Thursday, October 11, 2012

Debriefed #4 – DP

I must warn you that this interview was completely unplanned and spur-of-the-moment. It was very late at night here, and I must admit that I'd consumed some wine. I was certainly in no shape to be driving, but I was doing a sharp job of trying to convince DP to be interviewed. So sharp, in fact, that DP wrote "What I am thinking is 'how about now and get 'er done?'" Five minutes later we were talking! So please appreciate the spontaneity of this interview…


Peter said...



ampmfix said...

all right!

Woland said...

Curiously refreshing! Lasts the whole interview through!

Commander Whitehead

DP said...

Schweppervescence! Of course!

Chin chin

Woland said...

You know, you made one observation, en passant, which
I think will resonate with many Fofoa readers. Once one
has acquired the view of Another/FOA from the commanding
heights, as explained and expanded on by Fofoa, the serious
sounding talk of 98% of the "experts" and knowledgeable
people can be seen for what it is, or what Mr T, another gold
advocate, aptly describes as JIBBER JABBER. Prozit!

Pat said...

Word is spreading...

Harpua said...

"Savings price currency"

There is much wisdom in this statement. Perhaps we can more generally say, "stock prices flow". In the time I've had to consider that, I have found innumerable endeavors which are governed by this rule.

JulesFlying said...
This comment has been removed by the author.
matrixsentry said...

From the Guggenheim on Gold link at Zerohedge:

The possibility of an upward revaluation of the official price of gold should not be minimized. Although I do not anticipate or advocate a return to the gold standard, an upward revaluation of gold by one of more central banks is possible. If the Federal Reserve, for instance, announced that it stood ready to purchase gold at $10,000 per ounce, the gold-coverage ratio of the dollar would return to 75%, roughly where it stood at the beginning of Bretton Woods. This could restore confidence in the value of the dollar if its ultimate role as a reserve currency were to be challenged.

Gold’s industrial use only represents .03% of global GDP. Therefore, its upward revaluation would not cause a significant economic shock associated with rising input prices. Likewise, a higher price would probably not affect the behavior of the world’s largest holders, which are central banks and sovereign wealth funds.

Prescient investors should consider making allocations to gold and other precious metals as a hedge against the erosion of purchasing power of the dollar as well as for the potential upside from positive market price appreciation or a possible intervention at the policy level. Despite the sizable appreciation in gold prices in the last decade, gold is far from overvalued. This makes gold a low-risk investment and leads me to believe that gold will never again trade below $1,600 an ounce.

The Precarious Balance Continues

Almost 70 years later, the global monetary system is still living in the long shadow of Bretton Woods. Triffin’s views are as relevant today as they were when they were first published more than half a century ago. The current paradox in the global monetary system is as unsustainable as it was under the original Bretton Woods Agreement. The exact timing of an inflection point for Bretton Woods II remains unclear, and although it is not imminent, its eventual occurrence is virtually certain. As was the case in the 1960s, a reversal of the acquisition of Treasuries by foreign central banks will cause a major shift in global capital flows and insecurity about the value of dollar-based assets, particularly Treasuries.

I think this blog is going places as the concepts discussed here continue to gain traction.

Bjorn said...

Reading the Guggenheim piece I just have to echo FOFOA from "Kicking the hornets nest" i think it was?: The term Precious Metals has GOT to go!

DP said...

AD is one of the few proud holders of a FOFOA Ban Hammer, so I thought I would share this comment of his in conversation with Motley, which I'm sure you will agree is an interesting observation and thanks for sharing it with us, AD.

matrixsentry said...

Nice debrief DP and FOFOA!

DP, thought you might hit that grape in an effort to match planes with FOFOA. What a tease you are.

FOFOA, I say the curtains must stay. This isn't some high falutin blog populated with high nosers. We want the common man. Idea: do you debriefs in your garage!

Peter said...


Debriefs in da briefs?

Wendy? JoJo?

DP said...

Moar from the ZH Guggenheim post:

The possibility of an upward revaluation of the official price of gold should not be minimized. Although I do not anticipate or advocate a return to the gold standard, an upward revaluation of gold by one of more central banks is possible. If the Federal Reserve, for instance, announced that it stood ready to purchase gold at $10,000 per ounce, the gold-coverage ratio of the dollar would return to 75%, roughly where it stood at the beginning of Bretton Woods. This could restore confidence in the value of the dollar if its ultimate role as a reserve currency were to be challenged.

This is based on the size of the Fed's balance sheet - ie: the USD currency liabilities that are already in existance. It doesn't say anything at all about all the promised USD currency liabilities that are due to asset holders around the world, when their bonds reach maturity — just think of the existing USTs in the world waiting to pay out dollars some day in the future, let alone any other kind of dollar-denominated bonds. Will they be rolled over into more bonds, avoiding the need to finally print & settle? This is to say nothing of any derivative or Eurodollar payouts to come in the future, which are not currently appearing on the Fed's balance sheet.

I don't think this gold-coverage ratio based on today's Fed balance sheet means very much. How about you?

jojo said...

lmao@ the Graeber comment :)

JR said...

Re: MBS and the FED, The FED holds to term and reinvest the principal in treasuries. So no need to foreclose.

Further, under article 14 of the Federal Reserve Act, they can only own certain assets, aka they can't actually own homes, just derivative financial assets like GSE issued debt.

Also, they are the FED, and the USGs spending will ensure the FED keeps the financial markets nominally lubricated. The small and dwindling amount of MBS will quickly be dwarfed by other much bigger numbers.

Nickelsaver said...


I must say, you are exactly as I pictured you would be. Although a little disappointed you chose not to "dress" up. Nevertheless, you are the consummate entertainer, loved it!

A curious thought, I'd love to see a skype conversation between you and RJP. Although, I'll have to check the computer to see if I can run the British and Southern accent filter at the same time.

Woland said...

For several minutes today, Freegold arrived.
On Marketwatch, as of this moment:

Oil: $9245 (x100)
Gold $$17,724 (x10)
Silver $34,450 (x 1000)

catch it while you can: it may still be there

Robert Mix said...

WARNING! WARNING! I have found drinking and (just) emailing itself to be dangerous...

I always liked "foe-foe-uh" better, it's easier to say (fewer syllables, less work than F.O.F.O.A.)! Do some of you remember those multilingual plastic cards that many airplanes used to have, say 30 years ago? It was always English that had the shortest paragraph, and German the longest. My theory is that Germans have been cranky because it is HARDER for them to say what's on their minds!

NO, I have not been drinking at 11:19 AM US ET.

FOFOA, I agree w/ matrixsentry: Keep the curtains!

ampmfix said...
This comment has been removed by the author.
Dante_Eu said...

The best debriefing so far!

RJPadavona said...

Great interview, DP!

And yes, you do look like a British pop star. However, more like Depeche Commode than those other gumps, eh? :D

Although I was hoping to be the butt (pun intended) of a few prison rape jokes at my expense, I guess you couldn't resist the big nose. It's hypnotic, isn't it? .......You should see my grindstone ;)

As I said, great interview. But why would I have expected anything less? After all, you perform this way!


Biju said...

I could not understand 50% of what DP and RJP were talking. Accents, I am not familiar with.

DP said...

It's true, I will dance to anything. All it takes is enough of that wine.

Apologies, Biju. What we're saying is probably much better in your imagined version anyway though, if that's any consolation…

RJPadavona said...

Sorry, Biju and anyone else who couldn't understand me.

Believe it or not, I actually made a conscious effort to speak as plain as possible because I knew people would have difficulty with my accent. If you heard me speak when I'm not talking to "outsiders", you wouldn't be able to understand 95% of what I was saying:

Michael dV said...

Precious Metal
see if you leave off the 's' all is fine

Biju said...

No Problems DP & RJP.

I remember during my initial days in USA and ordering a burger at college food court. The man asked me "for here to go". I could not understand, though he kept repeating that several times. The line was long with impatient hungry stomachs behind me. After I heard the words clearly, I did not know the meaning. Finally I just nodded my head and he made it "for here"... there are several stories like this.

Victory said...

Wow I love the debriefing interviews, brilliant!  I really enjoyed your last post 'Think like a Giant' hope it's ok to post a question here.
T: how does the process of MBS purchases help to fund the Gov? The FED is purchasing these securities, but wouldn't this fund the banks as opposed to the Treasury? As funding the Gov't is really the bottom line here, how do these purchases work towards funding the nations yearly deficits?
FOFOA: ‘All the money the Fed prints for MBS purchases will be cycled through the USG Treasury account (spent into the economy by the USG). At least an amount equal to the issuance of new Treasuries…’
…after reading this post, and correct me if I’m wrong, I believe what you are saying FOFOA is that domestic banks are going to be buying Treasuries with the base money they receive from selling MBS.
FOFOA: ‘So what the Fed is doing is injecting actual base money flow into this paper asset "arena", since the physical plane earners (both foreign and domestic) are not coming in (in sufficient quantity)….’
FOFOA: ‘The big banks have plenty of reserves right now so the only thing limiting new mortgage creation is demand from borrowers, not supply of base money reserves. And mortgages are created "out of thin air". Treasuries are not. Treasuries require 100% base money flow. And that's what the Fed is injecting into this "arena".’
…this is were I was thrown off a bit because if the banks have plenty of reserves/base money right now then why is the Fed’s injection of more reserves/base money via MBS purchases the solution to steering these banks into purchasing Treasuries?

victorthecleaner said...

Can the Fed buy gold at $10000 per ounce, and then everything would be fine again? Return to Bretton-Woods? This sounds a lot like Jim Rickards.

So what is the problem here? If I were China and the U.S. would set what is in effect a new official gold price at $10000 per ounce, I would sell my $3000bn in bonds for cash and then go and buy gold. I would get, what, 9330 metric tons. Yeah! That's the jackpot, isn't it?

This tells you that the gold price in dollars would go a lot higher immediately.


Nickelsaver said...


What do you think of the interviews?

JR said...

Good stuff Victory,

Think more like this:

A primary dealer is a firm which buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities.
In the United States, a primary dealer is a bank or securities broker-dealer that is permitted to trade directly with the Federal Reserve System ("the Fed").[2] Such firms are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions.

The PDs have to bid - so either there existing reserves get drained or they use newly created reserves.

Okay, say a commercial bank expands its balance sheet for the purpose of buying Treasuries. It has created new liabilities which it has transferred to the Treasury. The Treasury "bank account" is at the Fed, so those liabilities get cleared with 100% reserves. In theory, the commercial bank which expanded its balance sheet now owes (has liabilities to) the USG's bank, which is the Fed. But the commercial bank also has an account at the Fed, its reserve account, consisting of liabilities of the Fed to the commercial bank, its reserves.

So there's a 1:1 (non-fractional) correlation between the new asset and the number of reserves required to clear that transaction. In other words, if the commercial bank bought $1,000,000 in Treasuries, its reserve account would be debited $1,000,000 in reserves which would be transferred over to the Treasury's account. The commercial bank liabilities would all be cleared. Then when the USG spends those dollars into the economy, the reserves would reenter the commercial banking system and the liability would reappear at whatever bank the USG stooge deposited his check. That bank liability would now be a liability to the Stooge, until he spends it passing it on to someone else.


But all spending that goes through the government carries a unit of base money (reserves) with it. When the USG spends, some stooge gets a paycheck. When he deposits that paycheck, the bank gets a liability (to the stooge) and a reserve (from the Fed) added to its balance sheet.

So, in reality, our bank at the top did not "expand its balance sheet". It simply swapped a reserve of one kind (base money) for a reserve of another kind (Treasury). It was simply an asset swap. So the money buying the Treasuries was the bank's base money reserves, not pure credit.

"just not why the money buying treasuries cannot be credit."

Imagine a bank with insufficient reserves trying to buy Treasuries with only its credit. It will transfer its liabilities to the Treasury's account at the Fed and now its liabilities to the Fed will exceed the Fed's liabilities to the bank. This bank will now be essentially reserve-less. In fact, it will be in a position of negative reserves. The only way for it to get reserves back would be for the Fed to buy some of its assets. So now, who actually funded the Treasury in this case? The Fed did by creating new reserves for the bank which bought the Treasuries.

JR said...

Hi Victory,

Regarding "the bansk have plenty of reserves," what about "the ongoing deleveraging within the banks?"

This deleveraging is competing with the Treasury for spendable reserves, which is another reason the Fed has to inject new reserves.

Victory said...

...k, so they have 'plenty,' as in enough to leverage credit for mortgage issuance, but not 'plenty,' as in enough to fund UST auctions. Is this the gist of it



burningfiat said...

Excellent interview FOFOA and DP. Just as bullshittin' as expected :D

Robert Mix, your comment reminds me... One I'd like to see interviewed also: Robert Mix, the Bearing guy!

M said...

So this is the guy I had that lively discussion about the Thai Baht with. I see he needs 9 foot ceilings in his house just to fit his ego in. JK..

I wonder if JR has 9 foot ceilings too...

DP said...

It's only 8'11". ;)

Woland said...

Does that mean that you just "keep it at 8'-11"", or, like in
Spinal Tap, can you set it to 11' if you want ??

Wendy said...

Whew, I think I'm OK .... just measured, and mine are only 8'7" :D

shortrib62 said...

VTC wrote:

"If I were China and the U.S. would set what is in effect a new official gold price at $10000 per ounce, I would sell my $3000bn in bonds for cash and then go and buy gold."

I don't think the Chinese would find a buyer for their 300bn in bonds, at least not at an decent price.

milamber said...

I found this interesting...

Speech with Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the Foreign Correspondents Club of Japan, Tokyo, 10 October 2012.

While the whole speech is worth the read, this is the 2nd to last para:

"The Eurosystem has decided to take firm action when it considers that these interest rates
do not reflect a genuine credit risk differential, but rather unfounded fears about the reversibility of the euro. Because at that point, the effectiveness of the single monetary policy is clearly jeopardised: the key interest rates that we set no longer feed through to the real economy in the same way in all countries via the bank lending channel – which is a crucial channel in the euro area given the predominance of intermediated financing. In order to fulfil our mandate of maintaining price stability, our monetary policy impulses need to be transmitted homogeneously across the whole area. This is why we decided to create a new instrument: Outright Monetary Transactions. The idea is to have a credible backstop to counter unjustified increases in sovereign yields. This backstop must naturally be accompanied by strict conditionality to guarantee that the country concerned makes effective progress towards a more robust economic situation."

Contrast that with Bernanke's three mandates (or is it 4 now considering that he has to keep all the derivatives humming too) & it really hits home (again) the differences between the ECB & the Fed.


Wendy said...

DP/Cracky, I'm very glad you agreed to do that, it was tons of fun to watch ;)

Bjorn said...


Yes. I probably shouldn´t be so amazed by the logical stumble as most of us has been there. But now it seems so ridicolous to write (for a non Fofoan that is) a pretty much otherwise coherent article that goes: Gold, gold, gold, GOLD gold gold/dollar ratio, and that´s why you should buy some gold and other precious metals!?!

Btw FOFOA i really that term you used: "Fofoans". We should get together and buy the island of Fofoa post transit and have our own beach party country!

DP. I read your script and loved it! Hilarious commentary by your "fans" there too. ;-)

costata said...

Hi FOFOA and DP,

Fun interview. Kudos to all of the interviewees for having the cojones to tell their stories and to FOFOA for emerging from his lair deep in the forest (and shaving).

I'm still quietly pursuing the subjects that have my attention these days. I'm breaking my silence to highlight something that I think is a game changer in the speech by Christian Noyer linked above (h/t milamber).

It's this (my emphasis):

First, the efforts already made on the fiscal front by euro area countries are already bearing fruit: the primary position of the euro area should be close to balance by the end of 2012

I assume Noyer is referring to the overall primary budget balance. Once it is solidly in surplus it gives these countries a vastly stronger collective negotiating position with bond holders and a wider range of options to achieve a long term resolution of the debt crisis in Europe. VtC will see the significance straight away I'm sure.

Here's the full passage (again with my emphasis):

First, the efforts already made on the fiscal front by euro area countries are already bearing fruit: the primary position of the euro area should be close to balance by the end of 2012, which is a remarkable achievement compared to the other major economic areas (Japan, the United States and the United Kingdom will all run deficits of around 9%, 6% and 5% respectively). At the current juncture, this is clearly an asset for us and an element of confidence both for the markets and economic agents, and needs to be further enhanced.

I also want to highlight a couple of comments from an earlier thread that I think should have garnered a LOT more attention. I'll post that comment shortly.


costata said...

China's Dilemma?

This commenter (罗臻), the post he provided the link to and the links inside that post provide an excellent overview of China's predicament IMHO.

It's a shame the comment didn't get more attention. (I realize that interesting exchanges on other topics were taking place on that thread. So this topic had some stiff competition.) Folks who are interested in how China's role in this GFC could evolve would find reading the material that 罗臻 linked worth their time IMO.

Here's my view of the situation. The China-currency-manipulator meme depicts China's exchange rate policy as a matter of choice ie. they manipulate their currency's exchange rate to gain an export advantage. This is a contemporary version of the historical "mercantilist" theories about currencies and exports.

I would invite readers to consider the possibility that China has much less freedom of choice than this meme suggests.

A/FOA correctly (IMO) point out that any country holding large FX reserves of US$ debt who tried to sell down in size would collapse the market for this paper. So it follows that no holder in size would adopt this policy. The issue I'm raising is that it may not be determined by policy. Japan doesn't have the huge diaspora that China and India have. Japan is trapped. In my opinion if the big money wants to get out of China nothing will stop it. (And I think it has been fleeing for some time.)

My research on trade flows and BOP etc leads me to the conclusion that if the capital outflows (capital flight) continue China's FX reserves will start to run down and they will have no good choices in how to deal with that situation. This is one of the structural problems I was trying to articulate at various times in earlier threads and e-mail exchanges.

In short China may, at some point, be forced to do the unthinkable - sell USG paper in size - and crash the $IMFS in the process. They would then be the perfect scapegoat for Washington to blame for the crash. Neat piece of political gamesmanship, no?

I understand that China was a very large buyer of US agency paper before it started buying T's and bonds in massive quantities. If it is still holding loads of these agency and/or private MBS it may be part of the reason for Bernanke's choice of QE3 focus. Another kick of the can down the road. (The decision to place China on the same footing as the primary dealers with the Treasury/FED would give them convenient cover for this kind of operation.)

Anyway that's my 0.02 and some food for thought for the discussants on some matters that I think merit your attention.


Raymond said...

@ ampmfix,

On the testing with the ultrasound device, I'm curious if you got any noticably different results from testing the bars of pure gold versus the coin, considering that the american eagle coin you measured is composed of one ounce of gold, but with extra silver and copper mixed in.

So I'm guessing both sounds speed measurement and the density in the bars and the coin should be different?

Crack said...

8'7"? That's an awfully long measuring tape for a lady to have to hold up on her own.

Raymond said...

@ Burning,

Coming back to your reply from the a few threads earlier, for which also many thanks,

You wrote about the “enlightenment of the masses of small savers willingly trapped in pension/banking system. I hope more of us small savers will wake up before there is nothing left to save.”

I think the FDIC guarantees are giving the small savers a fake reassurance that their savings are being protected.
I agree that the thoughts going around in the community here are very good for bringing more understanding of what makes a good store of value. The small shrimp that will understand before freegold, are able to put some portion of their savings into gold. The shrimp that do not understand, might lose their purchasing power in the short term, but when awakened after Freegold, they will still end up with a better Store of Value available the them. :-)

But how many shrimp are producing and earning so much today that they have no further utility for their savings? I'm talking of those who fall within the current FDIC guarantee limit. Buying some gold, or art, is one thing they could do; another would be to invest a portion of their savings in good education, for themselves or those around them, and try to ensure more production and earning ability for the future.

Jeff Snyder said...

Something JR said above got me thinking. Specifically: "Re: MBS and the FED, The FED holds to term and reinvest the principal in treasuries. So no need to foreclose.”

I assume that at least some – maybe most – of the MBS that the Fed is going to buy will be toxic or compromised MBS at prices well above real market value, thus "socializing the losses" and providing the sellers with fresh cash with which to invest. As I understand it, MBS are owned mostly by pension plans and insurance companies but were also purchased by European banks and even sovereign wealth funds. So if the Fed pays more than FMV to these sellers, it partially bails out the sellers by eliminating losses. In this regard, it would be very interesting to see exactly whose MBS the Fed chooses to purchase. Some of the fresh cash received by the sellers would presumably go into Treasuries, some into stocks and corporate bonds, etc. To the extent it goes into stocks, it would help the S&P climb a little higher. That is one side of it.

Alternatively, if the Fed buys new Fannie and Freddie mortgages, which there may not be much of a market for out there among real investors, the Fed keeps the existing mortgage origination business and housing market on a lifeline, because banks aren’t going to make mortgage loans if they can’t offload them. Presumably most of these new mortgages will be performing and of better quality than some of the toxic sludge originated before 2008, so the Fed can expect to receive mortgage payments.

Until JR’s comment about the Fed taking the principal and reinvesting it in Treasuries, I hadn’t thought about the consequences of the Fed receiving some portion of the nation’s mortgage payments and/or foreclosure proceeds and using those proceeds to support the FedGov’s spending spree. Isn’t this some kind of major tax coup – to convert some portion of the nation’s housing payments into funds to run the government? Do I understand that correctly? If so, why isn’t anyone talking about that? It seems a pretty radical innovation. What are the consequences of this? Does it extend the dollar’s life a little longer?

According to this - - there is about $13.2T in total mortgage debt as of 6/30/12. At $40B per month, it would take about 330 months or 27 years to buy all of that. Even at the end of 3 years, only about $1.44T will have been purchased, or about 11% of the amount of today’s total mortgage debt, so perhaps the amount and pace of purchases is not enough to make a major difference to the ultimate outcomefor the dollar, but if payments for housing made by those pursuing the dream of gaining admittance to the “ownership” society are converted into a mechanism for funding the FedGov, i.e. taxes, then home buyers have just become even BIGGER suckers in the “pwned” society – a more accurate description of this place IMO. A new tax has just been enacted, and how many even realize it? Is this right?

罗臻 said...


One scenario I like to bring up on my blog, because it is seldom discussed and I like to hit a problem from all angles, is that the renminbi may turn out to be the biggest loser. If the PBOC is forced to sell USG paper in size, it may well be because of yuan selling (they would have to deflate or allow the yuan to inflate). The initial effect of this would be to send USD paper prices lower, but it could happen as USD climbs, making USD paper attractive to foreign buyers. The Chinese could set off the greatest USD rally in history, piling everyone into $IMFS right at the end.

You may also like this post, it has Andy Xie arguing to float the yuan to defend reserves and ward off a crisis.
Capital fleeing China; China must float the yuan and slash taxes

Woland said...

Hello Costata;

Welcome back! In what follows, I am talking about stuff way
above my pay grade, so I'm asking your opinion, not offering
my own. Under "normal circumstances", when a country held
large fx reserves and tried to sell them, the flow would quickly
depress the value of the remaining stock. That's one side of
the equation. The other side, (and here's my question) would
be that in a "free market", the interest rate in the bills/bonds
being sold would spike up, at the same time the currency
value of the remaining stock was falling.
Under present circumstances, would the Fed permit a spike
in rates if a large seller would enter the market. I don't think
so. Short of exercising the "Samson solution", (smiting the
PBOC with the jawbone of an ass) my guess is that they would
be forced to buy all paper offered in order to maintain their
low interest rates. The question is what would China do with
the dollar deposits? Even the 15 Billion Nexen bid meets US
resistance. Short of a market busting bid for all gold at a
premium, which would trigger a LOT of unknowns, hard to say.

Would love to hear more from you on this. By the way, I
guess you know of Victor Shih's work on the capital outflow
issue? He's from Northwestern U and an INET grantee.

ampmfix said...


Overall I am not too thrilled with the tester. The accuracy is bad and not clear in the specifications (Accuracy: ±(0.5%n+0.1)???) . I measured again, a 999 silver bar measured with a micrometer was 4.28mm, the tester gave 4.2, but since there was no digit for the hundreths, it could be 4.21 or 4.29.

For the gold 9999 bar, measurement was 2.70mm and tester gave 2.8 so right there you have an error of +3.57%.

The results with the gold eagle coin were even worse (around 11.25%), but now i don't know what part of the error is attributable to the tester and what to the purity (91.67%).

Summarizing, the tester is not a panacea, and I would use it only as a complementary tool for pure large bars, basically to rule out tungsten.

Michael H said...


The question is what would China do with
the dollar deposits?

China would deploy these dollar deposits in the FX markets to support the Renminbi, to keep the RMB from depreciating in response to capital flight.

Boner Parte said...

or would they?

Woland said...

Michael H:

Since this stuff is above my pay grade, could you offer us
a "blow by blow" account of exactly what steps PBOC takes
when a member of the "super elite" moves 1 billion of RMB
deposits offshore? Have you seen Victor Shih's description
of how this same phenomenon plays out? Thanks

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

Michael H,

China would deploy these dollar deposits in the FX markets to support the Renminbi, to keep the RMB from depreciating in response to capital flight.

Mate, they can't there is no Renminbi "FX market". It's just proxies - derivatives.

Kid Salami said...

Hi JR - no I'm not Italian but English actually. I'm still thinking about the gold/captial/time question by the way, I read your quotes.

You say above that the "PDs have to bid", and on the primary dealers Wikipedia page it says:

"Such firms are required to make bids or offers when the Fed conducts open market operations,"

Am I understanding this correctly - the Primary Dealers MUST bid for securities whenever the government has an auction? Firstly, if this is true then this is most assuredly the most ludicrous thing I've ever heard and explains an awful lot that previously bemused me.

And secondly, even putting that aside, what are mechanics of it? How can you force someone to bid for something that they may not want? What if they all bid $1? If they must bid then there must also be stipulations on what prices they must bid, yes?

ampmfix said...

thanks jules, i know the niton (but i thought it cost 28000$), still too expensive...

Jeff said...

Jules, read the comments. The niton only tests the surface, will not detect anything inside.

JR said...

Visca el Costata!

JR said...

Merkel via And Y

In a dark blue jacket reflecting the mood in and about the eurozone, Merkel abandoned her usual cautious rhetoric warned outright of a war.

"Nobody should take for granted another 50 years of peace and prosperity in Europe. They are not for granted. That's why I say: If the euro fails, Europe fails," Merkel said, followed by a long applause from all political groups.

"We have a historical obligation: To protect by all means Europe's unification process begun by our forefathers after centuries of hatred and blood spill. None of us can foresee what the consequences would be if we were to fail."

"It cannot be that sometime in the future they say the political generation responsible for Europe in the second decade of the 21 century has failed in the face of history," the chancellor continued.

JR said...


"What happens if the Euro project fails?


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


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

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

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

JR said...

Another on the Euro's drive for peace, as a way forward without war, a new idea not built on the destruction of WWII - from "The Gold Man" (not Goldman) at the BIS

Mr. Kosares,

A few thoughts for you, as the questions are asked.

Q: ** It seems that both you and your friend believe that the world is splitting up into currency/trading blocks -- much as the world did for both World Wars. There has been much discussion around the world about the imposition of a NEW WORLD ORDER and international one world government. Simultaneously, we see another, opposing force at work -- regionalism, nationalism, even tribalism. What do you make of this? Is the Euro a child of the forces of the New World Order, or the forces of regionalism/nationalism/tribalism? **

A: Sir,

I would say, "Old World Order" to return. To understand/explain better: "A very easy way to view this "order", would be to simply say that the American Experience is reaching the end! As we know, world war two left Europe and the world economy destroyed. Many thinkers of that period thought that the world was about to enter a decades-long depression as it worked to rebuild real assets lost in the conflict. It was this war that so impacted the idea of looking positively toward the future. The past ideals of building solid, enduring, long term wealth were lost in the conception of a whole generation possibly doing without! In these fertile grounds people escaped reality with the New Idea of long term debt, being held as a money asset. Yes, here was born the American Experience that comes to maturity today.

New world order, regionalism and tribalism are but modern phrases that denote "group retreat to avoid paying up". The worldwide currency system is truly a reflection of an economy built from war, using the American Experience, the US$ and the debt that it represents. But, for the American dollar to continue as the representative of the global financial system, in the form of being the reserve currency, maturing generations of all countries must accept it, and the tax on real production it clearly imposes! In the very same mindset that people buy the best value for the lowest price (Japanese cars in the late 70s), and leave an established producer to die, so will they escape the American currency and accept any competitor that offers a better deal. And because we are speaking of currencies here, the transition will be brutal!


Q: **One other item you might clarify for me is "Who is really behind BIS?**

A: Perhaps, "who control them"?

Q: **The Swiss?

A: Yes.

Q: **The eurocentral banks?

A: Yes.

Q: **Who does BIS really represent?

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

Woland said...

Visca Merkel! In the end, her mentor, Kohl, was right about her.

By the way JR, you don't "look" Catalonian. Do you want your
own State and separate currency?? haha

Michael H said...


there is no Renminbi "FX market".

Well, they better get busy making one!

Ok, let me think about this.

'Capital flight' drains RMB deposits from the Chinese banking system. This is where Shih says the PBOC has about $1Tril in wiggle room via lowering reserve requirements and unwinding bonds:

Any additional outflow would completely deplete banks’ reserves and force banks to halt credit expansion and even to recall loans, which would drastically increase bankruptcies and slow economic growth. To support continual credit expansion, the PBOC can also print money on a large scale, as it did in the 1980s and 1990s (Shih 2004). This likely would trigger very high inflation rates. Inflation above 20%, however, provides strong incentive for the top 1% of households to reallocate their savings overseas.

So Shih sees printing RMB as the only way out for the PBOC, should capital flight intensify.

Would selling US GSE debt to the Fed be another way out for the PBOC?

China has increasingly lax capital controls and is moving towards internationalizing the yuan, and the result is higher demand for U.S. dollars from Chinese citizens.

Not sure what the mechanics of the 'higher demand for U.S. dollars from Chinese citizens' would be, but could the proceeds from GSE sales be used to fund this demand?

JR said...

The Nobel Peace Prize for 2012

The committee noted the EU had helped to transform Europe "from a continent of war to a continent of peace":

The Nobel Peace Prize for 2012

The Norwegian Nobel Committee has decided that the Nobel Peace Prize for 2012 is to be awarded to the European Union (EU). The union and its forerunners have for over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe.

In the inter-war years, the Norwegian Nobel Committee made several awards to persons who were seeking reconciliation between Germany and France. Since 1945, that reconciliation has become a reality. The dreadful suffering in World War II demonstrated the need for a new Europe. Over a seventy-year period, Germany and France had fought three wars. Today war between Germany and France is unthinkable. This shows how, through well-aimed efforts and by building up mutual confidence, historical enemies can become close partners.

In the 1980s, Greece, Spain and Portugal joined the EU. The introduction of democracy was a condition for their membership. The fall of the Berlin Wall made EU membership possible for several Central and Eastern European countries, thereby opening a new era in European history. The division between East and West has to a large extent been brought to an end; democracy has been strengthened; many ethnically-based national conflicts have been settled.

The admission of Croatia as a member next year, the opening of membership negotiations with Montenegro, and the granting of candidate status to Serbia all strengthen the process of reconciliation in the Balkans. In the past decade, the possibility of EU membership for Turkey has also advanced democracy and human rights in that country.

The EU is currently undergoing grave economic difficulties and considerable social unrest. The Norwegian Nobel Committee wishes to focus on what it sees as the EU's most important result: the successful struggle for peace and reconciliation and for democracy and human rights. The stabilizing part played by the EU has helped to transform most of Europe from a continent of war to a continent of peace.

The work of the EU represents "fraternity between nations", and amounts to a form of the "peace congresses" to which Alfred Nobel refers as criteria for the Peace Prize in his 1895 will.

Oslo, 12 October 2012

JR said...

HI Woland,

Do you want your own State and separate currency??

Lets ask ampmfix. Some general commentary while we await an informed opinion:

Just when it seemed stability was on the horizon for the tumultuous Eurozone, with Spain getting a grip on its debt financing and a plan to bail out insolvent banks, a fresh threat to the common currency has emerged with Catalonia's reignited drive to secede from the Spanish kingdom.

More than a million residents of the country's most prosperous region rallied for independence in a protest of historic proportions on Sept. 11, Catalonia's National Day. Some estimates put the crowd as high as 2 million, or more than a quarter of the 7.5 million who live in the northeast region including Barcelona. This week, after Madrid rebuffed Catalonia leader Artur Mas’ demand for more control over his region’s tax revenues, the regional parliament set a Nov. 25 date for polling Catalans on "self-determination."
Catalonia secession is neither a sure thing nor an imminent one, analysts note. Catalans for centuries have been bandying about the idea of independence for their thriving bastion of manufacturing, shipping, tourism and culture. The conservative government of Spanish Prime Minister Mariano Rajoy has made clear that it opposes Catalonia’s bailing on the rest of the kingdom, and it holds what essentially could be a veto if the region envisions moving into statehood and taking its Eurozone membership with it. By charter, the Eurozone’s 17 members would have to unanimously approve induction of any new euro currency user.

Mas may be stirring the secession quest to force Madrid to cede more power to Catalonia over its own finances. But in an environment of deep public spending cuts, the second bout of recession in four years and unemployment afflicting 1 in every 4 Spaniards, the notion of sheering off the northeastern corner flanked by Andorra, France and the Mediterranean Sea is clearly appealing to many. Catalonia accounts for 20% of the Spanish gross domestic product and a quarter of its exports.

Catalonia secession has long been part of the political landscape in Spain and has just entered a more active phase because of the tough living conditions resulting from European Union austerity measures demanded to keep euro users' national deficits in check, said Fabian Zuleeg, chief economist at the Brussels-based European Policy Center.

"This is potentially more serious, as it reflects a real conflict between the national and regional levels," Zuleeg said. "The way Catalonia sees it, they've been paying in excessively into the national coffers and, because they have their own deficit, they have to go cap in hand to the Spanish government," only to be denied latitude to keep the regional economy on track.

JR said...

So yeah, the euro and greater fiscal autonomy will do just fine. jajaja

JR said...

HI Kid Salami,

Its complicated but here are some starting ideas.

Primary dealers serve as trading counterparties of the New York Fed in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed's trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.
Primary Dealers

Who Buys Treasury Securities at Auction?

Dutch Auction

Kid Salami said...

Thanks JR, will read through those today.

Franco said...


What your ultrasonic thickness gauge does is measure how long a wave takes to travel through the metal, and then it calculates the thickness based on the assumed speed of sound of the material (which you have to enter). A couple of thoughts: first, the speed of sound in solids is not just one number. There is a number for a longitudinal wave, and another number for a transverse wave. Also, you would have a set of numbers instead of a single number if the solid were anisotropic, which means that the material has different properties depending on the direction. I have no idea of whether bullion coins can be considered isotropic or not. Also, as you already pointed out, if you are measuring an alloy, such as an American Gold Eagle or a Krugerrand, you are measuring a metal that has different properties as pure gold. All of this brings me to my second point, which is this: in light of the complexity summarized above, I would use an ultrasonic thickness gauge not to obtain an absolute measurement but a comparative one. I would measure several AGEs and write down the indicated thickness (we have to assume that all the AGEs in your test batch are authentic). If you measure them in the same way and the instrument is worth a crap, you should end up with numbers that are closely bunched together. I don't really care what the numbers are. I just care that for an one-once AGE, the instrument says x.xx +/- 5%. Then, when you get a new AGE, you measure it the same way and compare to your benchmark. If it's within your tolerance, then it's good. If it's made with a tungsten core, the instrument should report a reading well outside of your tolerance because tungsten has a speed of sound 61% higher than gold.

ampmfix said...


I think you are much better informed than me...
You even speak catalan and follow the Barça! ;0)

"Mas may be stirring the secession quest to force Madrid to cede more power to Catalonia over its own finances": exactly, Mas has used the secession thing to cover up his disastrous management, it is just a political card.

There is a huge percentage of catalans that do not want to separate. I don't think it will happen, just my 2c.

This sounds like the Telegraph announcing the demise of the euro... Lies, and propaganda all around!

ampmfix said...

Makes sense, Franco.

Raymond said...

@ Ampmfix,

Thank you for sharing some of the results.

The Eagle coin is perhaps not the best item here because there is not a smooth surface to measure on.

But the error margin seems small enough to detect when a bar would only be made of only half gold and half some other material.

And what Franco points to as well, even with the coin you might be able to detect when a reading is out of a range.

Good luck with testing it further.

Aquilus said...

My 2c on testing:

I have access to a scale that's accurate to 0.0001 of a gram. Also calipers for checking the thickness and diameter.

If all those check out, to me physics says that the metal is right since only a certain metal density can satisfy all three measurements.

ampmfix said...

Welcome Raymond, if I find out other issues I will let you know.

Woland said...

The following is an uninformed opinion, or perhaps a
conjecture. FWIW. Making a gold bullion bar, or a US
or other nation's minted gold coin using tungsten or any
other non gold element, are both crimes. But the latter
(coin) offense is also counterfeiting. The former crimes
may be dealt with by the police, the latter by the FBI. It
is therefore reasonable to ask, given your propensity to
cheat, down which avenue you would most prudently
wish to proceed. Also, a good fake struck coin ought to
be a bit more costly to produce, unless it were a large
well funded operation. Just a thought.

poopyjim said...

Anyone actually discovered a fake 1 oz. or less piece of gold bullion in their stash? I still think it's all much ado about nothing...

Franco said...


The problem with what you propose is that tungsten has a density that is only 0.25% lower than gold. That's well within the manufacturing tolerances of any kind of coin. The accuracy of the metering instrument is really of no consequence in this case. Hence the need to somehow test what's inside the coin in a non-destructive manner.


Rigorous testing of gold coins might be much ado about nothing...for now. If there ever is a revaluation of gold, I have no doubt that the market will be flooded with fake coins. In a way, what ampmfix is doing (and I want to get on that train, too) is preparing for the future.

Wendy said...

Cracky that is gross, and IMO a good argument "for" bras ;)

DP said...

+1 for structural support

Woland said...

Wendy, the technical term is, "manzeer", sometimes spelled
"mansiere" by our francophone friends.

On another topic, as a deadly dull friday has once again
induced an early bout of margarita consumption, I was
visiting over at king World News when I "thought" I saw an
article on Fofoa.

It read: "He serves as chief investment and managing director
of Fofoa Ltd. He is known for his insightful commentary, and
is a regular on Wall Street Week, CNBC, Bloomberg TV, MSNBC,
USA Networks, Fox TV, NPR. Quoted in the Wall Street
Journal, New York Times, Barrons, Washington Post, U.S.
News, World Report, Smart Money, etc. Things are looking a
little blurry at the moment, but if that's right, I'm outta here!

M said...

Costata... Do you have an email address I could get you on ?

Anyone know Costatas email ?

Wendy said...

Woland, are you telling me that the cartoon was of a guy??

costata said...

Hi M,

FOFOA has my e-mail address. I'm sure he won't mind forwarding your e-mail.


Michael H,

I think that China is running out of time to internationalize the Yuan. It's also a curious notion that you can defend the exchange rate of a floating, fully convertible currency via the FX market. That worked out very well for the BOE (Soros/Rogers raid) and Thailand (circa 1997) NOT!

The strategy that did work for Malaysia and China was capital controls. In the case of Hong Kong they managed to maintain their peg in the late 1990s using other strategies (but China had their back as well).


I'm familiar with Shih's work. He's an excellent analyst and researcher in my opinion. Look at the recent "strength" of the US dollar. Where is that demand coming from? Going long US dollars means that you are going short in some other currency, no?


Andy Xie is an excellent analyst and strategist but I sometimes think that he has too much faith in the FX market as a conduit for correcting imbalances.

I'll take a look at your blog when I get time. Keep commenting. I think you have much to offer the discussants here and our esteemed host.

Hi JR et al,

There's a lot more in that speech by Noyer. Particularly important IMHO is that de facto balanced budget provision in the Maastricht update. And let's not forget Noyer is the "gold man" either.

Back to my hermitage now I have a lot of reading to do.


/SleepingVillage/ said...

Rock 'n roll, DP. The wine was a nice touch. Morning or not, I hope you drank that sucker for breakfast after the interview.

I know I woulda! :)

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