2-3% for official CPI.

I tend to agree with Shadowstats that the USG has moved the goalposts to suit its ends, to disguise the real rates of inflation (already high) that its citizens are already experiencing.

Also, just based on our own experience of costs in this period, can we really believe that inflation has been at 2-3%. I don't live in the States, but from what I read, the costs of the basics are rising at a fast pace, closer to the Shadowstats figures than the official figures. Certainly here in the UK the costs of the things needed to live are rising much faster than our RPI, which is at 4%.

So, on the main point of this Fofoa post I believe the argument is moot, and the US is already there with regard to high inflation, and I expect the figures to keep getting higher following each new round of QE. I still agree that HI seems unavoidable though.

The comments on HI in other countries being less likely was made in a discussion. Someone mentioned that countries like the UK or Japan would feel the heat in the FX rates if they went too far.

I felt that this ignored the crucial fact that so many countries are now engaged in some form of QE (UK, Swiss, EU, Japan and China to name a few).

I don't think the FX rates will provide the red flag at all, as if you compare one pile of shit with another pile of shit, they pretty much stay the same, and if both piles are getting bigger, it's still all shit.

I believe the red flag will be rising inflation in these countries, as producers of real things start to demand more currency. Also, obviously, a rising price of gold will reflect the debasements.

I also think the red flags will not stop any country. As we have seen in recent elections in Europe, if any political party decides to try to do the right thing by facing reality somewhat, they will simply be booted out at the next election, as the populations seem to want free money, free welfare, free everything, virtually the world over. Maybe apart from Germany, as they have experienced HI and want to avoid it again.

And finally, I noticed that when Sky news channel puts up on screen its list of half a dozen of the major FX rates, they include a seemingly odd one at the bottom of the list: the gold price. Is Rupert Murdoch an Fofoa reader?

AdvocatusDiaboli said...

Gary,
"We would all agree that pure physical gold is a constant item, one ounce anywhere in the world at any time is the same thing."

Really? I start to have some serious doubts about that thesis. Can we agree that Au is a monetary token, except with different systemic properties (MoE vs. SoV)?

Now consider this: an additional ounce of Au has in my pocket a different marginal utility, than in your pocket. Sure it is still the same physical item, but will behave in my pocket differently than in yours in terms of being part of the overall systemic flow of monetary tokens.

The above also applies to dollar-tokens in your or my pocket. I guess this makes it so difficult to predict HI, because all "pockets" of the world are just different with their behaviour, but most economic modells always assume that the "pockets" with their marginal utility bias work all the same.

Greets, AD

JR said...

Hi Gary,

You might be interested in FOFOA's 2009 post "Meet John Williams"

http://fofoa.blogspot.com/2009/02/meet-john-williams.html

FOFOA has even highly recommended John Williams' reports, like his "Hyperinflation Special Report":

http://fofoa.blogspot.com/2009/12/gold-ultimate-un-bubble.html?showComment=1260656674215#c7704150587556337239

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

So, on the main point of this Fofoa post I believe the argument is moot, and the US is already there with regard to high inflation, and I expect the figures to keep getting higher following each new round of QE. I still agree that HI seems unavoidable though.

What you just said agrees with the point of FOFOA's post. The main point is we have had some inflation that has not translated to HI because of the structural support the dollar has had over the past but that this will not continue as foreign support for the dollar wanes.

The argument is not we haven't had much inflation because the Government CPI says we haven't had much inflation, FOFOA is assuredly well aware of the issue with Shadowstats the reported CPI:

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."

tripper said...

Gary: "As we have seen in recent elections in Europe, if any political party decides to try to do the right thing by facing reality somewhat, they will simply be booted out at the next election, as the populations seem to want free money, free welfare, free everything, virtually the world over."

The problem seems to be this "to do the right thing", which seemed to be saving failed banks at the cost of putting a nation in perpetual debt serfdom. The right thing to do was for Greece to restructure its debt 2 or 3 years ago. Now all this election buzz seems to be of little consequence. The shit has already hit the fan, now it's only the question who ends up getting messed up the most.

On the positive side, some interesting things take place in Greece, like this for example:
http://www.guardian.co.uk/world/2012/mar/16/greece-on-breadline-cashless-currency

Motley Fool said...

Desperado

This is right up your alley. :)

The monsters at the turning of the age

I can just sense your holding tightly to this worldview. ^^

TF

Gary said...

Thanks JR, I'd forgotten that Fofoa had alluded to Shadowstats before, or maybe I missed that post, it doesn't ring any bells at all. I wonder if the fiddling of the figures is working though? Do Americans believe prices are stable, or do they know something is up? Will the public's confidence be maintained for a few more years by false data I wonder?
Any Americans able to comment?

Tripper, I think you missed my point, which was not related to bank bailouts, but to people's desire for the easy life with free stuff. Politicians just deliver what their electorates want after all.

Sad to see the return of pointless trolling posts again, how sad these people must be to have no life to enjoy, rather wasting their time trying to provoke those with whom they disagree. As always, I will just ignore such cretins, even as others extend warm welcomes. Sure is a funny old world.

M said...

@ Costata

re Gold Miners

Today, gold miners are almost at their 2008 lows. This time, without the help of a financial crisis. I think this has everything to do with the negative view of the gold market by western paper bugs. Institutional or the general public. They are more interested in FaceBook and Groupon.

This might be the first time that the majority is right. Everyone is skeptical of the gold market and gold is falling, miners are going broke and people are laughing at gold bugs all the way to the bank.

Rick Rule recently said on KWN that over 50% of the gold explorers on the TSX Venture will go bankrupt in 6 months if the slide in the gold mining market continues. If gold goes anywhere near $1300, I doubt there will be many gold mining companies around.

M said...

The "anything but gold" trade continues unabated..

LONDON, May 13 (Reuters) - Worsening financial and political turmoil in southern Europe caused a surge of interest in London property last month with buyers from Greece and Spain showing strongly among investors seeking a safe haven for their money.

Overvalued London real estate. That's a safe haven for ya.

Desperado said...

@Motley, Are you insinuating that I am paranoid? Some of my family would surely agree, especially when I start talking about central banks, hyperinflation and gold.

I was recently back in the states visiting my mother and other family. This was my second trip home after dropping my citizenship in 2010, and as the departure day approached I was having problem sleeping, worrying about immigration and customs.

Well when I arrived the immigration agent read my hand prints twice and then made me go wait in the immigration holding pen. After a few hours and after enduring threats of making me go home, I was allowed to enter the US on a temporary visa, this time only. Why had they picked me out even though I was traveling on a Swiss Pass? Because in 1977 while returning home after a Dead concert I was arrested and thrown in jail for 2 weeks for possession of a controlled substance. After 35 years they have digitized all those old local police records and linked them to a TSA/Immigration fingerprint database. This trivial drug offense changed my life back then and is still doing it now. What will they think of to link our DNA/Biosigns to next? Smart Meters? Hello Tyranny.

So in this case not only was my paranoia justified, it actually was understated. Because now I know how far they are along. Check out this one from Business Insider. That is not a self sufficient $1 billion research center with security perimeter in the middle of the New Mexico desert. That is definitely a bug-out shelter for the elites from Washington in case things get too out of hand for them. For instance, what if they had to deploy gases or electronic anti-personnel weapons, what about "their people". They would have to be transported to somewhere safe. Like New Mexico. Why be paranoid?

M said...

"Rydex Precious Metals Fund. Since the late 2010 peak, the fund has dropped by 40% while the assets in the fund have declined by 70%. Interestingly, the assets in the fund declined by 70% in 2008. The difference is the fund’s price declined by 73%. In other words, we are seeing the same amount of outflows as in 2008 yet the market has declined by 40% and not 73%."

tripper said...

Gary: "Tripper, I think you missed my point [...]"

I did not miss it. I agree with your main point, so I find no reason to address it. It's just that your words suggested that those in power tried to do the right thing and got booted by the people for it. I disagree on this point, that's all. They got their country into the mess in the first place (because they delivered to stay in power) and failed to do the right thing repeatedly over and over until the reality kicked in. I guess this is how the end of welfare state looks like (every time).

More importantly, the side effect of those funny local greek virtual currencies may be that they will learn quickly to separate MoE from SoV. I found that this concept is completely alien to most people (including me, before I stumbled upon this blog). Now, if people were already used to this idea, then transition to freegold could be "PR positive". Right now I'm kinda worried what the transition would do to the social landscape. Would it not divide people even more, cause more unrest, widen the gap between poor and wealthy? I know "it's all about the giants", but would that not make things even worse? Just wondering.

Anyway, I heard Greeks like their gold in the form of sovereigns, how cool is that? :)

www.gregor.us said...

Delighted that my views were made central to this excellent post by FOFOA. And, I learned something new: that FOFOA has been carefully tracking the BUdget Deficit to the Trade Deficit.

"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%..... 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."

I will have to ponder the operational effects of this ratio, but, I must stay with my view that this also does not present "a big danger" to the USD until a recognition phase begins.

I think we have to accept an uncomfortable truth: global financial markets are well aware that destroyed capital is being replaced by capital from central banks. Keyensian spending from the government side continues. And the portion of the world that understands this is unconcerned. The rest of the world doesn't even understand it.

This is why we can observe the following, almost delicious paradox: "money-printing" in the Eurozone or elsewhere does not risk hyperinflation during a debt deflation. Instead, it maintains the viability of currencies as transactional units. Thus, a Bundesbank hard money approach actually risks hyperinflation, if it forces a debt-deflationary accounting of all the bad debt because that is the kind of chaos and fear that could eventually drive behavior.

The task of the inflationist and the hyperinflationist is difficult, therefore. One has to track and quantify social psychology at this point, in order to gauge when behavior will change.

G

M said...

@ www.gregor.us

You wrote "Thus, a Bundesbank hard money approach actually risks hyperinflation, if it forces a debt-deflationary accounting of all the bad debt because that is the kind of chaos and fear that could eventually drive behavior."

All of SE Asia used the hard money approach in 1997 and it did not result in a behavior driven hyperinflation. It did however , result in their currencies losing 50 to 60% of their value and all of their big banks collapsed. And tanks rolled the steets for a while apparently.

burningfiat said...

I think this Paul vs. Paul debate on Bloomberg is kinda pertinent to this post (did somebody link this already?).
Krugman doesn't think a little more inflation/national can hurt. Ron Paul got it right though, USG and bankers are addicted to spending and bailouts.
Starts at interesting point:

http://www.youtube.com/watch?v=jEmKIRqz9AI&feature=player_embedded#t=597s

Thereby not saying that Ron Paul would get what he expects (competing currency) by allowing gold and silver coins as legal tender :-)

Edwardo said...

Capital flight? Yes, I'd say so.

http://finance.yahoo.com/news/facebook-co-founder--america-is-ok--it%E2%80%99s-the-rules-that-are-a-pain.html

Regarding paranoia, it's useful to keep in mind that just because you're paranoid doesn't mean they aren't out to get you.

JR said...

Hi Gregor,

Thanks for continuing this interesting discussion. I had a question. You write:

This is why we can observe the following, almost delicious paradox: "money-printing" in the Eurozone or elsewhere does not risk hyperinflation during a debt deflation.

What do you think a hyperinflation is?

Do you think it is FOFOA's position that "money-printing" risks a hyperinflation?

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

You also noted:

"One has to track and quantify social psychology at this point, in order to gauge when behavior will change."

FOFOA detailed it pretty well above:

The United States currently enjoys reserve currency status, which enables it to borrow cheaply, and which keeps capital circulating through our government bond markets

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.

cont.

JR said...

Cont.

more detailing the main theme of FOFOA's above post "Inflation or Hyperinflation?" tracking and quantifying the social psychology aka the behavioral change that is always involved in HI, which is the end of political and then structural support of the $IMFS as reserve currency:


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

[...]

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.

[...]

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.

[...]

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?

jeb said...

IMF to purchase 2.3 Billion of gold. For me, this is interesting as they sold 400t in the last couple of years. To bail out the LBMA? And now they're purchasing..

http://www.commodityonline.com/news/imf-to-buy-gold-worth-$23-billion-as-credit-risk-increases-48052-3-48053.html

Date: Sat Jan 10 1998 21:03 ANOTHER (THOUGHTS!) ID#60253: Someone once said, "noone wants gold, that's why the US$ price keeps falling". Many thinking ones laugh at such foolish chatter. They know that the price of gold is dropping precisely because "too many people are buying it"! Think now, if you are a person of "great worth" is it not better for you to acquire gold over years, at better prices? If you are one of "small worth", can you not follow in the footsteps of giants? I tell you, it is an easy path to follow! An experienced guide is not needed for this trail, look around you and see. The real money is selling ALL FORMS of paper gold and buying physical! Why? Because any form of paper gold is loosing value much, much faster than metal. Some paper will disappear all together in a fire of epic proportions! The massive trading continues at LBMA, but something is now missing? The CBs are no longer lending! They will not anymore! We have reached production costs. Oil will have nothing of "gold paper" if gold must stay in the ground! And a CB values the wishes of oil far above it's return of leased gold! Hear me now, "if gold tries to go lower than US$ $280 the BIS will buy it OUTRIGHT in the OPEN for all to see"! They must! They will! I know. For no currency system could stand if "Oil" were to bid for gold!

JR said...

FYI about the IMF's most recent gold sales, which ended in December 2010:

QUESTIONS AND ANSWERS
IMF Gold Sales
Last Updated: April 13, 2012

On September 18, 2009, the IMF's Executive Board approved gold sales strictly limited to 403.3 metric tons, representing one eighth of the Fund's total holdings at that time. The gold sales program was completed in late December 2010.

http://www.imf.org/external/np/exr/faq/goldfaqs.htm

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

Re: the article, the IMF says:

Transactions. Following the Second Amendment, the Articles of Agreement limit the use of gold in the IMF’s operations and transactions. The IMF may sell gold outright on the basis of prevailing market prices, and may accept gold in the discharge of a member country's obligations (loan repayment) at an agreed price, based on market prices at the time of acceptance. Such transactions require Executive Board approval by an 85 percent majority of the total voting power. The IMF does not have the authority under its Articles to engage in any other gold transactions—such as loans, leases, swaps, or use of gold as collateral—nor does it have the authority to buy gold.
http://www.imf.org/external/np/exr/facts/gold.htm

jeb said...

Very interesting, thank you JR.

JR said...

Re-posted from above because its so good and gets to the heart of the matter (the "key to the kingdom"):

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.



See that? The key to the kingdom = "supporting foreign dollar settlement with CB storage."

Edwardo said...

Bill Black is a good guy as near as I can tell, but he is another one who doesn't remotely understand what The Euro is designed to accomplish.

http://wallstreetexaminer.com/2012/05/14/the-merkel-myths-that-are-devastating-europe/

Victory said...

FOFOA, Costata, Ari, VtC, and all,

i posted this comment on tfmetalsreport.com but I got no responses...i was wondering if anyone here would be kind enough as to opine on this theory...does it make sense or am i way off base here?

'The Chinese and Arabians have two of the largest Sovereign Wealth Funds (SWF) in the world...is it possible that the 'fat finger' contract dumps/ EE takedowns we so often witness are 'sometimes' not the EE at all? This would make sense in cases when Commercial/EE net long positions are increasing and net short positions are decreasing, such as now.

Is it also possible that using conduits (whoever they may be - JPM or multiple Hedge Funds) these SWF positions are categorized as Lrg Commercial, or both Lrg Commercial and Lrg Spec simultaneously....this would make analyzing the CoT report virtually impossible IMHO - (remember Blythe's recent interview in which she claimed JPM's positions were held on behalf of clients)

If we agree that the physical market is extremely thin compared to the Hundreds of Billions in fiat these SWF would like to convert into physical then lets put ourselves in their shoes...what would a savvy trader do? (Martin Armstrong routinely brings up the fact that in China the monetary authorities are all seasoned traders with several years of desk experience at large international banks) So being a savvy trader would you not short the shinola out of the Comex (tail waging the dog) so that you could buy physical in London OTC at a discount? In fact since gold is a Giffen Good (the higher the price, the less owners wish to part from it) perhaps they understand that to even get physical offers they need the spot price to be trending down in order to induce a few week handed western physical owners to sell. This scenario is even more plausible if we agree that longs on the Comex as a general rule don't take delivery anyway - they run from delivery - they are more interested in leveraged paper gains. So even if the Chinese did loose some fiat on their paper Comex shorts, that's the price they are willing to pay in order to get physical puked up in London. They know the real value of physical is multiples the current fiat $ anyway.

If the Chinese (or Arabians) tried buying physical in size as prices were rising not only would they bid price up against themselves but they would probably drive away most offers of size in the process. I don't believe the Chinese will ever use the Comex from the long side in an attempt to take delivery because they know better...they know that's not what the Comex is designed for. They know the authorities (including the CFTC) would never allow it, they would force cash settlement in the end. They did it to the Hunts and they were American, no way they let the Chinese do it!...'

-V

jeb said...

Here is ANOTHER, helping us to understand.


ANOTHER: Sir, You ask, What do you mean by "everyone trying to spend their overseas dollars"? It is a very large question, yes? A simple answer would be: What else can a person of small wealth do with a currency but "spend it"! Outside your country, small persons, large traders and Central Banks hold the dollar, not for spending, but for the "reserves" and "store of value". It is held in much more quantity than exists inside your borders. Many of these persons think and know, that in last resort, the dollar, it can buy "oil" or "Gold" anywhere in world. In the real world, this is the "real backing" behind the dollar held in many lands! Today, the same "system" that makes this dollar "strong in gold and oil" does destroy the native currencies of many peoples! You may list for me, as perhaps the Canada, Mexico, Japan, Africas, all of Asia, come to mind! I ask you now, what gain these countries to maintain a "system" of "currency reserves", that breaks the local savings and economies? In a world that finds many nations "hungry" for a "reserve currency system" that correctly values "gold and oil" for the benifit of "local currencies", this Euro will change many thoughts.In time, as the dollar does lose it's backing of oil and gold, thru a much higher price of these items, many "foreign dollars" will find "no other worth" but for "the spending of them for goods". The US economy cannot stand for these many digital units to "come home", as much will be the inflation should this result! I think, in this time, the great minds of your treasury will find many ways to "change the rules"! PH in LA, you have offered "some food for the thought" and "consideration" for them in your post. We watch this as it does progress, yes?

Wendy said...

It looks like "Another" changed his nic from Big Trader on this day:

Date: Sat Aug 23 1997 18:09
ANOTHER (thoughts not written anymore):
Hello to all!

I had the opportunity to read a private reports/discussion over the last week and thought
this one would have some meaning to this group. The thoughts come from a different
culture and land mass so they required conversion to Western style communication. Here
is from one you don’t get here anymore.

Why do they view their debt in terms of yield when it only returnees more of the same
paper? The only way to convert the return on this American debt is by buying something
real with it. Only then do we have a “yield”. So let us continue to view it as always before,
using it’s pricing gage to determine value, the US dollar.
The marketplace is never wrong to give a high price to a low value debt as long as it
uses an “unreal “ currency as a value gage. The Westerners use “paper to price paper”
and “more paper to price more paper” in an endless quest to add value where value only
exists in the minds of men. To this end they say we have lost holding gold, but our
families and children cannot go broke? No one owes us and we owe no one, and we do
not “convert paper to something real” to create “yield”. We already own our “yield”, no
conversion needed!
Now they have created the illusion of gold in great supply to lower it’s value in
currency terms, and the Americans accept this. They do not question that this illusion was
done using paper contracts ,that do not hold gold but are priced in currencies that offer a
yield valued only in human emotion terms. It is in this fashion that the greatest folly of
Western thinking will bring an end to an era of unvalued money. It will come about as the
entire world evolves into those that have military might using paper currency maneuver
little people countries with gold. But all gold is owned by someone, somewhere and is not
free for the taking. In the near future a real value will be exchanged for gold and those
that hold paper gold will bid much higher to obtain what they thought they already had!

Remember now, “a broke superpower ever destroys a simple country that has gold,
they will do business with them ”!
Big Trader


Now that most have converted paper gold contracts to real gold we have but to view the
“great scramble” from far away. To the advantage of many, the Americans continue to
position themselves in opposite fashion from the third world. They sell all real gold to hold
gold contracts and gold stocks.
At some point all of the gold will be off the market. Then the CBs will be forced to
become the full primary suppliers. This continued drift to CB sales will no doubt destroy
most bullish gold traders until London is forced to sell real gold. Then the true volume will
drive the price of gold in all currencies to such heights that it will force a reevaluation of
“what was primary supply” in the first place. During this “lock up” time all Asians will be
happy with the conversion price during the summer of the last few years.
Know this to be true, the millions of ounces out on hidden contracts will not be made up
for by the CBs once the problem begins. During this time the new “currency price” of the
entire gold stock will equal all the paper money in existence and the CBs will suddenly
claim they have very little gold in an effort to hide all they can.
Big Trader

This rewrite is very close. It comes from the real one, not the fakes. good luck!

Wendy said...

on the kitco forum

FOFOA said...

Hello Gregor,

You wrote: "I will have to ponder the operational effects of this ratio, but, I must stay with my view that this also does not present "a big danger" to the USD until a recognition phase begins."

When prices rise as in a hot inflation, those who cannot increase their own nominal spending to compensate for the higher prices will be forced to cut back in real terms. That's what inflation does. In terms of a trade deficit, inflation would normally reduce it. It's like you wrote, "it quickly begins to drive out spending for discretionary goods in favor of true basics."

But the USG is the one entity that can increase its own nominal spending to compensate for higher prices so as to not cut back in real terms. And if we can imagine that increase in USG nominal spending might feed back into the rising price phenomenon if it is not mopped up by foreign CBs, we can then imagine the beginning of a vicious feedback loop that will raise prices with or without a "recognition phase" in the financial markets.

In fact, we can theoretically ignore the financial markets and any mass psychological change in perception from this feedback loop and it will still end in hyperinflation.

So the significance of the budget deficit being greater than the trade deficit is simply that the trade deficit becomes entirely attributable to the USG. When this was not the case, whatever portion of the trade deficit was attributable to the private sector could (and most definitely would) contract in real terms absorbing some of the inflation. But the USG will not cut back in real terms because it can increase spending to compensate for higher prices, which it openly acknowledges.

Of course prices can rise simply from a confidence collapse in the currency. But you are arguing for hot inflation coming from exogenous forces like resource scarcity and the Lewis Turning Point in non-OECD countries. And my point is that combining your premise with the USG defending its own consumption in real terms creates a hyperinflation feedback loop in and of itself.

The USG believes that by cheapening the dollar it can increase our exports by making them more affordable abroad and narrow or eliminate the trade deficit because foreign products will become more expensive here. But as I wrote in Moneyness, "The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar."

Can you see the significance of the entire trade deficit being attributable to the USG? Can you picture the trade deficit expanding nominally while collapsing in real terms? The more it collapses in real terms, the more it expands nominally in defense, which causes it to collapse even more in real terms. That's the feedback loop. And that's why I said it's not really the actual ratio that matters, just that it's over 100%, which means contraction will be fought to the death. As I said in the post, "The real threat is that they might slow or stop their rate of accumulation relative to our rate of emission." This is the paper-thin barrier separating any price inflation from hyper price inflation.

Sincerely,
FOFOA

AdvocatusDiaboli said...

FOFOA,
no doubt that this feedback loop does occure. The question is how fast is it actually? And let's face it: arent we already in this modus operandi, except it is today in slow motion so it is hardly noticable?
So the basic question should be: What is accelerating the loop and much more interestingly what is decelerating it?

And under these assumption looking at todays (paper) price of gold, it is dirt cheap. Is somehow the "focal point" not working?

Greets, AD

costata said...

Victory,

I agree with most of the points you made in that comment above at May 14, 2012 4:29 PM but I think you are introducing an unnecessary complication by bringing the ME and China into your Comex scenario. The BBs are the key to this IMHO.

The BBs have better information on the gold market than other players. They have insights into supply and demand through their banking and trading relationships, central positions in the LBMA and the OTC markets. The BBs can play the Comex traders and pundits like a violin (or perhaps a banjo would be a more apt analogy for some of the "experts" observing the Comex).

For the purpose of your scenario it doesn't matter who is ultimately getting the gold. It stacks up OK as long as the buyers are co-operating with the BBs. So let's talk about China and the ME as two separate issues.

Given the huge flow of petrodollars, at the oil prices prevailing over recent years, the ME SWF and monarchies couldn't squeeze a fraction of their profits into physical gold without exploding the price. Also they have been throwing money at any investment (which offers some capital protection) that can absorb their surplus.

I intuit they are not buying gold in size these days. (Private citizens in the ME are a different story but the China private citizen scenario below applies equally to the ME shrimps.)

China (the State) retains the gold mined within its borders. It can build its reserves without going to the market to do so. In peacetime conditions gold in the ground is as good as gold in the vault to a sovereign owner. From a Freegold-RPG perspective the gold held by private citizens in China will be just as valuable and useful as the gold held in the public sector.

The banks and other parties importing gold into China are plenty smart enough to buy consistently without running the price. All they have to do is watch India and co-operate with the BBs. Every time conditions are right they can buy in size and there would be hardly a ripple in markets the size of London, Zurich and TOCOM. They don't have to march up to the Perth Mint, buy gold direct and tip their hand.

Maybe the Chinese government is backstopping the importers with a guarranteed buy on any surplus inventory and/or financing but none of this would be visible to anyone on the outside looking in.

costata said...

AD,

Is somehow the "focal point" not working?

Physical gold is not yet the "focal point". The reference point is still the paper gold market price.

AdvocatusDiaboli said...

costata,
"Physical gold is not yet the "focal point". The reference point is still the paper gold market price."

Really?
In the following video just replace the word silver (or orangejuice) with gold:
http://www.youtube.com/watch?v=QbhIcAf85_c

And my biggest problem, I still havent found any indication that would tacle the following thesis: "People that buy paper for paper want to sell paper for paper."

Greets, AD

AdvocatusDiaboli said...

P.S.
and before somebody quotes that FO(FO(A)) stuff: Since that dude was telling his funny storries much more than 32000t have been mined until today.

Blondie said...

We can only tell if we have entered that feedback loop if we can actually see that the flow of dollars is no longer being absorbed, or alternatively if we can see the results of this flow no longer being absorbed... no doubt the information detailing this flow exists/can be collated in one form or another, but probably only at the CB/BIS level.

The initial stages of the feedback would be slo-mo, and thus not easy/impossible to discern, but IMO it should be an exponential process once underway.

Focal point doesn't "work" until the market actively seeks one, and that would be triggered by sufficient reiteration of the USG's deficit feedback loop (the unabsorbed flow) and its subsequent results.

For regular folks like me, there is no way of knowing that "it is on" until we "know" that it is on, if you see what I mean. When "it's on", this fact will be self-evident, and that (unexpected for most) realization is what causes the collective to seek the focal point.


We can clearly see the change evident in the "gold community" over the last year or so where an appreciation has begun to emerge that physical gold in one's possession qualitatively differs from what was previously regarded as "gold", and that this appreciation continues to strengthen despite the best efforts of most "experts" to pump mining stocks etc. The lens' focus is increasingly sharpening, but there are not a lot of eyes looking at it. Yet.

jeb said...

Victory, Costata,
Is my thinking along the correct path if I said that the Saudis no longer need to purchase gold in size as they have already cornered the market.

Anand Srivastava said...

AD,

I guess you should read FOFOA's HI posts including this one. He has been saying that there has been structural support to the USD until now because of soaking up of excess USDs by European CBs and Chinese CB. If Chinese CB stops soaking up the USDs we will enter into the feedback loop that Blondie talked about above. We are not sure if the Chinese have really stopped or there are not other countries who will soak up the remaining. But we are near the time when there will be no CB soaking up the USDs.

That is when Inflation in USD terms should start in earnest and snowball into an HI. We could enter the feedback loop this year or maybe next.

AdvocatusDiaboli said...

a little OT:
http://www.wallstreetjournal.de/article/SB10001424052702304192704577403920600084232.html

The parlament demands the Bundesbank to do a correct accounting of Germanys gold. After trying to avoid that discussion at all, the response from Mr. Weidmann is amazing: "We can not do or publish the accounting, because it concerns ongoing trade and business secrets not only of the Bundesbank, but as well as other CB, as for example the NY FED".

Which translates to me: Go away, we dont have any gold at all anyway, paper is just as fine does not matter. The Bundesbank and its earlier gold is not owned by the people, it is owned by "us".

Greets, AD

AdvocatusDiaboli said...

AS,
"He has been saying that there has been structural support to the USD until now because of soaking up of excess USDs by European CBs and Chinese CB."

I dont know about the chinese, but I can say that the ECB is happy to suck it up from the reserve/asset side.
Since 2010 the € does not any longer exist: The ECB is buying up EU gov bonds like crazy and there is no sign that this will end, after the socialist parties are taking over the EU more and more it will increase. In order to spread this stuff over different balance sheets you also have as well the local CB with their TARGET2 balance sheets, but in the end it is all just one huge €-deficit spending.
To give you a perspective of the size already: In order to settle the T2 claims of the Bundesbank against the ECB you need 15000t of gold and this is just the tip of the iceberg, collected in the last 5yrs.
Comparing that with the FOFOA US gov. thesis, I guess the gov deficit spending exeeding the trade imbalance in europe is even worse than in the US.
Just to give you a perspective: That "great hard money" Germany has this year the biggest tax income ever seen, but still could not balance the budget.
In the end it does not really matter how the collectivist government get's to its real stuff from the serfs, shall it be by counterfeiing money or by taxing the money which is being pumped in circles and telling people that saving in gov.bonds is an investment asset (like in the EU, pension fonds are legally OBLIGED to save in bonds). The money itself does not matter, it's the real stuff from the physical plane that matters.
The only logical consequence for me personally: Who works for propping up that system on the physical plane is a moron and part of the problem, therefore I am planning to retire I personally really had enough.

Greets, AD

Woland said...

An interesting article over at FT by Bill Gross of PIMCO. The
title is "A Whale in the Waters of Negative Yields". The significance
of the article is not anything you will learn from it, but rather
just how deeply into the mainstream discourse the FOFOA
perspective has now penetrated.

JR said...

Hi Jeb,

That was a good Another quote there- http://fofoa.blogspot.com/2012/05/inflation-or-hyperinflation.html?commentPage=3#c5285365225207964107

PH in law said: Dear ANOTHER and Friend of ANOTHER, In Friend of ANOTHER's most recent post it was stated, "if everyone try's (sic) to spend their overseas dollars (presently Eurodollars), the US will no doubt invoke foreign exchange controls and most likely create a new currency."

And as Another pointed out, those "homeless" overseas dollars holders will want to dump them after the dollar collapse and price inflation takes hold (notice the cause is not oversees holders dumping dollars, that is the result of the price inflation in the US). And because the USG won't be able to stand all those dollars competing with it for those scarce goods, it will likely implement capital controls and take other steps to keep the Eurodollars abroad.

n time, as the dollar does lose it's backing of oil and gold, thru a much higher price of these items, many "foreign dollars" will find "no other worth" but for "the spending of them for goods". The US economy cannot stand for these many digital units to "come home", as much will be the inflation should this result! I think, in this time, the great minds of your treasury will find many ways to "change the rules"! PH in LA, you have offered "some food for the thought" and "consideration" for them in your post. We watch this as it does progress, yes?
http://www.usagold.com/goldtrail/archives/another4.html

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

Here's FOFOA fromabove on the same idea - the homeless Eurodollars held overseas won't be dumped until the US price inflation starts:

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

...

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.


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

And miner49er via Dilemma 2 - Homeless dollars:

The strategy of the level-headed is to slowly remap the globe financially. This involves as much as possible a SLOW transformation from one currency paradigm to Another. These dollars en masse will not return home. They were born in exile and will die in exile. We will hyperinflate ourselves, and won't need help from overseas...
http://fofoa.blogspot.com/2010/11/dilemma-2-homeless-dollars.html

costata said...

AD,

And my biggest problem, I still havent found any indication that would tacle the following thesis: "People that buy paper for paper want to sell paper for paper."

Of course. Obviously. Yes. Ja. Have you given any serious consideration to the possibility that you are an idiot?

costata said...

jeb,

Is my thinking along the correct path if I said that the Saudis no longer need to purchase gold in size as they have already cornered the market.

This is merely my opinion. I think it is a mistake to think in terms of cornered markets. Lets just say they have enough to feel comfortable and enough in their terms means thousands of tonnes.

costata said...
This comment has been removed by the author.
AdvocatusDiaboli said...

costata,

if there is one commidity in the world that is best suited to be traded in a fractional reserve manner, than it is gold.
But you ask me if I am an idiot, because I have problems to imagine how trading gold outside of fractional bullion banking after over 500yrs works?
I'm not sure who is the idiot or who is just naive.
Greets, AD

Jeff said...

"to settle the T2 claims of the Bundesbank against the ECB you need 15000t of gold..."

Raise the price.

AdvocatusDiaboli said...

Jeff,
raising the price by 30, all ECB gold would just be enough to settle the T2 imbalance for the last 5yrs towards Germany.
http://www.querschuesse.de/target2-salden/
If you want to settle all T2 balances you probably need a price raised 50 times.

But even doing so, nothing much has changed. The ECB would not have any gold any more, but the overall problem imbalance setup would still be the same towards the future.
And this is just the beginning of the rising problems over the next 5yrs in the eurozone.

Greets, AD

Jeff said...

Target2 is germans saving in debt? The other choice is saving in gold. Buy while it is cheap or wait for the ECB to settle Target2 after revaluation (devalue debt against gold). Savers still get gold, but much less of it.

Desperado said...

@AD,

"The money itself does not matter, it's the real stuff from the physical plane that matters."

We muppets are valued for more than just our contributions to the physical plane of our respective nation states. Like slaves, our obeisance and servility are also products and are just as important to the maintenance of the elite's power. This is part of Krugman's description of the dollar I mentioned earlier in this thread. According to him (in Paul vs Paul) the dollar is everything, the financial and political systems and much more. The dollar's significance is so vast that even Krugman doesn't even know exactly what it is. The $ and € represent far more than just MoE or SoV, they represent the entire corrupt and evil empires at their core. Both currencies were born of lies made by financial interests that ended up controlling the Fed and the ECB.

"The only logical consequence for me personally: Who works for propping up that system on the physical plane is a moron and part of the problem, therefore I am planning to retire I personally really had enough."

I agree, to contribute to that $/€ system is to accede to your own enslavement.

I have until the end of May to write a letter of contest to the HR department at the Swiss bank where I work. They have changed the retirement rules and starting 2013 employees born in 1957 or later will have to work 2 years longer than those born 1956 and earlier. I was born a few months too late (1957). They wrote that if I don't accept the new contract, they will fire me.

AdvocatusDiaboli said...

Jeff,
Target2 is the imbalance between Euro-CBs (only) due to money transfer between participating countries, that have not been settled through the ECB. It does not really concern the private german saver, but shows how screwed up the Euro-System is. In an abstract manner the total imbalance of the Target2 system basically acts as an expanded balance sheet, means: extra printed money for the internal euro zone.
Greets, AD

JR said...

Of course:

the dollar is everything, the financial and political systems and much more. The dollar's significance is so vast that even Krugman doesn't even know exactly what it is.

Why? Because its what we save in, and the paper whores have the power over it. L.D.O.

Governments are always net consumers, as it is their very job to redistribute part of our private savings into the infrastructure and secure environment that enables us to produce capital in the way that we do. Government's job is not to produce capital, but to enable and support the private production (and accumulation) of capital!

Being such that human society has evolved in this way, we private citizens must, in aggregate, be net producers so that government can net consume. And we become net producers by saving. Therefore we enable and support our own future net productivity by saving some of our past production of capital today, in the form of savings.

The financial system is really just the monetary plane's record-keeper of this vital process that actually takes place on the physical plane. In its modern incarnation, the global financial system has allowed for a strange international balancing act whereby (literally) one whole side of the planet's net production has allowed the other side to net-consume for decades on end. But this is an unsustainable anomaly, and it is beside the point of this discussion. So please push this giant, global imbalance-elephant in the room over to the corner while we continue this discussion about savings.

The question we must answer here is: Is Charlie Munger right? Are you a good person only if you put your savings into paper where it can be easily redistributed, and a jerk if you buy gold, depriving the paper whores of your savings?

[...]

This is why, when you save in government paper, you are enabling malinvestment and the destruction of capital that goes along with it. And it's the destruction of the capital that you just contributed to the marketplace that you are feeding. The same goes for the private sector. When you save in private paper you are enabling the expansion of frivolous consumption (beyond natural market constraint) and the destruction of your capital contribution to the marketplace that goes along with it.

http://fofoa.blogspot.com/2011/01/freegold-foundations.html

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

Don't save in their currency and the paper whores become "limp as a eunuch;" just separate the store of value so it cannot be fractionalized and then non-productive credit expansion will be as limp as a eunuch (which comes from this comment by yours truly). Snippet:

But debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.

It is easy to blame this on debt as a principle, but unless you don't mind being wrong, there are some deeper explanations out there. Debt under Freegold will not reach such destructive levels. "Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands. Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch.

http://fofoa.blogspot.com/2011/05/return-to-honest-money.html

JR said...

Debt can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands.

The system is designed to enable them by funneling your savings to their disposal.

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

An explanation of how people keep their wealth and property from the State is then Counter-Establishment economics, or Counter- Economics [2] for short.
http://www.blackcrayon.com/library/nlm/nlm5.html

Jeff said...

Desperado, will you be giving up your swiss citizenship then? I suppose you blame the swiss pegging to the euro for your trouble?

AD, I think we both see target2 as the balance of payments.

AdvocatusDiaboli said...

@Desperado,
I enjoyed you link to the CITE facility. I have no doubts that you are perfectly right about your assumptions.
On the other hand I wonder, what happens inside CITE, once all the sociopaths are all on their own. With whom are they going to play their ponzi schemes? Will the soldiers and serfs let them kick'm around to serve champange? :D
So if I had a choice I'd rather live somewhere in the woods....
Greets, AD

enough said...

Gold miners need $3,000 price in five years to remain profitable- world gold council- REUTERS

http://www.reuters.com/article/2012/05/15/peru-mining-wgc-idUSL1E8GF0AR20120515

Carl said...

FOFOA, could you please explain the process by which CBs refuse to "mop-up dollars" the we spend.

It is my understanding, born in experience, that all credit DENOMINATED in "dollars" that leaves our shores for foreign markets goes through an exchange prior to reaching final payment destination. These exchanges will either approve or reject that credit based payment. If the payment of credit DENOMINATED in "dollars", is accepted the final payment at the destination will be DENOMINATED in the local currency. If it is rejected, no transaction occurs and no goods are shipped.

Wouldn't there be an immediate reaction in the FOREX markets if CBs refused their fiduciary responsibilities by not clearing the credit DENOMINATED in "dollars" held at the exchanges?

Thanks.

Desperado said...

"...we are not even sure where the line between money and non-money is, its a kind of a continuum..."

Here is Krugmans quote.

Money is what the emperor says it is, slave.

Speaking of which, does anybody else think that Obama is going to cross his Rubicon before November?

@Jeff,

Unlike my old US pass, my Swiss pass actually has value. The US pass smacked far more of slave chains. With my Swiss pass I actually still enjoy financial privacy. Do you enjoy the fruits of your labor being owned by the IRS, your offspring being educated by the DoE and your family being probed by the TSA?

The SNB is an integral member of the club of western CB's. The peg and all other actions made by the SNB serve the elites, not the Swiss people.

JMan1959 said...

Costata,

I love it when you snap, man. I was sitting here in Texas trying to recover from borderline pneumonia, catching up on the posts, and as I read your response to AD (no offense AD) I started laughing so hard I went into a convulsive coughing fit. Probably set me back a week in my healing, but well worth it. Keep up the good work, lol...

Carl said...

Desperado said... "Krugman said...we are not even sure where the line between money and non-money is, its a kind of a continuum..."

Funny, you google the question of how much money is in circulation in the U.S. and some of the top responses you get are from the FRB stating that there is 1.1 trillion in U.S. currency in circulation, and that number includes U.S. currency held overseas.

The line between what is and is not money seems to be straight forward and clear to the FRB.

JR said...

Money is what the emperor says it is, slave.


Hmmm, FOFOA has written in Moneyness:

Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save.

Yup:

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

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

e_r said...

Gregor,

You wrote: "I will have to ponder the operational effects of this ratio, but, I must stay with my view that this also does not present "a big danger" to the USD until a recognition phase begins."

If you're waiting for the recognition phase, I think it will be too late.

FOFOA wrote: Can you picture the trade deficit expanding nominally while collapsing in real terms? The more it collapses in real terms, the more it expands nominally in defense, which causes it to collapse even more in real terms. That's the feedback loop.

Expansion of volume while there is contraction of value .

Understanding the dynamic is the key to understanding the process underway. IMHO, you are still focusing on a reactionary event (recognition phase) as opposed to the unfolding dynamic that will lead to such a recognition.

JR said...

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

A Flaw

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

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

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

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

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


http://fofoa.blogspot.com/2011/05/return-to-honest-money.html

Biju said...

searching about "Gold bonds" issued by Indian Govt. provided some fascinating historical reading

http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/7948.pdf

"(b) In a major effort to mobilise the vast gold reserves in the country, an issue of 15-year
Gold Bonds at 6.5 per cent was made in November 1962. The bonds were issued in exchange
for gold, gold coin, and gold ornaments. Subscriptions to these bonds totaled 16.30 tonnes.

The issue of gold bonds was accompanied by exhortations to the public to refrain from
buying gold and to surrender their holdings to the Government. The RBI advised commercial banks to consider recalling loans made against the security of gold. Forward trading in gold
was banned in November 1962
."

Govt considered recalling Rupee loan, so that they can take people's Collatearal Gold pledged for these loans. Cruel intentions indeed.

I remember people saying that in 1963, a lot of Gold smiths committed suicide because they were banned from making Gold jewellery(their livelihood)

Biju said...

If you read above article, Indian Govt banned owning Gold jewellery in 1963 under "Gold control Act", preventing Gold Jewllery more than 14K, had to declare Gold holdings.

I was not born then in 1962, But I know people ignored those ruling about holding/declaring then and will forever. No Indian trusts Indian Govt.

Carl said...

JR said... "Hmmm, FOFOA has written in Moneyness:

Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save.


FOFOA conflates.

Money is not "a value stored in your head!"

The perception of value is stored in your head, Money is a means of transferring that stored perception of value from one person to another.

Michael H said...

Carl,

” FOFOA, could you please explain the process by which CBs refuse to "mop-up dollars" the we spend.”

I’m not FOFOA, but perhaps I can paraphrase what he’s already written on the subject:

” It is my understanding, born in experience, that all credit DENOMINATED in "dollars" that leaves our shores for foreign markets goes through an exchange prior to reaching final payment destination. …. If the payment of credit DENOMINATED in "dollars", is accepted the final payment at the destination will be DENOMINATED in the local currency….”

I don’t think this is the full story. It’s not ‘I pay credit dollars for something and magically the vendor receives credit CHF’. Rather, I pay credit dollars (dollar-denominated credit, a promise to pay dollars from a private, non-dollar-printing party), the vendor receives credit dollars, and the vendor deposits those credit dollars at his local bank. The bank ‘exchanges’ those credit dollars for credit CHF.

The local bank aggregates these credit dollar-CHF exchanges and then settles them with the central bank. The central bank then nets out all the exchanges and, if there is an imbalance, has to decide what to do.

This is where it gets interesting. The central bank has two options:

1. Turn to the FOREX market, sell the extra dollar credits, and buy CHF credits.

2. Create digital CHF base money to give to the local banks in exchange for their excess dollar credits, and buy USTs with these excess dollar credits.

So in this context, ‘refusing to mop up dollars’ means that the CB would take option 1, instead of defaulting to option 2.

milamber said...

In relation to Biju's comments, I found a link at the Perth Mint concerning the RBI being required to have its gold shipped back from London:


http://www.punemirror.in/article/62/2012050420120504025313609120ae2ba/RBI-gets-HC-notice-to-explain-gold-deposits-with-Bank-of-England.html

RBI gets HC notice to explain gold deposits with Bank of England

Relevant quotes, edited for brevity:

"litigant Raghunath Shankar Kelkar has challenged the Reserve Bank of India’s (RBI) move to deposit 265.49 tonnes of gold out of its total stock of 557.75 tonnes abroad by filing a public interest litigation (PIL) in the Bombay High Court and demanded that the precious metal be brought back into the country, according to the provisions of the law.

Kelkar (56), has filed the petition as he found the move by the apex bank in contradiction to the section 33(5) of Reserve Bank of India (RBI) Act, 1934, which stipulates that 85 per cent of its gold reserves should be kept in India. The Reserve Bank held 557.75 tonnes of gold, forming about 9.2 per cent of the total foreign exchange reserves. Of these 265.49 tonnes are held abroad in deposits or safe custody with the Bank of England and the Bank for International Settlements.
He said that the RBI move was in violation of the legal provision as it had put 46 per cent of its gold reserves out of the country."



So *IF* this lawsuit has merit (and if my math is correct) then India has to hold 85% of its 557 tons of gold in country, or 473 tons. Right now they have 292 in country. London & or the BIS has to come up with an additional 181 Tons & ship it to India for the RBI to be in compliance.

Or they change the law.
Or dismiss the suit.
Or the litigant has an accident :)

Incidentally, Bron just destroyed the ZH article about the IMF buying gold.

http://www.perthmintbullion.com/blog/blog/12-05-15/IMF_To_Buy_Gold_Not.aspx

I guess he could have just referenced JR's comment yesterday :)

Milamber

Carl said...

Michael H,

The only "magic" being introduced here is your introduction of "CHF credits" which have absolutely nothing to do with the transaction, that's a totally different market.

Every time I purchase products from my vender in China, the current exchange rate calculations are made prior to my payment, I must pay within a specified time and I have to allow time for my payment to clear. And that payment is straight from my bank to theirs.

When they get my payment, it is in credit denominated in Yuan and not credit dollars.

When my vender buys stuff from the U.S., the process I've described happens in reverse.

My question stands.

By the way, I'm almost finished with that response..

Carl

Michael H said...

Carl,

"When they get my payment, it is in credit denominated in Yuan and not credit dollars."

So where does the dollar-denominated credit go? Where does the RMB-denominated credit come from? Are they interchangeable?

jojo said...
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jojo said...
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jojo said...
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Aquilus said...

Hello everyone,

Sorry to interrupt the thoughts of AD and Carl, but Gary (a few hundred posts back) posted an interesting followup to the discussion on non-US countries reaction to deficits.So:

@Gary

The original post had touched on the following:

The comments on HI in other countries being less likely was made in a discussion. Someone mentioned that countries like the UK or Japan would feel the heat in the FX rates if they went too far.

I felt that this ignored the crucial fact that so many countries are now engaged in some form of QE (UK, Swiss, EU, Japan and China to name a few).

I don't think the FX rates will provide the red flag at all, as if you compare one pile of shit with another pile of shit, they pretty much stay the same, and if both piles are getting bigger, it's still all shit.

I believe the red flag will be rising inflation in these countries, as producers of real things start to demand more currency. Also, obviously, a rising price of gold will reflect the debasements.

I also think the red flags will not stop any country. As we have seen in recent elections in Europe, if any political party decides to try to do the right thing by facing reality somewhat, they will simply be booted out at the next election, as the populations seem to want free money, free welfare, free everything, virtually the world over. Maybe apart from Germany, as they have experienced HI and want to avoid it again.



Unfortunately I have very limited time today, but FOFOA was gracious enough let me use the contents of one of his email responses to me regarding India's deficit. I should adjust it to your question, but do not have that much time today, and think it relevant as is anyway (and latest post is the post above):

FOFOA:I think it is a mistake to try and apply what’s in my latest post to any other country. The US and the dollar are a unique case. If the Indian government is abusing its currency, of course it is showing up on the foreign exchange. The rupee is not a global reserve currency and no one is structurally supporting India’s profligacy. There’s no reason to.



By forcing the exporters to sit on rupees for a while (or at least trying to) they do recreate an effect similar to China sitting on dollars. Any time a currency is used as a SoV it begins to overvalue that currency. But the rupee is not that overvalued because it is being constantly devalued. The dollar is massively overvalued because it is not being constantly devalued even though it is being abused worse than any other currency in the world. So with the dollar, you have extreme abuse meets extreme support. The support enables the abuse which makes the overvaluation constantly increase.


So while the rupee is maybe like a rock precariously perched 10 ft. above the Colorado river, ready to fall if a strong enough wind blows, the dollar is sitting at the top of the Grand Canyon in an even more precarious position. Make sense?


So basically, India has no support from outside. But other countries like Great Britain as Gary observed can and are doing QE to mop up their extra currency, and Japan has had for decades its surplus mopped up by savings/surpus.

Hope this forwards this conversation a bit.


@Michael H - you are now definitely added to my select list of commenters whose responses I look forward to. Great answers.

Carl said...

Michael H said..."So where does the dollar-denominated credit go?"

A major chunk of it ends up right back here in the U.S. as part of that process called trade.


Michael H said..."Where does the RMB-denominated credit come from?"

Come on now; where do "credit dollars" come from? I imagine the Chinease banks follow the same formula.

Michael H said..."Are they interchangeable?"

Sorry, I don't know what you mean by that.

Michael H said...

Carl,

"A major chunk of it (dollar-denominated credit) ends up right back here in the U.S. as part of that process called trade."

Correct. But what about the rest of it? The USA's trade deficit with China is famously large. What happens to dollar-denominated credit that does not return to the USA via the purchase of goods and services?

"Are they interchangeable?"

Sorry, I don't know what you mean by that.


Let me try to clarify. You have a dollar-credit account at your local bank. That is the bank's obligation to provide you with physical FRNs, should you ask for them. Your Chinese counterpart has a similar RMB-denominated account at his bank.

Can you open an RMB-denominated account at your local bank? Can your counterpart open a USD-denominated account at his bank?

(The question is clouded by the extra controls placed on the RMB as a currency; that is why I chose CHF and not RMB in my original response. But assume the RMB is freely convertible for this thought experiment.)

When you buy something from China, your bank transfers 'a promise to deliver USD-cash' to the bank in China as payment. The vendor may only see the final result -- a promise to deliver RMB-case appears on his bank statement -- but that doesn't mean that your 'USD-cash promise' turned into 'RMB-cash promise' by itself. Some institution had to make that change.

In other words, RMB-denominated credit and USD-denominated credit are *not* interchangeable (To answer my own question. Sorry), since they are promises to deliver different 'reserves'. Your bank will find it much easier to deliver USD-cash than RMB-cash, because that is what your bank has in its vault. The same applies to the chinese bank.

So, who takes in a promise to deliver USD-cash, and puts out a promise to deliver RMB-cash?

e_r said...

Michael H,

I tried to convey the meaning of a much more simpler concept, called monetary base to Carl sometime back.

You have a taken a trade-settlement concept and making Carl understand about trade-deficit. And you are doing it in fine fashion as well.

Good luck in your endeavor with Carl ;) My thinking is that he's going to get confused with the usage of words such as credit, reserves, promise-to-deliver-cash etc. in your post and warp himself around in semantic knots.

Carl said...

jojo said... "Carl,
I was curious what other usernames you use to post on the internet. The more you type, the more familiar it looks."


I started with "Carl" back in the 80s on BBSs, been using it ever since.

Maybe you've read some of my stuff before, I've been posting on this subject since 1995, had my on page for awhile at FreeYellow.com. Back then I referred to our economy as being a "makeshift busy work" economy with no real exportable productive capacity. There's nothing inherently wrong with that, as long as you don't import anything. And, I've been posting my thoughts on pseudo-conservative, Libertarian and gold sites for a long time.

Carl said...

Michael H,

I don't appreciate your apparent tone of condescension, I know what a trade deficit is.

And my point along with my question still stands, regardless of your attempts to smother it in superfluous rhetoric.

Let me ask you; at what point do they decide that trade is balanced and anything that comes in after that is extra?

Michael H said...

Carl,

There was no condescension in that post.

I won't have time for further comments now; I will respond later.

milamber said...

sub

milamber said...

I think my previous post got eaten, so reposting. Sorry if duplicate!



In relation to Biju's comments, I found a link at the Perth Mint concerning the RBI being required to have its gold shipped back from London:

http://www.punemirror.in/article/62/2012050420120504025313609120ae2ba/RBI-gets-HC-notice-to-explain-gold-deposits-with-Bank-of-England.html

RBI gets HC notice to explain gold deposits with Bank of England

Relevant quotes, edited for brevity:

"litigant Raghunath Shankar Kelkar has challenged the Reserve Bank of India’s (RBI) move to deposit 265.49 tonnes of gold out of its total stock of 557.75 tonnes abroad by filing a public interest litigation (PIL) in the Bombay High Court and demanded that the precious metal be brought back into the country, according to the provisions of the law.

Kelkar (56), has filed the petition as he found the move by the apex bank in contradiction to the section 33(5) of Reserve Bank of India (RBI) Act, 1934, which stipulates that 85 per cent of its gold reserves should be kept in India. The Reserve Bank held 557.75 tonnes of gold, forming about 9.2 per cent of the total foreign exchange reserves. Of these 265.49 tonnes are held abroad in deposits or safe custody with the Bank of England and the Bank for International Settlements.
He said that the RBI move was in violation of the legal provision as it had put 46 per cent of its gold reserves out of the country."



So *IF* this lawsuit has merit (and if my math is correct) then India has to hold 85% of its 557 tons of gold in country, or 473 tons. Right now they have 292 in country. London & or the BIS has to come up with an additional 181 Tons & ship it to India for the RBI to be in compliance.

Or they change the law.
Or dismiss the suit.
Or the litigant has an accident :)

Incidentally, Bron destroyed the ZH article about the IMF buying gold.

http://www.perthmintbullion.com/blog/blog/12-05-15/IMF_To_Buy_Gold_Not.aspx

I guess he could have just referenced JR's comment yesterday :)

Milamber

Biju said...

The only time "paper" Gold has moved to negative territory on a YTD(year to date) chart was approx between Oct 15 2008 to Dec 29th 2008.

We are slowly approaching that area. So far paper gold is up by $45 YTD. If it closes below $1500, there will be some panic among Gold bugs.

I hope paper and physical will decouple by then, based on Costata's link that cost of physical Gold mining is near $1400/oz. Since most of the miner's have removed their hedges and not sold much futures, if it goes below $1500, Miners should stop producing.

let's see how this goes.

Carl said...

Michael H,

Thank you for your patience, here is my response.

It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford.

"It Depends on what the meaning of the word is is" Bill Clinton

NOTE #1: One of the first things I was taught as an Air Traffic Controller is that "Phraseology Is Everything". It can mean the difference between an aircraft taxing "TO" the runway as opposed to taxing "ONTO" the runway, in front of landing or departing aircraft. Because of my 12 years in ATC, I developed the tendency to pay attention to phraseology and the meaning underlying its use. That experience also taught me that excessive verbiage (rhetoric) can be just as dangerous as the wrong verbiage.

NOTE#2: On the subject of whether or not the Fed will print; as all of you are aware, I've been hedging my position (vacillating) on this point, that's because I just wasn't certain. Well, let me say that after doing a little more research into the subject, that I am about 90 to 95 percent positive the Fed will not print beyond what it is required by law to cover with FRNs. And nobody's bank account, regardless the amount, is covered by a "promise to print FRNs" by the Fed, or pay in FRNs by the FDIC, or the USG.

NOTE#3: Some of my previous stated positions have been slightly modified by new information.

Onward,
Michael H said... " In 2008, the debt of the GSEs was essentially nationalized, was it not? This saved its value by converting it to a debt obligation of a more credit-worthy borrower."

Plastering old debt with new debt doe not salvage the value of the underlying asset, especially when it was the lack of value that caused the failure in the first place. The GSEs remain bankrupt regardless of the credit received, which only allows them to continue to function, supporting its working welfare recipients.

Michael H said... " the Fed has not been 'printing money'; they have been 'promising to print money' by expanding the (digital) monetary base. At this point, it is enough.?

You're making a distention that doesn't exist, there is no such thing as "digital base money" as digits are not issued with a provenance that imbues them with any special status over any other digit. You later acknowledged this with: "but I don't believe that what the creditors received could be distinguished from 'credit dollars', if this makes sense". It makes perfect sense because there's absolutely no difference between the two. A digital dollar issued by the Fed is exactly the same as a digital dollar issued by any other bank.

The Fed is not expanding "base money" with digits (digits are not and cannot be money, BY LAW). All the Fed is doing when it takes in GSE bonds, mortgage securities or Treasuries directly from the USG, is providing direct credit based upon the value (real or imagined) of the capital assets posted as collateral.

" Section 31 U.S.C. 5103, defines legal tender as "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

Did you note the wording taken from 31 U.S.C. 5103? "circulating notes of Federal reserve banks and national banks". This indicates that we have three different layers of currency here:

1) United States coins and currency
2) Federal Reserve Notes
And
3) Circulating notes of Federal Reserve banks and national banks

Carl said...

Response to Michael H continued,

It is notes generated by the Fed and contained in #3 (not FRNs) that are to buy the securities from the banks, and it is the unencumbered securities paid to the Fed, that it claims as its own, that are used as reserves. I'm also of the conviction that, it is the notes of #3, the ones that circulate among the Federal Reserve banks and national banks that are the only "promises to print" issued by the Fed.

And, it is my contention, backed by independent research, that it is the valuation of Capital Assets either offered as collateral or held directly by the banks, and not the credit that populates people's bank accounts (credit is not capital), that provide banks the "Multiplier Effect" that are the basis of the banking industry. It is also my arising conviction that the "Multiplier Effect", like the "Promise to Print", is nothing more than a myth.

"Credit dollars are a "debt generated" currency that is denominated by a unit of account. Unlike money (by a strict definition), credit itself cannot act as a unit of account. However, many forms of credit can readily act as a medium of exchange. As such, various forms of credit are frequently referred to as money and are included in estimates of the money supply."

That, was taken From Fed literature, I added the "debt generated" for clarity. As you can see, what the Fed leads everybody into calling "money" is by law and Fed admission, not so. Money is defined in 31 U.S.C. 5103 and it is that money which constitutes the real "base money supply". Credit is not money, it is either a written promise to pay money (debt) or an assumption that money will be paid (debt). This would also indicate that the vast majority of credit in circulation, populating bank accounts, used almost exclusively in commerce and driving the entirety of the "Monetary Plain", does so under an assumption of payment with no real promise attached.

There is nothing in fact or law, that I can find, which requires or assigns the Federal Reserve the responsibility or obligation to back or redeem any or all credit in circulation with Federal Reserve Notes, even when it is the issuer of that credit. The crash of 1929 and the subsequent cascading collapse of credit across the nation proved this beyond a shadow of a doubt. If there were a requirement for the Fed to print to cover all digits in the system, then it wouldn't be a Fractional Reserved System, it would be a 100% Reserved System and that's just not the case.

A simple test of this is the FDIC, which insures bank accounts for up to $250,000. You have anything over that in your account then, you're S.O.L. Also note that the USG backs the FDIC with its "Full Faith and Credit", the same stuff used to back the Fed. You'll get your deposit in the form of a check, good luck cashing it.

Michael H said... "Depositors ask for cash withdrawals from their local bank branches, who in turn withdraw their reserves from the Fed."

I hold that same position, only slightly modified. Depositors ask for cash withdrawals from their local bank branches, (as in a run on the bank), who in turn cash out the notes the Fed issued as payment for their deposited reserves. Once those notes are cashed, that's it, no more FRNs are owed by the Fed and it is now my stated position that, none will be forthcoming.

What they will do, as based upon their establish history in this matter and assuming they can't get another bank to cover the deposits for them, is write you a check, backed by the Full Faith and Credit of the USG, to cover your account up to the $250,000 limit. Again, guess what happens to any amounts over that limit....can you say "!POOF!"

Which reminds me, remember the banks in Calif. refusing to honor FDIC checks issued after the crash?

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

From Moneyness:

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

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

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

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

[...]

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.


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

JR said...

from above on the same theme:

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."

Carl said...

Response to Michael H continued,

"Credit dollars" or "digital dollars" are deceptive monikers anyway, as neither of them are "dollars", they are denominated in dollars. Something denominated in a unit of account, cannot be a unit of account.

All circulating FRNs are incidental to our current "credit based" economic system, contributing only a tiny fraction to the system's function. They are little more than a physical prod, a psychological tool employed to give you the impression that you are laboring for something other than a vacuous assumption that the credit you get as payment has some semblance of value as represented in the valueless FRN.

Michael H said... "All dollar-denominated credit will go ‘poof’, eventually. Not all at once. First, the credit from less credit-worthy borrowers will lose value."

I believe you misunderstand the nature of credit. Credit doesn't "lose value", you either have credit or you don't. It is the capital that backs the credit that either gains or loses value.

Credit flows from either existing or newly created excess value. Destroy that value and credit ceases to flow. With no new sources of excess value to generate new credit, old credit, which is debt, can't be serviced, the source defaults. This means that everything down stream that was dependent upon that flow to maintain their value, losses its value, on and on it goes...until all excess value is destroyed, no new credit can be created and all anyone is left with, is the debt.

If the unit of account that forms the basis of all the credit loses value then those who base their ability to create credit must come up with new sources of excess value in order to compensate for the loss of value in the primary unit of account. Failing this, no new credit can be created to service debt, default.

The implications of a formal dollar devaluation or a loss in faith in credit denominated in dollars upon the vast majority of financial/dept instruments/securities that are denominated in dollars and form the capital basis for contracts, portfolios and as sources of non-dollar based credit creation around the globe, would be catastrophic.

As Hypertiger put it: You have inflation greater than previous inflation to maximum potential, BOOM. Then you have inflation less than previous inflation to maximum potential, BUST. This is the cycle we are in.

By the way; that is the essence of Capitalism.

Taken from the Treasury web site:
"Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them."

As you can see, the Fed has no incentive to aid the USG by printing and putting all of its assets at risk. If the USG decides to print, it will take that responsibility away from the Fed, and then print. And, by the time the USG decides to do that, it will be after the collapse of credit.

M said...

@ enough

You said " Gold miners need $3,000 price in five years to remain profitable- world gold council- REUTERS"

It doesn't matter if gold goes to $10,000. Capital is fleeing the gold miners while the price of gold rises. Investors want treasuries and Net Flicks, not Goldcorp or Newmont. Gold miners are totally fucked. When the price of gold rises, the mass dumbfuck market thinks gold is in a bubble so the mining stock prices go sideways or even fall. When the price of gold falls, the dumbfuck market thinks they were right so the gold stock prices plummet.

Today there was another high profile disaster in the gold miners. International Tower Hill collapsed by 19%. Ealier this year, Kinross collapsed and is now at $7. Its 2008 low was $11. Agnico eagle collapsed by 20% too. You wont be hearing much from the hard money socialists because they are going broke as we speak.

JR said...

QFT:

"You wont be hearing much from the hard money socialists because they are going broke as we speak."

enough said...

M,

You may have missed my point. In order for gold to flow, the paper price can't fall below the cost of production. If $3000 per oz. is necessary for the gold to come out of the ground, does not the paper price have to rise to that level at minimum?

Edwardo said...

Clearly I've missed something in my ongoing freegold education, because I don't understand why we should worry overly much about mining flow? What needs to flow is the already existing immense global above ground stock. The world doesn't require more gold dug out of the ground as much as it needs what has long since been mined and is presently lying very still, to move, or, if you prefer, flow.

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

@ enough

"In order for gold to flow, the paper price can't fall below the cost of production."

I guess if you are taking about the specific flow of gold out of the ground.

My point is that it doesn't matter what the price of gold is if the companies mining it have no working capital. Apple has more then double the working capital as all producing gold mining companies combined.

enough said...

Edwardo,

I may be wrong but I thought ONE of the things that makes gold the perfect store of wealth is that it's stock increases roughly the same per annum as population growth over the last 100 years(ish)?

Wendy said...

yep, Another started out as "big trader":

"Date: Mon Aug 25 1997 00:04
GFD (The Paradox):
.....The gold market appears to be at a paradox best illustrated by Eldorado ( Sat 22:56 - good luck getting there! ;- ) ) and Big Trader ( Another: Sun 20:40 ) . "

Mike said...

anyone know why PAGE (pan asia gold exchange) was scrapped and what affect now that will have on demand in china? it was suppose to be a physical gold exchange to allow chinese in the suburbs access to physical gold in 10oz contracts from what i remember.

FOFOA said...

Hello Wendy,

You wrote: yep, Another started out as "big trader"

Maybe later he became/learned English?

"Big Trader ( the writer! ):

Let me clear up a few things. I am not the “Big Trader”! He cannot speak or write english and does not/would not post here. He has a need to get “thoughts” to other people. I do not do well with english either."


Maybe FOA posted on behalf of both ANOTHER and Big Trader? Maybe they knew each other? Who knows? It's pretty confusing, isn't it?

Thanks to Nick Laird (aka "Sharefin" from the archives) who just found those archives the other day and posted them on his own website.

I was curious about the posting protocol back in those earliest days of Kitco, so I asked Ari about it. Here's what he had to say:

"The earliest iteration of Kitco's posting routine had no security features to provide for unique user/handle identification. As a result, you would often find some users posting with the handles of other well-established personalities with the intent of slinging insults or posting idiotic messages in an attempt to embarrass or undermine the original person.

In an attempt to arrest this disruptive practice, Bart and his technicians put a new system into place as of mid-day September 23rd, 1997 which required users to register their posting handles for which a unique login code was assigned. As a result, each time you posted with your unique login code, the system would automatically associate that code with your chosen handle, and the posting handle would further be appended by a unique ID#.

The reason for the unique ID# was to address the lingering issue of duplicate posting handles. That is, even with the new system there was nothing that would prevent several people from accidentally (or deliberately) selecting a posting handle that was already in play by another poster -- so even though the posting names might appear the same, the unique posting/login code that was assigned to them would, at least, result in a unique ID# being appended to the post, even though the handle might be the same as others in use.

Bottom line: Prior to September 23, 1997, only by astute interpretation can you ascertain whether any given post might be by the person(s) who eventually emerged out of the original chaos as ANOTHER, but after that date you can know the true ANOTHER from the impostor ANOTHERs because the true ANOTHER was uniquely established in the new Kitco posting system with ID#60253.

And as for the USAGOLD archives, the oldest of all posts duplicated from Kitco goes only back as far as October 5th, 1997, (which was ANOTHER's first post after the unique ID# system was put into place). No attempt was made to sort out any of the chaos that came earlier in time, and after which time all impostors could be easily identified and weeded out."


Sincerely,
FOFOA

M said...

@ Mike

Apparently the PAGE system was actually killed by elements of the Chinese with interests in accumulating large stockpiles of Gold. (As well as other soon to be scarce Metals that China is rapidly becoming the only supplier. Rare Earths, silver, etc)

The upside for Investors in the Physical Market will see these crash / smash downs followed by buying at discounted prices. Hence the Chinese have a vested interest in keeping prices for all strategic commodities lower than the price would be now if the knock downs had never happened.

Wendy said...

FOFOA, You're right it is very confusing at the beginning, and it's great to have Aristotle's input and memory. Security was a huge issue, and in fact, I guess before they fixed it, they resorting to re-checking email addresses of the poster to authenticate the nic.

You may be right in that FOA was posting for Another and Big Trader, but I really think that who we know as Big Trader was referred to as "the trader" in the early days. Here's another one, and we've all read these words before:

"Date: Sun Sep 14 1997 21:12
ANOTHER (an answer?):
This could be an answer directed to the “Red Baron”?



The CBs are becoming “primary suppliers” to
the gold market. Understand that they are not
doing this because they want to, they have to.
The words are spoken to show a need to raise
capital but we knew that was a screen from
long ago. You will find the answer to the LBMA
problem if you follow a route that connects
South Africa, The middle east, India and then
into Asia!
Remember this; the western world uses paper
as a real value, but oil and gold will never
flow in the same direction.
Big Trader"

I'll keep digging through the boxes in the basement.

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

Yes its the stock to flow.

For 6,000 years gold has been used to store wealth. Only a small percentage has ever been used by industry. This means that the vast majority of all the gold ever mined is still available for use. It is generally agreed that 170,000 tonnes of gold has already been mined and is still available for use. This is commonly known as the ‘stock’.

Each year about 2,400 tonnes of newly mined gold arrives in the market. This is known as the ‘flow’. It is from these two amounts that the ratio is derived. When the stock is divided by the flow we arrive at 71. This means that the stock to flow ratio is 71 to 1. It is the ramifications of this simple ratio, when compared to the stock to flow ratio of other metals, that is so startling.

That amount of flow(mine production,2,400 tonnes) is about 1.4 percent of the stock. Even if gold production were to be doubled, then the annual growth in the stock of gold would still be less than three percent. It is almost impossible to imagine how mine supply could be doubled. Enormous new ore bodies would need to be discovered. The stock of gold is far, far greater than the amount of new gold arriving in the market each year. What this leads to is a situation where the value of gold is very stable.

If for some reason the mine supply of gold (the flow) were to completely cease for a couple of years, then again it would have no effect on the value of gold. It is the large amount of easily available stock that gives gold its stability of value.

Nothing else (except, arguably, silver) has anywhere near this stock to flow ratio.It is the stock to flow ratio that ensures that gold continues to hold a steady value. Because of its high stock to flow ratio, gold holds its value with a stability that is matched by nothing else, and can be matched by nothing else. Because gold has been successfully used as money for so long, it is now impossible to imagine how anything else could ever succeed as money.

Even if a new commodity appeared that satisfied the many functions and requirements of money, it still would not be able to achieve the high stock to flow ratio necessary for real stability of value over time. Because of its scarcity, platinum has been suggested by some as a new monetary metal. However, in the event that flow was to stop, then stocks of platinum would be exhausted in a matter of weeks. In those circumstances the value of platinum would skyrocket. That makes platinum far too volatile for use as money. Platinum is a precious metal; it can never be a monetary metal. It is the high stock to flow ratio of gold, higher than anything else, which ensures that gold holds its stable value over the longest period of time. Gold has been accumulated for over 6,000 years to achieve the stock to flow ratio that it has today. How could anything else ever match this?

rodjackson said...

Swung by your site to make a donation. Then I noticed you had removed your bitcoin address. I checked some of your posts, and saw you hadn't been thrilled with the price fluctuation. I don't know why you held onto them instead of having them automatically converted into USD, then maybe gold (which is how I would have thought you would have done it, considering the blog....)

It's a bit of a bummer. I don't use Paypal, have never owned a credit card, and no longer even have a bank account. I'll just keep my eyes open for when you decide to start accepting bitcoins again.

AdvocatusDiaboli said...

M & Edwardo,

amazingly here at FG the mining costs are never discussed, I personally think it's because it ruins the FG concept, therefore is not touched by the FG advocates. Just like Robert Zoellik said: "Gold is too cheap" (he did not mentioned "mining" gold, but I guess that's what he meant).
In the real world mining(costs) is the key point, why gold can be so nicely traded pretending that it is a demand commodity like orange juice.
That way the paper gold price discovery never reflects the stock (to flow ratio).

As long as there are free independent market miners out there struggeling to sell there stuff at the (potentially rigged none free) commodity market, there will never be Freegold.

And now shoot the messenger, but start to get used to living with it: There will not be FG until the complete financial system and society breaks, or wait 30yrs when no more gold is mined at reasonable costs.

Greets, AD

Blondie said...

@M,

While I agree with the thrust of your comments, I differ in some of the details.

Mine supply of gold is simply a part of the flow, not the entirely of it. Any gold that changes ownership qualifies as flow, because it has "moved". The stock is just that: the entire stock, including flow.

Gold is never actually consumed nor is it lost to decay. All the stock still exists. Gold is not subject to time. Being timeless, it is the best good in which to store value. The reason gold has such a high stock to flow ratio (why such a vast quantity of it does not move) is because it is functioning as its buyer intended when lying very still as stock: it is storing value.

We can know that gold is utilized as the pre-emminent store of value simply by considering who currently owns the stock of gold: it is overwhelmingly held by those of great wealth, the very group with the most surplus value to store and hence the group that find the greatest utility in gold's function. Not only that, almost the entire amount does not move, which tells us that it is held to store value.

The value of anything (including gold), however, is established by its flow, not its stock. Not enough flow??? You can't be bidding (valuing it) high enough!

Gold's true value will only be revealed when it ceases to flow, and promises will no longer be good enough. Only then will gold be valued accurately.

Blondie said...

Those relative few currently holding the bulk of the stock of gold must have confidence it is storing their value adequately: they've been holding it a very long time.

Blondie said...

As yet unmined gold is the wealth of those nations in whose jurisdiction it lies, and once it has been valued accurately it will be regarded as such by those nations. Until then it flows at paper value to uphold our current monetary system.

What a deal!

What sacrifice to enable this system. Already some nations "buy" all their domestic gold production. Soon enough all will do this, and sacrifice no longer. Flow will be greatly diminished as a result.

costata said...

Sorry for my undisciplined outburst earlier.

Cheers jojo but it's not the way to play.

JMan1959, I hope you make a full recovery quickly.

costata said...

Biju,

If I said $1,400 for costs I mistyped. I have read reports suggesting $1,250-1,300. Regardless of what the figure is I think production cost is the line that cannot be crossed for any extended period.

If mine and scrap flow stops (or is restricted) then the price would have to increase (Price = Supply) to meet demand or demand would have to be satisfied by bidding for the stock.

Either way it would be a new ball game and possibly (probably?) the trigger for revaluation.

AdvocatusDiaboli said...

something maybe for Carl to consider:

http://www.welt.de/wirtschaft/article106320192/Veraengstigte-Griechen-raeumen-ihre-Konten-leer.html

So in only ONE DAY, the Greeks withdraw 800 Million Euro (which means paper CASH notes).
But Greece has only 3100 bank offices => 258000€ per bank in average. Note for comparison: Here in Germany you should contact your bank if you want to withdraw cash >20000€, so they have it available.
Which leads me to think: If the whole banking system would not be a complete fraud by now, in this case some banks would have been bankrupt by definition, but they arent.
So, can we agree that any kind of paper with any kind of numbers of your desire will just be printed to make you happy?
Greets, AD

JR said...

Wendy,

All posts prior to September 23, 1997 can't be authenticated.

So for example, say a message on "Sun Sep 14 1997 21:12."

Ii may sound like it, but of course that is the goal of copycatting.

And as for the USAGOLD archives, the oldest of all posts duplicated from Kitco goes only back as far as October 5th, 1997, (which was ANOTHER's first post after the unique ID# system was put into place).

JR said...

HI Carl,

Thanks for being such a diligent advocate for FOFOA's position. What a clear statement you keep re-posting:

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

See that - Congress tells the Federal reserve what to do, as Congress created the Federal Reserve and Congress defines the terms of the Fed's existence by statute, the Federal Reserve Act - http://en.wikipedia.org/wiki/Federal_Reserve_Act

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

Did you know the Federal Reserve Act has been amended by Congress over 200 times? That's right, over 200 times. That is more than twice a year since its enactment in 1913!

So who knows what the USG will do to fund its addiction. But do not worry about the Federal Reserve getting in the way - Congress tells them what to do and has a long and storied history of changing its mind. The future will be no different, the Federal Reserve will continue to be an instrument of the USG. This is how it works:

"Congress has specified that a Federal Reserve Bank must ...

Michael H said...

Carl,

My response will take a few days, but first let me comment on your introductory note #1.

The difficulty in the type of discussion we’ve been having is not in the arguments; I think those are fairly straightforward when all is said and done. The difficulty is in the assumptions underlying the arguments, since those are left unstated and are really tend to be the root of disagreements. It makes it difficult even to ‘agree to disagree’ because we cannot even agree on what we’re disagreeing about!

As you may have noticed, long-time commenters at FOFOA’s blog tend to share a world view and set of assumptions about the monetary system and its future, based on a lot of background reading of ANOTHER, FOA, and FOFOA’s writings. You can call these shared assumptions and definitions a ‘culture’ if you’d like. You may be frustrated that definitions used here don’t match your own definitions. Call your definitions ‘textbook’, or ‘correct’ all you like, it doesn’t matter. What matters is that they don’t match how we use those words here. You can try all you like to change how words are defined at FOFOA’s blog, but you won’t succeed.

Let me borrow your ATC analogy. Say you have a volunteer new AT controller who cannot get the use of the words ‘ON’ and ‘ONTO’ straight. No matter how hard he tries he gets them mixed up. You cannot fire this person. Would you rather have him continue to try and fail to use the words correctly, and suffer the plane crashes that result, or would you rather have him abandon the ‘ON’ and ‘ONTO’ words altogether, and spell out what he means using a different combination of words?

That is what I think you are referring to as ‘excessive verbiage’ in my posts. I am abandoning the common usage of certain words (especially ‘money’) and finding workarounds, because my definition and your definition don’t match. I am not about to change my definitions to suit you, and I can hardly expect you to change your definitions for me, so in the meantime I’m afraid we’ll have to live with terms like ‘USD-denominated-credit’ or ‘promise to deliver USD-cash’, and the cumbersome sentences that result. Luckily we are not under the same time constraints as air traffic controllers.

Michael H said...

Carl,

And now some final thoughts on yesterday’s comments, before I start working on your longer response. I will try to be straightforward.

The original question:

” FOFOA, could you please explain the process by which CBs refuse to "mop-up dollars" the we spend.”

First: ‘mop-up dollars’. A foreign CB mops up dollars by purchasing USTs with any dollars deemed ‘excess’. This leads to,

” Let me ask you; at what point do they decide that trade is balanced and anything that comes in after that is extra? ”

Good question. I believe it would be based on exchange rates. If the CB sees that allowing the market to clear on its own would lead to an undesirable exchange rate, the CB will step in and mop up this ‘excess’ so that the exchange rates stay in an acceptable band. This applies not just to currency-peg nations such as China, but also to ostensibly free-floating currencies like JPY.

So again, the foreign CB has two choices, let the market push the currency exchange rate around, or ‘mop up’ this ‘excess’ by buying USTs. Neither is a particularly good choice.

(As an aside, it is an important point that the foreign CB uses the excess dollars to buy USTs, but then has to issue base money in its own currency to pay the local vendor. In other words, the PBOC buys USTs and ‘prints’ RMB, leading to domestic price inflation.)

How does a foreign CB ‘refuse’ to ‘mop up’ these dollars (or should I say “dollars”) then? By refusing to purchase USTs with the excess.

Of course, this could have all been perfectly obvious to you, and you were simply asking about the next step which is ‘if they refuse to buy USTs with the excess, what do they do?’, but I have no way of knowing whether that was your intention from the context of your question.

Michael H said...

Aquilus,

Thank you for the kind words.

Motley Fool said...

Blondie

"Gold's true value will only be revealed when it ceases to flow, and promises will no longer be good enough. Only then will gold be valued accurately."

I would just like to note, that technically this is not quite correct. At that stage the value of gold will be infinity. The true value of gold will only be shown when flow Starts again afterwards.

I know you know this, but let us not confuse others. :P

TF

intuitivereason said...

Cost of production can only be considered in terms of volume of production. Some mine have costs of production down in the $400 range (like the Kingsgate mine in Thailand), others (like Beaconsfield in Tasmania) have costs of production near $1600. As price drops, uncompetitive mines drop out until price rises again.

Same arrangement with most commodities.

enough said...

Hi Blondie,

you say........

'As yet unmined gold is the wealth of those nations in whose jurisdiction it lies, and once it has been valued accurately it will be regarded as such by those nations. Until then it flows at paper value to uphold our current monetary system."

so is it not important for TPTB to keep the paper price above mining cost so they can extract it as quickly as possible from those unwitting nations that hold much wealth par excellence still in the ground?

Carl said...

Michael H said... "First: ‘mop-up dollars’. A foreign CB mops up dollars by purchasing USTs with any dollars deemed ‘excess’.

WOW!

'Excess' dollars don't become 'excess' dollars until they hit the CBs. This means they already have the 'excess' dollars sitting on their books and that's how they know they're 'excess'.

Instead of having those digits sitting on their books doing nothing while waiting for the US to produce something that their economy wants (which would create a demand for the 'excess' dollars they hold), they put them to work earning interest through the purchase of Treasuries.

Technically, this means that the USG isn't "borrowing" so much as allowing CBs holding those 'excess' dollars the opportunity to put them to productive use, otherwise they just sit on their books doing nothing.

What this means is: It is the sale of Treasuries that are mopping up the 'excess' dollars we spend into their economies!

Motley Fool said...

WOW!

Everything is saved!

The USG just needs to sell more treasuries and nothing will go wrong.

and I was worried there for a bit.

Thank you Carl for these brilliant insights. I can now sleep peacefully again.

Crack said...

What this means is: It is the sale of Treasuries that are mopping up the 'excess' dollars we spend into their economies!

What this means is: It was the sale of Treasuries that were mopping up the 'excess' dollars we spend into their economies!

Fix yaw post?

DP said...

WOW!

Technically, this means that the USG isn't "borrowing" so much as allowing CBs holding those 'excess' dollars the opportunity to put them to productive use, otherwise they just sit on their books doing nothing.

Just… wow! Eh, readers? ;)

Michael H said...

Carl,

"Instead of having those digits sitting on their books doing nothing while waiting for the US to produce something that their economy wants (which would create a demand for the 'excess' dollars they hold), they put them to work earning interest through the purchase of Treasuries."

Your comment brings up an interesting question. What would happen if foreign CBs just kept the 'dollars' on their books, and didn't purchase USTs with them?

CBs do not hold currencies, they hold the bonds of the currency. Why? Can this change?

In other words, the cycle right now is:

Dollars accumulate abroad --> foreign CBs 'print' local currency to buy 'excess' dollars --> foreign CBs buy USTs with the 'excess' dollars --> dollars return to the US to be spent again.

What if the dollars accumulated abroad? Who would buy USTs? Would the US face deflation?

Just wondering out loud here.

Carl, when you write "having those digits sitting on their books doing nothing" and "put them to work earning interest through the purchase of Treasuries", I cringe a bit. Why would the foreign CBs need to reach for a yield?

"What this means is: It is the sale of Treasuries that are mopping up the 'excess' dollars we spend into their economies!"

Correct, it takes two to tango. But which do you see as more likely to stop: the issuing of new USTs, or the purchase of USTs by foreign CBs?

Woland said...

All "interest" "earned" today on US Treasuries in either negative,
or negative in risk adjusted terms (meaning at the long end of
the curve). Today holding treasuries have ONLY 1 point in their
favor: For entities with hundreds of millions +, they bypass the
insured limits on interest bearing deposits. They also bypass the
well demonstrated risks of "repo" when collateral values change
overnight. They thus have no nominal price risk, only real return
risk. So, holding them is hardly "an opportunity to put them to
productive use".

Carl said...

JR said... "HI Carl,

Thanks for being such a diligent advocate for FOFOA's position. What a clear statement you keep re-posting:


HI JR,

Sorry but, my arguments disprove FOFOA's position, especially so with the use of that quote.

It all comes down to understanding the difference between what is money by law and what is not.

JR said...

Well said Carl,

"Congress has specified that a Federal Reserve Bank must..."

jojo said...

Heyzeus Christ, Carl.

It's getting silly now.

http://www.youtube.com/watch?v=vJChh7ghGnE

DP said...

JR,

It all comes down to understanding the difference between what you believe you understand people to be saying, versus what they actually are saying.

jojo said...

"what is money by law and what is not."

"Congress has specified that a Federal Reserve Bank must..."

see that Carl?

DP said...

Once again, and with feeling…

what is money --> by law <-- and what is not.

Carl said...

From the FRB: "Credit currency has no legal standing as money but all debts incurred through its use are legally binding."

JR, jojo,

Think about it...

JR said...

Yes!!

Credit money and base money are different.

See how wrong it is to claim: "FOFOA's argument relies upon the notion that Credit Dollars will act/react exactly the same as Physical Dollars."
http://fofoa.blogspot.com/2012/05/inflation-or-hyperinflation.html?commentPage=2#c768843714705864226

Indeed, as FOFOA has made clear:

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).

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

JR said...

You are doing so good Carl, it great to see how your position has evolved make clear you now agree that:

1) the Congress tells the Fed what to do
2) Credit money and base money are different.


Bravo!!

Michael H said...

Carl,

Let me focus on the issue of whether the Fed will print. I will try to use as many quotes from your response as possible to illustrate my position, so hopefully we won’t get crossed up by our different assumptions and definitions.

First, where we agree:

”You're making a distention that doesn't exist, there is no such thing as "digital base money" as digits are not issued with a provenance that imbues them with any special status over any other digit. … there's absolutely no difference between the two. A digital dollar issued by the Fed is exactly the same as a digital dollar issued by any other bank.”

Agree, the digital base money spends into the economy the same way that credit money does. However, when the Fed issues this credit, it also does something else, which I will discuss later.

”There is nothing in fact or law, that I can find, which requires or assigns the Federal Reserve the responsibility or obligation to back or redeem any or all credit in circulation with Federal Reserve Notes, even when it is the issuer of that credit. ”

Agree. The Fed will not print to cover credit directly. It will print to cover its promises to print, as you discuss.

Let me see if I can put together a coherent ‘story’:

”The implications of a formal dollar devaluation or a loss in faith in credit denominated in dollars upon the vast majority of financial/dept instruments/securities that are denominated in dollars and form the capital basis for contracts, portfolios and as sources of non-dollar based credit creation around the globe, would be catastrophic.”

That is why it will be avoided at all costs, if possible. I believe it is possible, and it is in process. Do you believe it impossible? This is how it is currently happening, and how it will continue to happen:

”The GSEs remain bankrupt regardless of the credit received, which only allows them to continue to function, ”

”All the Fed is doing when it takes in GSE bonds, mortgage securities or Treasuries directly from the USG, is providing direct credit based upon the value (real or imagined) of the capital assets posted as collateral.”

”It is notes generated by the Fed and contained in #3 (not FRNs) that are to buy the securities from the banks, and it is the unencumbered securities paid to the Fed, that it claims as its own, that are used as reserves. I'm also of the conviction that, it is the notes of #3, the ones that circulate among the Federal Reserve banks and national banks that are the only "promises to print" issued by the Fed.”

”Depositors ask for cash withdrawals from their local bank branches, (as in a run on the bank), who in turn cash out the notes the Fed issued as payment for their deposited reserves. Once those notes are cashed, that's it, no more FRNs are owed by the Fed and it is now my stated position that, none will be forthcoming.”

Let me summarize in brief:

- “The GSEs remain bankrupt” but “continue to function” because of “direct credit” received from the Fed based on “real or imaginary” value of securities tendered to the Fed as collateral.

- The Fed purchases these securities with “notes generated by the Fed, #3”. These notes are “promises to print issued by the Fed”.

- Should depositors demand cash from their local bank branches, the bank will cash in on these “notes issued by the Fed” aka “promises to print.” The Fed will print cash to cover these notes, but not more.

Do we agree until this point?

Part 1/2

Michael H said...

Perhaps where we differ is, by the time that the bank run starts, how many ‘promises to print’ will the Fed have made?

Since 2008, these promises have been increased by the LSAP programs of the Fed, QEI and QEII. Do you think that, should another major entity go bankrupt, a ‘catastrophe’ will be allowed to play out, or do you think either the Fed or the USG will purchase these ‘assets of imaginary value’ so that the entity in question can ‘continue to function’ and ‘a loss in faith in credit denominated in dollars’ does not occur?

My position, in case it isn’t clear, is that the Fed has been emitting promises to print, and will continue to do so, to prevent the cascading failure of debt. The Fed will eventually be forced to make good on these promises, because the only alternative is to sell the portfolio of ‘assets’ into the market at their ‘real’ values instead of their ‘imaginary’ values.

Part 2/2

kobajashi said...

To all posters on FOFOA's blog!!


The latest issue of GEAB from LEAP2020 is availlable

This one is very intresting!!!!


http://www.leap2020.eu/GEAB-N-65-is-available-Global-systemic-crisis-Second-half-of-2012-Convergence-of-four-explosive-factors-Banks-Stock_a10517.html


They write about the return of the topic ""unmanageable debt of the US" by the end of summer and so the focus will be more to the VS!!

They also write about why a Greek Eurozone exit is impossible in practice

And about the "massive and sudden monetization of US debt by end of 2012!!!!!!!


Grtz

Koba

kobajashi said...

http://www.leap2020.eu/GEAB-N-65-is-available-Global-systemic-crisis-Second-half-of-2012-Convergence-of-four-explosive-factors-Banks-Stock_a10517.html

excerpt:


From the end of summer 2012, the return of the topic of the United States’ unmanageable debt, related to the automatic budget reductions imposed in the event of Congress’ non-agreement on debt reduction, will start a “Taxmageddon (10) » in the USA. One will thus witness the remake of the detonator-bomb tandem that European and American debts already played with in summer 2011, but this time in a much more powerful version. In fact, if fears of seeing the Euro and Euroland exploding have disappeared (11), they will be replaced by a danger much more alarming to the markets: the massive and sudden monetization of US debt (12).

kentherr said...

You are correct. The mining shares are acting poorly. Of course so is gold itself. So much for the inflation argument. Nothing different than 2008, Gold up, gold stock up; gold down, gold stocks down. The shares will be fine if gold ever rises again. kr

Carl said...

Jr,

#1 holds true only to the extent that, what congress attempts to tell the Fed to do, does not endanger the Fed. 100 years of Fed history supports this position.

As for #2; over half of what is referred to as "Base Money" is nothing more than credit.

And that is my point. What I've been doing here is attempting to covey to you the real consequences behind its meaning.

jeb said...

So would the currency be sacrificed to save the system, or is the system sacrificed to save the fed?

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