Thursday, June 21, 2012

The Debtors and the Savers 2012



Like Dust in the Wind

There are 31,530,000 seconds in a year. A thousand milliseconds in a second. A million microseconds. A billion nanoseconds. And the one constant, connecting nanoseconds to years, is change. The universe, from atom to galaxy, is in a perpetual state of flux. But we humans don't like change. We fight it; it scares us. So we create the illusion of stasis.

We want to believe in a world at rest—the world of right now. Yet our great paradox remains the same. The moment we grasp the now, that now is gone. We cling to snapshots, but life is moving pictures, each nanosecond different than the last. Time forces us to grow, to adapt, because every time we blink our eyes, the world shifts beneath our feet.

Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve.
–Tim Kring


Prices change. Don't they? Yes, of course they do! We don't always like it when prices change, but they do nonetheless. And why do prices change? Because values change! That's right, I'm talking about the way humans value things relative to other things. Relative values change constantly, and because relative value is a subjective choice made by each individual, what actually changes is demand.

I remember back in 2008 BlackBerries were all the rage. First generation iPhones were a little buggy and RIM (the maker of the BlackBerry) was rocketing toward $150. Both RIM and Apple were around $140 at about the same time. Today iPhones are cool, RIM is $10 and Apple is $577. Demand changes, relative values change, prices change. We don't always like it when things change, but they do nonetheless.

So why are some people so stuck on that old objective cost theory of value? One thing I have learned through writing this blog is that these people in particular, when they come across my blog, seem to be the most obsessive about "debunking" me. Yes, I'm talking about our old Marxist frenemy Ash. In the first draft of this post I had links to a couple of others as well, one who wrote something like Debunking FOFOA and another who devoted no less than six posts to the cause. But there's really no need to look any further than everyone's favorite Marxian with his ten posts and counting. He has an ongoing series over at "The Automatic Earth" devoted to debunking Freegold!

Marvin the Marxian

The Marxian View

Ashvin Pandurangi: "This series was a comprehensive attempt to debunk the [Freegold] theory by attacking its foundations, which range from Hegelian idealism to the (more concrete) marginal utility theory of value, and by replacing those foundations with what I believe to be more solid ones. Among these were Marx's theory of capitalism, spanning his concepts of surplus value, rate of exploitation, over-production and realization of value…"

In my 2010 post, The Debtors and the Savers, I explained the "Marxian" view of class struggle like this: "Simply put, Marx says it's the rich versus the poor. According to Marx the rich exploit the poor to get themselves a "labor-free income", which spawns a class struggle." This flawed perspective makes it impossible to understand Freegold, which is perhaps why they are so driven to debunk it.

Hegelian Idealism

With the correct delineation being the debtors and the savers (aka the easy money camp and the hard money camp), Freegold simply explains how, with the termination of the $IMFS, what remains is a system in which these two camps will no longer be in a perpetual state of monetary conflict. This is what Ashvin dubs Hegelian idealism; the idea that mutually beneficial coexistence between those whose innate tendency is to net-produce (produce more than they consume) and those who prefer easy money through borrowing, taxing and printing is even possible. His argument that it is not possible boils down to "they" (the evil ruling elite) will never let it happen.

Marginal Utility Theory of Value

Simply stated, the Marginal Utility Theory of Value which Marxists object to is really just the subjective view of value which I described at the top. They prefer Marx's objective view of value which says that value flows up through the costs embedded in the supply side rather than down from the subjective choice of the end user. And while Marx has been thoroughly discredited in economics, this objective view of value persists because it fits the "exploitation of the workers" theme that is so popular among impressionable young minds and scary doomers with batshit-crazy worldviews.


Which brings us to Ashvin's "more solid" foundations of Marxian "surplus value, rate of exploitation, over-production and realization of value."

Surplus Value

In this view, surplus value comes only from the Capitalist's exploitation of workers, be it from selling goods back to the workers for a price higher than the value (value being the cost of production paid to the workers), or from lending to the workers for interest or rent (labor-free income).

Rate of Exploitation

The rate of exploitation, as you can imagine, is simply the rate of surplus value accumulated by the Capitalists at the workers' expense. So if surplus value is the stock, the rate of exploitation is the flow.

Over-production

Here's a quick excerpt from Marxists.org on over-production:

The real problem when goods lie on the shelves is that no-one can afford to buy the commodities; in other words “over-production” should really be called “under-consumption”.

In another sense however, the term “overproduction” is valid; but it is not goods and services which have been over-produced, but capital.

During a boom period – the rising phase of a capitalist crisis – profits run high and a mountain of fictitious capital is built-up by speculation and borrowing for unwarranted future expansion. All this fictitious capital has to be fed by the surplus extracted from workers and this grows to be more and more of a burden on the backs of the workers until profitability can no longer be maintained, and slump takes over.

Realization of Value

Again from Marxists.org:

Realisation is the transformation of something from an ideal or potential form to an actual or material form. Realisation of value is the conversion of a profit or payment in the form of a surplus product or credit into money form.

Commodity production is based on the production of a product which the producer themself does not need, on the basis that their own need can be met by exchange or sale of the surplus product. In particular capitalist production can only complete the cycle of capitalist reproduction when the labour power is used, the product sold and paid for.

The beginnings of crisis often lie not so much in the failure to produce a surplus as in the failure to realise surplus production.

Are you starting to get the picture? These guys don't like the concept that value is in the eye of the beholder. They need value to be an objective metric in order to explain how the Capitalist exploits the worker. How the rich exploit the poor. How the bourgeoisie exploit the proletariat. From my 2010 post, here are Marx's classes in his version of the class struggle:

Marx's classes were:

1. Labour (the proletariat or workers) - anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.

2. Capital (the bourgeoisie or capitalists) - anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.


And here is my corrected delineation:

The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. "The easy money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

1. Debtors - "The easy money camp" likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.

2. Savers - "The hard money camp" likes to live within their means and save any excess for the future. They prefer hard money (or in some cases "harder" money) because it protects their savings and forces the debtors to work off their debts.


Some of my readers thought this was my most profound post. Others picked up on my theme and wrote their own articles about "the debtors and the creditors" thinking they had corrected my obvious error. It wasn't an error. It was intentional. The Debtors and the Savers are the two inherent camps. They are not, and should not be, direct counterparties! More on this in a moment.

In Time

In The Debtors and the Savers I posted a very short version of a forgettable movie which helped make the point that individual members of the two camps are not as obvious as the superficially rich and poor. In fact, many in the West who are living like kings are actually up to their eyeballs in debt.

For this post I'd like to direct your attention to the movie In Time starring Justin Timberlake and Amanda Seyfried. It's a much less forgettable movie than Tiger's Tail, so check it out. Here's a two-minute trailer:



The premise of the movie is that time is the currency. And since time passes automatically, that’s like inflation. If you just sit on your currency doing nothing, it will leak away with time. In the movie, when you run out of currency, you run out of time and you drop dead on the spot. Most of the people live in the ghetto and they never have more than a day or two at a time, so they have to keep working just to stay alive.

Then there are the rich people who have eons of time. You can literally live forever in this world if you accumulate enough currency which is also real time. And the rich get richer not by producing lots of good stuff, but by loaning their surplus time to the poor at usurious rates.

The story is told from the perspective of the poor, but from another perspective it really drives home the point that wealth is best kept not mixed in with the transactional currency by relying on debtors' servitude. In the movie the rich could only live forever as long as the poor lived hand to mouth, always working, producing, and never getting ahead to the point where becoming a consumer was an option. So the wealthy relied on the production output of poor debtors for their wealth which, in this world, was an endless life of luxurious consumption.

But as a net-producer (one who produces more than you consume) that’s not the best way to store your purchasing power. If you could pick a counterparty for your future, would it be a debtor who lives hand to mouth always on the precipice of bankruptcy, or a fellow net-producer? How about if you could choose between either all of the debtors as your counterparty, aggregated by a government which has every incentive to debase your savings, or all of the net-producers/savers with a 5,000 year track record of their innate drive to net-produce and save for the future? Which would you choose if such a choice existed?

This film is a classic illustration of the popular "Marxian" view of perpetual class struggle: exploitation of the workers. The wealthy live the good life consuming as much as they want on the backs of the indebted poor who must slave away producing just enough to stay alive, plus some surplus for the wealthy to consume.

But is this reality?

With the proper perspective and a little quiet contemplation it becomes obvious that, today, we highly indebted Westerners have a much higher living standard and luxurious rate of consumption than the net-producers of the world. Those supporting our lifestyle are not indebted to us—it's the other way around. And other things become clear as well. Like that credit (debt) is demanded by the debtors (remember, human demand drives everything), not forced upon them. And that banks, whose job it is to extend credit (aka easy money), are actually in the easy money camp along with the debtors. More on this in a moment.

The Mungerian View

Over on the other side of the coin we have Mungerian paperbug Capitalist and fair-weather friend to the "goldbugs" (a term with which I cannot identify), Izabella Kaminska [1], who, after "enduring" a few tweets from Freegolds among others, thought she schooled her buggy friends with a two-part series creatively titled, Debunking goldbugs.

I say she's the other side of the coin because Izabella thinks the savers owe it to the debtors to be their direct counterparty and earn some labor-free income via interest which the Marxians call exploitation. And I called her a Mungerian paperbug in honor of Charlie Munger because she sounds just like Munger and the Dingbat from my post A Winner Takes the Gold. Remember that Charlie thinks you’re a jerk if you hoard gold? Well Izabella says you're a selfish, anti-social cheat.

She even tries channeling John Locke's reasoning into an argument against hoarding gold with this clever quote from the conveniently titled RealitySandwich.com:

Suppose I have twelve loaves of bread, and you are hungry. I cannot eat so much bread before it goes stale, so I am happy to lend some of it to you. “Here, take these six loaves,” I say, “and when you have bread in the future, you can give me six loaves back again.” I give you six fresh loaves now, and you give me six fresh loaves sometime in the future.

In a world where the things we need and use go bad, sharing comes naturally. The hoarder ends up sitting alone atop a pile of stale bread, rusty tools, and spoiled fruit, and no one wants to help him, for he has helped no one.

Here's some John Locke from my post dealing with Munger and the Dingbat:

Furthermore, gold is the most socially responsible valuable good to "hoard" (save), which is another reason it is the focal point. John Locke wrote way back in 1690 that it is "foolish and dishonest" for men to hoard up things of short duration, things that are consumed in the support of life, or any more than one can personally use from the common stock of perishables and truly useful supports of life. This, Locke wrote, is how man came to value durable things of no industrial worth, that "he might heap up as much of these durable things as he pleased… and keep those by him all his life," because "he invaded not the right of others."

Of course you don't want to hoard perishable goods like loaves of bread! That's just silly. But it is an important concept to understand. So why hold someone else in debt rather than simply hoarding a durable thing of no industrial worth, as the real John Locke recommends? Well, Izabella's argument is that you are better off if you lend your surplus to someone so that you can later ask for it back. She calls this the "favour system" and she says that if you hoard gold then you are "opting out" of this "collaborative process".

But how does holding someone else in your debt make it more likely that you'll be able to redeem your six loaves than if you simply sold them and bought a durable thing that is extremely likely to be considered valuable by other savers in the future? In fact, it doesn't! And Izabella addresses this issue.

She says that you're better off not holding a specific person in debt because he might die, but rather holding your government's debt! She says the "sovereign lord" provides the vital service of credit aggregation and central clearing (which is true for the transactional currency) and thereby creates "fungible" and "non-perishable" debts for saving! (At least she didn't go so far as to call government debt infinitely divisible, discreet, transportable and pretty.)

But even though government debt may be relatively fungible and (nominally) non-perishable, you're still at the mercy of the government should it decide to debase your savings. Izabella says this is not only a good thing, but it is your social duty:

Luckily for the system, the sovereign can expand or contract the number of debts that circulate within its community to match the current production/wealth profile of the nation and keep the system in check.

[…]

You could say, the sovereign borrowed from the rich (those with surplus wealth which will otherwise perish) and redistributed the wealth according to the needs of the community. Since everybody received something, including the ‘rich’, a tax (cancellation of debts outstanding) kept the system in balance. Very MMT.

What she's saying here is that too much savings is a burden on the system and the government provides the valuable service of debasing burdensome levels of savings down to a socially healthy level. How does that make you feel? And yeah, Izabella is apparently quite fond of MMT, which is why this part reminded me of someone else who once said that savings above "a certain level" are a "burden". I'm talking about our very own MMT Greg:

I don't disagree with your idea of saving but it cannot be done to much of a degree on a macrolevel. There must be someone to consume your oversupply after a certain level. Savings is a burden when excessive. How to predetermine the "right" amount ? Dont know. How to know it when you see it....... right now. We have OVER produced a lot of things.

As Mosler is fond of saying, economics is the opposite of religion, in economics it's better to receive than to give. If you produce extra and [loan] it to me so I don't have to produce it myself .....THANKS is the proper response.

In part 2 of her bug schooling affectionately titled Gold’s Anti-Social Behaviour Order, here is Izabella expressing the same sentiment as MMT Greg regarding excessive savings being a burden on the system (my emphasis):

…there’s no denying a promissory note is a much more practical unit of exchange and store of value than a bar of gold.

The problem with promissory notes from a goldbug’s point of view, however, is that a sovereign always has the means to “manipulate” supply so as to regulate the system’s excesses and deficits for the benefit of the group: bringing their purchasing power of the notes down when there is an abundance of goods to notes “by printing more”, and bringing their purchasing power up when there is a deficit of goods to notes.

This puts the interests of the group above those of the individual, because — in the words of goldbugs — it “steals” wealth from individuals.

These regulative processes of course are necessary. They’re a correcting mechanism that ensure efficiency and curb wasteful production. And, as we’ve stated before, it is anticipated that promissory notes are eventually extinguished via the payment of taxes. In a perfect system the sovereign should provide for you, once you’re no longer productive anyway.

In other words, it is good that the government can reduce "excessive savings" through debasement. In fact it is the government's job to do that, just like it is the government's job to take care of you when you get old according to Izabella. And here is "gold's anti-social behavior" in a nutshell:

What gold thus represents, we would argue, is an opt out, and a cheat, from participation in the group correctional process. Its existence undermines the sovereign’s ability to regulate the supply of debt to match the needs of the system. In a situation where there are too many goods, and too little monetary sovereign debt, the sovereign clearly needs to create more sovereign ‘debt money’ — and debase the store of value — to encourage more of this overproduction to be used and efficiently allocated.

Since gold can’t be “debased”, it begins to attract investment from those who would rather not consume today’s overproduction (and via that sharing wealth and ‘favours’) but continue to hoard these for the purpose of individual wealth accumulation.

In the opposite scenario, when there aren’t enough goods to satisfy sovereign debt claims and the sovereign intervenes by contracting the money supply — by making it extremely expensive to borrow but extremely attractive to invest in the production of goods — gold attracts investment from those who would rather not delay consumption until tomorrow for the benefit of the community.

Gold in this way symbolises humanity’s selfish streak.

[…]

So while gold may be a workable underlier for a redemption option, this doesn’t change the fact that at the heart of the system it is faith and faith alone which holds everything together. Whether that faith is reflected in a sovereign’s ability to manage the economy on behalf of the group, in the sovereign’s guarantee to honour a gold option, or faith in the gold god himself… faith is the constant. Not gold.

What’s more, while gold encourages anti-social behaviour and hoarding in individuals, a fiat-based system encourages the very opposite: sharing, distribution, collaboration and cooperation.

And then she concludes with two options:

Which leaves two possible plans out of the crisis:

1) The goldbug plan: based on encouraging everyone to hoard ever greater amounts of natural wealth for themselves and themselves in what is ultimately a commodity you might never be able to eat.

2) The fiat plan: based on encouraging society to trust each other again, and via that storing, redeeming and returning favours until the system’s ails are eliminated.

This is obviously someone with both feet firmly planted in one camp telling the other camp what they should do. Almost reminds me of that famous quote about sharing and unselfishness by… hmm, I forget, was it Jesus? "From each [producer] according to his ability, to each [consumer] according to his needs." Funnily enough, here's what Wikipedia says about that quote:

In the Marxist view, such an arrangement will be made possible by the abundance of goods and services that a developed communist society will produce; the idea is that there will be enough to satisfy everyone's needs.

Now compare that idea with Izabella's post one week later titled The end of artificial scarcity:

It’s an environment that we have argued requires a new paradigm for the world. A transition towards a steady-state where money has no choice but to depreciate because its role as a store of value has been made redundant due to the general abundance of goods in society, brought about by technological innovation and efficiency. In a post-scarcity environment there is no need to delay or hurry purchases, or to even have a store of value. You use only what you need.

[…]

And when that happens money itself will die, because who needs to save for their old age, if over the time the system is going to provide ever more “stuff” you need for free or almost for free.

Not convinced?

We’d argue the signs that this is happening are already appearing.


Да здравствует революция indeed!

In truth, Izabella's whole argument in the two goldbug posts was based on a flawed premise considering that they were spawned by her frustration at interaction with "Freegolds" and a few of my other "regulars" on Twitter rather than with true goldbugs. That premise was her assumption that they (we) have, in her words, an "utter and complete hatred of the so-called paper money system."

The truth is that we view the primary and secondary functions of a monetary system separately. Paper money (and electronic currency) is, in fact, the best thing since sliced bread in the transactional role. Here's a quote from our very own Aristotle describing his personal journey and discovery that paper money is not only good, but necessary, back in 2000:

"Going in, I was a charter member of the Goldhearts club [aka a goldbug], and I emerged even more excited about the prospects of Gold than before. The future for Gold is bright, and it is rapidly approaching in the manner I laid out, if I'm reading the signs correctly.

In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free."


Freegold is not about making easy money a little bit harder. On the contrary, it is about the debtors and the savers coexisting without the perpetual monetary conflict embedded in all prior systems. (See The Debtors and the Savers 2010 for more about this perpetual conflict.)

Izabella has probably never heard of FOFOA's dilemma. Here it is, from The Return to Honest Money:

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

And from that same post, here's my definition of Honest Money: "My definition is that honest money is simply money that does not purport to be something it is not." As I explained in that post, money's two main functions, medium of exchange and store of value, are actually fulfilled by two different media, even today: a primary and a secondary medium of exchange. Today (and in Izabella's ideal world) that secondary medium of exchange is debt denominated in the primary medium.

The quote at the top of my blog reads: "Everyone knows where we have been. Let's see where we are going!" Well, everyone knows we have been where debt is the systemic store of value, its "tier 1" reserves, and Izabella doesn't seem to be arguing the inevitability that this is also our future. Instead she seems to be arguing that it is simply the better of two choices—the socially responsible and unselfish thing to do with your savings. But is she correct? Is debt really better than gold for the overall society?

In order to answer this question I think we need to look carefully at which one is better from two different perspectives; from the perspective of the savers and from the perspective of society at large. I'm attributing the perspective of society at large to that of the debtors as well. As I pointed out earlier, Izabella is clearly in the debtor camp. This doesn't necessarily mean that she's in debt. It simply means that she's in the easy money camp as opposed to being in the hard money camp—what she thinks of as "the goldbugs".

She may in fact have savings, but as she says, she "puts the interests of the group above those of the individual" and she's happy to do her civic duty of letting the government debase her savings when necessary. This puts her firmly in the debtor camp. And being in the debtor camp, she is obviously arguing for the benefit of the overall society or economy. So that's why I say I'm attributing the perspective of society at large to that of the debtors as well, because they are apparently one and the same.

Now would probably be a good time to restate that "the debtors and the savers" is a dichotomy, not a moral judgment. It is a way of viewing the world in two camps that corrects Karl Marx's most enduring (and harmful) legacy. Neither camp is better than the other any more than women are better than men. It is simply a model for understanding how two groups with apparently different innate tendencies have always been placed in conflict with each other throughout history due to the emergence of monetary systems. If you haven't read The Debtors and the Savers yet, now would be as good a time as any! ;)

From the Viewpoint of the Savers

Is money positive or negative equity? Izabella correctly implies money to be fungible claims on each other's goods. And she goes on to explain that these claims can sometimes be too numerous "when there aren’t enough goods to satisfy" all of the claims. This, she explains, is when the government steps in and makes adjustments to keep the number of claims roughly in line with the number of goods.

So when we look at money (or claims against the physical plane of goods and services) in aggregate, we can clearly see that hypothetically doubling or tripling the number of claims actually reduces the specific amount of equity in the physical plane each fungible claim represents. It is for this reason that I like to think of money in aggregate as negative equity, and also why I like to delineate between the monetary and physical planes.

Being a claim, it is merely one half of a physical plane barter transaction. You sold a good or provided a service in the physical plane and received a claim in the monetary plane. Once you redeem that claim for a good or service in the physical plane you will have completed a full transaction. But until that time, while you are holding money, you are only halfway there. And for as long as you remain in this barter purgatory, you are exposed to the effects of your claim being negative equity which I just described.

(I used the term "money" above because if, hypothetically, the gold stock could be doubled or tripled quickly enough, the same principle would apply to gold.)

Clearly it is the well-known exchange rate between monetary claims and the physical plane—as opposed to some intrinsic or cost-derived value—which gives these claims their value. It is the observed completion of other transactions today, yesterday and last week, which informs us of what we can expect to get for the claims we are holding. But as savers, we intend to hold these claims for a long time, perhaps even decades, so we want some sort of additional reasoning as to why they will hold this present known value for such long periods of time.

Of course very few savers hold the primary medium of exchange for long periods of time. We hold what Mises called secondary media of exchange. And the world is full of things other than "the common stock of perishables and truly useful supports of life" which we can hold (hoard) for this purpose, from stocks to bonds to antiques, classic cars or even baseball cards. Here is Mises from his book Human Action explaining the concept of secondary media:

A first-class bond is more marketable than a house in a city's main street, and an old fur coat is more marketable than an autograph of an eighteenth-century statesman. One no longer compares the marketability of the various vendible goods with the perfect marketability of money. One merely compares the degree of marketability of the various commodities. One may speak of the secondary marketability of the vendible goods.

He who owns a stock of goods of a high degree of secondary marketability is in a position to restrict his cash holding. He can expect that when one day it is necessary for him to increase his cash holding he will be in a position to sell these goods of a high degree of secondary marketability without delay at the highest price attainable at the market.

[…]

Consequently there emerges a specific demand for such goods on the part of people eager to keep them in order to reduce the costs of cash holding. The prices of these goods are partly determined by this specific demand; they would be lower in its absence. These goods are secondary media of exchange, as it were, and their exchange value is the resultant of two kinds of demand: the demand related to their services as secondary media of exchange, and the demand related to the other services they render.

[…]

One must not confuse secondary media of exchange with money-substitutes. Money-substitutes are in the settlement of payments given away and received like money. But the secondary media of exchange must first be exchanged against money or money-substitutes if one wants to use them—in a roundabout way—for paying or for increasing cash holdings.

Claims employed as secondary media of exchange have, because of this employment, a broader market and a higher price. The outcome of this is that they yield lower interest than claims of the same kind which are not fit to serve as secondary media of exchange. Government bonds and treasury bills which can be used as secondary media of exchange can be floated on conditions more favorable to the debtor than loans not suitable for this purpose. The debtors concerned are therefore eager to organize the market for their certificates of indebtedness in such a way as to make them attractive for those in search of secondary media of exchange. They are intent upon making it possible for every holder of such securities to sell them or to use them as collateral in borrowing under the most reasonable terms. In advertising their bond issues to the public they stress these opportunities as a special boon.

I included all of that long excerpt so that you could see how he explained, in his own words, the concept of a focal point in this secondary media role. Many items will suffice as a secondary medium of exchange, but the more an item is used in this function, the more value it derives from this particular function, over and above the value from other uses: "…their exchange value is the resultant of two kinds of demand: the demand related to [1] their services as secondary media of exchange, and the demand related to [2] the other services they render."

And then you probably noticed that his search for the focal point led him to government bonds. I figured this would make Izabella smile if she's still with us. So why do you think he didn't mention gold as one of the secondary media of exchange? Perhaps it was because, when he wrote the book in 1940, gold was the primary medium of exchange.

I think I'm now at the point where I can narrow the focus of the discussion substantially. Izabella and I are both talking about government debt versus gold as the two main competitors to becoming the focal point store of value (aka secondary media) of the future. So let's just stipulate that and move on. Also, I think we can both agree that government debt has been the official (and focal point) secondary medium of the recent past. Furthermore, Izabella says that between government debt and gold, gold is the more selfish choice. I'll stipulate to that as well.

In a moment we'll investigate whether the "selfish" choice is the better one for the economy as a whole, but in this section we are looking at it from the "selfish" viewpoint of the savers. Izabella admits that the government debases its own debt, which, taken along with her labeling of gold as the "selfish" choice, leads me to believe that she would be okay stipulating that, at least on the surface, gold appears to be the better choice from a "selfish" saver's perspective. So then the only question remaining is whether or not gold actually is better as it appears to be. Izabella says no.

Izabella warns "us" via Twitter: "The problem with gold (imho) is that it isn't a scarce commodity. You have to physically make it scarce by hoarding it."

The only problem with her tweet is the word "problem". Other than that, she's absolutely right! There are 170,000 tonnes of gold out there somewhere, 60 times annual production—that's a 60 year "supply overhang" in commodity terms—and yet the flow today is barely more than what's coming out of the ground. That's not a problem. That's absolute proof that gold is far more valuable than its commodity price today!

Gold’s value really comes from intergenerational Giants who have no need to ever sell it. They really just net-produce and net-produce and they do it willingly for more and more gold, and then just sit on that gold until they die and pass it on to the next generation. And they will keep doing this no matter what the $PoG does. They're not buying it for its weight, but for proven long run currency exchange value! But if there’s no flow for them to get some, then they have to buy things like extra castles and cars and stuff that drives up prices and drives down everyone else’s purchasing power.

So it’s better for everyone if there’s a steady flow of gold. Remember how Another said they justified the "gold as a commodity" (strong dollar) trade because they thought it would induce the mining industry to produce greater and greater quantities of gold?

Date: Mon Feb 16 1998 14:40
ANOTHER (THOUGHTS!) ID#60253:

Now, back to gold. The deal: you may stand your army for us, in return, "oil will back the dollar if the dollar is made strong by gold" "in as much as our people may replace the lost value of oil with gold" "in as much as we will produce oil in amounts to equate a gold/oil/dollar ratio close to that which existed at our previous agreement in the 70's" And, pray tell, how does the USA make the dollar strong in gold ? The BIS leads the creation of a paper gold market that will lower the world price of gold to the extent that it remains above "production costs".

Guess what, it worked! Contrary to all expectations of oil shortages, inflation, debt collapse and what have you, It Worked! But, there is one small problem?

The BIS and other various governments that developed this trade (notice I didn't use conspiracy as it was good business, as the world gained a lot), thought that the paper gold forward market would have allowed the gold industry to expand production some five times over! Don't ask where they got this, as they are the same people that bring us government finance and such. But, without a major increase in gold supply, the paper created by this "gold control operation" will either be paid by, 1. new supply. 2. the central banks. 3. rollover existing. 4. cash? or 5. total default! As the Asians started buying up everything last year ( 97 ) , numbers 5 and 5 started looking like the answer! When the CBs started selling into this black hole of demand, the discussion of #5 started in their rooms also.


So it’s good for everyone if there’s a steady flow of gold and a stable price for the Giants. These Giant super-producers (including oil producers) will produce the most stuff and leave it on the economic table for us without running up the prices of things we need to buy as long as gold is flowing unrestricted. And also, when CBs and nation-states start valuing gold the way these Giants do, we won’t have the mines running at full steam trying to add more to the supply. First of all they'll want the price to stay steady for the economic benefit net-producers bring to the table, and second of all they'll want their own treasure to hold its value. And to the nation-state, gold in the ground is a treasured reserve as well as gold in the vault.

It may seem counterintuitive, but the flow of gold from the mines will eventually be controlled or regulated by the government and, in most cases, will be just enough to keep the miners economically viable. This is why I view mining shares as a terrible Freegold play. Today the flow of physical gold is mostly from the mines to the savers. In Freegold, the flow will be almost entirely from the above-ground stock, from one saver to another.

As I wrote about in Glimpsing the Hereafter, gold is like a closed circuit for the savers, isolated from the transactional currency system which is used by everyone, debtors and savers alike. Some might call it selfish. I can live with that. Here's a taste from that post:

I think that if we look closely at how the debtors use the fiat money system with and without the assistance of the savers, it will become clear that we will all be better off with a bifurcated monetary system. And it will certainly be clear that the savers have no business taking debtors on as the counterparty to their savings.

[…]

So gold has kind of a double float. It floats with the inflation/deflation of everything else. And then it also floats in a closed circuit consisting only of savers (and their "hoard/dishoard" choices), of whom the majority (measured by value stored) are intergenerational giants.

The way the gold market works today is a little different. It is kind of a flow within a flow. On the surface, anyone can very easily buy exposure to the price of gold. In fact, this "exposure" is all that most Westerners want, including traders, speculators, goldbugs, hedgefunds, anykindafunds, banks, you name it. And most of this group is firmly in the debtors (easy money) camp. But underneath this superficial flow is the physical flow from the miners and physical gold pukers in the West to the true savers like the Giants in the oil-rich Middle East and net-producing Asia.

The key to keeping this gold market humming along, however, is that anyone who asks for physical in any size has to get it. But those who can afford real size also know that hogging the flow and stressing the system is not the best way to get what they want. So here's what we know. In 1997 the LBMA leaked to the Financial Times a paper gold clearing volume far greater than anyone imagined. This was the same time that Another said "the Asians started buying up everything" and that "the CBs started selling into this black hole of demand."

About two years later we heard from the European CBs through the WAG (the Washington Agreement on Gold) also known as the CBGA (the Central Bank Gold Agreement). The agreement came on the heels of the euro launch and, even though it was announced in Washington DC during an IMF meeting with Larry Summers and Alan Greenspan present, it was only between the European central banks. It stated very simply the following:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.

3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.

4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.

5. This agreement will be reviewed after five years.

Two years later, in 2001, gold began a relentless climb in dollar-denominated price of about 18% per year which continues today:



And then, in 2009, the CBs in aggregate became net-buyers of shiny rocks:



In 2011 the LBMA released a survey revealing not just the clearing volume it began reporting in 1997, but the total daily turnover in LBMA bullion bank gold credits. From my post Once Upon a Time:

And that's because the price of gold today still does not reflect the physical flow of gold that would normally be a function of arbitrage, with speculators transporting gold to where its purchasing power is highest. The flow of gold today is still sterilized by the paper gold trade within the LBMA bullion banking system that, by a recent LBMA survey, was around 250 times larger than the flow of new gold from the mines. That's a total turnover in the LBMA (sales plus purchases) of 5,400 tonnes every single day. That's the equivalent of every ounce of gold that has ever been mined in all of history changing hands in just the first three months of 2011. That's what the LBMA members, themselves, voluntarily reported. And that's a lot of paper gold that is still sterilizing the economically beneficial price mechanism that physical gold would otherwise be transmitting.

Yet things are changing, even today. That's what the rising price of gold since 2002 tells me. This is about much more than just a rising price. It's not just about a gold or even a commodity bull market. As FOA said, "it has everything to do with a changing world financial architecture." Gold's function in the monetary system is changing. And as FOA also said, "None of the other metals will play a part in this."

Gold will return to its pre-1922 function, but that does not mean we will return to a pre-1922 gold standard. This post is not about the merits of the gold standard. It is not about praising the hard money camp’s decision in 1445 over the easy money camp’s decision in 1922. It is about the choice of the Superorganism over the management of men. The pre-22 gold standard, although it allowed gold to function, still carried the same flaw I point to so often; that using the same medium for exchange and savings leads to regular recurring conflicts between the two camps.


Then in 2012 (just a couple of days ago actually), the US FDIC announced that gold bullion is up for consideration as an equal to government debt with a zero risk weighting. And just yesterday Ben Bernanke signaled his subconscious support for this measure by choosing to wear a gold tie. ;)



I'm sure this is all very insignificant information to a Mungerian paperbug like Izabella Kaminska, but let's just think about this for a second as it compares to her racehorse: government debt.

From a saver's perspective—one who wants to hold claims for a long but unknown, unspecified amount of time—debt is attractive in a falling interest rate environment. This is because debt usually has a specific maturity date and yet savers can't know precisely when they'll need their money. So debt is appealing as long as there is a liquid secondary market with plenty of upside to run.

This is most obviously true when interest rates are allowed to be set as high as necessary by the unfettered marketplace and then they begin to fall for one reason or another. As interest rates fall, old promissory notes signed when rates were higher become more dear. Debtors seek refinancing while savers can easily unload their saving without losing purchasing power.

This was the case from 1981 to present. Interest rates fell (for one reason or another) from around 20% down to 0%. Today there's not a whole lot of room for them to fall any further except for maybe going negative, and then you're just losing principle. So there's not much upside for debt today like there was in 1981, but with ZIRP there is a whole lotta potential downside.

Not only that, but in this case we're talking specifically about government debt. And what are our choices today? We can choose between almost no interest (actually negative real interest) from a government which is openly debasing its currency and diluting its bond market, or a slightly higher interest rate from a government with serious budget problems and some non-zero likelihood of default. That's quite a choice for a secondary medium with limited upside and unlimited downside!

Then there's gold, with limited downside and lots of upside potential. It's a tough sell to savers who have been swimming in a sea of Mungerian paperbuggerdom their whole lives, but not to the true Giants who already hold 170,000 tonnes and aren't letting it go at today's paper gold prices. As I have already pointed out, the intergenerational Giants who hold a great deal of this physical gold have no need to ever sell it. This is a key concept you might want to stop and ponder.

Lastly, I want to mention the nominal savings argument. Government debt, especially a government like the USG which can print its own currency, is at least nominally safe. If you save a million dollars you'll get a million back at the end of the day. The only question is what will be the purchasing power of those dollars when you need them. Well the same nominal argument applies to gold when applied properly. If you buy 500 ounces of gold you will still have 500 ounces of gold at the end of the day. The only question is what will be the purchasing power of those ounces when you need them. See?

So, not that I think I have convinced Izabella of anything, but just so that we can move on, let's agree that from the viewpoint of the savers—perhaps even a selfish viewpoint if that helps—who want to hold fungible "claims" on goods and services for a long but unknown/unspecified amount of time, gold beats government debt today hands down. If you don't agree then please return to the top of this section and read it again. If you agree, let's move on to the viewpoint of the debtors, aka the viewpoint of the economy as a whole.

From the Viewpoint of the Economy as a Whole

In the simplest terms, I like to refer to the savers as net-producers. All this means is that a saver consumes less than she produces. It's really the simplest way to differentiate the debtors and the savers. In general, the debtors either consume as much or more than they produce by borrowing, taxing or printing money. Of course everyone consumes, and everyone produces to one extent or another. But at the margin, debtors consume and savers produce.

My delineation does go a little deeper than this, though, to include monetary preference. That's why I use "the easy money camp" interchangeably with "the debtors". The easy money camp prefers easy money for various reasons including not just the ease of repaying debts but also that easy money may be how they make a living. And this is why I put the banking industry, including Wall Street, in the easy money camp along with the debtors.

Banks, of course, are often the creditors to the debtors. And that's why it's the debtors and the savers rather than the debtors and the creditors. The debtors and the creditors are in the same camp together! As I said earlier, it's not a good idea for the savers to be counterparty to the debtors. But, of course, Izabella Kaminska disagrees. She thinks it's the savers' civic duty to be the debtors' counterparty.

In thinking through which is best for the economy as a whole, it is important to understand that the excess money earned from net-producing does not disappear no matter how it is saved. It is always passed along to someone. The money remains in the economy. Hoarding gold does not deprive the economy of your excess earnings any more than buying government debt does.

If you choose to save in debt, your money is passed on to a debtor. A debtor's natural inclination is to net-consume (consume at the margin) rather than net-produce (produce at the margin) if at all possible. So by saving in debt you actually encourage a natural predilection to produce less since you enable specifically those people with the tendency to borrow rather than produce. In the long run you end up with high unemployment.

But in Freegold, the money that comes from net-producing is passed on to other net-producers who choose to sell their gold for one reason or another. These "dishoarding" net-producers (savers) are either going to use that money for consumption or they will use it for productive purposes like starting or expanding a business. All of these uses tend to employ someone. And if the easy money camp is managing the currency prudently, some may even sell their gold for money just so they can lend it for productive purposes, or invest it in promising ventures.

Debt-financed consumption only expands the total amount of debt and the ranks of the unemployed. The idea that debtors borrowing to consume can sustainably raise employment levels is pure hogwash.

So in no uncertain terms, Freegold is the key to true full employment! Debt as an alternative to gold ultimately leads to high unemployment! Izabella, Munger and the Dingbat are all dead wrong!

The Winds of Change

Are you enjoying high unemployment yet? The $IMFS is, even though its leaders will never admit it. One of the Fed's (quote-unquote)
"mandates" is full employment and Obama touts (quote-unquote) softening unemployment while the number of PhDs on food stamps has tripled.

Everyone would enjoy full employment, right? The debtors, the savers, the economy as a whole? Well, maybe everyone except the welfare junkies. And who's the biggest welfare junkie of them all? The only hint I'm gonna give you is look at the picture at the top of this post. See? Welfare junkies don't always look like this:



The flight plan to global unemployment was filed in 1922 when they came up with the brilliantly circular idea of using credit as the store of value foundation for credit. Of course global unemployment is a fantasy island destination, so here we have had an emergency hard landing on the island of reality with a brief layover before heading toward our new destination, change.


Banks can provide all the credit the debtors need beyond their ordinary income (and that includes governments). There is no fundamental economic need for the savers to contribute their surplus earnings through debt securitization as a store of value. All that does is encourage unemployment.

The savers have no business being counterparty to the debtors. A German economist, uber-easy money camper and social justice activist who wrote the book on easy money a century ago even said as much. From his book cleverly titled 'Free Money' on which John Maynard Keynes showered fulsome praise, here's Silvio Gesell:

"And it is clear that money cannot be simultaneously the medium of exchange and the medium of saving - simultaneously spur and brake.

[…]

I therefore propose a complete separation of the medium of exchange from the medium of saving. All the commodities of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!"


And a fun quote from Keynes:

"I believe that the future will learn more from Gesell’s than from Marx’s spirit."

The Debtors and the Savers is simply a common sense adjustment to the prevailing dichotomy of the Capitalists and the Laborers, or the bosses and the workers. It is a slightly altered lens with which to view the history of the world. The old lens has a bloody history of leading to dangerous and deadly confrontations. It will also prevent you, personally, from understanding Freegold early enough to profit from that understanding.

Of course all present goods and services get used in the present, but that doesn't mean that surplus value is only an illusion based on exploitation. Surplus value is very real, and savable through any length of time and in theoretically limitless amount. But not if you're using debt as the medium. Using debt, too much "savings" becomes a burden which is then dealt with one way or another.

Everyone will understand this eventually, although it may not specifically be called "Freegold" in the end. Thinking for yourself pays. Seeking reassurance feels good, but it doesn't pay. Waiting for official confirmation is also rewarding, but the reward isn't money.

"Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve."

FOA: "It has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, [and here's the all-important caveat] everyone that is positioned in physical gold will carry this storm in fantastic shape."

Sincerely,
FOFOA

[1] Note to Izabella: When I use you in a post like this you shouldn't take it personally. I never expect to change a fixed mind. You were simply used as a literary device, so please don't take it personally. Or do… that could be fun!



555 comments:

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Sarah said...

Jim Sinclair wrote on his site:

"The Fed is out of time. The question is if the management of the Fed is looking to deep six the present administration. No Fed in history has ever failed to support the incumbent. I doubt this is going to be the first time because of the cost of inaction, not because I think the Fed is loyal to the incumbent."

I have to wonder though, if the Fed initiates QE3 before the U.S. Nov. elections, then we could see oil prices spike in the country, which wouldn't be a good thing for Obama's second-term bid. So could we expect QE3 after the November elections this year?

Sarah said...

Jim Sinclair wrote on his site:

"The Fed is out of time. The question is if the management of the Fed is looking to deep six the present administration. No Fed in history has ever failed to support the incumbent. I doubt this is going to be the first time because of the cost of inaction, not because I think the Fed is loyal to the incumbent."

I have to wonder though, if the Fed initiates QE3 before the U.S. Nov. elections, then we could see oil prices spike in the country, which wouldn't be a good thing for Obama's second-term bid. So could we expect QE3 after the November elections this year?

Michael said...

Thank you for the great insight. Unfortunately it is a quite complicated topic for people to deal with (at least for me and I would say I am really interested). It would be great if your valuable thoughts could be amenable to a greater audience.

Sarah said...

Jim Sinclair wrote on his site:

"The Fed is out of time. The question is if the management of the Fed is looking to deep six the present administration. No Fed in history has ever failed to support the incumbent. I doubt this is going to be the first time because of the cost of inaction, not because I think the Fed is loyal to the incumbent."

I have to wonder though, if the Fed initiates QE3 before the U.S. Nov. elections, then we could see oil prices spike in the country, which wouldn't be a good thing for Obama's second-term bid. So could we expect QE3 after the November elections this year?

Dr. Octagon said...

FOFOA asks: "There's a reason I mentioned employment in this post. Did you miss it?"

No, I don't believe I missed it. Here's the relevant bit that I'm focused on, from above:
In thinking through which is best for the economy as a whole, it is important to understand that the excess money earned from net-producing does not disappear no matter how it is saved. It is always passed along to someone. The money remains in the economy. Hoarding gold does not deprive the economy of your excess earnings any more than buying government debt does.

If you choose to save in debt, your money is passed on to a debtor. A debtor's natural inclination is to net-consume (consume at the margin) rather than net-produce (produce at the margin) if at all possible. So by saving in debt you actually encourage a natural predilection to produce less since you enable specifically those people with the tendency to borrow rather than produce. In the long run you end up with high unemployment.
[...]
Debt-financed consumption only expands the total amount of debt and the ranks of the unemployed. The idea that debtors borrowing to consume can sustainably raise employment levels is pure hogwash.


The first paragraph is correct, but the second attempts to contradict it. Just as currency saved in gold does not dissapear, passing from one net-producer to another, currency saved in debt does not dissapear either, passing from one net-producer through a net consumer, to another net-producer. A net-consumer, by borrowing currency in the first place, is borrowing it to spend on something that has, in aggregate, been produced by a net-producer. You can't have net-producers without net-consumers - it has to all balance out by definition, over the long-run. Strictly from the point of view of employment, whether currency moves from one net-producer to another net-producer through gold or through a debtor, I see little difference. I recognize that interest and defaults make the debtor path more complicated and burdensome for the debtor, and that value stored in debt has problems relieved by storing value in gold instead (especially when debt is leveraged against the currency), but I genuinely don't see how you can claim "So in no uncertain terms, Freegold is the key to true full employment!".

Sarah said...

Jim Sinclair wrote on his site:

"The Fed is out of time. The question is if the management of the Fed is looking to deep six the present administration. No Fed in history has ever failed to support the incumbent. I doubt this is going to be the first time because of the cost of inaction, not because I think the Fed is loyal to the incumbent."

I have to wonder though, if the Fed initiates QE3 before the U.S. Nov. elections, then we could see oil prices spike in the country, which wouldn't be a good thing for Obama's second-term bid. So could we expect QE3 after the November elections this year?

Jeff said...

FOFOA: If you are the world's largest engine of easy and casual debt creation and also the maker of the paper that denominates it, there is another way to default. And there is another kind of default the market can anticipate. Devaluation!

Two Historic, World-Class Bubbles are About to Pop

Bubble #1: Government Debt (with a nominal value in the tens of TRILLIONS)

Bubble #2: Perceived Wealth, denominated in purely symbolic, un backed, unsustainable-Ponzi-debt-based currency (with a nominal value in the HUNDREDS of trillions)

It is the 28-year hyperinflation of the US$-denominated debt asset bubble that is about to pop.

Jeff said...

Nervous investors fill swiss safes with cash, gold (one out of two ain't bad)

http://opinions.caduceusx.com/viewtopic.php?f=20&t=8622

Michael said...

Today is an odd day in the markets: Dow down, Euro down but gold up...this is not the usual pattern. I'm wondering if we are about to see gold plow a path for itself. Granted it is a paper market but usually the paper would have sold off to meet margin calls. It is just one day but if it persists I will consider taking action.

KindofBlue said...

A note from Jim Sinclair
(re: Martin Armstrong/deflationists):

"Never before in the entire period of 1968 to 1980, or 2001 to present, have I received so many copies of classical deflationist scenarios in one day. It would seem as if the God of Deflation overflew the gold guys and dropped their leaflets.

Classical deflation does not have a snowball’s chance in hell of occurring now for any length of time. To assume that you have to hold the belief that Bernanke is a mole in the present administration, placed their covertly to bury the present administration so deep that there will never be a democrat in office after 2013 anywhere.

If you believe there is a political appetite for the collapse of the Western financial system, they had a perfect chance in 2008 and did not accept that great opportunity to purge the system of Banksters for political reasons.

The problems of 2008 are here now and greater. Derivatives still challenge the entire system at a greater level. A major under the covers audit is being done right now of some major banks for serious OTC derivative problems. Market miscreant activity allowed the break to near nothing for many financial institutions. The activity specifically is the absence of the uptick rule, which is still missing. The regulators are controlled by Washington which in turn is owned by the hedge fund and bankster’s lobby.

Nothing whatsoever has changed except the degree of difficulty which has risen to a level never existing in market history.

The rescue will come in the form of QE to infinity for the entire western world’s financial system.

The market historians making fun of the gold community may not like the fact that it was the huge communication to his prison authorities and the system that actually got him the opportunity for freedom. Whatever the mental level reason for his hate of “Gold Bugs,” he is wrong.

Gold is going to and through $2111 on its way towards Alf’s levels.

The euro and the dollar, in that order, will be bailed out. QE will rise to infinity the longer Bernanke plays chicken with the present administration for perseverance of the private bank, the Fed, and its power.

Please stop sending me copies of the latest tome from our respected market historian. The history he is going to make now is his largest market error in his career, scaring the life out of investment protection insurance non trading gold holders, so much so that when they leave they will never return to the gold market.

I have written about Currency Induced Cost Push Inflation hundreds of times. They are all in the compendium. Our beloved historian does not understand this concept, but will be defrocked by it.

This popular writer is determined to walk the halls of ivy again, doing anything necessary to make that happen. Part of that is not having a history of being rescued by the “Gold Bugs,” which he was. I knew him in the 70s when he looked down at me as not in his high circles.

Nothing has changed.

Respectfully,"
Jim

Pretty strong stuff.

matrixsentry said...

Santa is getting a little frustrated with Martin Armstrong. I feel his pain because as a long time follower of MA I am also frustrated. I smell a new FOFOA post that will directly address Mr. Armstrong. The Day of the Deflationists

DP said...

This line succinctly captures the problem with Armstrong's view:

I have written about Currency Induced Cost Push Inflation [Ed: AKA "hyperinflation"] hundreds of times. They are all in the compendium. Our beloved historian does not understand this concept, but will be defrocked by it.

Armstrong thinks "it can't happen here" simply because the US (along with its Dollar) lies at the "core" of today's financial system.

Big whoop! Britain and its Pound used to be the core economy/currency prior to the US and its Dollar taking the role. Few thought it was possible then either, but it still happened.

And yet he is the one who has written people need to look outside of their goldfish bowl and see the big, wide world on the outside looking in.

It saddens me to have to add him to my funeral pyre of analysts I used to rate. But he leaves me no choice. If it's an consolation to him, he's in good company. Well, copious is a better word really.

DP said...

Moving swiftly along now, ask yourselves what you make of this:

Gold is going to and through $2111 on its way towards Alf’s levels.

Sarah said...

Jim Sinclair wrote on his site:

"The Fed is out of time. The question is if the management of the Fed is looking to deep six the present administration. No Fed in history has ever failed to support the incumbent. I doubt this is going to be the first time because of the cost of inaction, not because I think the Fed is loyal to the incumbent."

I have to wonder though, if the Fed initiates QE3 before the U.S. Nov. elections, then we could see oil prices spike in the country, which wouldn't be a good thing for Obama's second-term bid. So could we expect QE3 after the November elections this year?

Jeff said...

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

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

But then a reasonable person might point out that the USG still issues Treasuries equal in amount to all its deficit spending. And if we and the Chinese aren't buying them, then the Fed has to, so it makes up a cool name like QE2 to disguise the real purpose of the purchases...

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.

Dr. Octagon said...

From the article: "Then in 2012 (just a couple of days ago actually), the US FDIC announced that gold bullion is up for consideration as an equal to government debt with a zero risk weighting."

I like this. If you read the full document, it also appears to value that gold at "current market values" (p279), with a bit of a haircut margin to account for volatility.

Woland said...

Paperbuggerdom vs Goldbuggerdom: A WWF cage match: 6/29/12
Watch it live on Paper View!

FOFOA said...

Hey Woland, I've got one for you.

Question: What is a net-producer?

Click here for answer.

FOFOA said...

Hello Dr. O,

I am no stranger to bold, shocking and thought-provoking statements. I know them when I see them, and I certainly know them when I write them.

You wrote: "You can't have net-producers without net-consumers - it has to all balance out by definition, over the long-run.

This is true, but debt is not the way to full employment within the Debtor camp. Now bear with me here, yes, someone consumes all net-production as you say, so it does all balance out. But with the Debtors and Savers paradigm, we can see that it is far better for overall employment if Savers consume that net-production rather than Debtors. In other words, you can be a net-consumer if you want to be, but first you have to save up to do so. The rest simply consume as much as they produce (in aggregate).

That's not to say debt is eliminated. We live in a world of easy money and banks, and that's not going away. The only thing that's going to change is that the savers are not going to be the ones financing the debt. Just try to imagine every single net-producer saving in gold. The net-producers would constantly be bidding gold away from other net-producers, and net-production would truly be consumed by those who saved up first for the ability to become a net-consumer.

The Debtors' camp (in aggregate), on the other hand, would be consuming what they produced. In this camp, of course, we have the USG. So everyone has to produce a little extra for Uncle Sugar. It's called taxes. And out of taxes we take care of things like welfare. We also have easy money and banks for lending. And when the currency system expands through lending, that extra consumption comes out of everyone's production who is holding the currency at that time. It's called the inflation tax.

But where it doesn't come from is the Savers' gold. As inflation taxes everyone (Debtors and Savers alike) who is holding currency, the price of gold also rises.

So now, in essence, we have the Savers' camp which net-produces and then net-consumes its own net-production. Then we have *EVERYONE* (Debtors and Savers inclusive) who, in aggregate, consume exactly what they produce. You see, the Savers are part of this circuit that uses currency, pays taxes, and also gets hit with the inflation tax, just not on the savings portion of their holdings.

Now let's do a little math. 7 billion people each producing and consuming 1 on average. Production = 7B and consumption =7B. Then let's say there are 3.5 billion savers who at one time or another produce an extra ½. But they don't all do it at once. As you say, "it has to all balance out by definition, over the long-run." So 1.75 billion of the savers are producing ½ over and above the 1 they are producing to consume, and the other 1.75 billion "Savers" are consuming that ½. So, in aggregate, those 3.5 billion Savers are still producing and consuming 1 just like the Debtors in aggregate.

So that's Freegold. Now let's look at debt-financed consumption.

7 billion people, 3.5 billion producing 1 ½ and 3.5 billion producing ½. Total production = 7B, same as in Freegold. The only difference is that one entire camp is under-producing in aggregate.

I'll gladly pay my taxes for wherever I choose to live. I'll even bear the inflation tax because it is the price we pay for the numerous benefits of easy money. But hands off my savings.

Sincerely,
FOFOA

FOFOA said...

Too much finance can suffocate a country - BIS economist

"Like cancer, a nation’s financial sector can grow so large that it starts to devour its host, according to the chief economist of the respected Bank for International Settlements (BIS).

“Beyond a certain point, financial development is bad for an economy. Instead of supplying the oxygen that the real economy needs for healthy growth, it sucks the air out of the system and starts to slowly suffocate it,” said Stephen Cecchetti, chief economic adviser to the BIS, known as the central bankers’ bank.

“Households and firms end up with too much debt. And valuable resources are wasted.”

In his remarks, which were made to a BIS conference in Switzerland last week, Cecchetti not only questioned the benefit to societies from a large financial sector, but he also questioned financial globalization: the trend of some countries to rely on other countries for financial services.

Cecchetti’s speech to central bankers at the conference would seem to fly in the face of the widely-accepted beliefs among economists that globalization always benefits societies and a growing financial sector is a sign of progress.

“Many of us have started to ask if finance has a dark side,” he said, pointing to the ongoing detrimental effects on economies from the global financial crises.

Evidence suggests, Cecchetti said, that a growing share of the financial system actually slows overall economic growth and countries can become vulnerable by either specializing excessively on finance or relying too much on other countries to provide such services.

“Has financial globalisation gone too far in some countries?” Cecchetti asked."

milamber said...

FOFOA,

I didn’t think it was possible to improve on the original Debtors V Savers post, but somehow you did. Bravo. Thanks also for linking the Age of Inflation.

A couple of comments:

Dr. O. The reason that debt based consumption finance "works" right now is because ROW continues to fund US overconsumption.

Do you think this is sustainable?

I have always observed the only debt that is sustainable is self-liquidating debt (IE debt that makes an entity more productive).

MnMark wrote,

“You'll pardon me if I don't stop to read the hundreds of hours of reading that is linked here before presuming to post a question or comment.”

Actually if that is all you did, then yes I think you would be pardoned. But you didn’t do that. As JR pointed out, you ascribed thoughts/words to FOFOA that he didn’t write. And then when told where to find out what was written, you declined to do any further research.
Obviously up to you if you don’t want to, but don’t make the mistake of thinking that you have found some flaws in the thesis simply because you choose not to look.

A couple of items that I saw over the weekend that I think are relevant to this post & the unfolding geopolitical chess match:

It is not just the FDIC that put its name on the “Gold is just as good as gov’t debt meme”. There is a working paper linked to the FDIC proposal that comes from Treasury, the Fed & FDIC. It is 300 plus pages and you can find it here.

http://www.fdic.gov/news/bo
ard/2012/2012-06-12_notice_dis-d.pdf

At first skim, it appears that The US Gov’t is going to attempt to move the Paper gold market into the banking system and attempt to get *ALL* goldish items to be classified as gold and as good as US Debt. (HA!)
Thus providing much needed capital boost to the IMF$ banking system that will allow the party to continue. I can’t believe that the BIS would go along with this, but that is what it looks like they are proposing to these tired eyes!

http://www.reuters.com/article/2012/06/23/us-russia-energy-shift-idUSBRE85M0IQ20120623

Putin is quoted as saying,

""Twenty-five percent of our oil is produced by companies with foreign partners. That should tell you how open our industry is to foreign capital. Not in all countries is there such broad participation by foreigners," he told the executives.”

I wonder how much flow in Gold Russia demands for its oil?

Excellent read about the US geopolitical position (I just ignored the hand wringing about Obama being just like Cheney since it is not really about who is the figure head)

http://www.angrybearblog.com/2012/06/is-barack-obama-morphing-into-dick.html

I know all the focus is on Europe, but the Indian Rupee is collapsing


http://www.reuters.com/article/2012/06/25/market-india-stock-close-idUSL3E8HP3N320120625

& the Chinese are starting to speak publicly (or at least to the NYT)that Chinese numbers about commodity consumption don't add up. I wonder if this is groundwork for a policy change announcement to stop supporting US Treasury market & support more domestic consumption. I can't figure out why any Chinese govt official would say these things (especially in a leadership change over year)this publicly...

http://www.nytimes.com/2012/06/23/business/global/chinese-data-said-to-be-manipulated-understating-its-slowdown.html?pagewanted=all

Milamber

Sarah said...

Greece's lawyer sees euro being saved, but the zone will require a trillion euros more for this rescue...he also talks about an europe-wide FDIC process leading to a more consolidated continent -, which he sees more effective than capital controls.

http://www.youtube.com/watch?feature=player_embedded&v=OCJWkTTrJO0

jojo said...

"I can’t believe that the BIS would go along with this,"

Milamber,

Isn't that just supporting and enabling the $IMF to get as big as needed to fail?
That's some poker playing, no?

Dr. Octagon said...

FOFOA - thank you for responding. I do appreciate it. I agree with your comment above, @4:39PM. Where I continue to differ though, is in the matter of whether a freegold scenario is good for employment or not. I admit I'm not fully convinced either way, but my weak understanding still leads me to a different conclusion from what you suggest, and I'm trying to figure out why.

Net-producers, in aggregate paying for net-consumers exclusively through taxes is fair, just, and open. But net-producers paying through taxes plus currency (savings) devaluation allows for a larger transfer, because it's hidden. With a larger transfer, more net-consumers can be supported, or supported at a higher level. Do you agree with this?

A higher level of support for net-consumers means more government jobs, more EBT cards, and the enablement of jobs that would otherwise not be economically viable, such as private military contractors, medicare doctors, and such. Yes?

So, if you take away the hidden tax of inflation ("hands off my savings"), and shift it to taxes, which are out in the open, those taxes will either need to be much higher, or employment lower, as a result of this change. And if it's all out in the open, I suspect overall funding would be lower, because net-producers will not be as accepting of the size of the transfer when it's out in the open, as when it's partially hidden, (or even better, when it's applied to savers outside of the country, like China). And so this leads me finally, to lower employment, not higher. At least, so it still seems to me.

FOFOA said...

Hello Milamber,

You wrote: "The reason that debt based consumption finance "works" right now…"

By "works" do you mean debt-based consumption is employing people in the West? From my perspective it has never "worked". It has slowly eroded the work force in the West, first transitioning it toward a FIRE/service-based economy with lower real wages and then ultimately toward higher unemployment.

I think there's "works" as in we haven't starved yet because the containers are still coming in full, and then there's "works" as in our debt-based consumption has only built up the work force to the east of us.

Part of the problem is that debt-based consumption doesn't necessarily raise absolute consumption within the debtor camp. What it does is it raises consumption relative to production within the camp. Debt could raise absolute consumption which would also lift production within the camp, but empirically absolute consumption stays about the same while production falls. So empirically, debt only raises relative consumption among the debtors while production is eroded and then ultimately falls. This is how our trade deficit grew, how China's "reserves" grew, how production moved from West to East, and it is also precisely where the potential for a vicious feedback loop lies in debt-based consumption.

I stand by my bold statement in the post, which is why I'm responding more than usual. If debt-based consumption works as Dr. O thinks it does, then the MMT guys are right and the USG should just spend whatever it takes to employ everyone. And there you have another bold statement.

Sincerely,
FOFOA

Dr. Octagon said...

Maybe our disagreement is simply one of timing. I believe that debt-based consumption raises employment artificially, leading to eventual collapse. I also can see how freegold may lead to a more sustainable level of employment, whatever that level may be. When I compare freegold employment, I'm comparing it to today, which means lower employment under freegold, compared to today's artificially raised levels. But FOFOA, are you comparing it to levels post-collapse, or even an average over both time frames? If so, then I can see the reason for saying that employment levels would be higher under freegold. Not necessarily full employment, but averaged over decades, covering the boom-busts we have today, higher.

milamber said...

JoJo,

You may be right, but I don't see any reason for the BIS to support that bastardization of the policy. (and again, that is my interpretation of the document. I could have what they are saying completely bass ackwards).

The necessary time to get an alternative transactional currency up & running has elapsed. The Euro is here. Why should the BIS support such a move by the US? The paper gold market as is structured has to collapse. Why prolong it?

Milamber

FOFOA said...

Dr. O,

You are quite obviously confusing consumption and production. I stand by my statement in the post unconditionally. In Freegold we will have higher employment/production in the West, period. Under a debt-based system employment/production among the debtors is eroded and ultimately falls.

Will we in the West have as high of a living standard as today right after the switch to Freegold? Not initially. Does that mean debt-based consumption is a viable and preferable system? No way. I suppose having a rich and generous uncle is preferable to not having one. If only everyone could have a China to send them stuff for nothing but trillions in paper that will ultimately be worthless. But who's gonna be China's China?

Sincerely,
FOFOA

Michael H said...

Dr. Octagon,

There's employment, and there's "employment" like your "private military contractors, medicare doctors, and such", and victor's nail salons, and the FIRE sector.

Maybe what I am saying is that employment does not equal production.

If the net-producers' excess was controlled by the savers, then perhaps that excess would be invested in productive enterprises that would employ people to do useful things, instead of encouraging people to spend money they don't have on things they don't need.

FOFOA said...

Thank you, Michael H!

That's a good explanation of erosion! It's similar to the early signs of inflation. At first it manifests as lower quality, and then smaller package sizes for the same price, and then ultimately prices must rise once quality and quantity has been eroded as far as possible.

Sincerely,
FOFOA

milamber said...

FOFOA said,

“By "works" do you mean debt-based consumption is employing people in the West?”

My bad. I wasn’t clear in my brief comment to Dr. O. I will expand on my statement & see if I can do better.

The US sending FRN’s to the ROW for full containers is sustainable. At some point the system breaks (We are witnessing it right now). So when I put works in quotes, I was using the term to describe the activity of the current system, not as a descriptor of something that is desirable let alone sustainable.

I thought one of the key points (If not the key point) of your post was this statement,

“Debt-financed consumption only expands the total amount of debt and the ranks of the unemployed. The idea that debtors borrowing to consume can sustainably raise employment levels is pure hogwash."


"From my perspective it has never "worked". It has slowly eroded the work force in the West, first transitioning it toward a FIRE/service-based economy with lower real wages and then ultimately toward higher unemployment.”

Yup. I used to believe the Dogma, “we think; they sweat.” Now I see it as one big hustle.

“I think there's "works" as in we haven't starved yet because the containers are still coming in full, and then there's "works" as in our debt-based consumption has only built up the work force to the east of us.”

Bingo!

“Part of the problem is that debt-based consumption doesn't necessarily raise absolute consumption within the debtor camp. What it does is it raises consumption relative to production within the camp. Debt could raise absolute consumption which would also lift production within the camp, but empirically absolute consumption stays about the same while production falls. So empirically, debt only raises relative consumption among the debtors while production is eroded and then ultimately falls. This is how our trade deficit grew, how China's "reserves" grew, how production moved from West to East, and it is also precisely where the potential for a vicious feedback loop lies in debt-based consumption.”

Agreed.

“I stand by my bold statement in the post, which is why I'm responding more than usual. If debt-based consumption works as Dr. O thinks it does, then the MMT guys are right and the USG should just spend whatever it takes to employ everyone. And there you have another bold statement.”

I will add a statement to that:

US (Core Economy for MA) Debt based consumption works beautifully as long as the following items remain true:

1. Total debt must always grow. IE the debtors must always be allowed to print magical dollars that ROW will always take in exchange for physical plane items.

2. The debtors can never mind an increasing number of people becoming idle (U3, U6 or whatever classification someone who isn’t working falls under) & staying permanently un(under) employed. And their SOL is maintained through government welfare disbursements.

http://www.ers.usda.gov/Briefing/incomepovertywelfare/transferpayments.htm

But if either one of those rules gets broken, then it ends. That’s why debt based consumption is not sustainable.

Even in a core economy, Martin.

Milamber

milamber said...

"The US sending FRN’s to the ROW for full containers is sustainable"

NOT sustainable. Somehow the not didn't make it.

Sorry for any confusion.

Milamber

Michael said...

I see we have a new Michael in addition to me and Michael H.
I do not see an easy way to change my name so I will hence forth sign off as Michael d V (of Vegas). So far I only see one other post by the new Michael so (not that I have that much or that much of importance to say) I'll keep the Michael in the title of the post but add the dV to my sign off.

insteadofablog said...

FOFOA is advocating the existence of "classes", a Marxist concept.

Nope. In fact, as Roderick Long points out, it goes back at least to "a circle of liberal French social theorists – most notably Charles Dunoyer, Charles Comte (son in-law of Jean-Baptiste Say), and Augustin Thierry – who published in the journal Le Censeur (1814-1815) and its successor Le Censeur Européen (1817- 1819). When Marx wrote, 'No credit is due to me for discovering the existence of classes in modern society or the struggle between them; long before me, bourgeois historians had described the historical development of this class struggle and bourgeois economists the economic anatomy of the classes,' it was primarily to the Censeur group that he was referring.

Michael said...

milamber
where is the post from jojo you are responding to?
thanks
Michael dV

Tyrone said...

Pelosi wants the President to abolish the debt ceiling
“I would like to see the Constitution used to protect the country’s full faith and credit, as the Constitution does,” Pelosi told reporters Wednesday. She was endorsing the idea that Obama should use the 14th Amendment — which states that “The validity of the public debt of the United States . . . shall not be questioned” — to circumvent House Republicans who want spending cuts in exchange for another debt ceiling hike.

...So let it be done

Anand Srivastava said...

What do you guys think of this short article? Do you think those 5 stages match your perceptions of the crisis.

http://www.facebook.com/notes/vizeet-srivastava/causes-and-probable-consequence-of-current-competitive-devaluation-happening-sin/432044196836103

comments?

Beer Holiday said...

How does the possibility of the yuan becoming the next reserve currency sit with freegold? How much gold does China have, and would they want freegold. I can definitely see that they would want a new international settlement, the present system doesn't work very well for them (That link is a repost to the Paul Keating interview found by Costata).

Here is an interesting ANZ bank report (.pdf) on the build up to a full float of the Chinese yuan.

From the report, under "trend 7":

"Australia and New Zealand are the first two Western economies to sign a currency swap agreement with China. The UAE and Turkey also established a line in Q1 2012.

China is reportedly about to close a deal with Brazil with an agreement of $30bn (roughly RMB190bn). With an official line being open via lenders of last resort, other countries can allow their local commercial banks to conduct RMB business. This will increase the international acceptance of the RMB as a trade currency and
promote the RMB as a financing, and eventually, an international reserve currency."

Assuming that the yuan appreciates considerably, I'd guess that would make those incoming US containers that much more expensive.

FOFOA, Thanks for the link to the Schiff cartoon, I'm going to go back and reread Sushi Island with that perspective.

victorthecleaner said...

FOFOA, Milamber, Dr Octagon,

how about this line of argument. First, an equation from the real plane. Here is how GDP (i.e. the goods and services created) is used:

GDP = Consumption + Investments + Exports - Imports

The financial plane determines the incentives for consuming or investing. If I boost consumption (by providing cheap loans to my consumers with credit created in the banking system), the consumers bid up the prices of some goods and services.

This provides an incentive either
a) to invest in additional capacity, or
b) to forget about investing and just to import the stuff

In a closed economy, (a) is the only option. Consumer loans will stimulate the economy (and perhaps cause a boom and later a bust, but that's a different story).

In an open economy, the decision between (a) and (b) depends on who is more competitive, the domestic industry or some foreigners.

As long as there is a mechanism that a trade deficit leads to an improvement in your international competitiveness (such as pre-1922 or with freegold), (a) and (b) will both happen and remain in balance (In fact, creating consumer loans domestically will cause inflation relative to gold which determines international prices, and so it even discourages (b)).

The situation becomes toxic if the foreigners accumulate our debt, neutralize the trade adjustment process, and thereby remain more competitive for the long run. In this case, (b) dominates.

The problem is that the components of GDP that move abroad is manufacturing (everything you can ship, cars, electronics, etc.), but what is left behind are services that cannot be moved abroad (nail studios, hair styling, dog grooming, running your local Wal Mart store, serving coffee to go).

The result of the additional consumer loans is that GDP changes little, consumption and imports grow, but investment remains unchanged.

I think it is an effect of the persistent gap in competitiveness between us and the foreigners that we even lose investment when our manufacturing moves abroad.

So in effect, the ratio investment/GDP shrinks. This is precisely what has been observed since the 1970s when the U.S. trade deficit became permanent. Towards the early 1970s, General Motors was the largest employer. Today it is Wal Mart.

If we lose employment, this is probably also because the difference in competitiveness is never adjusted. Jobs move abroad together with the manufacturing industry.

Why is this happening? Sure, it works only because the foreigners keep accumulating out debt. If they don't, it is over. But our government could also stop it at any moment, provided they understand what is happening and decide to fix it: capital controls, trade controls, no interest payment on debt held abroad, deliberately blow up the paper gold market, etc. But I suppose the government has loved the fact that its deficit has for decades essentially been funded by foreigners.

Victor

victorthecleaner said...

Will the Yuan become a reserve currency?

Question: Do you mean the Yuan as a MoE or the Yuan as an SoV?

As an SoV, China would need to become the new U.S., i.e. permanent trade deficit and everyone globally buying their debt. Why would anyone do this? I think the fact that the U.S. was allowed into this position required a combination of several very special preconditions:
a) coming from a gold standard, at least internationally, having a lot of credibility
b) being the biggest economy by far after WW2
c) being the guarantor of military security in the West during the Cold War, being too big to fail from the outset

So Yuan as an SoV is rather unlikely in my view. How about Yuan as a MoE? (which then eventually implies gold as the SoV)

That's more likely, in particular among their major local trade partners. How about globally?

Well, tell me what Saudi Arabia is going to do with all the Yuan they receive for their oil. Sure, buy some consumer electronics, toys, etc. from China (I think fashion-wise there are some cultural differences...)

So perhaps SA still want to get some gold for their oil, even if that is a lot less in terms of weight. It is somehow plausible that the winner in the competition for the MoE will be
a) a currency whose county(ies) have the most trade relationships globally
b) a currency with a large and liquid gold market

That would both be the Euro, still, even after Greece (although a New Dollar might also be a contender for this position).

Victor

Beer Holiday said...

Thank you for your help, VtC. Especially for bringing SA into the picture, that's much clearer.

I meant yuan the MoE. I'm thinking along the lines of the yuan facilitating international trade, which "frees up" the dollar system to inflate the debts away.

I've been trying to overcome a block in understanding: how can Europe allow the their debts to default/inflate-away and at the same time act as the stepping stone away from the $IMFS.

It seems increasingly likely to me that the yuan wants to step into the role in a transition from the $IMFS: China/the BRIC'S are the big creditors, and China has been buying the UST's to keep the game going. The question I have is: does China have enough gold to give the yuan credibility as a reserve currency. They certainly aren't shy about putting the idea out there.

Robert said...

I do not see any evidence at all that the Chinese want the Yuan to become the new reserve currency. They won't even let the Yuan float against other currencies. The Chinese strategy has been to strictly regulate the currency to build up the infrastructure and enrich the kleptocrats. Becoming the new reserve currency would require relinquiching more control. I do nto see that happening anytime soon.

FOFOA said...

Excellent, Victor!! Succinct and thorough.

[At some point in the debt fueled erosion process (i.e. financialization)] the financial plane [takes over] the incentives for consuming or investing.

If I [print and basically give money away for free] the consumers bid up the prices of some goods and services.

In a closed economy, this provides an incentive either
a) to invest in additional capacity, or
b) to forget about investing and just to [consume] the [basically free] stuff

In an open economy, the decision between (a) and (b) depends on who is more [gullible], the domestic industry or some foreigners.

The situation becomes toxic if the foreigners accumulate our debt, neutralize [any desire for us to produce], and thereby remain more [productive] for the long run. In this case, (b) dominates.

The problem is that the components of GDP that move abroad is manufacturing (everything you [need]) but what is left behind are services that cannot be moved abroad (nail studios, hair styling, dog grooming, running your local Wal Mart store, serving coffee to go [basically the kind of stuff an heiress is used to consuming]).

I think it is an effect of the persistent gap in [reality] between us and the foreigners that we even lose investment when our manufacturing moves abroad.

If we lose employment, this is probably also because the difference in [reality] is never adjusted. Jobs move abroad together with the manufacturing industry.

Why is this happening? Sure, it works only because the foreigners keep accumulating our debt. If they don't, it is over. But our government could also stop it at any moment, provided they [fall on their sword]. But I suppose the government has loved the fact that its [heiress lifestyle] has for decades essentially been funded by [gullible] foreigners.

#FYP

Sincerely,
FOFOA

JR said...

Hi Beer Holiday,

how can Europe allow the their debts to default/inflate-away and at the same time act as the stepping stone away from the $IMFS

In a word, Gold.

Date: Tue Mar 31 1998 08:32
ANOTHER (THOUGHTS!) ID#60253:

Now, with the world awash in "US dollars" and "gold paper", a new asset is being formed to "draw" the oil producers closer to Europe! The offer is the "exact opposite" of the "US dollar agreement", this new offer will drive gold to a value that will allow it to become "the world oil asset and currency".

Date: Sat Apr 25 1998 23:35
ANOTHER (THOUGHTS!) ID#60253:

There will come a time when gold and Euro are as "the same". Not in price or value, but as used for "real money".

Money is not what you afford, you earn it! In the near future, gold money will buy more than dollar money, much more! It is as to compare a one dollar bill to a hundred dollar bill, both money, just one buys more!

Many think the only way gold can rise in dollar terms is if USA prints too many! Truly, they have printed too many already. Gold will rise in dollar terms, many thousands even if treasury inflates currency no more.

6/14/98 ANOTHER (THOUGHTS!)

From Sam: For whatever percent backing by gold, will the Euro be convertible to physical gold, and by whom (i.e. all or limited)?

ANOTHER: Your question of Euro gold backing? The Euro will not be backed or fixed in gold. It will be the first "modern currency" to hold true "exchange reserves" in gold. It is important to understand that "exchange reserves" of gold are much more powerful a tool for currency defense than gold backing!

8/10/98 Friend of ANOTHER

The Euro will not replace gold, it will evolve into a gold transactional currency. It will also price Euro gold very high, perhaps $6,000 in current dollar terms buying power. However, in actual dollar terms of the future, $30,000 US will reflect the American debt as the negative reserve asset it truly is.

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

Michael H: "Who says that events since 2001 haven't played out as A/FOA expected?"

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


Forum 1600

Beer Holiday said...

Thank you, JR, you always seem to have the relevant quotes at your fingertips.

And you are correct, the comments section of Forum 1600 contains FOFOA's response to a very similar question, if anyone is interested.

@Robert There is plenty of discussion by banks/MSM outside of China that they will take the reserve currency status, but the official word in China AFAIK is:

Prof 李稻葵 (Lidao kui) :

They are aiming for the yuan to be the next reserve currency, but they say it is at least 10 years away. They have five criteria to meet, but have so far met only three. They say the euro cannot possibly be the world reserve currency (Me: but they would say that).

1. The currency is an open international currency - cross
2. A big enough economy to back the currency - tick
3. international trade with China must be big enough - tick
4. The exchange rate must be gradually increasing - tick
5. The financial market of China has to be big enough/stable enough - cross

Many countries are already settling in RMB e.g the Philipines

Beer Holiday said...

Regarding my comment above:

Prof 李稻葵 (Lidao kui) is David Daokui Li in case you are interested.

JR said...

Yes Beer Holiday,

I particularly liked

Spend some quality time with the Eurosystem's balance of payments and marvel at how remarkably balanced Europe is with the rest of the world. Then compare that with the US balance of payments.[...]

So for goods and services combined, the Eurosystem ran a trade deficit of €1.3 billion in April, while the US ran only a $43.5 billion deficit (down from its previous normal $50 billion, but back up in May). Looking back at 2010 (just to get a full year's picture) the US ran a $500 billion goods and services deficit for the year. The Eurosystem (even with those lazy PIIGS) actually ran a trade surplus for the year, exporting more goods and services than it took in! [...]

Of course there is a huge imbalance inside Europe between the states running a large surplus and those running a large deficit. But with a shared currency the adjustment pressure for such an imbalance is foisted elsewhere, not on the currency. It lands squarely on the politicians, who, like Costata said, couldn't be a more deserving bunch of Aholes. For the dollar, the structural deficit and debt of the US places a massive devaluation pressure directly on the dollar.[...]

And notice I didn't even mention gold yet. Anything that would appear to seriously threatens the euro, like an outright sov. debt default, would explode the price of gold which would simultaneously rescue the euro balance sheet and kill the dollar.


FOFOA said

Beer Holiday said...

I'd add to that at least

6. Gold reserve matching or exceeding the US (like the euro has)

I can see the flaws in that argument for the yuan being the reserve currency, however it satisfy's some other problems I have with the mechanism for the euro taking over namely: gold going through the roof and/or US HI leaves the worlds greatest (but decaying) military power potentially in chaos. That sounds like a dangerous world.

A more feasible/peaceful scenario to me is today's greatest creditors, the BRICS, leading the old superpower peacefully into retirement. And ensuring international trade continues at the same time debts are inflated away.

Please feel free to shoot this down as best you can, I really want to get past me road block :-)

Jeff said...

Debt based consumption is illusory and temporary. You raise your standard of living by growing the FIRE sector like a cancer, making it impossible to determine the real worth of anything. Your house, your job, your money, your wealth is not what your currency say it is, and it isn't worth what you THINK it is. The value judgements you put on everything are wrong. In the end you lose all your gains, and more.

FOFOA: Now, back to this privilege which, in the end, may turn out to be more of a curse.

FOA: In the early 90's, the dollar saw its match as the Euro was taking shape. To counter this threat it promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar system beyond its ability to serve as a real fiat money system. The whole dollar landscape become just a trading asset arena, evolving away from any meaningful currency use to trade for real goods. It can head in no other direction now because our local economy, the US economic base, cannot possibly service even a tiny fraction of the purchasing power currently held in dollars worldwide...

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

5/26/98 ANOTHER (THOUGHTS!)

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

AdvocatusDiaboli said...

FOFOA,
similiar/many points to your argumentation can be also found here:
http://www.cobdencentre.org/2012/05/in-defence-of-the-euro-an-austrian-perspective/#
german version:
http://www.misesinfo.org/?p=2355
Greets, AD

P.S.
Despite all the Euro enthusiasm in the essay (and I am a big fan of Jesus), but what most Euro-fans and Jesus as well dont get:
http://en.wikipedia.org/wiki/The_Scorpion_and_the_Frog

Jeff said...

Our numeraire is shot; we just haven't realized it yet. That's why the G is desperately trying to fill the void and keep those containers coming in. Things are going to get really depressing when reality comes rushing back.

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

FOFOA: And because we were running a trade deficit, those dollars that paid for it came back to the US buying up the stock and bond markets rather than the price of consumer goods. So the more easy credit we created, the more our paper investments would eventually rise, with a time lag that gave "early adopters" a gain far above consumer price inflation...

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

Beer Holiday said...
This comment has been removed by the author.
Woland said...

First Stephen Cecchetti, now here come Jacques Delors and
Helmut Kohl. Something big is brewing, when the elder
statesmen endorse such a proposal.

enough said...

The ECB MTM quater end party fast approaches.......

If I remember correctly FOFOA felt a dud for 6/31/12 might be meaningful for the paper gold mkt? This may be incorrect.

However, it looks like cheap spanish sparkling wine might be served at this quarter's shin dig.....

DP said...

Spanish? That's pushing the boat out a bit isn't it?

JR said...

Tinto de verano!

Peter said...

Or they might just fart in the tub.

Yes.

milamber said...

@ Michael dV

jojo said...

"I can’t believe that the BIS would go along with this,"

Milamber,

Isn't that just supporting and enabling the $IMF to get as big as needed to fail?
That's some poker playing, no?

June 25, 2012 5:49 PM

AdvocatusDiaboli said...

"Isn't that just supporting and enabling the $IMF to get as big as needed to fail?"

why should the BIS have any interest in that? Okay okay okay, except because ANOTHER said so...

Woland said...

Via the FT: Delors and Schmidt back eurozone debt agency

"The core principal should be: sovereignty ends where solvency
ends", the economists write in a 49 page report to be published
on Tuesday June 26. At the same time, the Euro area as a whole
should ensure that adequately priced access to sovereign financing
is generally possible, also in crisis times.

The report comes 2 days before a critical EU summit where leaders
are preparing to grapple with plans to revamp the single currency,
including the possible mutualisation of sovereign debt.

Coming from a panel headed by two of Europe's leading eminence
grises, - particularly Mr Delors, who is credited with drawing the
blueprint for the euro's creation in 1989 - the proposal could lend
weight to a Franco-Italian effort to get Berlin to back common
eurozone bonds.

At the same time, by including incremental loss of sovereignty
for countries that tap the common debt, it could also appeal
to the German government, which has repeatedly insisted that
it will not support eurozone bonds unless this comes with more
EU level control over profligate governments.

Under the Delors Schmidt proposal, all eurozone countries would
agree to issue debt equal to 10% of their economic output through
the European debt agency to provide an available and liquid
market for debt issuance. Countries would be allowed to increase
the amount of commonly issued, but only by gradually ceding
power over their budgets to the agency.

Countries seeking to issue more than 30%, for instance, would
be subject to conditions similar to the current Greek, Portuguese
and Irish bailout programs. If a country needed more than 40%
commonly issued, the agency would become directly involved
in drafting national budgets and setting economic assumptions.

No doubt more will be out over the week end.

Dr. Octagon said...

Michael H says: "Maybe what I am saying is that employment does not equal production." Yes! I agree! This is the kernel of my hesitation to accept the statement "So in no uncertain terms, Freegold is the key to true full employment!". An argument for higher productivity under Freegold is not an argument for higher employment under Freegold.

Thank you victorthecleaner, for your 12:51 AM comment!!! The key bits for me were: “The situation becomes toxic if the foreigners accumulate our debt, neutralize the trade adjustment process, and thereby remain more competitive for the long run.” …. “If we lose employment, this is probably also because the difference in competitiveness is never adjusted.”. Ah ha! Freegold restores the competitiveness adjustment across economies, thereby eliminating the advantage of performing transportable work (like manufacturing) overseas, instead of in the United States. So those jobs return. Very good! Almost all of my reading on what influences employment is from the time period of relatively closed economies, where “(a) is the only option”, and I was limiting my thinking to net-producers and net-consumers within a closed economy, which is not the reality of today.

milamber said...

VtC,

Re your June 26, 2012 12:51 AM comment.

I don't see anything in it that I can find fault with.

The only comments that I would add is that the core economy (Core being defined as the one that is the reserve currency) doesn't realize Triffin's dilemma until it is too late to do anything about it.

The post WWII geopolitical situation was such that the majority was in no position to disagree with the dollar being "As good as gold". Coming on the heels of The Great War, the Gold Exchange Standard, The Weimar Hyperinflation, The Depression, WWII & an ongoing Cold War, Bretton Woods looked pretty good. Especially considering the alternatives.

In addition to what FOFOA has outlined, another problem with having the exorbitant privilege is it causes the country that has it to look at the world financial system from the perspective of, “It’s our dollar, but it is your problem.” It also allows the core economy to think that it is healthier than it is and allow for the mother of all mispricing of risk.

But hey, don’t worry about it. The US has a printing press, so it is all good. :)

Milamber

victorthecleaner said...

milamber,

The only comments that I would add is that the core economy [...] doesn't realize Triffin's dilemma until it is too late to do anything about it.

Speaking about U.S. companies and perhaps even banks, you are probably right. But I don't think the U.S. government is oblivious to the long term fate of the dollar. The key players on the technical side from Volcker, Greenspan to Rubin, Summers, are not that stupid. They know fully well that the dollar was used as a political tool and that its fate is now in the hands of foreigners. They may actually try to control the timing and shape the reset as far as they can.

Victor

fonoah said...

Going back to Dec 2011; Headline in the West Australian newspaper - "Euro Architect admits its flawed design" - they were quoting Jacques Delors then aged 86. Back then I wondered "Why does he appear to be capitulating instead of defending (FG)"?

How do his latest proposals square up?

Regards FoNoah

milamber said...

VtC said...

"The key players on the technical side from Volcker, Greenspan to Rubin, Summers, are not that stupid."

I agree that they are not stupid.

Connolly wasn't stupid. Neither was Nixon. Contrary to popular opinion (and I am not putting your comment in that category) most senior level govt folks aren't stupid. But they have two problems that always hamper their efforts:

1. They have to respond to the situation that is thrust upon them.
2. They have a world view that doesn’t always comport to the real world.

Consider this from

http://onhyperborea.wordpress.com/2011/12/07/nixon-was-funny-and-why-the-us-should-care-about-events-in-europe/

“While discussing events surrounding the suspension of the dollar’s convertibility into gold and the introduction of “The Snake” (one of the precursors to the EMU and a mechanism by which European governments banded their currencies together through a system of controlled floating exchange rates), Marsh quotes this hilariously telling exchange between then US President Richard Nixon and his chief of staff, H.R. Haldeman:

Haldeman: Did you get the report that the British floated the pound?
Nixon: No, I don’t think so.
Haldeman: They did.
Nixon: That’s devaluation?
Haldeman: Yeah. Flanigan’s got a report on it here.
Nixon: I don’t care about it. Nothing we can do about it.
Haldeman: You want a rundown?
Nixon: No, I don’t.
Haldeman: He argues it shows the wisdom of our refusal to consider convertibility until we get a new monetary system.
Nixon: Good. I think he’s right. It’s too complicated for me to get into.
Haldeman: [Fed chairman] Burns expects a 5 percent devaluation against the dollar.
Nixon: Yeah, OK. Fine.
Haldeman: Burns is concerned about speculation about the lira.
Nixon: Well, I don’t give a shit about the lira.”

http://www.amazon.com/Euro-Battle-New-Global-Currency/dp/0300176740

Now Nixon was no dummy, but the events that he had to work with made him, well not really give a shit about the lira. My argument in regards to not worrying about Triffin’s dilemma is there were so many other things to worry about, that some credibility inflation problem in the future was irrelevant to action that was being taken then.

How many times have we seen really smart people do dumb things? I could cite numerous examples, but as it relates to the current thread, consider the following:

Bernanke really did believe that housing prices could never go down.
Rubin & Greenspan honestly thought that not regulating the banks (their self-interest would take care of things) was a splendid idea.
Volcker thinks that his rule will help.
Geithner is a whiz using Turbo Tax (JK on this one)

Growing up on Chicago School hocus pocus & bastardized Keynesianism and seeing the magical mystical dollar in action skews ones reality somewhat. That combined with the *immediate* pressures at hand lead to some strange outcomes at times.

Milamber

Gary said...
This comment has been removed by the author.
milamber said...

VtC,

And since FOFOA linked it, consider this quote from The Age of Inflation,

"Most really important political decisions are taken on the spur of the moment, and the events which prompt them are unforeseeable. In the minds of the men who run a country there are lines of thought and principles which lead to a particular course of action. The explanation for it—the theory—is only worked out later."

THE AGE OF INFLATION pg. 16-17

Now keep that thought in mind as you recall October 2008. They are smart men. But they are facing an impossible challenge, that I would argue they made worse by using their smarts to continue the fiction.

But really, what choice do they have?

Milamber

milamber said...

@ Gary. I agree up to a point. I would argue in this case, the Euro/RPG group *DID* see this coming & began planning for it after the Nixon shock.

Will their efforts succesful? I hope so. Otherwise we go from the death of the reserve currency w/o a new international transactional currency waiting in the wings to take on the MoE load. The SoV load is already cornered er uhm, covered.

Milamber

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

FOFOA: Don't make the mistake of assuming central bankers are stupid, or anti-gold, or that they are not fully aware of the concepts and principles I am writing about. When I write about the "logical preference" for gold, or the "de facto ascent of gold" to global IMFS reserve asset par excellence status, or gold as "the de facto solution to the international reserve question," these are logical, de facto realities of which central bankers are acutely aware. So when you hear them talking about complex solutions requiring massive[ly unlikely] global cooperation, new international treaties and enabling legislation, realize that they are talking about ditching the dollar in the most diplomatic terms they can, and then recall Randy's words:

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.

FOFOA: And after you think about it for a while, maybe you'll start to understand why gold was the asset chosen to occupy the #1 spot on the Consolidated Financial Statement of the Eurosystem, and why this is a key driving force (along with impartiality and systemic stability) behind the evolution to a 90+% gold proportion of reserves in the new international "Freegold-RPG" monetary system.

Gary said...
This comment has been removed by the author.
Edwardo said...

Not exactly OT, but interesting nonetheless.

http://www.theoildrum.com/node/9251#comments_top

On a less OT note, Bella Pelosi is leading the charge to have President O declare the debt ceiling unconstitutional. The outcome of this gambit will, of course, bear directly on the crucial question of whether or not Uncle Sugar will voluntarily cut back on his spending habits. Try not to laugh too hard.

victorthecleaner said...

milamber, Gary,

from the documents of the Nixon/Kissinger area, perhaps about 5% have been declassified. Everything else, from the planning around the end of gold convertibility to the Yom Kippur war remain classified. Don't take a couple of funny passages out of context and claim they would give an accurate picture of the Nixon administration.

Here is some more Nixon/Kissinger for your entertainment:

28 Oct 1971, Nixon to Kissinger (on the phone):

Burns has this idea that we have to move quickly with Europe. [...] the French won't make a deal unless we raise the price of gold. [...] It is my view that we can't. I don't want you to say that to him but just remember that Arthur is pushing for cutting a deal with the French. [...] Schutz and I feel that would be a mistake. We have to keep free. But see Arthur. [...] I would like to get it where you, George [Schultz], Connally and I - would make this decision. I want to put Burns [...] off.

3 Dec 1971, Kissinger to Connally (on the phone):

K: Say, it seems to me George Schultz is having 500 haert attacks because of the gold thing.

C: What about?

K: I don't think they taught him in his economic courses that you should raise the price of gold.

C: I am sure he is having heart attacks over raising the price of gold. We did discuss the possibility. We talked about the French and devaluing the dollar in terms of the price of gold the same way the French will revalue the franc in terms of the price of gold.

14 March 1973, Kissinger to Simon (on the phone):

K: I basically have only one view right now which is to do as much as we can to prevent a united European position without showing our hand.

S: Okay. Well, I interpret that as less intervention, which is a good idea, and I think George [Schultz] will be very happy with that comment. Do as much as we can to prevent a unified European position.

K: I don't think a unified European monetary system is in our interest. I don't know what you think for technical reasons, but these guys are now helping to put it to us.

S: Yes, sir.

K: I don't know whether that's true in the short term, but I'm convinced that that's true in the long...

S: I just agree with you a thousand percent.

15 March 1973 Kissinger to Simon (phone, about the 'snake')

K: Will that drive the Europeans together, this arrangement?

S: Well, basically - [...] Now if over a long period of time this float worked properly, then perhaps they would be together.

K: But we should create conditions in which the Common Float is as hard to work as possible.

S: Well, let me tell you how that can be done.

K: By not intervening.

S: Exactly! Or intervening at some time to help some people but not others.

6 June 1975, Kissinger and Enders (phone)

E: Well, we have a fair size interest in preventing a gold block. It is a question of which Europeans could coalesce three or four years from now.

...

victorthecleaner said...

...

25 April 1974, Kissinger and Enders (meeting)

E: [...] It’s been in the newspapers now—the EC proposal.

K: On what—revaluing their gold?

E: Revaluing their gold — in the individual transaction between the central banks. That’s been in the newspaper. The subject is, obviously, sensitive; but it’s not, I think, more than the usual degree of sensitivity about gold.

K: Now, what is our position?

E: You know what the EC proposal is.

K: Yes.

E: It does not involve a change in the official price of gold. It would allow purchases and sales to the private market, provided there was no net purchase from the private market by an individual central banker in a year. And then there would be individual sales between the central banks on —

K: How can they permit sale to the private market? Oh, and then they would buy from the private market?

E: Then they would buy.

K: But they wouldn’t buy more than they sold.

E: They wouldn’t buy more than they sold. There would be no net increase in gold held by the central banks that was held by the EEC. It could be held by others. I’ve got two things to say about this, Mr. Secretary. One is: If it happens, as they proposed, it would be against our interests in these ways.

K: Have you accepted it or is this just a French proposal?

E: It’s an informal consensus that they’ve reached among themselves.

[...]

K: But if they ask what they’re doing—let me just say economics is not my forte. But my understanding of this proposal would be that they—by opening it up to other countries, they’re in effect putting gold back into the system at a higher price.

E: Correct.

K: Now, that’s what we have consistently opposed.

E: Yes, we have. You have convertibility if they—

K: Yes.

E: Both parties have to agree to this. But it slides towards and would result, within two or three years, in putting gold back into the centerpiece of the system—one. Two—at a much higher price. Three—at a price that could be determined by a few central bankers in deals among themselves.
So, in effect, I think what you’ve got here is you’ve got a small group of bankers getting together to obtain a money printing machine for themselves. They would determine the value of their reserves in a very small group.
There are two things wrong with this.


K: And we would be on the outside.

[...]

K: I am just totally allergic to unilateral European decisions that fundamentally affect American interests—taken without consultation of the United States. And my tendency is to smash any attempt in which they do it until they learn that they can’t do it without talking to us.
That would be my basic instinct, apart from the merits of the issue.


E: Well, it seems to me there are two things here. One is that we can’t let them get away with this proposal because it’s for the reasons you stated. Also, it’s bad economic policy and it’s against our fundamental interests.

K: There’s also a fundamental change of our policy that we pursued over recent years—or am I wrong there?

E: Yes.
Secondly, Mr. Secretary, it does present an opportunity though—and we should try to negotiate for this—to move towards a demonetization of gold, to begin to get gold moving out of the system.


K: But how do you do that?

E: Well, there are several ways. One way is we could say to them that they would accept this kind of arrangement, provided that the gold were channelled out through an international agency—either in the IMF or a special pool—and sold into the market, so there would be gradual increases.

K: But the French would never go for this.

E: We can have a counter-proposal. There’s a further proposal—and that is that the IMF begin selling its gold—which is now 7 billion—to the world market, and we should try to negotiate that. That would begin the demonetization of gold.

...

victorthecleaner said...

...

K: Why are we so eager to get gold out of the system?

E: We were eager to get it out of the system—get started—because it’s a typical balancing of either forward or back. If this proposal goes back, it will go back into the centerpiece system.

K: But why is it against our interests? I understand the argument that it’s against our interest that the Europeans take a unilateral decision contrary to our policy. Why is it against our interest to have gold in the system?

E: It’s against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings—about 11 billion—a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We’ve been trying to get away from that into a system in which we can control—

K: But that’s a balance of payments problem.

E: Yes, but it’s a question of who has the most leverage internationally. If they have the reserve-creating instrument, by having the largest amount of gold and the ability to change its price periodically, they have a position relative to ours of considerable power. For a long time we had a position relative to theirs of considerable power because we could change gold almost at will. This is no longer possible—no longer acceptable. Therefore, we have gone to special drawing rights, which is also equitable and could take account of some of the LDC interests and which spreads the power away from Europe. And it’s more rational in—

K: "More rational" being defined as being more in our interests or what?

E: More rational in the sense of more responsive to worldwide needs—but also more in our interest [...]

Victor

victorthecleaner said...

milamber,

Bernanke really did believe that housing prices could never go down.
Rubin & Greenspan honestly thought that not regulating the banks (their self-interest would take care of things) was a splendid idea.


I don't believe any of these claims. Bernanke (and Greenspan and everyone else) knew perfectly well that the housing bubble would burst one day and take down a good part of the banking system. They just did their very (!) best trying to keep the system afloat for another couple of years. Same with Rubin/Summers/Greenspan and the deregulation of the OTC derivatives. They know what happens when the system stops expanding (aka inflating).

Victor

Beer Holiday said...

Re China:

Chile Is Latest Country To Launch Renminbi Swaps And Settlement


From the above Zerohedge article:

So to summarize, the list of countries that China is transacting with directly (that we know of), and bypassing the USD entirely, is as follows:

Japan
Russia
Iran
India
Brazil
and now, Chile

In other words, it looks like the BRICs already have their "bilateral" arranagements all sorted out, and are now quietly moving into other suppliers of key resources with swap deals, all without mentioned the world "dollar."


From my comment earlier, you can add these guys to the list;

Australia
New Zealand
UAE
Turkey

Beer Holiday said...

And to the above list, I would guess a basket full of Asian region countries, The Philippines, Vietnam, North Korea (oh yes I did) etc.

Blondie said...

VtC said:

“If people hold a large portion of their savings in the form of the MoE (for whatever reason) and credit volume can expand without immediately affecting prices, how would the gold price flag this 'hidden infaltion'?“

“I am asking about a situation some 30-50 years into the new financial system. The immediate shock will have long been worked off. It is basically the question of how stable is the new system.“



FOFOA said:

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

“… because we were running a trade deficit, those dollars that paid for it came back to the US buying up the stock and bond markets rather than the price of consumer goods. So the more easy credit we created, the more our paper investments would eventually rise, with a time lag that gave "early adopters" a gain far above consumer price inflation... “


======

Credibility Inflation of a MoE (currently the dollar) is firstly and foremost a result of the structural support given said MoE by those (Giants) accumulating a surplus of it and not converting this surplus into SoV. In doing so, they are lending their own credibility to this MoE, making it the de facto SoV. (I note here that they have credibility because they are net producers... it is their production (the physical plane) that gives this.) This must be done publicly, continuously, and in size sufficient to overwhelm alternative/incumbent SoV to get CI.

As pointed out above, this MoE (did) flow/s back into the stock and bond markets of the issuer… as credit grows the inflation is not reflected in consumer goods but in financial instruments. Once this trend is established, a secondary factor becomes involved in this inflation: that of the speculator further bidding up financial instruments because of this rise in their value relative to real goods. The speculator also, firstly because of the credibility given by the Giants storing value in this MoE, and secondly because of the established trend in capital gains in these instruments, chooses to store their value also in this MoE, further exacerbating the situation.

But it must be noted that the entire event was precipitated by a real surplus being used to supply “structural support” by the Giant/s running this surplus. Without this action, the rest of the CI could not occur. The smaller actors follow the lead of the larger ones. CI could only occur in FG by a Giant/s choosing to publicly store value in a MoE. This wouldn’t be done, because it would create an arbitrage opportunity between that MoE and gold, an opportunity that would be taken by the issuer of that MoE if no one else.

This is the mechanism, “how would the gold price flag this 'hidden infaltion'?”: the MoE issuer would seize the arb by buying gold themselves. FG is a Nash equilibrium.

To state that differently:

In FG, "If people hold a large portion of their savings in the form of the MoE" another actor who can see this (such as the MoE issuer) will remove this extra value from the MoE by exchanging it for gold, and thus the goldprice will flag this "hidden inflation"; because it ain't hidden from everybody.


I note Victor that you have described the entire process very well since you asked the initial question in the last thread, and mostly answered it yourself as well... for example:

" (In fact, creating consumer loans domestically will cause inflation relative to gold which determines international prices, and so it even discourages (b))"

"Sure, it works only because the foreigners keep accumulating [our] debt. If they don't, it is over."

Victory said...

VtC,

Good stuff, was that a Mortimer find?

-v

Michael said...

I found this referenced on ZH. I believe it was supposed to make me hate Mundell. I actually found a new respect for the man after reading it. It also explains why Greece will not get a bailout.
http://www.gregpalast.com/the-euro-is-a-big-success-no-kidding/
Michael dV

victorthecleaner said...

Blondie,

thanks, you answered it. The key to the argument is this:

the MoE issuer would seize the arb by buying gold themselves. FG is a Nash equilibrium.

Applying this to the present situation, we are waiting for the USG to make the next move, don't we?

Victor

Beer Holiday said...

Everyone, you've been too nice.

Well I've been sitting here in my Mum's basement in my gimp outfit waiting to be spanked for long enough, that I'll have to do the spanking myself, Michael Hutchence style (SFW link).

@Beer Holiday, you asked two questions

1. How does the possibility of the yuan becoming the next reserve currency sit with freegold(sic)?

You fool Beer Holiday, it fits perfectly. Every family in China and India has some gold (decent amounts - not just a wedding ring), it's part of their wedding tradition. And they actually follow their tradition, something lazy westerners who drink too much beer wouldn't even recognize (I'm looking at you "Beer Holiday").

The state-controlled media has been telling citizens to buy gold consistently, and specifically warning against silver.

Bron Suchecki from the Perth mint speculates in this interview that the Chinese became buyers in bulk from the Perth mint in 2005, and show no signs of stopping.

2. How much gold does China have, and would they want freegold(sic)

You asked in a whinny, annoying voice. Why did you ask this? You know that no one knows the answer. All we know is that they have been buying as much as possible, including their own mine output, and they are the in the worlds top two producers. "Would they want freegold(sic)" See above. Freegold is capitalized FYI, can't you read?

VtC already pointed out that the SoV is separate from the MoE in Freegold, so which country (of zone) spits out the MoE paper tokens isn't that important.

Few, that's better, and the real pain was typing out those hyperlinks :-)

victorthecleaner said...

Victory,

yes, some of it was found by Mortymer - some other quotes are from the National Security Archive.

Victor

Beer Holiday said...

VtC - That's an amazing find.

China talk - To paraphrase Bron's interview above "we ship most of our output into China and India". My memory is that roughly 11% of world output is processed at the Perth mint.

Blondie said...

Victor,

”Applying this to the present situation, we are waiting for the USG to make the next move, don't we?“

I think it is in China’s hands as much as anyone’s, and in some ways in no one at all's. How much control do China have over demand for their production? If they can't run a surplus, they can't support the dollar. Maybe they should raise their prices? :)
Seems most likely that they'll both let it run as long as it can, but eventually it must get away from them, and maybe it already has.

Beer Holiday,

”1. How does the possibility of the yuan becoming the next reserve currency sit with freegold(sic)? “

Gold is the next reserve asset; there will be no “reserve currency” as such, just currencies which are more or less exchangeable for gold.

”2. How much gold does China have, and would they want freegold(sic)“

Not as much as they would like, and yes.

Reread my comment from earlier today. China are the big net producer; China have been supplying the structural support to the dollar since the launch of the euro.

Big Trader is China.

China saw the writing on the wall in the 90s, and started buying physical in size, but not to the extent that they ran the price. The WAG was IMO not only a heads up to the BBs that they were now on their own regarding leasing of gold, but also that European structural support was ending. This is a direct message to China, the big buyer lurking under the market: If you want to keep physical flowing, you must support the market yourself.

So, however many thousand tonnes China has absorbed since then, it has not truly been at whatever market price they paid. They have been subsidising the gold price with their structural support. Every ounce of physical gold purchased by anyone since approximately 2000 has been subsidised by China, who by supplying this support kept the paper gold market from imploding and the physical flowing. Obviously they want to absorb as much physical into their zone as possible before this support is no longer possible, as does everyone who understands what is going on.


Here in NZ the govt is once again trying hard to assist the mining industry in greatly expanding gold exploration, which amounts to almost the same thing as our CB buying: it'll still end up being local gold, one way or another. And by the time those mines are in production, the whole paradigm will have changed, thus the NZ govt will just be "moving with the times" when they nationalise/tax that production.

Alien said...

Michael,

the regulations are still in place for the 99%.

Try cutting some trees in your garden without the signed approval of your neighbors and see what they will fine you. You can't even change a wall building a winter garden without their consent!
Now we hate the present monetary system but the next one will be even worse for those without gold! It should not be greed but angst as incentive to possess it.

Beer Holiday said...

Thank you Blondie. Something finally clicked and I'm past my stumbling block - there is no special "reserve currency" in Freegold (how did I forget that).

It amazes me how much baggage I have from living in the current system.

Beer Holiday said...

Edit: Reserve fiat currency/MoE, that is.

Alien said...

And btw those horrible people on EBT WILL not go to work the day EBT will be cut even if they had a job or a qualification, which they probably don't. You need a Martial Law or those FEMA camps to keep them quiet. And that will be the same for the EU where millions live on dole. Only Germany has about 8m receiving some kind of support!

victorthecleaner said...

Blondie,

I like this part:

The WAG was IMO not only a heads up to the BBs that they were now on their own regarding leasing of gold, but also that European structural support was ending. This is a direct message to China, the big buyer lurking under the market: If you want to keep physical flowing, you must support the market yourself.

Victor

Beer Holiday said...
This comment has been removed by the author.
Anand Srivastava said...
This comment has been removed by the author.
Beer Holiday said...

Blondie, with that one post you eliminated every perceived logical and logistical issues I had with Freegold. You're a "master teacher".

Edit: Use of non-religious terminology

Beer Holiday said...

Thank you to everyone who helped me past my stumbling block.

I now see everything I posted about China is entirely consistent with a transition to Freegold.

The big producers are just setting up the paper currency network that they will use to trade in Freegold and in the transition. The ROW will keep trading, business as usual, as all of the debt in the $IMFS are inflated-away. Europe doesn't have to do anything internally, but the rest are forming their own alliance.

You don't end up with a drowning US at the end, they get the bonus of being one of the largest gold holders at the end to soften the fall.

What we end up with is a new international settlement, and all of the debts wiped clean. Maybe this is the transition, and we're watching it.

Blondie said...

Michael dV,

Thanks for the link to the Palast article on Mundell and the euro. Just like Beer Holiday said about China, the euro situation too is entirely consistent with FG.

BTW, you should be able to easily change your username from within your profile (click your username or avatar beside one of your comments) by clicking the link that says “edit profile” and then changing the Display Name and then “Save Profile” at the bottom. ;)

costata said...

OT and just a brief comment but I could not resist the opportunity to record in these pages this idiocy from Mike "Mush" Shedlock:

http://globaleconomicanalysis.blogspot.com.au/2012/06/zero-hedge-provides-empirical-proof-of.html

Earlier I read the ZH piece he cites so his heading caught my eye. I think this post succinctly displays the key elements that are awry in his logic and thought processes. And as a bonus he ends the post with this:

Those charts also show why hyperinflationists are in an alternate universe and why proponents of "huge inflation but not hyperinflation" are on Mars.

Time will tell, Mush, time will tell.

costata said...

For the China watchers this is an absolute must read IMHO (my emphasis):

At best, the chart shows that China’s dollar position has become balanced over the last half year. That the dollars China takes in through exports cover the country’s dollar import costs, but that’s all. There are no surplus dollars leftover for reinvestment.

http://ftalphaville.ft.com/blog/2012/06/26/1060301/chinas-amazing-short-usd-position/

Don't be put off by the fact that this piece is by Izabella Kaminska. When she avoids philosophy and ideology and sticks to journalism she produces good pieces. In the post Izabella quotes Standard Chartered analysts including this (my emphasis):

Over time, firms in China’s tradables sector have built a “short USD‟ position. In theory, over time, exporters and importers together should have net-sold dollars equivalent to the country’s trade surplus. However, we find that corporate China has actually sold many more dollars than that; we show the accumulated ”excess” of USD selling in Figure 3.

About $700 billion forsooth.

Some interesting theories are offered to explain what is happening. Blondie might like to weigh in on this matter given this remark at June 26, 2012 10:14 PM above:

If they (China) can't run a surplus, they can't support the dollar. Maybe they should raise their prices? :)

Maybe it wouldn't do them or the USA a scrap of good if they did increase their surplus. If memory serves me the latest figures I saw showed that China had increased their holdings of USG paper in their FX reserves. Perhaps it's far too late in the game for surplus countries to balance deficit countries.

Strange too that this article posits that the PBoC has been intervening to prop up the exchange rate of the Yuan/Renminbi. "Curiouser and curiouser" cried Alice.

In any case some food for thought. (h/t Macrobusiness blog for the original link)

Cheers

Beer Holiday said...

Seconded: I recommend "Macrobusiness" blog to anyone interested in China news.

The ANZ bank brief I linked to was from there, but I hate links to embedded .pdf's, hence the source was given.

Jeff said...

Good link, Costata. Taking into account the yuan bilateral trade deals, and this story, is a picture emerging:

http://www.bloomberg.com/news/2012-05-09/china-investment-stops-buying-europe-debt-on-crisis-concern-1-.html

Is China moving more aggressively to spend dollars and buy resources as the game speeds toward its' conclusion?

As for Mish, Prechter, and the deflationistas, they will loudly proclaim victory just as they are destroyed by a future they can't imagine.

FOFOA: Yes, we will have a grand deflation... denominated in GOLD! It will be brought on by all the same factors the deflationists correctly recognize. The failure of debt, the winter cycle, etc... And it will look the same as they imagine. Depression, unemployment, falling prices (when priced in GOLD), black and white pictures, etc...

You see, hyperinflation is exactly like deflation. The only thing hyperinflation has in common with inflation is part of its name. Other than that it looks just like a deflationary depression. In fact, it IS a deflationary depression, with a different numéraire!

John said...

@ Victor

Many thanks for finding and sharing that invaluable historic dialogue....speaking for myself, one of the most helpful things I've read here in the many thousands of lines of otherwise interesting and illuminating things. It did bring up one thought that I'd like to pose to you and anyone else who cares to share an opinion:
FreeGold as I understand it has taken the shape of an "all or nothing moment/transition"....something akin to what happens during nuclear fission.....but what if instead we have a political group, in this case the EU, with lots of gold reserves and therefore the ability to create "new" banking reserves through revaluation, merely choosing the periodically revalue in baby-steps on an as needed basis. In other words, instead of going from $1500 straight to $30K or $55K or whatever...we take many many small incremental adjustments? is this not possible because we would be "signaling" and therefore letting the cat out of the bag? Thanks for your thoughts on this.

Beer Holiday said...

I'm past my stumbling block and music helped. I hope it helps someone else. My last comment on the matter.

John said...

And as a follow-on point....wouldn't the taking of small incremental "baby-steps" of gold revaluation also serve to relieve the pressure of the paper gold markets....thereby extending the utility of the present "something for nothing $IMF system? Kind of like periodically readjusting the cork in the bottle.

ElaisaKasan said...

For review and comment:

http://www.scribd.com/Free_Nations/documents?page=1#

MatthAu said...

@Blondie (6:40)

Thank you so very much.

Michael H said...

@ John RE: "baby steps":

This is where we are now, an incrementally-rising gold price that keeps the current system functioning for the time being.

The argument in favor of making the revaluation sudden is the same for all currency revaluations, whether with respect to gold or with respect to a stronger fiat: the bigger the surprise, the bigger the net gain for those in charge.

Surprise minimizes front-running.

DP said...

This is where we are now, an incrementally-rising (relative) gold price that keeps the current system functioning for the time being.

The surprise, if there still is one, is found where the incremental rises occur.

Gold is the recipient of 'structural support' today.

The euro is no cross of thorns in this Depression.

Victory said...

BIS Gold Swaps and Custodian Accounts

http://ftalphaville.ft.com/blog/2012/06/25/1058101/

...this is a short read, just some trend observations that Izabella Kaminska admittingly does not know how to interpret.

The amounts (tonnage wise) are not that large so probably nothing

milamber said...

Victor,

Thanks for posting the Kissinger/Nixon/Connolly/Simon et all transcripts. I am sure that as more becomes declassified, we will get a clearer picture.

To your statements…

“Don't take a couple of funny passages out of context and claim they would give an accurate picture of the Nixon administration. “

The impression that I was trying to make is that in a crisis, leaders do what they have to do. They have a worldview & and an agenda that they want to see realized (or maintained), but they also realize that there is only so much they can do.
After the collapse of the gold pool, ending the gold convertibility, the rise of Opec as a political/economic cooperative (unseating the TRC as the domestic price setter), USSR/China relations, etc., speculation in the Lira didn’t concern Nixon very much.

“I don't believe any of these claims. Bernanke (and Greenspan and everyone else) knew perfectly well that the housing bubble would burst one day and take down a good part of the banking system. They just did their very (!) best trying to keep the system afloat for another couple of years. Same with Rubin/Summers/Greenspan and the deregulation of the OTC derivatives. They know what happens when the system stops expanding (aka inflating).”

I will think long & hard on that.

I think that Bernanke truly believed that he could engineer a soft landing or a permanent plateau. I think that Greenspan bought into his own myth as the Maestro. I recognize that they understand the mathematics behind the endgame of the reserve currency being debt based & what all that implies. But I think that they honestly believe that they can engineer a solution that doesn’t end in Hyperinflation of the Dollar Freegold/RPG.

Of course, who knows what Bernanke/Greenspan say at night when the inescapability of it all closes in.

But maybe Greenspan never did get that far away from his 1965 essay http://www.usagold.com/gildedopinion/greenspan.html

But as I am still working through JR’s links regarding Rothbard’s bastardization of Mises, I am unsure who really believes what. I was one of the ones suckered in to believing Rothbardian's worldview as being the natural successor to Mise's.

Damn HMS/Political Anarchists

(There's a contradiction in terms!)

Milamber

milamber said...

Gary said…

“milamber,

are you blind, or just naive, or so wrapped up in the groupthink, that you did not stop to consider reality?”

You got me. As Mish said, I am blindly living in my naïve groupthink world where Mathematics reigns supreme & the current system resets in a hyper inflationary depression!

“the 'they' you talk of are the likes of Hank Paulson, ex-Goldman Sachs.”

Actually the “They” that I was referring to were Central Bankers who above all else prize stability, IMO.

“Was he ever likely to do the right thing, like Iceland, tell the dumb bankers to eat their losses and fuck off, eat their pain and start again afresh?”

I don’t think that he could logically do that. The US is kind of like a a shark in that if it stops swimming, it dies. If the US stops inflating, it dies.

“Was he hell. Plenty of choices, but one reality, when bankers run the show, bankers will be saved.”

I think that the goal is to save the system by sacrificing the currency & hoping against hope that you can do it w/o war/civil unrest.

“You tell me, as you think they had no real choice. I know they're out for themselves and their ilk, everyone else can get stuffed. “

Since you already know, why do you want me to tell you anything?

Milamber

Edwardo said...

Jeff wrote:

"Hyperinflation is exactly like deflation. The only thing hyperinflation has in common with inflation is part of its name."

Hyperinflation begets very different social behavior. Crime statistics bear this out.

Jeff said...

Here is a hit piece on Mundell. FOFOA readers may come to different conclusions than the author.

Robert Mundell, evil genius of the Euro

http://www.guardian.co.uk/commentisfree/2012/jun/26/robert-mundell-evil-genius-euro

victorthecleaner said...

milamber,

I think GATA have collected some FOMC minutes (I think they are released after 3 or 5 years) from around 2003-6 in which they make jokes about the mortgage market. They knew perfectly well what would happen. Perhaps somebody remembers the link at which GATA collects these documents.

I have a general comment on the choice of your point of view. There is a certain "hard money school"/goldbug world view in which
1) you have to assume that the relevant politicians want X, but are too stupid to implement it and always produce the opposite of X
2) you keep being surprised about the ongoing political actions - you are trying to predict things (for example the goldbugs have been telling us for a year now that QE3 was imminent), and then something totally different happens (QE3 still not implemented).

If you adjust the framework in which you view the world as follows:

1) The US government including the Fed are willing to do a lot (!) in order to preserve the international role of the dollar. In particular, they accept wrecking parts of their banking system and parts of their middle class in order to keep the dollar in its reserve position for another couple of years.

2) The ECB plainly follows their mandate to achieve their price inflation target below but close to 2% annually. This includes that
a) the ECB will always provide liquidity to their banks and prevent chain reactions of defaults
b) they will print in order to prevent price deflation
c) but they won't print in order to fund the running budget deficits of their governments
d) in particular, they let the interest rates on government bonds creep up, and if a government defaults, then so be it.

With these assumptions, I think, most of the political and monetary actions of the previous years make a lot more sense. There is no need for any big conspiracy theory either ('New World Order' thing). It is just that you ask which goals are the observed political actions consistent with.

Victor

Michael dV said...

Blondie
thanks for the suggestion
I looked at my google profile and did not see an option there for name change. If it shows up now I will have been successful. I see the Mundell article was suggested again today.

Edwardo said...

John,

I'm glad you brought that up. That idea has been on my mind for little while. My view is that, advantages for doing so notwithstanding, finding the right currency denominated price in a oner, is going to be quite difficult. How likely is it that, at the time- whoever it falls upon to make a two way market in physical at a vastly higher price- "they" are going to, as it were, find the right level at the outset? I imagine several dramatic revaluations-the first of which will be the biggest-in order for the gold to flow in sufficient "size".

Jeff said...

I'm with Victor. The housing bubble wasn't about real estate; it was about expanding (inflating) the system. For the $IMF managers everything is about buying time, now.

FOFOA: ...But in this crisis, the currency itself is the key. All else is noise.

d2thdr said...

Milamber said - But I think that they honestly believe that they can engineer a solution that doesn’t end in Hyperinflation of the Dollar Freegold/RPG -

I would rephrase it- But I think that they SINCERELY HOPE that they can engineer a solution that doesn’t end in Hyperinflation of the Dollar Freegold/RPG

victorthecleaner said...

How about this: "They know that dollar HI will eventually be unavoidable, and so they will try to control it, including the timing and the resolution, as much as possible."

Victor

milamber said...

Victor said,

“I have a general comment on the choice of your point of view. There is a certain "hard money school"/goldbug world view in which
1) you have to assume that the relevant politicians want X, but are too stupid to implement it and always produce the opposite of X
2) you keep being surprised about the ongoing political actions - you are trying to predict things (for example the goldbugs have been telling us for a year now that QE3 was imminent), and then something totally different happens (QE3 still not implemented).”

I agree that what you describe is a prevalent view. I used to be in HMS/Deflationist camp (2008/09 timeframe) & I still carry some of that baggage. But, I am curious to know what have I posted that makes you classify my view as the one you described?

“If you adjust the framework in which you view the world as follows:

1) The US government including the Fed are willing to do a lot (!) in order to preserve the international role of the dollar. In particular, they accept wrecking parts of their banking system and parts of their middle class in order to keep the dollar in its reserve position for another couple of years.”

Maybe we are arguing intent versus consequences.

I don’t think that Bernanke/Greenspan/Paulson/Geithner/Summers/Rubin (BGPGSR) thought that they were going to wreck housing & the middle class. I think they believed that they could control any damage. Once it imploded, they had no problem bailing out the banks & initiating the reinflation.

To wit:

“Bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. Betting against markets is usually precarious at best.”
- Alan Greenspan (June 1999)

“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”
- Alan Greenspan (October 2008)

But did they have purposefully collapsing the US housing market as a policy goal so that the could simply reflate? I don’t think so.

“2) The ECB plainly follows their mandate to achieve their price inflation target below but close to 2% annually. This includes that
a) the ECB will always provide liquidity to their banks and prevent chain reactions of defaults
b) they will print in order to prevent price deflation
c) but they won't print in order to fund the running budget deficits of their governments
d) in particular, they let the interest rates on government bonds creep up, and if a government defaults, then so be it.”

OK.

“With these assumptions, I think, most of the political and monetary actions of the previous years make a lot more sense.”

If the assumption is that BGPGSR deliberately wrecked the housing market, then No. If the assumption is that BGPGSR has to keep blowing bubbles in order to keep the US economy going, then yes.

“There is no need for any big conspiracy theory either ('New World Order' thing). It is just that you ask which goals are the observed political actions consistent with.”

I get a chuckle out of the FEMA Camps/Black Helicopter/NWO/Alex Jones types.

But, I do think that all entities have plans, worldviews & mindsets that drive how they interact with the world. The question I am struggling with is figuring out which ones are important to understand and discarding the rest.

Milamber

Gary said...
This comment has been removed by the author.
victorthecleaner said...

Milamber,

I don’t think that Bernanke/Greenspan/Paulson/Geithner/Summers/Rubin (BGPGSR) thought that they were going to wreck housing & the middle class. I think they believed that they could control any damage. Once it imploded, they had no problem bailing out the banks & initiating the reinflation.

I don't believe that either. Again, I would have to assume they are all less clever than I am. Sure they are not. And they certainly had the better data.

Just to make the point, do you remember Greenspan warning of "irrational exuberance" in 1996? That was when the overvaluation of the US stock market became obvious. Robert Shiller wrote a book about it and explained it.

So why did Greenspan not make a more serious effort at cooling down the bubble? Well, he started. But then, towards the end of 1996, we know that "Big Trader" threatened to blow up the BBs. The gold carry trade got derailed, and the Fed needed to fix other things first and could no longer freely act to cool down the stock market.

Of course, Greenspan knows a bubble when he sees one, and he also knows that real estate bubbles usually end with a collapse of the banking system. You need not know that much about the history of finance in order to see this. I refuse to adopt any world view in which I have to assume that Greenspan is stupid. He isn't. It is just that they had a different priority of what most people assume. They had to keep the dollar alive. The fate of the banking system and the domestic real estate market were secondary to that. Same with the strong dollar policy and the deregulation of OTC derivatives in 1998. The knew it was high risk and would eventually lead to further problems, but not today, but rather at some point 5-10 years down the line.

By the way, if you were Greenspan, what would you have said in 1999 or in 2008? "Sorry, Ladies and Gentlemen, we were unable to properly regulate our financial sector because the government had decided to support the dollar by creating further liquidity in order to lower interest rates even further and thereby prolong the period of dollar accumulation by foreigners. The banking regulation got in the way, and we needed to drop this objective in favour of the higher goal of keeping the dollar alive." ???

Victor

d2thdr said...

Gary did you read this one -



If you owned an oilwell in your back yard and no-one could take control of it, then oil is the best investment. But, most people use various forms of western paper to trade oil and that paper will burn in a currency fire. Make no mistake, a currency fire is now in process and it has much fuel remaining. Even Korea will find out that oil is all that counts. Their paper will die! Gold would have helped them in a different world, but for now gold is in the background as the IMF tries to add more paper to this inferno. If one owns real gold , it will be with ease to view the world currency developments. They will be truly of biblical proportions!

OR This one


Do you really hold dollars?

It is important to understand that few persons or governments hold US dollars! Look at any investment portfolio and what you will find "are assets denominated in US$". This sounds simple, but it is not. You have heard the phrase, "money is moving into real estate, land, oil, stocks or bonds". It is a bad meaning, as it does not what it says.

All modern digital currencies do not go into an investment, they move THRU it. The US unit is only an exchange medium to acquire assets valued in dollars. US government bonds are the usual holding. No CB holds any currency! They hold the bonds of that currency. The major problem today, is that digital currencies have erased the currency denominations of all government/nation debt holdings! Even thou a debt is marked as DM, USA, YEN, they are in "real time" / "marked to the market" and cross valued in all currencies! No currency asset, held by CBs today are valued in the light of a single issuing country, rather "all currencies are locked together". To lose one large national currency, is to lose the entire structure as we know it!

There is an alternative. Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies". Gold can be used to revalue any asset, and not be destroyed in the process!

Another does not come across as confused. He was anything but. If you read through his commentary and of FOFOA you will get some incredible understanding of various aspects of your own life. There are many things that the triumvirate have explained which to me appears very much like a fractal.

Texan said...

Milamber,

I wouldn't lose that deflation baggage too fast. At least deflation in things like wages and, yes, housing and other stuff we (in the US) own. And won't that be the pain trade for all those newly minted landlords trying to grab a bit of yield in the ZIRP world?

victorthecleaner said...

By the way, there is a book titled "Greenspan's bubbles" by Fleckenstein that is a nice example of how you can collect all the data meticulously and still be totally fooled.

He has all the FOMC interest rate decisions, data on how the economy was doing and whether the stock market was cheap or expensive, etc. And he concludes that Greenspan was a completely incompetent maniac.

This is because he thinks he can analyze US domestic monetary policy in isolation and because he thinks it was Greenspan's job to optimally regulate the US financial sector in order to provide the best framework for the economy.

He doesn't see that the US dollar has an international role as well (a typically American world view - pretending you are alone on the planet although your government has obviously been fed by the Chinese and for a decade). The problem is that once the dollar fails in its international role, it is lights off domestically as well. This is the reason why everyone (Greenspan, Bernanke, Rubin, Summers, etc.) assigns the higher priority to the international role of the dollar (without explaining it to the public though).

Victor

Blondie said...

Greenspan: “Bubbles generally are perceptible only after the fact.”

Firstly, note that he qualifies his statement with ‘generally’, and we assume agreement on the definition of the term ‘bubble’.

Bubbles are Credibility Inflation.

I define a bubble as any good whose price is being driven by its price rather than the normal utility of that good.

So if for example we see people bidding on houses because they want to sell later for a profit more than they wish to use the house itself, then housing has entered a bubble.

I’m with Victor and Jeff; real estate was simply a corollary bubble within the larger credit bubble. This is just what happens when you relax lending criteria in order to stave off a credit contraction.

There is one "bubble" that never need pop, of course, because its credibility is established by existing real value rather than abstract promises, and because this is its utility: the pre eminent SoV,

==>GOLD<==

Texan said...

Gary,

I didn't see anything particularly contradictory in your quotes. All variations of a theme: paper wealth will disappear, the USD is going to get hit big time as a SoV, and physical gold will take its place.

Beer Holiday said...

Re: China

I found a very interesting report for anyone who wants to follow China

very interesting report

Some highlights:

In the first area, initiating a global reserve currency, Zhou Xiaochuan, Governor
of China's Central Bank has already taken the lead. In March 2009 on the website of
the People's Bank of China he stated: "There is a need to create a reserve currency that is
disconnected from individual nations and is able to remain stable in the long run."


Governor Zhou has received support in his initiative by the current Managing Director
of the IMF, Dominique Strass-Kahn along with former head, Michele Camdesseus, and
former World Bank chief economist Dr. Joseph Stiglitz. Other supporters include Noble
Laureate, Robert Mundell, father of the Euro and coincidentally, an Advisor to both
Greater China Corporation an the Chinese Cultural foundation
, and even Dmitry
Medvedev, President of Russia.


The report suggests the reserve could be made up of:

These assets could initially include the following, but can be adjusted periodically.- Currencies: the four currently in the SDR plus the Chinese yuan, Indian rupee,
Brazilin real and perhaps the Korean wan and Canadian and Australian dollars.
- Precious Metals: gold, silver, and platinum.
- Industrial Commodities: iron ore, steel, copper, aluminum, lead, zinc.
- Energy Commodities: oil, gas, coal and perhaps even carbon credits.
- Food commodities: wheat, corn, soybeans, rice, sugar, and coffee


Wouldn't it just be easier to use gold? Although that approach does solve e.g the gold for oil flow problem. Thoughts?

mad1571 said...

@ChrisF
So the way to reduce unemployment in the West is for China to rapidly sell their trillions of Government $ debt and buy Gold... !!

China is buying tons of gold right now. But just to be clear, this is solving THEIR problem... not ours.

I believe China understands the concept of FreeGold. They have gained so much from comparative devaluation, I find it strange that they would do a 180° and try to become the world's reserve currency, thereby falling under Triffin's dilemma as well.

They will encourage their citizens to buy and hold gold. That's the idea behind PAGE. Even if it gets shot down for the time being, but they'll eventually get it up and running.

Beer Holiday said...

More from the above link:

The final area, Building a global securities market, is also an area where China is
well situated to take the lead.
- Currently, securities markets are of national origin (e.g. the New York Stock Exchange)
but through merger and acquisition have become more multinational (e.g. NYSEEuronext).


Suddenly China buying the LME makes a lot more sense.

mad1571 said...

To FOFOA or anyone.

For the time being, is there room for another QE3? At the time of this writing, U.S. debt is at $15.8T, giving us less than a hundred billion a month from now until the end of the year.

All I'm saying is that there is no room for QE3... at least, not until after congress had increased the debt ceiling.

The alternative is for the Federal Reserve to directly print money. I would consider that a dishonest default.

As for the debt ceiling, I'm 99.99% sure that congress will simply raise the debt ceiling and kick the can down the road.

Beer Holiday said...

The report mentions former World Bank President, James D. Wolfensohn. That is very important to me, he's been talking about the techtonic shift in wealth from West to East for years, buy without saying how it will happen:

Thus, it may be easier for China to take the first step in creating a global securities market.
The concept on how to do so was developed a number of years ago with former World Bank President, James D. Wolfensohn.


Here is an interview with Wolfensohn, in which he says gold is the ultimate store of value, and that the USD will still be around in the future, but he questions it's value

Beer Holiday said...
This comment has been removed by the author.
Beer Holiday said...

Perhaps the idea of China launching a global reserve currency backed by gold, oil, and other commodities explains

1. Costata's observation of China's rapidly increasing oil reserves

2. China's purchase of the LME

Beer Holiday said...

Zhou Xiaochuan, the governor of the People's Bank of China said "a national currency was unsuitable as a global reserve currency because of the Triffin dilemma"

Beer Holiday said...

Just to add that Freegold makes way more sense to me than a global reserve currency backed by commodities, but that is what China is saying they are implementing.

FOFOA said...

"The Bank of Korea has said that its current gold holdings are too small and that the BOK may buy more gold this year in order to diversify its foreign exchange portfolio which is exposed to the dollar.

Eugene Kim, chief investment officer at the central bank's foreign-exchange reserve management group, said its gold holdings are "too small" given the size of its forex reserves, which stood at a record-high of $310.87 billion at the end of May, and that the BOK might buy more bullion this year.

According to the BOK's latest data at end-2011, U.S. dollar-denominated assets accounted for 60.5% of South Korea's total forex reserves, while other currencies such as the euro, yen and pound made up the remaining 39.5%.

The BOK said that they will not be selling their euro assets but they will be diversifying into yuan denominated assets – Chinese debt and equities.

He said the BOK isn't currently investing in the Brics nations except for China, but it is closely looking for opportunities in other Asian and Latin American countries--such as Indonesia, Malaysia, Thailand, India, Brazil and Mexico--from a long-term perspective.

Mr. Kim said the central bank needs to boost its gold holdings even after two purchases last year that took the amount to 54.4 metric tons, or about 1% of the total reserves.

"Unlike other financial instruments, gold doesn't produce interest. But given its symbolic presence and usefulness as a safe haven in times of crisis, the BOK needs to buy more. We may do so this year," he said."


[Source]

Beer Holiday said...

If anyone is interested, I checked out the claim in the China currency paper that it has the support of Robert Mundell.

I'm not convinced, but I found a talk he gave in China last year, and here was his slide on what China could do:

If the yuan were made convertible a new and larger monetary area could be created side by side with the dollar and euro.

This would require a collective monetary policy based on monetary stability of the Dollar-Euro-Yuan (DEY) Area.

That looks a lot more feasible than backing your new "global reserve currency" with commodities.

PS the second slide of the talk is titled "Another look".

Beer Holiday said...

From Robert Mundell's talk:

The euro-dollar could then become the central pivot for a restored international monetary system.
A world currency, the INTOR, based the Eurodollar as an anchor pivot, could be created for the IMF system as a whole in which every member of the Fund would share.

KnallGold said...

Beer Holiday...and 1+1 equals 2!

As a wonderful side note, my new girlfriend celebrated her XX. birthday recently (of course a women's age is as secret as a central banks vault, so don't even THINK to try to find out!).

You might know that Goldbugs have a bit a low creativity when it comes to things like gifts (hello Topaz...) and she even asked for no gifts because of "enough useless crap laying around" etc etc. - yet I didn't wanna leave her party without one so I thought hey, a Goldcoin doesn't really use up THAT much space, so I gave her one in a nice small box with green velvet - it was verry well received!

Coincidentally the coin had the year of her beloved (but deceased) fathers year of birth....

Ah this useless, anti-social yellow heavy metal! Even capable of raising a few new eyebrows at the specific moment, as a totally unwanted side effect ;-)

DP said...

Ah this useless, anti-social yellow heavy metal!

Nothing anti-social about liberating a few hundred $ from the confines of your bank account and putting them back to work in the productive economy.

You're doing god's work!

Beer Holiday said...

@KnallGold

And 1+1+1 = 3 . €$¥C

I hope you and your new girlfriend are happy together.

I read your post as semi-allegorical FWIW.

Beer Holiday said...

IvoCerckel just tweeted:

China just announced they are making the yuan fully convertible .

Actually they are testing it first in their "special economic zone" Shenzhen, the port city where they first tested market capitalism 30 years ago.

That ticks one of their 5 criteria for having a tilt at the world reserve currency and/or launching Freegold . Only one criteria left...

RPG!RPG!RPG!

AdvocatusDiaboli said...

Back to the OP, maybe FOFOA wants to add that one:
http://www.youtube.com/watch?v=CNzIc8oZM4c

Beer Holiday said...

@KnallGold 1913?

Jeff said...

I just can't let go of the indian rupee story. Previous discussion covered the depreciating rupee and how this was forcing down indian gold imports. I thought that a rising gold price (in rupee) was a buy signal to indian housewives who feel wealthier and want to frontrun further depreciation. This story makes me feel vindicated:

http://www.business-standard.com/india/news/central-bank-likely-to-impose-curbsgold-coin-sale/478620/

The Reserve Bank of India (RBI) is likely to clamp down on gold coin sales by banks, amid rising bullion imports adding pressure to the current account deficit and weakening the rupee.

Sarah said...

Apologies for the spam of my previous comment- I thought my comment didn't post earlier so I kept reposting here. Anyways - new comment/food for thought:
------
At Nakedcapitalism - the article argues that we won't be seeing hyperinflation in the U.S. anytime soon, by citing differences between the U.S. and Weimar, and Zimbabwe:

"In the German example, the Germans had a huge foreign currency liability that it had to pay, meaning it could not make good on the liability by printing money....In the Zimbabwe example, taxes were again central. Unable to recoup enough tax revenue and with large foreign currency obligations and a loss of productive capacity, the government resorted to printing money in an environment where prices were rising.

So, hyperinflation has very specific preconditions that are not apparent in the U.S..

No foreign currency liability: The U.S. dollar is the world’s reserve currency so the U.S. can pay for trade goods in U.S. dollars. The U.S. does not have a peg to gold or some other currency which acts as a de facto foreign currency liability. And the U.S. government has substantially no foreign currency liabilities. All of the debt is issued in domestic currency.
Price pressures are still anchored: While commodity prices are rising, they are rising in all currencies, not just in USD. Moreover, their rise will create demand destruction before any hyperinflation could occur. Why? Unemployment is high and capacity utilization is low, meaning there are no inflationary pressures on that front to help push inflation higher before demand destruction sets in.
Currency revulsion has not set in: Tax compliance is high in the U.S. We are not talking about Russia, Greece or Argentina where government has had a difficult time in raising tax. Moreover, as the USD is still the world’s reserve currency, there has been no freefall sell off of dollars, nor do I anticipate any in the near-to-medium term."

Beer Holiday said...
This comment has been removed by the author.
Edwardo said...

I'd just like to note that it has been conclusively shown that a whole host of commercial banks have been systematically manipulating Libor. It's one deeply #&@%! up banking system we have wouldn't you say?

Beer Holiday said...
This comment has been removed by the author.
Beer Holiday said...
This comment has been removed by the author.
KnallGold said...

The euro is toast within 10 days, the euro will die if we don't stimulate growth, "the euro will go to hell when we don't do xy" said Monti, "there won't be eurobonds as long as I'm alive" said Merkel (now that lady has guts!) etc etc - this all looks like the Big Clash of the savers and spenders on this EU summit, doesn't it?

Well, I'd know a solution, if they only would listen...

enough said...

Bloomberg:

"the Finnish Minister for European Union Affairs, Alexander Stubb, just suggested that EU rescue funds (ESM/EFSF) could potentially partly guarantee Italy's and Spain's bonds if the two countries provide collateral. Such 'covered bonds' reduced his country's borrowing costs during an economic crisis in the 1990s, and now "could be a solution which would bring down the interest rates of Spain and Italy."

enough said...

Bloomberg:

"the Finnish Minister for European Union Affairs, Alexander Stubb, just suggested that EU rescue funds (ESM/EFSF) could potentially partly guarantee Italy's and Spain's bonds if the two countries provide collateral. Such 'covered bonds' reduced his country's borrowing costs during an economic crisis in the 1990s, and now "could be a solution which would bring down the interest rates of Spain and Italy."

milamber said...

Texan said...

"Milamber,

I wouldn't lose that deflation baggage too fast. At least deflation in things like wages and, yes, housing and other stuff we (in the US) own. And won't that be the pain trade for all those newly minted landlords trying to grab a bit of yield in the ZIRP world?"

Texan,

I look at it a little differently than that. Whatever bubble that gets blown will eventually pop. Because that bubble gets popped, it doesn’t mean that we have deflation. We just have a popped bubble.
That’s a Big difference between the two.
Wages will stay depressed because as FOFOA pointed out in this post, debt based consumption is not sustainable. But as long as Chen is willing to provide for the US and accept monetary plane tokens, then the US has to be willing to accept high unemployment. High unemployment will always keep wages depressed.

Those two points above, I think are the ones that most deflationists hang their hats on, but I don’t think that they really understand why they are happening. And as Costata showed us from Mish’s blog, they will trumpet a collapsed bubble & unemployment as overwhelming evidence of deflation when it is not. It is a consequence of a collapsed bubble in a particular industry. But as Victor pointed out, since the game is to keep the US dollar as MoE internationally for as long as possible, we will just inflate the next bubble.

Assuming that RPG doesn’t happen before hand, then my candidates for the next bubbles to pop (in this order) are:

1. Higher Education
2. Medical Care

Milamber

Michael H said...

Sarah,

While the US does not have 'foreign currency-denominated liabilities' like Wiemar Germany did, the US does have a massive trade deficit coupled with a massive US government budget deficit. These two deficits working together, the constant inflow of real goods from abroad to feed the USG, is the hyperinflationary threat to the USD.

I think FOFOA's recent posts 'Peak Exorbitant Privilege' and 'Inflation or Hyperinflation?' lay out the arguments.

Conventional wisdom says that a lower foreign exchange value of the USD should stimulate US exports, discourage imports, and narrow the trade deficit.

FOFOA argues that the opposite will happen: should the USD decline in forex markets, exports may rise some but imports will rise faster to feed the constant US government consumption in *real* terms.

Michael H said...

Sarah,

Can you post a link to the referenced article at naked capitalism?

Texan said...

Milamber,

Pretty much by definition, every industry is "in a bubble". And pretty much every industry it appears is going to contract, all at their own speed. FIRE is about to go through another huge contraction, you mention two others, state and local governments are shrinking - and now manufacturing is falling off. I think its arguable whether GDP overall has even probably been negative if they used a real deflator. I am reading stories that China is in a tailspin, and commodities confirm that. And Europe we know is entering region-wide recession, even Germany.


So, I don't have any issue calling all of the above something besides "deflation", but from where I sit at least, cash is king - for now. Prices of stuff going lower unless capacity is cut - either way same result, idling of economy at lower production level. And shiny cash equivalents of course.

Texan said...

And shiny cash equivalents are also king of course.

Texan said...

And if Proctor and Gamble and now Nike, among others, are any indication - there goes consumer discretionary. Let's see what happens with Apple. Talk about a bubble......

But yes, technically I agree it's not "deflation". I don't know what to call it frankly.

Sarah said...

Michael H,

Here is the naked capitalism article titled "What are the preconditions for Hyperinflation?

http://www.nakedcapitalism.com/2011/04/what-are-the-preconditions-for-hyperinflation.html

-----
I'm one of those less-economically literate people, so does this statement below essentially mean that Americans' high spending and consumption habits will keep imports to the U.S. high, while because U.S. is a service economy, U.S. exports very little anyways? --Demand for dollar will continue to wane, and eventually lead an rapid upshot in hyperinflation in U.S.?

"FOFOA argues that the opposite will happen: should the USD decline in forex markets, exports may rise some but imports will rise faster to feed the constant US government consumption in *real* terms. "

Sarah said...

Hmmm that's weird. I don't see the comment I posted above that Michael H replied to me on. Here it is again ---

- Apologies for the spam of my previous comment- I thought my comment didn't post earlier so I kept reposting here. Anyways - new comment/food for thought:
------
At Nakedcapitalism - the article argues that we won't be seeing hyperinflation in the U.S. anytime soon, by citing differences between the U.S. and Weimar, and Zimbabwe:

"In the German example, the Germans had a huge foreign currency liability that it had to pay, meaning it could not make good on the liability by printing money....In the Zimbabwe example, taxes were again central. Unable to recoup enough tax revenue and with large foreign currency obligations and a loss of productive capacity, the government resorted to printing money in an environment where prices were rising.

So, hyperinflation has very specific preconditions that are not apparent in the U.S..

No foreign currency liability: The U.S. dollar is the world’s reserve currency so the U.S. can pay for trade goods in U.S. dollars. The U.S. does not have a peg to gold or some other currency which acts as a de facto foreign currency liability. And the U.S. government has substantially no foreign currency liabilities. All of the debt is issued in domestic currency.
Price pressures are still anchored: While commodity prices are rising, they are rising in all currencies, not just in USD. Moreover, their rise will create demand destruction before any hyperinflation could occur. Why? Unemployment is high and capacity utilization is low, meaning there are no inflationary pressures on that front to help push inflation higher before demand destruction sets in.
Currency revulsion has not set in: Tax compliance is high in the U.S. We are not talking about Russia, Greece or Argentina where government has had a difficult time in raising tax. Moreover, as the USD is still the world’s reserve currency, there has been no freefall sell off of dollars, nor do I anticipate any in the near-to-medium term."

JR said...

Hi Sarah,

I gonna post a bunch of stuff from FOFOA's Moneyness dealing with Weimar (and the Naked Capitalism worldview in general) I think you should just read the whole thing.


The Debtor and the Junkie

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

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

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

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

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

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

JR said...

cont.

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

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

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

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

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

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

Michael H said...

Sarah,

"I'm one of those less-economically literate people, so does this statement below essentially mean that Americans' high spending and consumption habits will keep imports to the U.S. high, while because U.S. is a service economy, U.S. exports very little anyways? --Demand for dollar will continue to wane, and eventually lead an rapid upshot in hyperinflation in U.S.?"

Close.

The first part should read "The American government's high spending and consumption habits will keep imports to the U.S. high"

Still, the spirit of what you wrote is nearly correct since what has been happening since 2008 is that, as the American private sector cuts back, the American government is spending more to compensate.

The second part is essentially correct, that the US real economy has been hollowed out and will not turn around immediately.

costata said...

Hi Sarah,

This discussion about exports misses a few critical facts. US exports have increased since the onset of the GFC. I have seen analysis which places America's share of international export trade at levels (high percentage) not seen since the 1970s.

The US dollar has depreciated against other currencies over the past decade. In recent times, for example, the Yuan is up around 30 per cent against the dollar.

None of this has done a scrap of good in reducing the US trade deficit. In the posts that JR and others cite FOFOA provides a breakdown showing that the private sector is not driving this process. It has already retrenched - reduced its "lifestyle" as discussed by FOFOA. This process is being driven by the government sector - one of three players in this game called "economics" as FOFOA may remind us at some point.

All of this talk of "why it can't happen" (HI) cites many dubious claims. For example "demand destruction". For people on food stamps perhaps? What about "supply destruction" from companies going broke and exiting various sectors? At some point prices cannot fall further ie. when they fall below the cost of production people/companies stop producing. If grain "prices" won't permit a farmer to plant it kind of makes a mockery of the concept of a net producer BTW - productivity and opportunity are two sides of the same coin.

One of the supply and demand related truisms of economics is that the cure for high prices is high prices. In a free market that is true, as is the statement that the cure for low prices is low prices. Both serve to balance supply and demand in the physical plane by sending price signals to producers. But in markets where prices have become divorced from the natural supply and demand expression of producers and consumers through bid and offer then the speculator reigns supreme. Price discovery is frustrated and warped so that prices either tell us nothing or outright lies about fundamentals.

So this is the "world" economy we Westerners live in today. A world where the monetary plane is marked to myth and it mediates all (or seeks to) transactions in both the monetary and physical planes. There is a lot of truth in the claim that we no longer have markets "only interventions". And financial "innovations" (AKA fraud) masquerading as inventions I might add.

If the only way to eat (consume) is to hit ctrl+P then print it shall be. Not yet awhile. The bag of tricks is not quite empty yet but we near the bottom of the bag IMVHO.

PS. I note from reading the comments that you ask good questions Sarah and raise pertinent issues. No better starting points in my opinion. I would encourage you to continue.

costata said...

Off topic. This article presents some interesting observations about RE but I present it for another reason. It provides an insight into the nature and art of the seasoned bullshitter, to whit:

“Inventory in Orange County CA is super low. During the top of the housing scare, the city that my office is located in had almost a 6 month supply of unsold homes. Currently it is down to just 45 days!” reported a real estate agent in California.

My emphasis, of course. Did you grok that people? The USA had a housing "scare" AKA I almost had to surrender the lease on my beemer until the cash buyers showed up and the foreclosure pipeline started delivering the goodies.

http://www.upi.com/Business_News/Real-Estate/2012/06/26/Move-in-ready-foreclosures-dry-up/3171340715456/#ixzz1z9DVXIEi

And this gem apparently from a Florida realtor:

Appraisals are another factor keeping a lid on prices. “Appraisals that are less than agreed-to contract sale price are inhibiting natural valid appreciation,” complained an agent in Florida.

The prospect of having your ass sued off tends to temper the enthusiasm of appraisers old chum.

Cheers

Wendy said...

I've been away, and am just starting to read this post: I have alot of catching up to do.

My first grandchild was born June 21 at 11:55pm via emergency c-section, he was 3 weeks over-due and 9 1/2 lbs. it was a pretty intense weekend. His name is Jackson :), he is pretty cute!

costata said...

And while I'm feeling self indulgent a little more off topic material. Very nearly a text book example of how you can use the same data to support arguments that are 180 degree opposites (from Charles Hugh Smith):

http://www.oftwominds.com/blogjune12/housing-bottom6-12.html?source=Patrick.net

costata said...

Wendy,

Congratulations!! (I hope your grandson's time management problem is resolved over time.)

Cheers

Wendy said...

Wow, that post sounds like I' reading a preschool story book ..... I'm really tired.

Wendy said...

Thank you costata ;)

costata said...

Gee whiz deflationistas, what is the price of exchange traded foodstuffs whispering?

http://www.gracelandupdates.com/images/stories/jun12/2012jun26corn1.png

From Stewart Thomson's latest missive to the masses:

The major media may be playing down the skyrocketing prices of corn, wheat, and soybeans, but the price charts are telling another story. Note the vertical move by corn. It has blasted up and out of this "super-wedge" chart pattern.

Bullish on gold I see as well after catching up with his post of June 19 vintage. How devilishly contrarian given Martin Armstrong's dire warnings to the goldbugs and his ongoing torrent of prognostications on all manner of things. I see similar numbers from Thomson on gold to Jim Sinclair's as well.

Edge of the seat stuff for the faint of heart leveraged speculator. Who will triumph in the battle of the pundits? Boredom of course for the strong hands with an eye to history and the lessons of political machinations.

I can't resist observing that Martin is perilously close to falling foul of this candidate for the position of costata's fourth dictum:

Never make an appointment to see a clairvoyant with whom you need to make an appointment.

Martin is spreading himself a little too thin in the punditry avocation IMVHO. "Punding" a little too broadly. Perhaps he aspires to relive the glory days of jetting into Sydney and other towns in the 1980s to advise the "corporate raiders" as they were called back then on how to asset strip companies, load them with debt and hollow out economies. Bonding with Bondy and Big John in the process I imagine.

More recently these carpetbaggers of earlier times called themselves leveraged buyout practitioners or private equity. Plus ça change, plus c'est la même chose!

costata said...

Attention Reluctant Silverbugs

(With the usual caveat about the wheels not falling off.) The opportunity to roll may be approaching in the next few months and, to boot, go out on a high note before the curtain falls. That area of key support around $24 to $26 (identified by none other than Martin Armstrong himself) seems to be holding quite nicely.

Our "equal opportunity" manipulators in the paper gold and silver markets may yet have another surprise in store for the punters. So an exit at a much more favourable GSR may be in prospect. And, as always, I'm not calling tops or bottoms - just a good old fashioned pump and dump.

And what is a brazen prediction without some equally brazen numbers to go with it? Let's say somewhere above US$55 for silver and for those with nerves of steel and exquisite timing before liquidity, er, evaporates, a sub-40 GSR.

costata said...

What if "they" don't print like a fiend?

Surely Mario Draghi the GS "secret agent" will deliver for his handlers? This essay from Pater Tenebrarum apparently begs to differ with this notion. For your consideration (my emphasis below):

http://www.financialsense.com/contributors/pater-tenebrarum/we-wish-you-a-long-life-is-a-hyper-volatility-event-coming

When push comes to shove, so the generally held view, then 'Germany will relent', or 'the ECB will print'.

But what if they don't, and why is everybody so sure of this? Dalio makes an important point about the ECB, which we briefly mentioned yesterday as well – namely, that its governing board is also split into major factions. Nothing will get done that has not the overwhelming support of all of them.

Moreover – and this is our opinion, not a point specifically mentioned by Dalio – the ECB's governing council will simply not do anything that could be interpreted as a breach of the central bank's statutes.

Mario Draghi himself has made that crystal-clear not on one, but on several occasions. He even went as far as insisting that it is not the merely the letter of the law, but the spirit of the law that is to be adhered to. In short, don't expect any 'clever legal tricks' from the ECB.


Then again perhaps he won't deliver. Apparently he, and the board, have obligations governed by "treaty" and "statute" - that sounds serious to your old Uncle costata.

http://www.ecb.int/ecb/orga/accountability/html/index.en.html

From the document found at the above link we have yet another link to this:

The Accountability of the ECB

http://www.ecb.int/pub/pdf/other/pp45_57_mb200211en.pdf?24afe9e90d1f0a9d583069fd513e3e72

Where we find this, for example, with my emphasis:

As illustrated in Table 1 below, the
maintenance of price stability is an explicit,
though not the only, objective of the ECB
and the other three central banks referred
to in this article.

While the Treaty also assigns a further objective to the ECB, namely that of supporting the general economic policies in the Community with a view to contributing to the achievement of the objectives set out in Article 2 of the Treaty – where this is possible without prejudice to the objective of price stability – it does so with clear prioritisation.


So I guess it's over to Ben Bernanke to reinflate the world! Sadly not everyone thinks this is even possible any more but I guess we'll see who is right in due course.

TontoD said...

@Sarah

The problem with Nakedcapitalism and Pragcap (MMT/MMR) is that when the word hyperinflation is mentioned, they immediately think Weimar-style or Zimbabwe-style hyperinflations that run currency up to the trillions.

The definition hyperinflation itself varies from one textbook to another, be it 50% a year or 50% a month. However, a 3-to-1 devaluation is still hyperinflation none the less. As FOA once said "the Ruble stayed in use and function with 6,000% inflation. My god they still use it now.". Indeed, Wikipedia has a long list of examples of hyperinflation that didn't go up to the trillions.

Yet if you go through MMT/MMR with a fine-toothed comb, they couldn't rule out this type of hyperinflation. It's just that they don't acknowledge it as "hyperinflation".

AdvocatusDiaboli said...

costata,
thanks for the link to the ECB, the first sentence was enough to skip the rest of that propaganda crap:

"The accountability of the ECB and the transparency of its monetary policy..."

Oh great!!!

TRANSPARENCY???? WTF. Where did the last 1trillion went? Where is the TRANSPARENCY?

ACCOUNTABILITY???? Oh, is that, if you print up for whatever trash some buddy hand over to you? Is that buying trash bonds, despite the nobailout clause and hiding those in the books? WTF are those crooks talking about? Who is accountable for the price stability? Will those crooks pay for the people price difference in the supermarket? You read the latest version of the ESM? UNLIMITED IMMUNITY FOR ITS MEMBERS!!! Wow, thats accountability.

One thing: If any german citizen would handle his tax declaration or trade accounts with such "transparency" and "countability" he would either end up in jail or be fined to infinity.

costata said...

AD,

You're such an idiot, Skippy. I had to laugh when I read your comment of June 29, 2012 1:06 AM. On reflection I realise I almost (but not quite) missed you during my recent preoccupation with end of fin year matters.

From an addendum to that Pater Tenebrarum post I linked earlier which had AD skipping everything after "the first sentence":

An unidentified troika official told the daily: "While they (Greek government) legislated rules to reduce the number of civil servants, they were bringing people in through the window." The official added that over 12,000 people were hired by local councils even as a cost-cutting initiative merging municipalities was underway.

Zannias' report to the new government coalition after June 17 elections allegedly reveals that although over 53,000 civil servants retired in 2010, the overall number of state staff was almost steady at 692,000 people, To Vima said. In this case, most of the vacancies were filled immediately, the daily said.


In the interests of wide accessibility for readers let's look to Wikipedia for a crucial fact that has escaped Skippy's attention:

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

Treaty Establishing the European Stability Mechanism

According to this treaty, the European Stability Mechanism will be an intergovernmental organisation under public international law and will be located in Luxembourg.

I'm suspecting that the word "intergovernmental" implies some involvement from governments (and therefore politicians) in the establishment of the ESM. If so, "unlimited immunity", would not surprise me at all. They're shifty critters these politicians.

So stay tuned Skippy there'll be plenty more opportunities for you to skip everything after the first sentence and then post a comment.

AdvocatusDiaboli said...

costata,
calling me skippy, but just looking at the english most shortest version of the wikipedia description is funny.
For everybody interested in more details (specially summed up critics), read the german wiki version.
Anyway, for more interested read the complete original document about the ESM, it is also available in english: costata you dont need to be "suspecting government influence", it is stated directly what the purpose is:
"The ESM will cooperate very closely with the IMF in providing stability support. The active participation of the IMF will be sought, both at technical and financial level."

Texan said...

Costata,

FWIW, the move in grains is entirely - 100% - based on extreme heat and drought in most of the Easterm corn belt. And this next week temperatures are going to exceed 100 degrees farenheit, at a critical point in time for corn development. The USDA this week gave the crop it's worst rating in over 20 years. A few rains will bring the price way down, but if we don't get rain, I think the price moves a lot higher.

The rest of the CCI looks awful, with the exception of US nat-gas.

Beer Holiday said...

@Costata - Great finds.

@AD Why don't you try to look at the world through some different eyes for a change. Maybe Robert Mundell's eyes, the guy who created the reality you live in.

Kudos to whoever posted that link first, it really changed my world-view.

AdvocatusDiaboli said...

BH,
funny that you say that: Jep, take a look. Never ever there was such a flood of rules and regulation before in human history than at the time the EU was established. And even today the rules and regulations are heavily increasingly inflating every day.
So all I can say to your link: Obviously that guy was a moron.

Anybody who lives in the EU and runs a business for a couple of decades will conform to this.

And the other economical stuff claimed in the article: It did not happen since the start of the Euro since over 13yrs ago. In fact, it did the opposite and somebody with some common sense and life experience can easily tell that it will not happen in the next 13yrs.

AdvocatusDiaboli said...

BH,
to explain why he was a moron:

"He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing."

Okay, he does not like to have democracy decide about it. I can understand, that "would" be a good approach. But now a quick REALITY check: Who decides about it now?
Jep: The EU. Who is that? Not democracy, but even much worse: State employees (morons qualifited by brownnosing) paid by lobbyists (paid shills). Those state employees are not accountable towards their nations and the lobbyists are not interested in an efficient market, but exclusively to the industries that pays them: Making up funny regulations, so that they can sell new stuff nobody wanted in the first place or changing the rules so there infividual client has a market advantage.

That's the way it rolls. Why was Mundell so far off? Probably because he is just another economist playing in his illusion sandbox.
Greets, AD

Blondie said...

The economic architecture Mundell had a hand in shaping has not quite yet come of age, a distinction those distracted by political sideshows are incapable of making.

AdvocatusDiaboli said...

"a distinction those distracted by political sideshows are incapable of making."

You are telling me, that the EU is just a political sideshow?
I can not think of anything that is not yet regulated by the EU in my life. Can you?
But hey, thats just a sideshow....

So the Endgame will be either an undemocratic totalitarian EU-Dictatorship over the nations, similair to the UDSSR or Jugoslavia, or if not heavily enforced enough by the rising police state, a complete collapse of the EU, probably with civil wars (if you havent been there, I suggest to take your next holiday in some Parisian banlieues.)

Hey, but that's just a sideshow. Thanks alot Mundell.

Blondie said...

My comment was not for your benefit (because that really would be naive), but simply another perspective for those who may wonder what it is that your sound and fury signify.

Beer Holiday said...

@AD "Thanks alot Mundell."

Please take care of your "alot" they are a very special creature.

PS I'm a lazy Westerner who speaks no other language well.

PPS How is "looking at things through other people eyes" going for you?

Beer Holiday said...

AD - I'm learning Mandarin as fast as I can FWIW.

AdvocatusDiaboli said...

Blondie,
such talk of: "the greater good will arive", "you just dont understand", "justice will come", "this is the overall plan", "the final stand".....

Sorry, but phrases like that, most of the time you hear from deeply religous people or very similair minded followers of some doctrine announced by people like Hitler, Honecker... when things are already headed of the edge. Anyway, amusing those are....

Beer Holiday said...

@AD Rubbish - to compare Blondie to Hitler is an insult to history. How dare you...

AdvocatusDiaboli said...

BH
no, only compared to the propaganda of the blinded followers of such.

Anyway, the news today: more bailouts, euros to come so the pigs can party....

AdvocatusDiaboli said...

and this is what the government tells the german public (published by the "consumer department"):
http://www.verbraucher.de/UNIQ134097074600670/goldkauf-sichere-anlage-oder-riskante-zockerei

Questioning "is gold a secure asset or risky gambleing?" and giving the following answers:

Gold is a very risky asset.
Gold is expensive.
Must not hold it at home, but deposit boxes are expensive.
Currency risk.
No yield/dividend.
But even in case you still want to invest, better buy paper gold or mining stocks.

Okay, so that's what the same german government, that just let the junkies have more alcohol....

Beer Holiday said...
This comment has been removed by the author.
AdvocatusDiaboli said...

"and think what the REAL economic powers want"
Who? Comm'on, just let us know WHO in person or corporation or government?

oh yes, the "giants", thats what the 10oz. keyboard commando from mummies basement know for sure.

Beer Holiday said...

AD - I retract that statement. End of argument. Victory is yours! - enjoy your model.

Edwardo said...

The latest stick save.

http://www.bloomberg.com/news/2012-06-29/u-s-stock-futures-gain-after-eu-deal-to-stem-debt-crisis.html

And here I thought yesterday's "inexplicable" late day moonshot in shares, after plummeting for the better part of the day, was just down to end of quarter shenanigans. Clearly there was more informing the ramp than that. Certain players got advance word on the aforesaid stick save, methinks.

Pat said...

This entire " euro" isssue, while a pertinent side trail to meander about on occasion, is still a side trail and hardly worth being dragged onto again and again by the village idiot, solely because it is his only topic.
If say abortion, another emotional issue for some, was somehow a side trail would we allow ourselves being dragged onto that trail merely because some advocate of one side of the position wanted to screetch at us how wrong the other position was? I rather doubt it.
FOFOA has made it clear numerous times the existence of the euro either way is not going to affect Freegold ultimately, so it's a side trail. A side trail the village idiot wants us to spend all of our time on.
Time is money- choose wisely.

Michael H said...

Sarah,

A few more comments regarding the post you linked:

"No foreign currency liability: The U.S. dollar is the world’s reserve currency so the U.S. can pay for trade goods in U.S. dollars."

The flip side is that the US gov can print as many USDs as required to pay for the goods it consumes.

"The U.S. does not have a peg to gold or some other currency which acts as a de facto foreign currency liability."

As FOFOA wrote, it is the trade deficit feeding the US government budget deficit that creates a 'real goods' liability for the US gov. Should prices rise, the US gov will attempt to outbid both the US private sector and the rest of the world to get the necessary goods.

"And the U.S. government has substantially no foreign currency liabilities. All of the debt is issued in domestic currency."

The flip side is that all the US debt will be devalued by heavy inflation (incentive to inflate).

"...(commodities' price) rise will create demand destruction before any hyperinflation could occur. Why? Unemployment is high and capacity utilization is low, meaning there are no inflationary pressures on that front to help push inflation higher before demand destruction sets in."

The US gov will not face the same demand destruction due to higher prices, since they will be able to print the necessary USDs.

"Currency revulsion has not set in: Tax compliance is high in the U.S. We are not talking about Russia, Greece or Argentina where government has had a difficult time in raising tax."

The 'tax compliance' that the US gov needs to worry about is not for the 'overt' tax on its own citizens, but on the 'covert' tax on the rest of the world. This covert tax is both in the form of inflation on US debt and dollars held abroad, and on the necessity of supporting the dollar system by purchasing the US debt flow.

Once the rest of the world stops paying this 'covert' tax then it is all over.

"Moreover, as the USD is still the world’s reserve currency, there has been no freefall sell off of dollars, nor do I anticipate any in the near-to-medium term."

A sell-off of dollars is not required for US H-I; all that is required is for the rest of the world to stop 'mopping up' the excess dollar flow out of the US, i.e. to stop paying the covert tax.

costata said...

Michael H,

You clever devil:

The 'tax compliance' that the US gov needs to worry about is not for the 'overt' tax on its own citizens, but on the 'covert' tax on the rest of the world.

Sooo right! Make a mini-me-Michael-H and drive around on that modified golf cart. Wayne eat your heart out.

costata said...

Skippy,

You're a busy idiot I'll give you that. At June 29, 2012 2:40 AM:

BH, funny that you say that: Jep, take a look. Never ever there was such a flood of rules and regulation before in human history than at the time the EU was established.

Th Old Testament must f%^k with your head big time. if rules bug you

KnallGold said...

Hmm, BCBS/BIS considering Gold to become tier 1 asset?! Biggest news since 1971, pump and dump, maybe, at least "spot the dog" has suddenly gotten fire under its foots...

http://www.resourceinvestor.com/2012/06/28/the-next-leg-up-for-gold-prices-draws-near#.T-zvDCFVlMY.twitter

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