Saturday, August 23, 2014

Six!


Six years ago today, I started this blog as a tribute to something I'd only discovered three months earlier. The fact that I'm still at it six years later speaks to the depth of the material I had only glimpsed when I started. I once started another blog on a different subject and lost interest after only a couple of months. I do tend to lose interest easily. In college, I changed majors and colleges several times, and after college I changed careers twice. Six years on one subject, for me, is remarkable.

I have no formal education or background in the subjects I explore on this blog. Everything here I learned since 2008, through reading, thinking and writing this blog. Once you understand the basics, it's mostly common sense. But the real strength behind my subject matter is the foundation I chose as my muse, the five years of Freegold archives left behind by someone calling himself "Another" and his friend, "Friend of Another" or FOA.

Many people write blogs related to their profession or area of expertise and influence. This is not one of those blogs. If I have any level of expertise or influence in the subject of my blog (which is not my judgment to make), then it comes from writing this blog, not the other way around. So I am deeply moved whenever real professionals make comments praising what is essentially my hobby.

As this is an anniversary post, here are comments from a couple such professionals over the past six years. Krassimir Petrov is an economics professor from Bulgaria who has been blogging and writing articles since well before the global financial crisis. He received his PhD in economics from Ohio State University and now teaches in the Middle East and Southeast Asia. In 2010 on his blog, he sent his readers to one of my posts with this recommendation:

"This is one of the very best contributions in the inflation-deflation debate. It is long and detailed, but the topic is extraordinarily complex."

Two weeks later, after reading some of my earlier posts, he added this:

"FOFOA is probably one of the very best analyst in the whole world. The more I read from him, the more I am convinced of his vast superiority over most experts and analysts…"

In 2011, I wrote a post directed at Rick Ackerman. Rick is a professional trader, financial advisor and blogger with a large following, well known as a hard-core deflationist. My post was an attempt at addressing his 30-year aversion toward dollar hyperinflation as the final outcome, using FOA's reasoning. Within days of my post going up, he left the following comment on my blog which made the hairs on my arms stand at attention when I first read it:

"Sheesh! Where to begin? It's difficult to give up a belief system that took root 30 years ago, but I find your arguments irresistible. I took notes as I read the essay, thinking to rebut you point-by-point; instead, halfway through it, I found myself overwhelmed by the clarity of your thoughts. The real power of this essay is that each step of the hyperinflationary endgame it foresees is entirely consistent with human nature, particularly where self-interest and self-preservation are fated to play out.

I will have to find a way to break this gently to my readers, perhaps starting with the joke about not having to outrun the bear. It goes a long way toward explaining how the Masters of the Universe will actually benefit from hyperinflation. You've also helped me understand how I could have been so bullish on gold over the years even though I considered myself a hard-core deflationist. It was a conflict between head and heart, really, but you’ve resolved it with the most persuasive argument I’ve seen in favor of gold. Even better, you’ve provided a sound basis for arguing that at $1500 per oz., gold has barely begun to discount the dollar’s final fall.

I especially appreciate the patience and humility you showed in walking readers through your argument one gentle step at a time. By not trying to overpower your opponents, you have produced a treatise that is certain to engage many minds. Thanks for engaging mine -- at a depth that had eluded me for three decades."

Such comments are wonderful confirmation for my efforts and my presentation, but again, I have no real experience or background in the subject matter. My secret is my deference toward the view presented by Another and FOA. I work to hone the lens they left behind in order to share the view with others, but all credit for the view itself goes to them.

In my last two posts, I have been progressing toward the simple concept that Freegold is all about clean floating exchange rates. Not just a clean float in the price of gold, but in currency exchange rates as well. It's a little more complicated than that, but not really. To "float" simply means that the private sector (also known as the market) determines the exchange rate.

It's not a proposed change of rules or anything like that. Instead, it is the recognition that this is where things are heading on their own, without any further rule changes. It's not a system that will require a clean float or punish a dirty float. Instead, it is the observation that a clean float is what everyone who matters now wants. It is the direction they are all heading today, including the US, Europe and China, and that once a fresh starting point is reached, the rationale behind it will be obvious to everyone and exchange rate manipulation will, for the most part, become a thing of the past.

It's not even that floating exchange rates are the most fundamental principle involved. After all, the euro took many countries which used to have their own currencies and combined them into a single currency zone. There's no floating exchange rate between France and Spain. The more fundamental principle than floating exchange rates is functioning automatic adjustment mechanisms. This principle applies across all borders, whether they share the same currency or not.

The difference is, for adjustment mechanisms to function automatically, wherever an exchange rate exists, it must float, i.e., it must be determined by the private sector. Whenever the public sector intervenes in exchange rates, it prevents the automatic adjustment of imbalances and therefore causes imbalances to accumulate. It's a pretty simple concept.

Public sector intervention in exchange rates covers everything except a common currency and a clean float. Hard fixed, pegged, adjustable peg, dirty float, they all prevent imbalances from correcting gradually and therefore cause them to accumulate, which leads to an unstable and vulnerable situation. Using a common currency or having a clean floating exchange rate leads to balance, stability and invulnerability.

Covering this point properly would require an entire post, and it's one I may write in the future because it is somewhat controversial. But in brief, the reason it is controversial is because one famous economist in particular thinks that hard fixed exchange rates are essentially the same thing as sharing a common currency. They aren't, because what can potentially work in theory has been shown time and again to not work in practice. As FOA said, "This is the way fiats work, whether gold backed or not, they always break from strict printing discipline."

For hard fixed exchange rates to work like a common currency requires "strict printing discipline" in response to international imbalances, while a common currency and a clean float do not. And it's not just discipline that's required, because the complexity of getting the adjustments just right would challenge even a supercomputer. Yet it seems to follow that if a hard fix can work, then looser fixes or adjustable pegs are fine too. But the complexity and difficulty multiplies as you ease away from the hard fix, then it disappears suddenly when you finally give control over to the marketplace.

In any case, such academic exercises are irrelevant at this point as the trend away from fixed exchange rates toward either a common currency or a clean float has been established by those who matter for the last 40 years and then some. It is now "baked into the cake" as they say, so none of this is meant to be a discussion of possibilities. It is simply part of the lens and the view.

What a clean float from a fresh starting point (which I should stress that we do not have yet) will do is to balance trade automatically through the exchange rate. There will be no need for the systemic settlement of trade imbalances. Economy-wide trade imbalances will be corrected gradually, almost imperceptibly, over time through changes in exchange rates.

Different economies obviously produce different things, and different things have different (and constantly changing) relative values. Some economies produce more valuable products with less effort, while others produce less valuable products with more effort. Nor is consumption or the enjoyment of the fruits of one's production equal across different economies. The United States, for example, produces a lot of stuff, more than any other country in the world. We are, in fact, the largest economy in the world (unless you count Europe as a single economy) based on gross domestic product.

Yet even as the largest producer in the world, we still consume more than we produce. FOA said it well. "Collectively, [we use] our own attributes and require the use of other nation's as well… We cannot place [our attributes—our enormous resources and high productivity] up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert."

Running a trade imbalance is a choice that is most easily made by the net-producer. The choice is to consume less than you produce, which is what makes one a net-producer by definition, and nearly anyone can make that choice. The choice to consume more than one produces, on the other hand, generally requires support from an external source.

Profits are income in excess of costs. They can be invested, saved or consumed, so profits alone don't define a net-producer. It is what you do with your profits that determines whether or not you are running a trade imbalance. Here's a rather confusing comment from Another in 1998:

"As you ponder these thoughts, consider that; all economies today are truly equal in production as the exchange rates are the manufactures of profit!"

As you think about this comment, recall that in my last post I quoted an article about Airbus calling for the ECB to intervene in the foreign exchange market to weaken the euro. The article explained:

"Airbus, which sells its aircraft in dollars but incurs costs in euros, is one of the most exposed groups in Europe to a strong single currency. Other groups such as Unilever, SAP and BMW have also faced currency headwinds."

The list price of an Airbus A380 is $400M (€298M at the exchange rate at the time of writing), but a tough market has forced them to discount the price significantly in order to sell airplanes. Having spent $25B developing the A380, plus the cost of producing each unit, it is estimated that the break-even point will be once they sell 420 planes. So far they have delivered 138 planes and have orders for 180 more.

The bottom line is that their costs of production are still higher than their income for this plane. They need to cut costs or sell more planes at higher prices in order to turn a profit. In a competitive market, you need to be competitive in order to profit. But there is a potential shortcut.

Just as a simplistic exercise, let's say A380 sales are happening at $300M per unit (€224M at the current exchange rate), and production costs are €230M per unit, for a net loss per unit of €6M. If the euro exchange rate was to decline 5% from $1.34 to $1.27, the $300M price would suddenly convert to €236M and the €6M loss per unit would magically become a €6M profit per unit. Without any cost cutting, competitive improvements or increase in price, a profit would have been magically manufactured by simply manipulating the currency exchange rate.

Now read Another's comment again and see if it makes any more sense the second time around:

"As you ponder these thoughts, consider that; all economies today are truly equal in production as the exchange rates are the manufactures of profit!"

Manual labor, like factory work, has the same basic output anywhere in the world. A screw turn is a screw turn whether you're Chinese, French or American. By moving the production facilities for certain parts to China, Airbus could cut costs because, even though the output is the same, the manual labor is cheaper. Part of the reason for that is China's support of the dollar. By weakening the yuan, China lowers the living standard of manual laborers which increases the nominal profits of the company owners, wherever they may reside. This is how exchange rates manufacture profits.

You may think that Chinese laborers work cheaper than, say, United Auto Workers in Detroit, because they are accustomed to a lower standard of living. While it may be true, it will be irrelevant with a clean float. I think we'll all be stunned by how quickly the purchasing power of comparable work on comparable products will equalize across borders between comparable economies with clean floating exchange rates.

Getting the ECB to lower the euro exchange rate through FX intervention would have a similar effect to moving production to another country that already manipulates its currency. It would lower costs at the expense of a lower standard of living for all workers in the local economy while elevating the nominal profits of the company owners, the bonuses of its executives, and the standard of living in America where we can buy overseas using an overvalued dollar. As FOA said, "the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today."

There is another way, other than currency exchange rate manipulation, to manufacture profits. That other way is through real cost cutting and real improvement in output, in other words by becoming competitive. From the articles quoted in my last post:

"Currency manipulation is not a route to competitiveness, it is a soft alternative to hard explanations to the electorate."

"We have to concentrate on whether the European economy is competitive and then we will have an appropriate exchange rate."

With this latest honing of the lens, I think that the view of not only what is unfolding in real time is becoming clearer, but also some of Another and FOA's posts from 16 years ago are also making more sense. Here's another one that should be familiar to most of you. Please let me know if you think it makes any more sense with an improved lens:

ANOTHER 5/26/98: "The Western mind does focus on "what I buy today for the lowest price". Yet, in this modern world economy, the lowest price is always the function of "the currency exchange rate"? The Yen, it is compared to the dollar today, and used to purchase goods. One year later and the Japan offers these goods for much less, as the Yen has fallen to the US$. The currency value of this purchase, was it "true" today or a year ago? Understand, all value judgments today are as subject to "exchange rate competition"! It is in "this exchange rate valuations" that the private citizen does denominate all net worth! A safe way to hold the wealth for your future, yes? You should ask a Korean or the Indonesian?"

Here are a few more:

FOA 9/22/98: "The currency confidence factor comes from a strong positive exchange rate, much like that enjoyed by the dollar today. The average European will buy from the USA in the same way that Americans buy bargain goods from other countries. Using an overvalued dollar makes one feel as there is no inflation, even though there has been massive dollar currency inflation over the last twenty years (the real cause of price increases is when the exchange rate is allowed to balance a negative trade deficit)."

FOA 9/26/98: "The possibility of FXC (Foreign Exchange Controls) is very real. This topic has been discussed in several well written books spanning 25 years. In a way, the closing of the gold window in the early 70s was a form of FXC. Anyone outside the country could no longer get their gold because too many dollars had been printed to cover the gold in the US treasury.

Today, too many derivatives have been printed (paper gold is one of them) than can be covered by the outstanding dollars! The US Federal Reserve either prints a load of dollars to cover this contingent or the system falls apart. If the Fed prints, the Americans get inflation. If the Fed doesn't print, the world financial system, based on a dollar reserve currency, starts to implode and foreign holders of dollar assets try to exchange these for their local currency. To do this they must take the dollar home to the USA for exchange! During this exchange, if the dollar loses too much value in the exchange rate, these foreign holders just SPEND THEM in America!

Again, the US experiences price inflation, only this time it's during a global deflation in dollar assets. To stop this chain of events, this time the US Treasury closes the dollar window. It's usually a last effort to hold the banking system together. The gold window was closed by holding gold at a low price valuation and not selling any of it. The dollar window will be closed by buying dollar currency at a rate so low as to stop most major holders from exchanging. This usually brings a two tier market, dollars inside the country worth more than outside the country. For some time, all dollars outside the US were called Eurodollars! Will we see these Eurodollars exchanged for Gold????"


Very briefly, I want to draw your attention to these curious charts of Foreign Direct Investment or FDI in the US:


They come from here, and the data comes from the US Dept. of Commerce Bureau of Economic Analysis, or BEA. You can download the latest BEA Excel spreadsheet for FDI Financial Transactions here. I noticed a curious coincidence when I decided to compare the mysterious FDI outflow to the puzzling "Belgian" Treasury buying from the same quarter.

The net decline in FDI for the first quarter was $117B, but the decline from Europe alone was $124.6B which is on line 15 of the spreadsheet. And if you add up the first quarter increase in "Belgian" (Euroclear?) Treasury holdings from the TIC data, that is, take Belgium's March total ($381.4B) and subtract its December total ($256.8B), you get the same number for the same time period, $124.6B. I'm sure it's just a strange coincidence. ;D

Back to Another and FOA:

ANOTHER 11/17/98: "It is the "practical understanding" that our modern world must use a "digital paper money" for commerce. All accept this. However, without a "gold currency" priced daily in the "free market", and used as real reserves, any "world reserve currency" would expand using "debt only" as the tool. This result brings the eventual reckoning for all users. The "host country" finds all other nations supporting its "lifestyle", even as those country's private financial infrastructure is destroyed. It is the rising US equity markets and falling inflation that so indicates the last days of the dollar! Many say this is a sign of strength for America, yet they know not what time of life the dollar has attained. The "old man" has he become even as persons place their financial horse upon his shoulders. The world debt structure of this "old man" is such that the true pricing of gold in a new currency, will bring such a weight as it will end his life! The purpose of the evolution in "paper gold trade" is offered in many reasons. At first, it was the "deception" to hide the "life age" of the dollar. Much as your Hollywood actors obtain the "facelift", yes? This "deception"(low gold price in US$), to the surprise of many, was created by the "Euro makers" not the "dollar makers". To their advantage, world traders and dollar investors were greatly fooled and, as you say, "jumped on band wagon" to help sell paper gold down! This action did prolong life of dollar as was needed, for the Euro was taking much time to complete…

It has always been the desire for the "hard currency" to settle old dollar debts. Dollar debts made "unreasonable" by the loss of "honest commerce" by "dishonest exchange rates". As has been from the past, and will be in the future, Gold does always settle the score!"

FOA 5/20/99: "The largest difference between the two (Euro / Dollar) is found in how the exchange rate value of each is "Managed" for political purposes. The dollar is ruled by one country and one country only. This implies that only one Economy is taken into consideration when policy is discussed, the USA."

FOA 3/14/99: "This brilliant, modern free trade system and all of its benefits cannot be implemented using the US dollar as a reserve currency. It shuts off commerce that in turn limits the use of commodities such as oil, metals, food and the like. Many hail the low price inflation in the US as a victory and ignore the intent other nations had in following "free trade". That being to promote a world economy, not just a US economy.

Enter the Euro! Understand that the increased use of commodities is a good thing. It's not just for the purpose of making rising chart pattern so speculators can sell their calls! Commodity usage creates real things and helps the lives of real people. When citizens gain real productive mechanisms, they hold real wealth. Some would have you believe that third world people are enriched by saving US treasury bonds, not true! The only way to increase world trade, with an eye on building new consumers in all countries, is to remove the overhang of "dollar settlement"."

FOA 8/2/99: "My friend, I (as taken from Another) use the term "western view" because it is a clouded perception of how the world sees the dollar. For the dollar countries, it buys much at the expense of others. The very strong dollar that "bulls your stock markets" does not clearly represent the value of the foreign goods it is exchanged for. Your view is to save the dollar and the US economy because it is holding up the rest of the world. That is the very problem, as only on a dollar based reserve system does this occur. Instead of using a currency based upon only one countries interest, the USA, use a currency based upon the "conflicting" interest of many nations, the Euro! Under such a system, world trade and exchange rates will balance more fairly."

FOA 9/19/99: "Every day, new evidence emerges that shows Euro liquidity becoming as deep as the dollar with little threat of "dirty float" interventions in exchange rates… The ECB can now slowly phase out dollar reserves as the Euro assumes more of the world trade settlement function. A function in and of itself, that will further lower the dollars world need, use and therefore value. Because the US still runs a trade deficit, it still ships a surplus of dollars to most countries. In today's new Euro world, the dollar exchange rate will eventually be forced to fall enough to balance this flow."

FOA 12/5/99: "In the private sector, it was always the business trade that built up excess dollars as they sold more "goods" to the US for dollars than the US businesses sold to them. Using Japan, the net effect of all their private companies selling into the US created a huge negative balance of trade account. For many years now, if these countries walked into the foreign exchange markets and sold these excess dollars for Yen, it would have drove the yen way up. If done early and before a large position builds up, this is the "natural way" a true fair currency exchange market should work. If the US continues to buy more from Japan than it sells, the currency markets react until the goods being traded are evenly priced.

This action would protect the workers of both countries from being exploited, even though their productive efforts are equal. Contrary to the "business community propaganda" a worker in Japan does not tighten a bolt better or faster than one in the US. Take all the technology innovations and pour it into a big pot along with natural human nature and add some cultural differences. Boil it down and we find that through the world over everyone works the same for the same incentives. Of course the business community always leaves out a "true" incentive / compensation package when comparing national productive effectiveness. Trust me, I've been everywhere and seen it all. You would not work as "effectively" and as productively in, say India, if you received the same pay they do. No, by far and wide, the real national industry productivity measurements are all skewed from "engineered" exchange rates between nations.

So, back to our currency rates. No person or nation ever expanded its wealth by selling two TVs in exchange for one TV. The US knows that the road to national wealth is not in a strong currency by itself, rather it's through operating in a manipulated currency market! If your workers can tighten one bolt in exchange for foreigners tightening two or three bolts, your wealth, standard of living and voting citizens are better off.

Under the old dollar / gold standard, no foreign government wanted to see its people tightening 3 or 4 bolts in trade for every one the US worker did. Perhaps a ratio of one turn for two could work for a while until their economies grew. But no one wanted to get locked into doing this forever, as this modern dollar standard has forced them to do.

It worked better back then as they traded two turns of the nut for one US turn and they retained a little gold wealth in the form of US dollars. Are you still with me? This is important to grasp. …

So, as we can see, nations started holding dollars and US treasury debt because it represented a wealth for wealth exchange. Nations, Japan included, were content to have their Central banks enter the currency exchange markets and buy up the excess dollars their businesses created when they sold more to the US than they bought. In that time they did not think they were exploiting their workers into making two turns on the bolt for one US turn, because they were trading most of the additional "twists" for the wealth of gold.

By 1971 the "dirty float" of currency exchange markets was normal practice until the US closed the gold backing for the dollar. Suddenly, all the dollars that were purchased overseas to adjust the exchange rates were now worthless! The only recourse for governments to regain real wealth for all the additional "nut turns" was to use the dollars to buy local American goods. One problem though, all the dollars were collected while the gold standard impacted exchange rates! Now, with only a pure dirty float for an exchange market, any reverse selling of the dollar into the US would drop that currencies value. So, the good purchased from the US would only represent a tiny return of the wealth value these dollars were originally traded for.

It is here that the story begins to change and the world heads for a new alignment. Everyone in the world was impacted by this move. From oil producers to auto makers in Japan. Everyone lost, big. If gold had become so worthless, as most US politicians proclaimed, why didn't they just revalue what they had left to, say $2,000 and call in what dollars were out there? They didn't because in that scenario they would have drained the dollar as a reserve unit and killed the notion of dollar supremacy. Gold would have regained its exact value as money to the world prior to currency / exchange / standards. Perhaps $3,000 or $4,000 an ounce (back then) and the US would have run some real inflation.

The world Central Bankers (and oil producers) took a real hit when this all happened and it won't be allowed again. They have supported the fiat dollar standard and even helped "pump it up". All in an effort to keep business rolling until a new currency could be created. One based on several economic national arenas, no dollar reserves and a world market price for gold. As opposed to the present IOU paper dollar gold system. Even though the Euro is born, this package is not complete, but it's getting there!

Truly, you have to have been around the turn a few times to understand that no one (and I mean NO one) is wanting a larger piece of the old dollar pie. The notion of currency parity for the purpose of trading up debt reserves is something being floated by the Washington think crew!

Are these nations trying to pay up for past US military action? Oh boy, not a chance. Why don't we pay Italy for all the good the Roman legions did for everyone!! No one is worried that the US will back away from protecting its interest after it's bankrupt. Whether it's oil or national security, they will act as best as able. See ORO's post about this, it's real good. Besides, look at Russia. No money, no nothing but still out there firing away!

Also: The present paper gold market depends on new hikers entering the gold trail towards its end. They buy paper gold as some kind of stock market / investment hedge without knowing the big picture. In the past their actions would have worked their purpose. But not in this transition. A currency exchange storm is going to sink a lot of these paper boats and kill the very assets many wanted to protect. Buy the gold not the price!

Thanks FOA"

FOA 12/29/99: "Our modern currency history (the last 20 years) has shown that the world needs both of these moneys [fiat and gold], but needs them in a different format from the past. Our present dollar could do the same but it carries the baggage of huge unpayable international and local debts. Debt made non payable by the dollar reserve system that forces the social needs of just one people upon the world using unbalanced, rigged exchange rates. It eliminates the escape route of a "free market" gold price and therefore locks down the ability of other nations to trade outside this system. Free the world of this system and a great deal of American wealth will be seen for what it really is, an illusion of bookkeeping. Indeed, create a workable reserve medium, based on world needs and wants in a settlement format and the race will be on to use your product… Especially if it "includes" the money the world has wanted for all its history. Gold!"

FOA 1/11/00: "The strong US economic success has been spelled out more in our SOL (Standard Of Living) than if expressed in financial accounts. Dollar exchange rates, interest on dollars, stock market values, home values all represent what an American "can buy" if they decide to spend their wealth. Not what they presently have as owned wealth, paid up 100%. This leveraging of dollar affairs has created an "illusion of savings" that in effect allowed a high SOL. In other words, we live high on the hog today because our present equity values and savings don't really exist. Time has transformed the entire dollar system into a giant "futures contract" that only represents the wealth we could obtain in partial "future purchases". Just like the gold market, we mostly trade paper wealth and call it real. Yet, if a large percentage demand for delivery ever happened, the contracts would fail. Yes, our wealth and economy status is really based on us cashing in and buying just a little at a time. If we didn't, the illusion would be exposed. Only our present dollar economy is "super leveraged" not just into the future of US goods production, rather it also completely depends on future foreign fulfilment to produce those real goods. Truly, most of our present sizeable financial wealth is little more than a function of the "acceptance of dollars overseas" by others."


Everybody loves the original, and that's what I'm here to promote. It can be found here, here and here, but this blog has become a Freegold archive in its own right, with 60,000 comments over the past six years, 433 posts, and now 7.2 million pageviews, an average of 3,300 per day. You'll notice that I have no advertising and I'm not selling anything, so if you like what you see and would like it to continue, please support this blog.

Sincerely,
FOFOA


376 comments:

1 – 200 of 376   Newer›   Newest»
Jim Okefenokee said...

Delightful. (h/t MdV)

burningfiat said...

Happy blog-birthday, FOFOA!

Without your essays many of us would never have broken the code to Another's and FOA's insights...

Cheers!

/BF

Beer Holiday said...

"one famous economist in particular thinks that hard fixed exchange rates are essentially the same thing as sharing a common currency."

Hand up "Bob Mendell sir" ... :-)

farmersteveg said...

I'll just start off by stating the obvious. I'm pretty sure I don't get the connection between the drop in FDI and the Increase in Belgium purch of Treasuries per the TIC data. Just in case there is anyone else out there as obtuse as I am, can anyone explain to me (maybe in one syllable words), the significance of such and maybe even what we should look for in the future which would lend credence to what everyone else but me can already so obviously deduce ?? (I think I may be rambling)

MatrixSentry said...

Wow! Six years have come and gone so fast. Happy Birthday!

I for one have been supporting this blog for many of those years and I will continue until the end. There will sadly be a day when Freegold will be natural and self evident, so much so that this blog will naturally reach the end of its life just as the $IMFS has.

Maybe FOFOA can pick up another hobby?

Phil S. said...
This comment has been removed by the author.
ein anderer said...

Happy blog-birthday, FOFOA!

Without the lens you’ve digged up most of us would think of wealth still in terms of speculation output screen and paper numbers—instead in terms of something golden, concrete, sitting still …

Cheers!
ea

Jeff said...

Happy birthday FOFOA, and congratulations to everyone who has read and understood A/FOA. Some say they aren't relevant after 16 years, but their views are more compelling in hindsight than they were in the 90s. What other econ blogger has stood the test of time as well?

https://www.youtube.com/watch?v=ncjcjpQzceQ

Post revaluation FOFOA hobbies...happy little trees?

https://www.youtube.com/watch?v=YLO7tCdBVrA

Phil S. said...
This comment has been removed by the author.
vas squat said...

Farmer,

I'm not sure I have it right, but I can give you my interpretation. the FDI information shows $128B in dollars going from the US to the European Union. The TIC data shows Belgium purchasing treasuries in a similar amount. The coincidence in timing and dollar amount suggests the money that was sent to the European Union from the US was used to purchase treasuries. One explanation is that this is just backdoor QE. How this might work is that the Fed or an intermediary opens an account in Europe, electronically credits it with $128B, and then uses it for treasury purchases. Another thing it suggest is that the Belgium treasury purchases do not represent a new form of structural support but more likely an old form of Fed support via sneakier avenues.

Phil_O_Dendron said...

Thanks for your great work - a donation is on the way.


Fofoa said "The net decline in FDI for the first quarter was $117B, but the decline from Europe alone was $124.6B which is on line 15 of the spreadsheet. And if you add up the first quarter increase in "Belgian" (Euroclear?) Treasury holdings from the TIC data, that is, take Belgium's March total ($381.4B) and subtract its December total ($256.8B), you get the same number for the same time period, $124.6B. I'm sure it's just a strange coincidence. ;D"

Can someone explain the significance of this. It is not clear to me.


Nickelsaver said...

FOFOA,

Congrats on 6 years!

There was one concept in this post that stood out to me (emphasis on the word or is mine), "Using a common currency or having a clean floating exchange rate leads to balance, stability and invulnerability."

It makes me wonder what is perceived (by the superorganism) as an easier goal, a clean exchange rate or a common currency? Are the two inseparable?

A clean float is the engine of Freegold, is it not?

Thanks again for yet Another eye opening article.

Dante_Eu said...

Congrats FOFOA!

Somehow you are able to think like a kindergarten kid. Maybe due to no formal education in the subject. Let's hope there'll be no need for lucky number 7. :-)

t au said...

Happy Blog Birthday FOFOA.

+ 1 Matrix Sentry

This equivalent PhD level course instruction in world finance/economics/human behavior/moneyness is a bargain at any price (donation).

Michael dV said...

Fourteenth!

Michael dV said...

Ironically the most important blog I read is the one I most want to become irrelevant.

byiamBYoung said...

Happy blogday FOFOA! Just re-read your first post. I liked the way it ended:

"Well, this feels like a really long blog post. So I'll end it here."

LOL

Michael dV said...

I'm always surprised when fofoa is surprised that people appreciate his writing. Those of us who came here and stay here do so because this is the only modern financial writing that considers all variables and makes sense of them.
While it is pleasing to see others finally understand one or another point under the freegold lens at this point it doesn't matter to me. I'm happy for them but I'm past being able to look at the world in another way. I'd be willing to do it but I just do not see anything else that is more than a repetition of the confused ideas of gold bugs, mainstream apologies and conspiracy nuts.
As fofoa grows in his ability to use information from the monetary world to hone in on the minutia of the great undoing we all see his view reinforced. We benefit by becoming more secure in our outlook.
While I would be shocked by data that showed otherwise I remain open to such information (otherwise we really would be a cult). I continue to enjoy the writing and expanding my personal understanding of the way the money world works. I am watching the greatest events in monetary history unfold and I have the color commentary coming at me in real time given by one of the very few who understand the game. I think the fact that he is not burdened by any 'master' he must serve allows fofoa to see things clearly. Imagine the conflict those like Ackerman must deal with if they are burdened with a prior stance. Even worse is the situation for those like the bunch on KWN who must fit their views so as not to conflict with the sponsors business. Other are just caught in some old model or another and spend their days endlessly fitting new data to fit a paradigm that never existed.
How could rational minds not appreciate our host?

tEON said...

Congrats FoFoA for starting, and running for 6 years, the most erudite blog I've ever read. Opening one's mind to your writing dismisses so many misconceptions that will, no doubt, always exist amongst the general financial populace.

I recently listened, with incredulity, to Eric "PMs will see new highs by years end' (repeat yearly) Sprott. Probably accepting his own poor analysis he is now talking about Ebola... of all things. Good grief.

Anyway, thanks for all you do. I know your more deserved rewards are forthcoming. I encourage those who have the vision to see your value - to donate.

Cheers,

Michael dV said...

I just did some re-thinking of my 'end of the world' supply list.
Both flour and rice supply about 1500 calories per pound.
Rice just needs hot water. Flour needs an oven or at least a pan and baking powder/baking soda.
Rice is $17 per 25 pound bag (Jasmine) and flour is less that $8 for the same size bag. I have both but as I look at the calories (730,000 for 1 man at 2000 cal/day) required I'm adding more flour. At 31¢ a pound and the thought of cinnamon rolls I can't resist. If things go bad I can always make tortillas or the equivalent of pan fried paste.
Sugar is similar and who can't think of many uses for that.
Unless these get wet they last forever. Flour can get bugs but that is what a sifter is for.
If one uses only flour to feed a person (not recommended) the cost to provide 730,000 calories is $125 (for 20 bags @25 lbs/bag).
I do believe I can get costs to under $1/day. Again my way requires the ability to cook.
If transition is peaceful I'm going to donate all my supplies to a local hog farmer in trade for bacon....
oh yeah...need to put more Yoder's canned bacon on the list!

Lisa said...

I just had the most wonderful "AHA MOMENT" after reading your Airbus currency exchange rate example, and the examples following. I love when that happens.

These have been concepts which were hard for me to understand - but wow, I read the examples and it became very clear. And after I understood, the Another and FOA quotes took on a whole new meaning.

I know a lot of you guys get all this stuff the first time, and maybe it is the difference between a male and female brain, but when I can understand the concept from the example - I have learned it!!

So very thank you FOFOA and happy blog birthday.

I encourage everyone who visits regularly to consider a regular, monthly donation to FOFOA of whatever works in your budget. His expenses continue every month, as does our education.

Blake said...

Regarding the outflow of FDI netting out perfectly with treasury purchases through Euroclear, I'm at a loss. Seems Europe simply divested itself of one class of dollar assets only to purchase yet another class of dollar assets (Treasuries). Unless of course that was an intermediate transaction and the proceeds (Eurodollars) from the sale of those Treasuries were used to purchase gold?

FOFOA said...

Hello Farmersteveg,

"I'm pretty sure I don't get the connection between the drop in FDI and the Increase in Belgium purch of Treasuries per the TIC data. Just in case there is anyone else out there as obtuse as I am, can anyone explain to me (maybe in one syllable words), the significance of such and maybe even what we should look for in the future."

On the TIC data, I have been pointing out that "For. Official" has been flat for over a year as evidence corroborating my thesis that official support has ended. Flat is the most I expect to see. Under the last post, Nickelsaver said:

"As far as China goes, I think the signs are there that support has ended. I am waiting until I see a significant decline in the numbers, not just a plateau, to say its a done deal."

Again, plateau is all you're gonna get, IMO. I don't expect to see a significant decline like NS is waiting for. A decline would mean outright selling by foreign CBs, while "flat" simply means they aren't buying any more in aggregate. First, I agree with FOA who said that moving slowly away from the buying would be more than enough:

FOA 10/5/01: "The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline…"

Second, I agree with Another that foreign CBs will not sell Treasuries in bulk, for a whole host of reasons:

ANOTHER 11/2/97: "Will Japan sell US treasury debt and risk taking dollars out of "usage"? Not in your life! Nor will any other CB! They will talk about it. They will sell a little. But sell a lot? It will not happen."

ANOTHER 11/7/97: "Remember, all currencies are the same now as they are "digital paper"! Nations will defend the system at all cost They will never sell US$ treasury debt as that debt is their currency!"

So, without "official support" stepping in at the margin whenever the private sector drops the ball, all that's left is "willy-nilly" support which is the fickle, profit-driven foreign private sector "hot money" that has the tendency to turn on a dime and the ever-present ability to panic.

Back in April, I pointed out that year-over-year structural support had turned negative in February. It didn't stay negative, but that's not the point. The first YOY negativity marked a whole year of being "flat" or established the plateau. It didn't even necessarily mean selling. Debt matures, and if you don't roll it over or buy more, your holdings will decline automatically over time.

Cont…

FOFOA said...

2/4

At that same time, people pointed to Belgium as someone who was "obviously" picking up the slack. Belgium is part of the Eurosystem, so the Belgian CB wouldn't be buying Treasuries; it would have to go through the ECB. But some suggested it could be either stealth buying by someone like China, the shifting of Treasury holdings to a private sector custodian by Russia to avoid sanctions, or even covert QE by the Fed as "vas squat"(?) suggested. I never bought any of those c-theories for a number of reasons, the biggest being that the simplest explanation was private sector "hot money" flows that happened to be aggregated through Euroclear which is based in Belgium.

The strange coincidence in the FDI numbers, if it is not just a coincidence, would support the idea that it's private sector money, and not any of those other unlikely theories. But there's more!

Public sector (foreign CB) support has traditionally been through US Treasury debt plus some Agency debt (MBS) prior to 2008. By traditionally, I mean for the last three to four decades. Foreign private sector (willy-nilly) "support" (support is not really the best term as it's done for profit and not for the purpose of supporting $IMFS stability), on the other hand, includes all international flows into and out of any US-based investments (stocks, bonds, Treasuries, FDI, money markets, real estate, etc…).

Some of the dollars we trade for foreign goods and services (our current account deficit) come back to us through investment channels (our financial/capital account surplus). The present status quo is a net inflow from the foreign sector of about $40B per month.

Whether or not the $124.6B FDI outflow to Europe was directly related to the simultaneous $124.6B inflow through Euroclear(?) doesn't really matter. Either way it was a wash, which means that "Belgian Treasury buying" we knew about as early as March was offset by an FDI outflow during the same three months which we didn't find out about until the data was released in June. So what we thought was willy-nilly support coming out of Belgium turned out to be net-neutral for Q1 when factoring in FDI.

One interesting question might be whether the largest FDI outflow ever (by a factor of 2) was a fluke or the beginning of a trend. We should have an idea when the Q2 data is released next month. It could have simply been the shakeout of international mergers and acquisitions such that a large stake in some American companies passed from European ownership to American ownership and the proceeds of the sales were parked, at least temporarily, in Treasuries.

We know that the "Belgian" buying stopped in March, and since then at least $17B in "Belgian" Treasuries have been sold. So it might be significant if the FDI outflow continued. Whether it was related or not, if it continues then we must wonder where the balance is going if not into Treasuries. Even if it is related, moving from FDI into Treasuries is a big step down Exter's pyramid toward liquidity for a huge chunk of Eurodollars.

Cont…

FOFOA said...

3/4

Understand that, even though I'm talking about foreign investment (foreigners investing in American stocks, bonds, FDI, Treasuries, real estate, etc…), this is all about the US dollar's exchange rate. It's all about whether the perpetual overvaluation of the dollar can be sustained without structural support from foreign CBs (spoiler: it can't).

The dollar's perpetual overvaluation can be seen in, and is in fact defined today as, the perpetual US trade deficit (more goods and services flowing in than out) and the perpetual current account deficit (more payments for goods and services flowing out than in). Those are basically two ways of looking at the same thing, counting the flow of goods and services or counting the flow of money payments for goods and services.

The counterbalance to those goods and services flows are investment, capital and financial flows. These essentially cause the goods and services trade deficit. In and of itself, this is not necessarily a bad thing. But in the case of the US, the dollar, and the $IMFS, it is a bad thing because they have been structurally supported and maintained by the foreign public sector for so long now that the entire US economy, the American standard of living, most critically now the US government's current status quo (because it can print to spend any amount in extremis), and in fact the global $IMFS are all now structurally dependent upon the perpetual overvaluation of the dollar. In other words, the entire system is dependent on foreign private sector investment flows into the US maintaining the current US trade deficit which is up to about $41B per month right now.

When you invest in a foreign asset, you basically have two risks. You have the risk that the resale price of your asset will decline, and you also have currency risk. Foreign public sector (structural) support essentially eliminated currency risk on dollar assets which helped to "pump up" (as FOA said) our financial markets since currency risk wasn't much of a factor. Private sector foreigners investing in US markets has the same effect on the dollar exchange rate as foreign CBs buying dollars and using them to buy Treasuries. It overvalues the dollar versus goods and services and therefore causes a goods and services trade deficit.

We talk about usage demand, like foreign oil priced in dollars. This creates a pool of circulating "Eurodollars", but it's not necessarily an expanding pool, and it is not what causes our trade deficit. If you are a foreigner holding a dollar, you can use it to buy a foreign good (like oil) which is priced in dollars. But then the seller has to decide what to do with that dollar. Likewise, you could lend your dollar to a foreign entity in a dollar-denominated loan, but then the borrower is going to spend that dollar and the new holder will have to decide what to do with it.

At the end of the line, all "homeless" dollars either 1.) come back to the US through the purchase of US goods and services, 2.) come back to the US through a US-based investment, or 3.) get exchanged for another currency in the FOREX and put downward pressure on the dollar's exchange rate. This is kind of like a "trilemma" for the dollar after 55+ years of overvaluation. There is a delicate balance between the three, and the status quo (the $IMFS) hangs in the balance.

Cont…

FOFOA said...

4/4

In the past, the foreign public sector (European CBs and the PBoC) would step in to maintain the status quo (weaken their own currencies and strengthen the dollar) whenever the foreign private sector panicked, driving the dollar down. Also, any major change in #s 1 and 3 would mean crashing the USG's "standard of living", which is "something our currency management policy will confront with dollar printing to avert" as FOA said. This (hyperinflation) is a given.

So, assuming the ECB and the PBoC won't step in next time a financial panic weakens the dollar, which IMO is a pretty safe assumption, your pensions, annuities, gov't handouts and general American standard of living are all in the trusty hands of the foreign private sector which, as I said above, has the tendency to turn on a dime and the ever-present ability to panic.

What is required of this "turn on a dime and panicky" foreign private sector is the net investment in US assets of about $40B per month. That's new investment money coming in. Just holding their positions (not selling) is not enough. We need MOAR each month, to the tune of about $40B more. Any outflow, like the FDI outflow, requires that much more new inflow.

In the first three months of 2014, there was a net FDI outflow of $39B per month. That means the inflow required to maintain your pensions, annuities and gov't handouts was $40B (the status quo trade deficit) plus $39B (the FDI outflow) for a grand total of $79B per month. So let's hope this darn FDI outflow doesn't continue. And let's also hope there's no panic in any of the other US investment sectors, like the stock market or something.

Which reminds me, some would say that all US investment sectors are currently overvalued based on common sense and historically-used valuation metrics. Can you name one that's not? So when you have bubbles developing in everything, how can you get foreigners to keep (stupidly?) investing an additional $40B per month in perpetuity (spoiler: you can't). In other words, I recommend physical gold.

I hope this answers your question, Farmersteveg (Steve made a very generous donation—thank you, Steve!—and so I felt obliged to give a generous answer). If not, please be more specific next time, oh, and sorry for all the syllables. ;D

Sincerely,
FOFOA

WinstonSmith said...

Thank you very much for the FDI explanations.

I'd like to recommend to all of you another blog, called PonziWorld.
http://ponziworld.blogspot.de/2014/03/globalizations-cult-of-superiority.html#more

This guy calls for the mother of all output gaps and the end of globalization. His assumption is that once the USD gets revalued, there will be an umemployment crisis all over the world and relentless deflation (sweat shop workers in Asia will become unemployed because Americans cannot buy their product anymore) and the transition will be very difficult for everyone everywhere, to say the least.
Very good read!

Mike said...

Can someone please point me to ORO's post mentioned by FOA. Looks like it will be a important post to read.

FOA 12/5/99:"No one is worried that the US will back away from protecting its interest after it's bankrupt. Whether it's oil or national security, they will act as best as able. See ORO's post about this, it's real good."

sean said...

Congratulations FOFOA on your 6th anniversary!
I've often thought that you should be awarded a PhD for the amount of research and expert analysis you've done, I'm just not sure which university professors would understand the concepts. Perhaps you've found one in Bulgaria!

farmersteveg said...

Thanks FOFOA. My donation was not that expensive, but definetly is going to be worth a lot in the near future. I would encourage all of the readers of this blog to make such a donation NOW while the decision to make is EASIER (lest our greed might kick in later)

To condense your response, still no sinister conspiracies between central banks, just foreign (European?) private investors parking $'s further down exters pyramid probably. Should any market today (they are all overvalued) adjust to a more realistic valuation, this willy nilly foreign private sector $ might decide not to go into US Treasuries and then things really get interesting?
If this is close to being correct on my take on your response, and me being the pot watcher I am, what should we be looking out for besides a quarterly FDI report? (I need something to keep my imagination from going full retard!!)

t au said...

@ Mike

I believe the referenced ORO post is here

http://www.usagdfa.com/1999/12.html

see post # 20166 - 12/3/99. "THC - All roads lead away from Rome"

If not, it may have been post # 20036 - 12/1/99 "THC - US position as protector"

It appears that ORO's opinions were well thought of by FOA.

Lisa said...

Mike

I will teach you how to fish ;D

Using links on right side, at top of post, go to "Linkable Regular Forum 1998-2007".

That FOA quote is comment number 20311 on 12/5/99, and here is the link to that specific quote:

http://www.usagdfa.com/1999/12.html#20311

(You can link to specific comments in this area by right clicking on comment number and "copying link location")

If you work backwards there are lots of ORO quotes. I just looked briefly, but it appears there was a discussion going on between ORO and THC in November and December 1999, which is what you are looking for.

Let us know if you find something good - you can give us the link to the comment

Sam said...

Great post FOFOA.

Blake said...

FOFOA –

Thanks for fleshing out the FDI/Belgium section of your post. I too had Exeter’s pyramid in mind when I initially read this post. Although I took it one step further and posited that ultimately, those net outflows of FDI found their home in gold and that Treasuries were simply the way station. Presently, as the $DXY continues to climb, perhaps we are currently witnessing wealth move down to the base on the pyramid, its ultimate destination being physical gold.
Further, I agree that foreign private investment cannot continue to invest dollars in the United States to effectively keep the $DXY well bid. In that sense, it really is only a matter of time…That said, as foreign direct investment (FDI) is only one input that coheres to form total foreign private investment, does not the $79B figure you quote to maintain the status quo assume that all other avenues of foreign private investment, i.e., “stocks, bonds, Treasuries, real estate, etc.” will effectively be flat in Q2 from a net inflow perspective. In other words, as far determining willy-nilly support, must we not look beyond just FDI outflows and determine net flows into/out of stocks, bonds, Treasuries , real estate, etc. to assess the state of “homeless dollars”.
And because these flow numbers are published well-after the fact, we would expect to see the effect of waning willy-nilly support well before we actually can analyze those figures. In that sense, if total foreign private investment were indeed waning, we would see either real price inflation in goods and services in the United States and/or a falling $DXY. As we haven’t seen either of these conditions manifest yet, it seems that foreign private investment is carrying the dollar – for now.

Aaron said...

Outstanding work FOFOA. Over the five years I've been reading your blog, I've gone from pot watching the price of silver, to pot watching the price of gold, to pot watching the strength of the USD on the FX, to GLD inventory, TIC reported Treasury Holdings by foreign CBs, to finally pining for the days of free floating exchange rates and all of the benefits that go along with it (very quick balancing of trade as currency printing/buying ripples through the FX)

When I started reading your blog way back when, if someone had asked me the difference between a clean exchange rate float and a dirty float, the only thing that would have come to my mind would have been soap. Who knew it was all so complicated yet all so easy at the same time.

Phil S. said...
This comment has been removed by the author.
One Bad Adder said...

Happy 6th FoFoA - Good post - Time flies eh?
$IRX Pattern repeat here - http://stockcharts.com/h-sc/ui?s=$IRX&p=W&b=5&g=0&id=p52000848056 ...if SM turns south, we just may slip into the abyss.

Joe Vanderbilt said...

FOFOA, your ability to connect the dots (and find the dots first) never ceases to amaze me. Congratulations on these 6 years!

One question about the FDI issue, if Q1 was a wash (i.e no net inflow of ~$40B/month), and if it did not go to FOREX (no fall seen in the dollar exchange rate), then what is the ROW private sector doing with their ever growing pile of dollars? Could the foreign CBs be providing support by holding the cash itself instead of buying USG debt? I imagine this would not show in the TIC data.

Tom R said...

I think hobbyists devote greater passion and enthusiasm to their hobbies than do many professionals who may become jaded.

Therefore, post RPG launch, I suggest nuclear fusion as a hobby. If you grasp the subject as quickly and thoroughly as you have Freegold, and similarly progress the field of understanding, you'll have a working reactor in short order.

The world will be a better place from your efforts, as it already is improved by YOUR thoughts on Freegold.

Roacheforque said...

Undoubtedly one of your best posts ever!

I think if Another had said "deterrminant" instead of "manufacture" the whole exchange rate comment would have been easier to understand - one of those odd colloquialisms I guess.

But there were other quotes from A / FOA that I've either forgotten, or never read (and I thought I read it all!!) which were truly "golden".

Those quotes will likely fill in some hazy areas of the larger view.

In the end, with all the conflicting nonsense flying around in cyberspace, the various streams and networks, the FOFOA message remains consistent and cohesive.

It is the foundational truth under which all the hyperbole and propaganda compete for attention, distraction and obfuscation (aside from and competing with abundant confusion).

The essential question on timing becomes one of "what everyone who matters truly wants."

That seems the most lingering factor, "Who really matters and what do they truly want?"

I agree with the assumption, but this complex world never seems to function quite as simply as that.

Time, it appears, needs a little more of itself to prove all ...

jojo said...

It's good to test the lens against the mainstream. I'm never disappointed that I've read so much here over the years.

Check out the nice graph at the end of this paragraph in the article :)
"But monetizing US Treasury debt hasn’t been exclusively monopolized by Americans. Barron’s also publishes the dollar value of US T-bonds held at the Federal Reserve by foreign central banks (Blue Plot below) which have been huge purchasers of Treasury debt for decades. Once purchased, these central banks do what central banks always do, that is “inject” the resulting “liquidity” into their banking system, increasing its ability to create credit (debt). However, foreign CBs apparently reached their limit in 2011 of how much US Treasury debt (the US National Debt) they were willing to monetize, and since then the Federal Reserve (Red Plot) has picked up the slack. "



http://www.gold-eagle.com/article/%E2%80%9Cmonetary-policy%E2%80%9D-gone-berserk


M said...

@Edwardo

I agree with everything you said about the idea of a reserve currency. I think it would be pretty easy to argue that the world would have been better off if they let the system explode in the 80s rather then pay to postpone it. They created a monster now. Not sure what good it did anyone.

Sam said...

A dollar is a credit. A USG treasury is a debt instrument designed to lend credits back to the very institution that issues the credit in the first place. Since the USG via the FED can issue credit on a whim, it comes to reason that the very existence of such an instrument represents an overvaluation of the credit itself. There is no other reason for treasuries to exist.

Dollars flow through everything else including financial and other debt instruments. The seller on the other end gets dollars and would further circulate them. Only loaning dollars back to the USG allows for the same dollars to be used to buy something rather than an additional supply of dollars being needed and printed. Treasuries are nothing more than the suppression of the supply of dollars.
It shouldn’t be long now until smart??/dumb?? money figures out that buying treasuries is not a good investment. These traders/gamblers do worship their historical charts though don’t they.

Robert said...

Six year for the blog, and I have been following it for almost three and a half. I still remember laying in my hotel bed on a business trip to Jakarta in April 2011. Deflation or Hyperinflation? was my first post. I vividly remember thinking "I do not grasp all of this, but this is important, and this connects the dots better than anything I have seen before." Before that the best I had found was Chris Martenson's Crash Course -- which is excellent but stops where FOFOA picks up the ball and starts running. Is it odd that I remember the day and where I was when I found FOFOA's blog? Congratulations FOFOA!

Dim said...

Historical TIC data for foreign official holdings has plateaued before since 2000. I note that between Jul 2009 and Jun 2010, holdings were steady at around $2,700B. Also between October 2010 and June 2011 holdings were steady at around $3,240B. Granted, before these two plateaus there were two large increases in buying respectively. There was no large spike before FOFOA's most recent plateau, however.

Wumpski Wumpski said...

Steve,

Any US asset market, eg stock market, might be the pot you are looking for.

It's quite a siren song, this rising stock market. Why settle for a dollar when you can have...three?

Let's watch and see.

Phil S. said...
This comment has been removed by the author.
Reality Show said...

Happy 6th Fofoa. I have found your latest series of posts to be extremely enlightening, thank you so much.

For giggles this from the Council on Foreign Relations.
In response to a comment one of the authors writes "creating money ex nihilo creates neither wealth nor debt. Money is money. For proof that it is not debt, ask a cab driver if he is worried about the government defaulting on his $10 bill, or when he expects to get repaid. You will get very strange looks. Money is purchasing power. So no one is being tricked. If the Fed gives me cash I can buy more things. That is not a trick, it is an indisputable fact." Hehehe

t au said...

Ah yes, it apparently continues to flow east.

"India's Appetite for Gold Improves"

http://online.wsj.com/articles/indias-appetite-for-gold-improves-1408964049

JR said...

What's up in CB land?

If Yellen's pants were as tight as the monetary policy tea-leaders suspect her rhetoric implies you could tell what religion she was (and that's something you don't wanna know), yet...

... on the other side of the pond Draghi just went from laser maiden ponpoot to riding shotgun in the slutmobile, getting frisky as he went off his prepared remarks up in the 'Hole and signaled the ECB might be getting loose:


Inflation has been on a downward path from around 2.5% in the summer of 2012 to 0.4% most recently. I comment on these movements about once a month in the press conference, and I have given several reasons for this downward path in inflation, saying it is because of food and energy price declines; because after mid-2012 it is mostly exchange rate appreciation that has impacted on price movements; more recently we have had the Russia-Ukraine geopolitical risks, which will also exert a negative impact on the euro area economy; and of course we had the relative price adjustment that had to happen in the stressed countries as well as high unemployment. I have said in principle most of these effects should in the end wash out because most of them are temporary in nature — though not all of them.

But I also said if this period of low inflation were to last for a prolonged period of time, the risk to price stability would increase. Inflation expectations exhibited significant declines at all horizons. The 5year/5year swap rate declined by 15 basis points to just below 2% — this is the metric that we usually use for defining medium term inflation. But if we go to shorter- and medium-term horizons, the revisions have been even more significant. The real rates on the short and medium term have gone up, on the long term they haven't gone up because we are witnessing a decline in long-term nominal rates, not only in the euro area but everywhere really. The Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term.


http://www.businessinsider.com/the-key-part-of-mario-draghis-jackson-hole-speech-2014-8


So if it is not a dirty float and devaluing against the $ for the ECB, what "available instruments" might Draghi have in mind for stimulating a rise in inflation? Sounds like it might not be just sitting around and waiting for Yellen to get her poon tightening exercises going, doesn't it?

Edwardo said...

It's nice to see you back here, JR. Let's hope your right regarding what I take to be your intimation regarding Draghi and the ECB's next move.

Jeff said...

Phil,

Do you think someone can keep repricing gold on the books without making it available? Why did the US close the gold window when they repriced gold?

FOA: "All of the many items ThaiGold posted today about government control of gold pertains to past policy in a different ""gold is official government money era"". The use of gold through that era is riddled with failure. In the future (see my latest Gold Trails) currency reserve competition will require a country to keep gold free for private trade. Making price discovery a physical affair only. This will come about in a completely different atmosphere from today where gold is still manipulated as a world "official currency" asset. Mostly now manipulated by a failing IMF/dollar system. The next reserve currency, the Euro will not compete with gold and will require it to find its FreeGold value level. The US will have absolutely no incentive to controlling gold to defend its currency in that era."

As you consider the Thoughts of ORO, remember that he was a hard money advocate.

FOFOA: "The following quote is from ORO, one of the brightest hard money advocates that faced off with FOA. I think it sums up the flaw in hard money thought with one sentence: “In short: for a monetary system to work, someone, somewhere, must be able to exchange the currency for gold AT A FIXED RATE. We call this parity.” If you can detect the flaw in ORO’s statement you are well on your way to a surprising revelation."

And welcome back JR. "The smile of recognition returns to my face as this point is made in these few, short sentences better than I have seen it made in entire articles on the subject. Welcome back, my friend. --------"

Phil S. said...
This comment has been removed by the author.
Gold Kiwi said...

If what is written here is true, it explains why gold held in western vaults has been shipping east over the last few years:

http://philosophyofmetrics.com/2014/08/27/the-fall-of-mans-logic/

There's plenty of things in that blog post that I (and most people reading FOFOA) wouldn't agree with, but that doesn't mean it should be dismissed in its entirety.

Roacheforque said...

Why JR, to answer your question about Drahgi, "His words, of course."

I have just given FOFOA my heartiest, most heartfelt endorsement over at the annals for this anniversary effort.

The eloquence of Six! exceeded my most ambitious expectations.

Even the little people could read it, and "cultivate a certain ... understanding" that transcends their daily distractions.

FOFOA, I commend you!

-R

Robert said...

Gold Kiwi, What from that post should be dismissed and what should be seriously consider? He seems to understand the importance of oil and its relationship to gold. He seems to understand that there are imbalances in the current $IMFS that need to be resolved and that the current system is unsustainable. He seems to grasp that giants see wealth differently from the shrimps. He senses that a grand new paradigm is coming, and that plans for it have already been made. So far so good.

But it is hard for me to believe that China is worried about gold denominated pre- WWII sovereign debt that it defaulted on decades ago, and that plans to make good on that defaulted debt is greasing the movement of gold eastward. It is hard to see how governments intend to use the SDR to resolve the imbalances in the current system. And I do not buy that western powers have much choice about the flow of gold, as if they could simply turn off the flow without collapsing the entire current structure.

I think the author says a lot of thought provoking things, but it does not seem to be very tightly developed. So what do you think we should focus on?

Gold Kiwi said...

Robert, the points I don't agree with are that an IMF SDR will form the basis of a new IMFS (that's the central theme of JC Collins' writing) and that the purchasing power of physical gold won't dramatically increase in proportion to fiat currency. That doesn't fit with the Freegold thesis.

The part I found fascinating was the Chinese default on the gold denominated bonds, the theft of gold during WW2 and effectively balancing the books before the Shanghai Gold Exchange can become the new physical gold price discovery mechanism. As the author pointed out, China already settled with British bondholders before the handover of Hong Kong.

Another related blog post is this one:
http://philosophyofmetrics.com/2014/05/07/u-s-treasury-renminbi-bonds/

tunc k. said...

Mr. Volcker, on page 232 of this book, presents this statement: "a nation's exchange rate is the single most important price in its economy" for "it will influence the entire range of individual prices, imports and exports, and even the level of economic activity. So it is hard for any government to ignore any government to ignore large swings in its exchange rate."

Aurora said...

Thank you so much FOFOA, I personally appreciate the time and effort you put forth sharing this very important information with us. A job well done my friend!!! I look forward with great anticipation to your next serving of brilliance, and you really deliver each and every time. Congratulations on six splendid years of your FG blog. Just pushed the donate button for you in show of my appreciation. I would recommend and hope that others donate as well to recognize your effort and personal expense making this magic happen for us.........Cheers.....Aurora

Roacheforque said...

The post referenced at philosophy of metrics was interesting and could possibly bring some valuable new information to light, but reading further about how the ebola virus was manufactured as a false flag distraction for global systemic change dumped all hopes of credibility into the deepest darkest pits of full spectrum conspiracy paranoia. Even more disturbing is the unified agreement of followers (commenters) across the several posts perused, especially and including that one.

I'm afraid the koolaid there is a bit strong for my tastes, Possibly due to the infusion of grey Ausley?

Michael dV said...

In our continuing discussion of why the ECB is not like the Fed....from ZH no less...I don't think they see the whole picture but even this recognition surprises me:
http://www.zerohedge.com/news/2014-08-28/6-reasons-why-ecb-will-avoid-qe-long-possible-and-why-fed-did-it

Sam said...

@tunc k.

Cool quote from Volker.

To sum up FOFOA’s latest distillation of Another and FOA’s writings I think we can see Volker’s statement as completely true. The next few sentences from Volker perhaps should have read:

--governments that intervene and manipulate their exchange rate in either direction will cause the gradual accumulation of imbalances and eventual disturbances. It is therefore desirable for the world to develop a stable system where functioning automatic adjustment mechanisms keep imbalances and disturbances in check--

Blake said...

http://www.alhambrapartners.com/2014/08/27/attending-the-exits-part-2/

As FOFOA, the author draws attention to waning private "support" of the dollar by examining the cumulative flows of private holdings of US$ assets...

Franco said...

Structural support from foreign central banks seems to be back in force. Below is the annual accumulation of US Treasury bonds and notes by foreign central banks:

2009: +161 B
2010: +172 B
2011: +144 B
2012: +210 B
2013: -9 B (!!!)
Last 5 months of available data (Feb-Jun 2014), annualized: +209 B

So, for all the trash talking out of Russia, Europe, China, central banks are saying "not yet".

Michael dV said...

This doesn't sound like support for ECB QE! In fact it is a clear Hell NO!
Hollande will have to learn how to run a country in the real world.

http://www.zerohedge.com/news/2014-08-28/german-finance-minister-tells-eu-leaders-free-money-partys-over

Dim said...

Does anyone have any thoughts as to why foreign official holdings plateauing is any different to the last two times it plateaued this decade re my previous comment:

"Historical TIC data for foreign official holdings has plateaued before since 2000. I note that between Jul 2009 and Jun 2010, holdings were steady at around $2,700B. Also between October 2010 and June 2011 holdings were steady at around $3,240B. Granted, before these two plateaus there were two large increases in buying respectively. There was no large spike before FOFOA's most recent plateau, however."

I also note that the US is at its lowest point of 'exorbitant privilege' in 2013 since 1998, that being trade deficit/total imports, and all signs point to lower for 2014. Less USD leaving the US to pay for exports, coupled with less/no USD flowing back in to buy Treasuries. I guess this makes things different this time..?

ein anderer said...

Franco,
FOFOA’s argument is using a YOY comparison. Your’s don’t, right?

Indenture said...

Franco: Where did you get your data?

Motley Fool said...

Gold kiwi

I have to ask, why do you link such swill? A harsh term to be sure, but not unfair, I think. Sentences complicated to the point of being devoid of meaning, simply to impress; a vague ominous tone and subtle implications based on some facts and a truckload of imagination.... conspiricst drivel.

I recall being steered to this blog not too long ago on twitter, and will stick with my initial response( paraphrasing) that there are too many foundational errors in thought at play here that it would be worthwhile to engage the author as it would be too time consuming, and likely to bear few fruit.

I do want to highlight one thought I found of interest :

"Those who purport that the BRICS countries are going to overthrow the western banking cabal are unable to explain why the western banks and governments would be willing participants in their own demise by making the gold available in the first place."

The content of the query is interesting, even if the wording is not.

Magnanimosity is not generally a likely driver of action, though pragmatism does suffice. Still, it remains something that could be thought upon in more detail.

TF

Sam said...

@MF

If I were to try and answer that "interesting query" I would say that the loss of hoards of gold in the west would be but a symptom, not the cause, of their demise. The $IMFS currently trade with their neighbors using over valued credit propped up in value to maintain the system. Can't fix that with Gold

Franco said...

Indenture:

http://www.treasury.gov/ticdata/Publish/tressect.txt

M said...

@ DIM

Yeah I dunno. There was some bigger developments the last time it plateaued. China joined the wto in around 2000 and the financial crisis in 9/10. Plus they say that the forign buyers have slowly been moving into shorter and shorter duration.

What is your point about the trade deficit ?

Dim said...

Hi M, I'm not sure what my point is about trade deficit is. Though I remember reading in Exorbitant Privilege that the world needs a US trade deficit so the world economies can continue to expand. I think the implication was that a lower US deficit might suggest a move to other currencies is occuring (and by necessity the non-rollover of USTs).

Jeff said...

France to ECB: 'manipulate FX'

ECB: 'Oui' or 'Non'?

http://www.bloomberg.com/news/2014-08-31/france-asks-for-more-action-from-ecb-to-correct-overvalued-euro.html

M said...

@ Dim

Interestingly enough, one can surmise that Russia has been moving to other currencies all along. No wonder the US is war mongering Russia. Russia has the 5th biggest forex reserves in the world yet exports to the US as a percent of their exports is 2.1%. Putin should stop carrying the US's water. But I don't really understand why the whole world is so scared of ditching the IMFS.

That is a keynesian fallacy (the world needs a trade deficit to expand). The whole point of an economy is efficiency and productivity. Not growth for the sake of growth.

ein anderer said...

Update to FOFOA’s post »YOY Structural Support Now Negative«: The post from April 4th, 2014 covered the Official foreign holdings of treasury securities data inclusive February 2014.

FOA (10/5/01): »The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline …« (accentuation: mine).

The data are updated around 15./16. each month, covering the figures from the month next-to-one. All 2014 data so far:

(2013) 2014: in billion of dollars

2014/01: (4048.9) 4068.0: + 19.9
2014/02: (4100.4) 4069.3: - 31.1 (first time negative)
2014/03: (4093.8) 4053.7: - 40.1
2014/04: (4080.0) 4067.5: - 12.5
2014/05: (4075.9) 4092.2: + 16.3
2014/06: (4012.2) 4108.2: + 96.0

Phil S. said...
This comment has been removed by the author.
Indenture said...

So what happened to cause the +96 Billion?

Sam said...

It’s funny to see all the different ways to track statistics. Another way to look at it is foreign CB’s have only added 59.3 billion in the last 18mo. or around 3 billion a month. If you don’t count the big spike in May and June (which will probably correct itself a little in the next few months) foreign CB’s only added 18.6 billion or less than 2 billion a month. Prior to this development over the last decade CBs stored between 30-40 billion per month on average. Nothing to see here though.

M said...

@ Sam

So forign CB's have only added 59 billion over 18 months. That would cover the US's merchandise trade deficit for ONE month.

So how come we don't see trade with the US seizing up ? Where do these numbers have to go in order to change something ?

Sam said...

@M

The US doesn't need foreign CBs to buy treasuries to cover the trade deficit. The USG writes a check and the fed prints the cash. They need foreign CBs to hoard cash and or loan it back to them to keep all that excess cash from chasing goods and services. This keeps the dollar overvalued.

So how long does it take for some serious inflation to hit the US once the morphine drip is cut off? Don't know. I'm on the record saying 2014 is our year but it's just a guess. I know there is a lot of hot money out there but 40 billion a month with no CBs participating more than token amounts shouldn't take long.

Joe Vanderbilt said...

@Sam

Can we know if the CBs are hoarding the cash? Is it reported somewhere?

Michael dV said...

Joe V
The central banks 'hoard our cash' when they buy treasuries. Those numbers are what the last few posts have been about.
As Sam said, if all the money the US government spend just went out into the world and then came back to be spent we would see much higher prices and almost certainly the currency would have gone to hyperinflation by now.
When central banks buy bonds it allows the government to spend that instead of having to ask the fed to make more new money.
It was in the best interest of all to keep the system going until an alternative to the dollar was in place (the Euro) in order to keep global commerce alive and goods flowing across the planet. 7 billion souls count on that flow to keep themselves employed and fed.
We though things would collapse in 2000 when the Euro hit the streets but then China stepped into the role that the ECB had been performing.
Now China is not buying bonds (no net increases) and there does not appear to be another savior on the scene.
We will see what happens as the Fed and the US government try to prevent collapse and to hide all signs of failure. At this point their efforts are pretty transparent with support of high S&P and low interest rates.
The question being considered is: will the private holders of treasuries, the ones who buy to make money and not to support the dollar, give up and begin to sell the 4+ trillion they hold. If this happened suddenly it could cause a sudden collapse. They would not only crush the market for treasuries but also be trying to buy stuff as quickly as possible because they would know that the dollar would become worth less/worthless soon.

Sam said...

@Joe

There might be but I think it can be somewhat opaque as CB’s only voluntarily report reserves. If they have more reserves than needed to defend their currency they may choose not to report them. I think it’s pretty clear that buying treasuries isn’t an “investment” like it poses as but more or less represents a necessary support to maintain the dollar reserve system. If you agree with that statement then hoarding dollars makes slightly less sense than buying treasuries. Though on the surface it accomplishes the same overvaluation of the dollar that a treasury purchase does by preventing its circulation into goods and services it has the rather large down side of forcing the USG to expand the money supply way faster because no one is loaning/recycling old dollars back to them.

If treasury accumulation by foreign CB’s are waning, and treasury purchase are superior to hoarding cash in order to maintain the system, that is a good enough indicator to me that official support has been withdrawn without needing to see how much cash is being hoarded by who.

Joe Vanderbilt said...

Thanks Sam, that makes sense to me. But I think that it might make sense to start hoarding dollars rather than treasuries if you want to support the system a little while longer, for whatever reason, but want to be closer to the exit. It is after all one more level down on the Exter's pyramid. If you think about it, shouldn't we expect to see precisely this happening just before the crisis hit?

Michael dV, thank you for the answer but I know how the story goes... I am trying to make sense of the TIC and FDI numbers that seem to show that the US is now missing the "status quo" net inflow support of $40B/month. But the trade deficit is still there so where is all this cash ending up? Not the Forex as no fall was seen in dollar exchange rate. Someone must be hoarding it.

Franco said...

Sam said:

" Prior to this development over the last decade CBs stored between 30-40 billion per month on average."

According to the official data, the biggest year ever (as far as foreign CBs accumulating US Treasury bonds) was 2012 with a total of $210 billion, which would be a monthly average of $17.5 billion. If you have any evidence that supports your claim of $30-40 billion per month, I'd like to see it. From Feb to Jun of this year, the accumulation was 17, 12, 19, 20, and 20 billion. Yes, it's only five months, but it looks like a change of pace from the up-and-down of 2013, where they accumulated as much as 53 billion in a month, and dropped as much as 24 billion only three months later.

Eric C said...

I interpreted Joe's question as asking when USDs are paid for a good/service to a foreign company, and they go to the bank in their country and are exchanged for local currency; can those USDs sit there unnoticed... I have wondered this.

Sam are you saying that CBs can choose to not report this number?

Is it correct to say the SWIFT system tracks this? Where would I look to find these numbers for governments that were holding USDs and not buying treasuries?

M said...

@ Sam

"The US doesn't need foreign CBs to buy treasuries to cover the trade deficit. The USG writes a check and the fed prints the cash. "

Understood. But each time the Fed does that, it is directly stealing theoretically finite purchasing power via inflation, from the other CB's dollar hoards. So this doesn't induce price inflation in the US per se, but it does devalue the forign CB's dollar holdings. Against what , I don't know..

And Y said...

Fed: US consumers have decided to 'hoard money'

Those St. Louis guys...just shut up!

Sam said...

@Franco

I'm looking at this data.

http://www.treasury.gov/ticdata/Publish/mfhhis01.txt

ein anderer said...

Yep, Sam, Franco, same with me.
Since I do not understand FG in those finer details very well (mainly because it would need a lot of RRRTF in a foreing language), I sticked to FOFOA’s way to analyze the treasury data: comparing the Foreign Officials of month A (2014) with month A of 2013.

Franco said...

Sam:

I don't understand the discrepancies between this table:

http://www.treasury.gov/ticdata/Publish/tressect.txt

and the one you linked.

For example, in your table, the foreign official T-bonds & notes for 6/2014 was 3767.2, while for 5/2014 it was 3731, so the net change would be $36.2 billion. On the table that I linked, the accumulation for June 2014 is shown as $20 billion! And both tables come from the Treasury. I don't get it.

The Dork of Cork said...

"unless we crash our lifestyle to a level that will allow their export! "
The function of production is not to export , it is to consume.
You are falling for the bankers perfect method of destroying internal or local exchange - where they rip out energy units from this exchange and push it into manic export and import practices - the now smaller surplus is therefore extracted from the hinterland and directed into national & financial capitals.
I advise you to walk through Aragon (Spain).
The village system of production distribution and conumption was broken first by national Autarky (the national phase of "development")
Post 1959 the village system was finally smashed by the international market state.
The villages are now empty (nobody and I mean nobody lives in them)
Spain has now lost all redundancy.
Its a failed state.
I can remember you once talking in a glowing fashion about the Bank of St George.
Then without a hint of Irony you talk about the destruction of the Anglo Dutch model of sucking in surplus production from the world hinterland.
St George !!!!!
The UK ??????
Can you see any connection ?
Look at where much of inter euro trade is flowing.
The UK (and France & Holland if you subtract Rotterdam entrepot operations))are in chronic trade deficit with the new Euro Commonwealth.
Most of the euro areas production is useless to most europeans as they cannot afford to consume it.
Europe is a extreme colony of the Boys from Genoa.
Thats is function.
Nothing more.
If it was anything else they would have stopped the destruction of ancient societies many moons ago.
Its only higher purpose is to support a empire of usury with the center of orbit in London.

It is no different from the UK banking union of the 19th century.

Dim said...

@ Franco, your table is net whereas Sam's is gross.

Notice yours says "NEGATIVE FIGURES INDICATE NET SALES BY FOREIGNERS TO U.S. RESIDENTS OR A NET OUTFLOW OF CAPITAL FROM THE UNITED STATES"

Sam said...

@Franco

After looking at both reports I think mine counts T-Bills and your doesn't. More importantly yours seems to use raw data as it's released and isn't updated with revisions down the line and mine is. You should notify the treasury. That report seems to be incomplete and inaccurate.

I think a bigger point is that real structural support for the system was really Europe for a while and then China. Though I personally think treasury purchases are a terrible move beyond structural support for the system I can't speak for other CB's and private money with minds of their own and what moves they will make from time to time for various reasons. It won't help keeps things together for long though.

Dr, Boer said...

Hugo Salinas Price predicts how the dollar and other fiat currencies will die: when none of them can purchase any real gold. Meanwhile, the price of "future gold” will be very low.

FOFOA predicted the same scenario. I like this convergence. Full article of Hugo SP:
http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?fiidarticulo=246

M said...

I predict as this keynesian claptrap enters further into the surreal that paper gold price manipulation will be accepted and implemented as a mainstream policy. Yellen and co. will say that they are trying to break the back of inflation by smashing the paper gold price.

This is already happening. And hedge funds have been front running this policy all along too. This is why paper gold can't get back up. Jim Rickards said recently that its not even a secret anymore that the paper gold price is being smashed. He said that whoever is doing it should be embarrassed.

Sam said...

The gold price having fallen from manipulation has literally destroyed a large percentage of portfolios invested primarily in gold stocks. Some of these mine stocks have gone to zero and are in bankruptcy, never to return.

All the way down Another (and later myself from association) said to buy gold for the long haul because in the long term it may go very high. Then in typical like form, traders said buy gold stocks for the long term also. Don't listen to Another, it will never go that high and with these paper items you will get rich if it only goes up $100 bucks! Indeed, leverage ruled the day all the way down with little regard to the fact that the "little guy" could lose it all with no hope to run for the final payoff. Now, here at $250 gold, Another presents a case for the destruction of the pricing market mechanism and still says, buy gold for the long haul. A concept, I might add that fundamentally offers the most bullish case for physical gold, while posing a worst case scenario for mine stocks.

-FOA

Motley Fool said...

Dr Boer

Sulke kommentaar maak my soms moerig.

As ek dit sou moes verwoord in analogie sou dit soortgelyk wees aan se dat 'n nuwe befaamde man se opinie dat die aarde rond is jou nou meer sekerheid gee om die idee aan te neem.

Vir my, as ek dink oor wat boerwees vir my beteken, is dit om te volhard en deur te druk as dit swaar gaan, vindingryk te wees in alle omstandighede, en die knaters te he om stelling in te neem. Selfs al is die posisie wat gevat word nie altyd reg nie is dit die bravado, die chutzpah om te kan se : dit is wat ek dink en fok almal.

Ek gee nie 'n fok om oor wie saamstem met die idees nie, want hul opinies enige kant toe maak nie 'n verskil aan die feite nie.

Ek veronderstel ek neem nou aanstoot omdat jy twee persoonsweses waarvoor ek respek het kombineer en in naam aanneem, en dan sulke kak kwyt raak. Maar fok man, groei 'n paar.

TF

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

@ Phillip

:)
here it is
http://youtu.be/ImqxhaPyLEo?t=12m26s

Edwardo said...

Schiff and Riclards, dressing alike and thinking alike. The last (bogus) refuge of the failed gold guru is to cry "manipulation"

M said...

Haha I noticed that they dressed the same too.

But Edwardo. The gold standard was a manipulation. The London gold pool was a manipulation. The LBMA is what ? A manipulation. Schiff still won't say that its being manipulated. He just didn't want to get into it with JR.

Michael dV said...

Dr. Boer
Rob Kirby also used that as a milestone: 'the dollar will collapse when China cannot get the gold it wants"….
Those who don't understand the importance of gold are doomed to never understanding the way the new system will unfold.

Edwardo said...

I'd say that the entities/systems you mentioned were managed rather than "manipulated." You likely feel that I'm engaging in semantics, that I am making the proverbial distinction without difference, but my view is that the term manipulation conjures up images of some remorseless animal, a cat, perhaps, toying with its helpless prey.

The term managed, on the other hand, tends to not have that aspect as part of its meaning, which is probably why it tends to not be invoked by woeful gold bugs when describing the admittedly opaque (but not necessarily nefarious) movements of the "gold" market.

If the "gold standard" the LBMA, etc, were manipulated in the manner implied, as some object that was, for all intents and purposes, (figuratively, if not literally) putty in the hands of its supposed operators, than the manipulations would have never ended. After all, when does a piece on a board game ever defy the will of the hand that moves it about? Never.

But the asserted "manipulations" did end since those who were said to be doing the manipulating, were far from omnipotent puppeteers. They were just managers who managed until, well, they could no longer manage. The present paper market will experience the same failures as before since those who are said to exercise power over the gold market at a whim, controlling its every twitch with something like god like control, don't exercise the kind of unshakable, manipulative power they are said to have.



Sam said...

The very existence of a futures market for an unconsumed commodity is to suppress the price. The act of excepting a piece of paper today for the promise of even more gold tomorrow relieves any real or perceived pressure on the gold today.

The intrinsic value of paper gold is $0. If you buy, hold, or trade paper gold you are on the opposing side of physical gold advocates and a support for the current system. Though I feel sorry for some poorly informed "gold bugs" that hold paper gold I'm starting to lose that empathy. When paper gold system pays you out its final intrinsic value price you will then realize you were sitting on the wrong side of the table.

t au said...

Sam + 1,000

Dr, Boer said...

TF,

my vierkante boerenverstand verstaan ​​nie alles. Is bly as ander steun gee aan FOFOA. Jy nie gelukkig nie, jy boos. Neem my onbegrip nie kwalik.

Blake said...

Dollar bid is relentless; seems like "wealth" is moving down Exeter's pyramid :)

Roacheforque said...

I'm not sure how this viewpoint from Jared Bernstein (the Obama position?) differs much from the view using the Freegold lens. It certainly puts an interesting spin on the "inevitability" of Freegold just happening because it's what "everyone who matters" wants, including the USG.

http://www.zerohedge.com/news/2014-09-08/obamas-former-chief-economist-calls-end-us-dollar-reserve-status

It's just that the dollar's trench is so deep and tangled, it doesn't seem to be happening as simply as we'd like ....

Tekin said...

Help wanted on global official liquidity estimation

What I intend to do, is to calculate the ratio of official global liquidity to official gold reserves, in order to make a first order estimate of the impact of “dethroning the king dollar” on the gold price.

Yardeni defines global liquidity as, non-gold international reserves plus Fed’s holdings of US Treasuries and Agencies. http://www.yardeni.com/pub/frodorcb.pdf It is approximately 18 trillion dollars.

Last summer, World Gold Council reported the size of official gold holdings as 31,793.9 tonnes, or approximately 1 billion ounces.

http://www.goldreporter.de/wp-content/uploads/2013/06/Weltgoldreserven-06-2013.pdf

Therefore, the first order estimate is about 18,000 USD/ounce.

The problem with Yardeni's definition of global liquidity is that, it does not include Soverign Wealth Funds or Stabilization Funds. Wiki states the size of these funds as about 20 trillions. http://en.wikipedia.org/wiki/Sovereign_wealth_fund#Size_of_SWFs

Now, I do not know whether information supplied by Wiki is reliable or whether all the assets of these funds are parked in forex. Additionally, some Stabilization Funds are mentioned but no estimates on their sizes are made. Anyway, as a rough approximation, this contributes another 20,000 USD/ounce to the estimate bringing the sum to 38,000 USD/ounce.

There appears to be one additional complication. BIS introduces a distinction between official and private global liquidity. http://www.bis.org/publ/cgfs45.pdf My understanding is that private official liquidity would be backed by private gold hoards, however, in times of stress, governments do intervene the markets. I really do not know!?

****

Depending on the geopolitical situation I expect a gradual, stepwise satisfaction of gold backing requirements. I mean, the first line of defense being, US gold reserves fully backing the US monetary base. Then, the components of global liquidity are backed by gold, one by one.

My understanding is that in the gold standard, the monetary base solely consisted of physical gold. In the 1930s, Fed could not QE, therefore, gold standard was discarded. I wonder if I am on the correct wavelength? Now, Fed is picking up the fruits of this new and improved monetary system by QE'ing. In the 1930s and 1980s, in times of stress, gold fully backed the monetary base. If the dollar remains as the reserve currency, this is how far things would stretch at. This is how I understand it.

http://dollardaze.org/blog/posts/00751/gold_to_mb.png

The monetary base: http://research.stlouisfed.org/fred2/series/BASENS
Gold reserves: http://www.fms.treas.gov/gold/current.html

Their ratio is 15,000 USD/ounce. From a historical perspective, 20%-30% overshoot would not be surprising.
Additional US or IMF (per Jim Rickards) QE, would boost these numbers to the sky.

***

The main point of this post is to ask:

1) How is the global liquidity calculated?

2) Which gold backs private global liquidity? Official or private?

Thanks!

Motley Fool said...

Dr Boer

It seems my assumption was incorrect, meaning English is a better medium.

I probably overreacted, but my objection was not with your level of understanding, it was with your proffered support seemingly motivated by the opinion of another who has a similar position. In essence my objection is that you did not take a position of your own, which is what I think a 'boer' would do. My annoyance was with the contradiction between your actions and your name.

Then again, who am I to point fingers, having allotted myself the name of fool.

Peace

TF

Indenture said...

"I mean, the first line of defense being, US gold reserves fully backing the US monetary base."

Gold will not back any currency. There will be no 1-1 (dollar for ounce) calculation. Instead gold will be a reserve asset used to defend a currency. There is a big difference. (thanks Matrix, after correcting me at TFMetals it finally clicked).

Phil S. said...
This comment has been removed by the author.
Michael dV said...

Tekin
The idea of calculating "how much currency per how much gold" is a very gold standard idea. The concept we see here is very different. We see gold taken completely out of the monetary system except that central banks would hold enough to defend their currencies in the forex market.
Gold would be held as a store of value and would float roughly inverse to currencies depending on how much they over print.
Another factor to consider is that the price of gold does not depend in any way upon how much gold there is but rather how much is available for sale at a given price.
Now we have lots of physical out there but not that much for sale at current prices. Fortunately (for many ) there is lots of paper gold for sale and a large part of the gold buying market has their needs met by this paper product.
Who knows what the future holds but the opinion around here seems to be that we are not returning to a gold standard and that it will be a world of 'physical only' if/when the paper gold market fails.
These calculations may be useful but only in a very un-freegold world.

Jeff said...

Teken,

See http://fofoa.blogspot.com/2010/06/how-can-we-possibly-calculate-future.html

Somewhat unrelated, the Saudi America shale scam seems to be running out of suckers:

http://www.bloomberg.com/news/2014-09-08/halcon-s-wilson-drills-more-debt-than-oil-in-shale-bet.html

Aaron said...

Tekin-

If I might add to Michael dV's fine comments I would say this. Freegold predicts a wealth reserve that floats against currencies. In such an environment you can't simply calculate a gold price by dividing global physical above ground gold inventories against CB paper issuance. As Michael dV correctly points out, that view is rooted in a gold standard perspective and I would add such thinking doesn't apply in a Freegold world.

In a Freegold IMFS, gold is set free from the monetary system. You can't make a connection to gold inventories and the amount of printed money. It's impossible. Gold is no longer money. It is an asset just like a rare painting or a bottle of fine wine. Gold is valued by the market both public and private as a wealth reserve -- for CBs and private individuals alike.

We know human preference spans far and wide. As we move forward I'm sure we can agree many savers will chose to store wealth in gold while others may opt to purchase productive land or rare coins.

The point is, of all savers in a Freegold IMFS, how many will chose to save their surplus in gold at any given time? That's the magic of free markets. We don't know! Trying to calculate the price of gold based on currency issuance is like trying to calculate the price of a bottle of Henri Jayer Richebourg Grand Cru compared to CB currency issuance against said bottles of fine wine. The perspective you seek to research is a hard money perspective that doesn't work in a Freegold IMFS. Freegold is different. Freegold has both hard and soft money conduits, something this planet had never seen before in a globally recognized economic system.

tEON said...

Excellent comments Indenture, Phil S., Michael dV, Jeff and Aaron!

Phil S. said...
This comment has been removed by the author.
Tom R said...

Here’s an interesting article on separating the functions of financial institutions.

http://www.24hgold.com/english/news-gold-silver-should-banks-lend-money-at-all-.aspx?article=5795039234H11690&redirect=false&contributor=Mish

The Freegold thesis separates the functions of money (SoV vs MoE), but the above concept does something similar on a local level.
It is still a half-way solution, in that savers would stiff face counterparty risk via the issuer of the currency. And investors in loans would not get final settlement even when the loan is repaid, for the same reason.

Edwardo said...

Phil S wrote:

So far we've seen that producers have no issues competing at around production costs. Their product is never consumed or destroyed and they keep digging out more and there's competition among them so even outside a paper-price-discovery a low gold price like we have today is no problem for them.

No issues? No problem? I don't think so. Gold producers are just hanging on, and they are doing so by engaging in the kinds of "business practices" that are not conducive to health and prosperity beyond the near to intermediate term.

Here's what I'm getting at.. we could well arrive in a FG world without the price moving much and not even notice it

Perhaps, but you can't have it both ways. If paper gold doesn't move much before the advent of a physical only market then I would have to conclude that it did so because the flow became fatally constricted. I can easily imagine that happening from the standpoint that, at some stage, perhaps as I write, front running something as monumental as Freegold (and thereby hastening its arrival) seems as likely to occur as not. Put another way, what are the odds that a bunch of shrimps are the only ones front running the end of the $IMFS? They are non existent.

there's a USD hyperinflation and collapse in confidence all bets are off, but actually that's a pretty big IF

A collapse in confidence is a pretty big IF? You feel that confidence is robust? I'd say that it's manifestly fragile and has only been maintained in its less than stellar standard by extraordinary measures the likes of which will have to be employed again. After all, there is no way for this system, debt saturated to the nth degree as it is, to possibly repair itself by growth or confiscatory schemes. As always, it's a just a question of when the next flock of black swans appears and decides to void their bowels en masse thereby despoiling whatever unfortunates lie beneath the hail of fou(w)l excrement.

As "the dollars come home", they might indeed have "tools" at hand to extinguish them before entering local circulation, thus keeping all our scary hyper-scenarios at bay..

As for tools in the monetary authorities paper arsenal, well, I imagine they will engage in capital controls of one form or another, and, equally, I imagine that they will fail to do much except provide great irritation.

Phil_O_Dendron said...

Phil S said: "As "the dollars come home", they might indeed have "tools" at hand to extinguish them before entering local circulation, thus keeping all our scary hyper-scenarios at bay.. "

these dollars would come home for a purpose... to buy things of value. If a trillion dollars suddenly show up in the US to buy US "stuff" that stuff is going to increase in price.

I don't see how all of these dollars held abroad that eventually come back to the US would not cause (hyper) inflation. The only way these dollars come back and not bid on US real things is if they were exchanged for more paper promises. How long will the world take our paper promises whether they are in the form of FRNs or treasuries or whatever? It cannot last forever.

Tekin said...

@Phil S.

So whatever "post-reval" fiat price you can come up with, I'd say you won't be able to "defend" or prove it in time before the actual event.

That means, I should not try to estimate the post-reval price. I understand.

However, isn't it strange that FOFOA has already tried this? I remember the bell shaped probability curve for freegold; namely:

http://3.bp.blogspot.com/_cvdgPlEKW9k/SyB1N0j9N9I/AAAAAAAAA8w/583w8BZU7hU/s1600-h/Freegold_bellcurve.gif

FOA once said that 1 ounce of gold would by a good sedan, something like 5 series BMW.

It looks like I'm in good company.


@Michael dV

The concept we see here is very different. We see gold taken completely out of the monetary system except that central banks would hold enough to defend their currencies in the forex market.


That is exactly what I am trying to figure out by calculating international liquidity.

Probably, the two tier calculation I made is the source of the confusion. What I tried to to say was this:

a) If USD provides the international liquidity, gold price converges to A.
b) If gold provides the international liquidity, gold price converges to B.
c) B is greater than A.

I did not even mention whether I preferred the outcome a or b.

Another factor to consider is that the price of gold does not depend in any way upon how much gold there is but rather how much is available for sale at a given price.


A distinction has to be made between private gold and official gold. Let us only look at official gold. Mind you you. Even official gold would not be available for sale. The question is, what should the price of gold so that it can successfully provide international liquidity.






-----

@Michael dV

...we are not returning to a gold standard...

@Aaron

Gold is no longer money. It is an asset just like a rare painting or a bottle of fine wine.


All right. It is an asset. I want to buy that asset. What is its price?

Wine is for drinking and gold is for international liquidity. If the wine does not taste good, then it is not worth the money I paid for it. If the gold does not provide international liquidity, it is no good. Now, we currently have scheme for providing global liquidity. It is in dollars. I want to replace it with gold. If the replacement is too small, we have contraction a la post World War One; if the replacement is too large we have inflation. I want to measure the existing scheme so that I can replace it similarly sized one. What is wrong with that?

Indenture said...

Tekin: "Now, we currently have scheme for providing global liquidity. It is in dollars. I want to replace it with gold."

You want to replace currency liquidity with gold (the physical asset) liquidity? After transition, how is physical gold more liquid than currency?

Jeff said...

Did the read the post or only look at the graph?

FOFOA: The West loves its paper wealth. It loves to record it, to publish it, to know where it is, to know where it stands, to throw its weight around with it, to tax it, to track its movements, and occasionally to take it away. It is this $IMFS fascination with paper wealth that made it possible for you to even find a number for "Global Household Wealth", Stefan. And when I think about this number for a while, it is hard not to laugh at the absurdity of it.

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

byiamBYoung said...

"As always, it's a just a question of when the next flock of black swans appears and decides to void their bowels en masse thereby despoiling whatever unfortunates lie beneath the hail of fou(w)l excrement."

Hehe. Nicely done.

Michael dV said...

I guess I'm not clear on the 'internationally liquidity question.
Central banks will have an option to create more currency by buying gold on the market. I think it would be a great step for the Euro to take now. They could offer to buy in SIZE which would precipitate a higher price. The fact that they were expanding the currency and acquiring gold at the same time would act as a buffer against inflation.
They could begin to sell gold if inflation did occur and thereby call in currency.
I guess this currency expansion is what you mean by increasing international liquidity.
Since gold is only acting as a balance sheet asset however it would not be gold increasing liquidity. Gold would just be the mechanism by which currency was created.
As for miners meeting needs of the market now...I'd say hardly...the markets needs for 'gold' is now met by those who sell paper promises of gold in the future. If all 'gold need' had to be settled with physical gold...we'd already be there (FG).

anand srivastava said...

Phil.S.

If I were to try to calculate the worth of gold in freegold world, I would start with the present flow of gold in the world. Remember its the flow that matters, not how much gold there is in the world, private or official.

Then I would try to surmise how much is the trade worth between countries, basically outstanding balance of payment, each year.

Now if assuming all the BoP gets balanced by the involved private parties buying gold instead of keeping currency, you could calculate the price directly.

But the real world is not so simple. You will have to apply heuristics to ascertain the effect of the following factors.
1) How much of the money people will store in cash, land, other assets.
2) How the BoP will change in the new world. May countries will become rich others poor. Very differently to what it is at present.
3) How the volume of gold on sale will change in freegold. We can't assume that mining output will go up. In fact it should go down. Also gold on sale will also drop, because less amount will need to be sold to get the same about of currency. There will be a transition period where these numbers will be very different from the steady state.

These are just some things that will cause a very large effect on your calculations. There will be others that may not affect the steady state but will be important during the transition, like capital controls confiscation. Also transition period will be different in different jurisdiction, based on how and when the govt and the populace comes to terms with the new world.

I think there are huge variables involved. If you come within only 2x - 1/2x, you will have done pretty well :-). FOFOA has used the numbers given by Another, and they have a huge huge margin.

Sam said...

Two questions to ask yourself if you are bothered by the prospect/chances of a higher gold price and USD hyperinflation.

1). What would it take avoid hyperinflation and why would you think anyone including the United States would want to avoid it? Consider that hyperinflation of the dollar has already happened and avoidance would be a waste of energy. If you look closely the world, including the US, is preparing to deal with it not working to avoid it.

2). What downside is their to a high price in gold? Under the current system there was an obvious downside but under the next system a higher gold price is welcomed. The paper markets for gold have served their purpose and are no longer needed. Another once said we will all wonder at some point why we thought gold could be had for so cheap when so many people wanted to own it. Without the acceptance of paper alternatives gold's true worth will revealed. Though the world will call it a revaluation to me it will more accurately resemble a revelation.

Motley Fool said...

Sam

Avoidance would be possible by repaying debts in revalued gold, and cutting future entitlements by idk 95%?

However, the cost benefit analysis suggests this to be a vastly inferior option.

In the HI scenario the debt is repaid without loss of gold, people lose their entitlements (but the event can be blamed instead of direct government action) and there is social instability.

In the repayment scenario the USA would lose almost all gold, people would lose their entitlements( and would be able to directly blame government) and there is social instability.

@Tekin

There are too many variables imo, and I have attempted the calculation before with various methods. Anand touches on some.

It would be more apt to compare flow of gold in nominal value (unknowable) versus balance of payments (unknowable) with given GDP sizes and efficiencies (unknowable). The reason why once cannot know any of those is that the change in the monetary system would affect all three, and it is not possible to predict where they settle.

I suggest spending more time reading. Beyond this wanting to determine such, I sense many other gaps in understanding from your post.

TF

Tekin said...

@Indenture

You want to replace currency liquidity with gold (the physical asset) liquidity? After transition, how is physical gold more liquid than currency?


The answer is standard A/FOA line: Gold is a real money of of ancient world class proportions that is no one's liability. If you do not like this one let me try another A/FOA line: Gold is the ultimate form of payment.

@Jeff

Did the read the post or only look at the graph? ...This transfer of wealth that is coming is ... more like flipping a switch on the virtual matrix.


All right then let me conceptualize it as a double throw switch. You flip the switch and one contact reduces the value of dollar reserves to zero while the other contact increases the value of gold reserves; so that the net effect is that while the dollar amount of reserves has not changed, its essence has changed from paper to metal. Pure alchemy. Did not A say; “Dollar reserves of CBs? They really do not exist!”, or something similar?

Although frankly speaking, my expectation is that, it will be like rotating an old analogue knob with some sticky points around the circumference, although I would not object instant revaluation/gratification. The sooner the better.

@Michael dV

They could begin to sell gold if inflation did occur and thereby call in currency.
I guess this currency expansion is what you mean by increasing international liquidity.
Since gold is only acting as a balance sheet asset however it would not be gold increasing liquidity.


What I have in mind is something like this: Use a trade currency (dollar/euro/yuan etc) to track the balance of payments and periodically (quarterly, annually etc.) settle the trade deficit in gold. Did not A/FOA say that payment in USD does not conclude the payment and gold is the ultimate form of payment?

@anand srivastava

I think there are huge variables involved. If you come within only 2x - 1/2x, you will have done pretty well :-).


I agree. The following BIS quote is alarming. It means the world has changed since A/FOA posted. An order of magnitude estimate has to be made.

BIS: “In a world of high capital mobility, global liquidity cannot be approached as it used to be a few decades ago.”

http://www.bis.org/publ/cgfs45.pdf

Eric C said...

Hi TF,

I am curious why you see it as a reduction of future entitlements. Are you referring to 401k plans and social security or just 401k plans. I think current dollar values will lower at the transition point but I don't see why that means medicare will be any better or any worse.

Eric

Motley Fool said...

Hi Eric

I am referring to all three.

As a simple heuristic consider that which cannot be paid, won't be. In a freegold system gold will be a barometer for the health of a currency. Excessive printing to pay excessive promises will have a knock on effect, making such unsustainable.

Two more things to keep in mind here is demographics, where the US for example has the baby boomer problem, and the sheer real value of health benefits promised to this and subsequent generations.

I do not see that it can be paid, and so I hold it won't be.

TF

Dante_Eu said...

Things to come?:

Fake Tungsten Gold Coins

Seems to be sophisticated fake.

Indenture said...

Tekin: "Now, we currently have scheme for providing global liquidity. It is in dollars. I want to replace it with gold."
"A/FOA line: Gold is the ultimate form of payment."
Payment is different from liquidity!
"Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets."
So the question is, which will be easier to trade, currencies or gold?

Edwardo said...

Well, here we are, it's two and half years later and the price of paper gold isn't even half way to $3,000, the price level the WGC said the market must attain by 2017 for the industry to stay profitable. FWIW, energy prices, which are the single biggest input to mining costs, are more or less where they were at the time the article at the link was written. Have a nice evening.

Aaron said...

Tekin said...

What I have in mind is something like this: Use a trade currency (dollar/euro/yuan etc) to track the balance of payments and periodically (quarterly, annually etc.) settle the trade deficit in gold.

So in effect what you are saying is, "Your nation has given our nation more goods than our nation has given your nation this past year so please, have some of our CB (?) gold to settle that trade imbalance."

That's not how trade settlement works in a Freegold IMFS. Settlement occurs via freely floating exchange rates.

Sam said...

+1 Aaron

This is the essence of what this latest set of posts from FOFOA has revealed. It's pretty compelling. Logically and practically speaking why would you run a trade deficit or surplus and then periodically correct it when it can be corrected daily and more efficiently by letting the exchange rates move freely between currency zones.

Secondly if you did use gold to settle trade imbalances between currency zones that means it is still tied to the monetary system. If it is ties to the monetary system it won't function properly as a wealth asset for savers.

Thirdly you can't force people to save when trading with them. Savings must be a choice that is made by the saver.

I think a lot of gold bugs want to see nations using gold all the time because they think that usage will make it more valuable. This is not the case. Gold's highest value will be achieved when it is free to represent the unmanipulated savings of all the people in the world. Once in this role It will function as an emergency asset for CB's in times to crisis

runninggloves said...

has anybody considered at the minimum gold is worth 8500$?

assumptions:
the chinese and japanese combine hold 2.4T worth of US bonds
US holds 261million OZ of yellow stuff

if the chinese/japanese offer to extinguish 2.4T of bonds in exchange for 261million OZ, the US wont budge

2.4T / 261Million OZ > 8500$/oz

now turn this around

If the US offered 261million OZ to the chinese/japanese to buyback 2.4T worth of US bonds, China/Japan would take the deal in a heart beat.

Now if someone has any other comparisons to make to rationally justify a higher gold price, comment on it.

Sam said...

Hi runninggloves

What's your favorite FOFOA post? I think gold is worth $12,232 an ounce because if you take the price of tea in China and divide that into current amount of oil on the moon it's roughly $9200 an ounce in 1980 dollars. Adjusted for inflation I get $12,232. Of course FOA and ANOTHER posted over a decade ago and couldn't have known about the iPhone 6 PLUS

runninggloves said...

@Sam
well what we shrimps think doesnt matter;
it who that is supposedly sitting on a huge pile of international currency that decides; and who else besides china and japan?

unless you believe these surplus running countries really count on being paid back in real goods and services?

Indenture said...

runninggloves: Why would the US sell any gold to extinguish the Dollars (Treasuries) held by China and Japan? If China wanted to sell Dollars (Treasuries) one HUGE block of Treasuries wouldn't be listed for sale as a 'all-or-nothing' transaction. Instead, just like stocks, the huge block would be broken down into smaller units and the first small unit would be placed for bid. Let's pretend this unit sells and the US is the buyer. Will the price stay the same for the next sale or would there be an increase? Could China buy shares in Apple with their Trillion without effecting the price of Apple shares? Of course not so how could China buy a Trillion in gold without effecting the price of gold during the purchase proc

runninggloves said...

@Indenture

thats the whole point im trying to make; the US wont sell at the implied rate of 8500$/OZ
"US wont budge if the chinese/japanese offered"

but if the US offered, the chinese and japanese would take the gold and run.

thus concluding that these three parties (japan/china/US) believe its worth more than 8500$/OZ

that is of course a lower limit.

i understand your point that things are priced on the margin. but this is just a thought experiment.

or another way to frame the issue. shall foreigners prefer metals over dollars. @ what rate? besides that implies the US ran out of capital to export.

or china does not want to pull the plug until they are urbanized enough? how much is enough? right now they are at 60% urbanized at best.

the big question is. shall the west try to stave off the price increase in gold. just how much dollar claims can the western CBs soak by releasing metals?

Indenture said...

(affect) Affect can also be used as a verb. Use it when trying to describe influencing someone or something rather than causing it.

Could China buy shares in Apple with their Trillion without affecting the price of Apple shares?

Tekin said...

@Aaron
That's not how trade settlement works in a Freegold IMFS. Settlement occurs via freely floating exchange rates.
@Sam
+1 Aaron

If I remember correctly, FOFOA's opinion is that private gold flows should settle the trade balances while I suggested that official gold might be used. Settlement via freely floating exchange rates looks surprisingly similar to the existing system.

@Sam

...take the price of tea in China and divide that into current amount of oil on the moon...

Sacrilege! Sacrilege! How can an outsider suggest making an order of magnitude estimate of the final gold price! Sacrilege! …. Have a nice blog Sir!

Michael dV said...

rg
A few months ago I noted that if all outstanding US debt were to bid for the known banking system gold held in GLD then gold would settle that for $220,000 per ounce...
This is all just silly because gold is being held tight by all parties and moves only when it has to....for now.
We must just accept that we are not in a monetary environment that allows gold to move freely.
Indenture, for the life of me 'effect and affect' get me every time. Affect can mean a persons emotional presentation...after that I mess up about 50% of the time.

Reality Show said...

I don't know what to make of Draghi's recently announced foray into asset-backed securities. Is it of any material importance?

runninggloves said...

@Indenture
sure apple shares would rise, why would china want apple shares?

central bank actions are coordinated, QE never stopped in the world the CBs just "take turns" doing QE; so...
what is to stop them from replacing all deposits with SDRs

start another monetary system and kick this can for another half a century?

the central banks have enough tricks to keep the system going than gold holders can stay alive?

Indenture said...

"start another monetary system..."
It must be harder to start a monetary system than just saying the words and having the different economies of the world accept it.

I'm reminded of Ender's words, "It's good to see gold being sold. It means currencies are functioning."

Motley Fool said...

@tekin

You are free to make your estimates. I would simply not expect it to be taken seriously. As I said to you before, that kind of calculation is not something that can be done from the outside looking in.

Even fofoa's estimate which is based on hints by another should be taken with a large pinch of salt. The idea was simply to convey the order of magnitude, not to be an exact figure.

If we make some assumptions, under the outlines I laid out previously, and order of magnitude estimation is possible, and that is about all.

TF

Tom R said...

I'm at a loss to understand why the ECB is getting into, or even hinting, at QE. I thought the whole point of the gold reserves was so that it could function to balance the currency. Need to tighten? Then sell gold, and absorb currency from the economy. Need to loosen? Then buy gold with printed money. The assets and liabilities sides of the balance sheet rise and lower together.

Perhaps they discretely tried to buy gold, in size, but nobody was selling. Time to use the nuclear option and publicly announce that the ECB is buying at xx,xxx euros per ounce?

AT said...

News flash: Bo Polny is still NOT changing his tune on $2000 gold in 2014!

http://www.silverdoctors.com/is-bo-polny-changing-his-tune-or-is-golds-next-stop-still-2000/

:)

runninggloves said...

@Indenture

I am a fan of gold too, but to say these central planners are running out of tricks is being optimistic

unless there is a day when the state is better off letting gold float, it is not happening.

we can probably agree that the goose is getting killed

and somebodys gotta play devils advocate

they can definitely force the metal underground for a very long time, for centuries perhaps?



Phil S. said...
This comment has been removed by the author.
Michael dV said...

RG
'gold holders' are not the important party that needs to be pleased or punished by central bank actions. Major producers are who count. If they are not satisfied with what they are getting in trade for their goods or commodities then things must change. Gold seems a natural way to even the score but surely there are other things such as protection (the Saudis) or political compromise (the Chinese) that could work short term. Another has said however that gold has always been important.
As for the ultimate price of gold, it has been noted here before (Eduardo?) that gold exploded from a suppressed price suddenly recently (1971 to 1980) by rising in price 24X. Fofoa's $55,000 is in that range. Ultimately the future purchasing power of an ounce is just a guess but 'a huge increase' is not just a wild wishful fantasy.

Sam said...

I wonder why every 200 comments or so someone pushes the idea that all thoughts and opinions hold merit and to scrutinize any of them is in poor form. I would guess it has something to do with the state of education in the world today. Merit badges for all and such.

I read this blog because the material in it rings true for me. When someone has a differing opinion and they feel compelled enough to share it with the group, I view it, even welcome it, as an opportunity to either change my understanding of things or strengthen my foundation of understanding. You have an opinion on the value of gold? Great. So do I. Let's talk. If you don't want it to be scrutinized against the freegold view don't post it in the comment section of a blog dedicated to understanding freegold. If your comment reeks of the opinion of someone that hasn't even read the material it should be ridiculed. It is not valuable to the discussion unless you can defend it. Saying all opinions are welcome and deserve respect is intellectually lazy. It is for all intents and purposes the polar opposite of seeking the truth.

InowB4 said...

@rg
"they can definitely force the metal underground for a very long time, for centuries perhaps?"

They can and they intend to do exactly this. As long as gold is money, there's a NEED to dig it up, right. If gold is an asset, there's no NEED anymore, because it's an asset above ground AND below, right?

Freegold is NOT about gold. It's a system, where exchange rates are floating freely against an asset (marked to market). It could be beans or diamonds or a basket of commodities. Gold has just the highest probability to be used as such. If/when
used, it will be demonetized FIRST (to solve FOFOA's dilemma).


@Tom R.

"I'm at a loss to understand why the ECB is getting into, or even hinting, at QE."

Think about your question again with above said in mind and look at the euro/dollar chart since they publicly intended QE
--> The principle of floating exchange rates preFG.

@FOFOA

TYSM. You are my inspiration. <3

Edwardo said...

I like your comment, InowB4, but the following tidbit deserved to be left on the cutting room floor.

It could be beans or diamonds or a basket of commodities.

It couldn't be a commodity or a basket of them, because, by definition, commodities are necessary items required for day to day life. This is how we know that gold is not a commodity. Ex jewelry, which is hardly necessary, prized though it is, and some (slated to be fazed out) electronics applications, gold is useless.

That said, diamonds, while not a commodity in the most meaningful sense, have other drawbacks, such as, for example, and for starters, their lack of indivisibility and malleability.

Edwardo said...

Make that phased out. It's early and I'm a bit fazed.

InowB4 said...
This comment has been removed by the author.
Edwardo said...

What is that stink in the air?
It's only Bo Polny mon frere.
He's blown it again as to price as to when
I don't mind but his subs surely care

Or this one

Baloney's a cheap cut of meat
That's not very tasty to eat
Bo Polny tastes worse, a vegemite curse
Please pardon my French but he's sheet*

*The words "he's sheet" should be said with a french accent.

Diamond Jack said...

Diamond Saint Jack
The name says it all

runninggloves said...

It would be interesting when that next crisis comes.

every major CB is at its lower bound already doing QE

credit crisis implies a loss of trust by lenders
and since currencies holders are also lenders (implicitly)
a currency crisis is an implicit credit crisis

so this system requires a certain percentage of people not understanding for it to continue.

has anybody got a guess of:
% of people that see this fiasco and currently is hedging
vs (less than 10% for sure)
% of people to start hedging before the avalanche kicks into gear (beats the heck out of me)



Eric C said...

Hi RG,

I think it is more important to see the direction of the flow rather than trying to guess at numbers and percentages. I see what you are saying and what you are trying to accomplish but just try to sit back and relax. This is not a trading blog.

Eric

Jim Okefenokee said...

Edwardo,

this is a tad OT but...

(a) I'll let the vegemite slur go through to the keeper because we owe you one (taking Rupert Murdoch off our hands)

(b) Why is it that every time I see the name Bo Polny, I always start humming this:

Bo Polny

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

So the BOJ just officially entered the world of negative interest rates. They bought bonds that return less money after they mature regardless of the coupon. So you buy the bond for a 1000 and get 980 back. This means that thier balance sheet is out of whack now no ? The cash that they emitted (liability) can never be reigned in by selling the bond.

Eventually some of this lunacy has to matter. Trade in the physical plane has to seize up somewhere. Maybe that will happen before price inflation makes it happen.

runninggloves said...

@M
BOJ also holds a chunk of bonds @ positive rates; so on the aggregate their portfolio is still @ positive rate. now if this continues.

--still waiting for alright get this
Deposit Owners Association fees paid towards the Bank for account maintenance. enforced all across the board throughout the banking system.

M said...

@ Running

Its still the first time one of the big cbs went full retard negative. They will start incurring losses on their balance sheet. The coupon on other bonds doesn't matter

Bright aurum said...

Another hefty gold ETFs puke incoming.
https://www.bullionstar.com/image/2309

Phil S. said...
This comment has been removed by the author.
runninggloves said...

@M
Can we say that the biggest asset of CBs is not even in their balance sheet.

has anyone consider an intangible line item in CB balance sheet which measures faith denominated in interest rates?

the Japanese people are very conformist. it will take a lot longer for the people to lose faith

one conundrum is that. japanese are asians but them not being gold crazy like indians and chinese is an intangible asset of the BOJ. maybe the japanese never saw high inflation like the chinese and indians; well atleast the ones that are still alive.

runninggloves said...

one has to wonder - how many percentage of people that take out loans actually understand the amortization schedule?

i presume that when people in this forum looks at price increases, smaller packages, they can calculate the inflation rates ; but maybe the masses have not the slightest idea of assessing their own inflation rate?

but you gotta hand it to the CBs -
since they know that if QE continues continuously ; the proverbial frog will jump out of the pot, so they invented a new way of doing QE - QE alternates between on/off within any individual country/monetary union. but globally QE is constant. since a vast majority of people have a home bias when it comes to investing, reading current events, and what have you. the vast majority of the people have not figured out that QE has never stopped. and it gets even better when swap lines initiated between major CBs are off balancesheet events thus not reported. so what makes these CBs look like geniuses is that, say 5 major CBs exist. 1 do QE on massive scale while rolling swap lines with 4 other CBs. people in the country that see the supersize QE get alot less inflation than they expect due to say 80% of the QE has been swapped with the other CBs. the benefit for the 4 other CBs is that they can just have enough artificial inflation from swap lines without doing QE, so they can take credit for things not going down in flames when QE temporarily stopped.

i believe alot of people have underestimated the impact of coordinated CB action for the time being.

Delusional Investing said...

Happy Belated Birthday FOFOA.

After mulling over the free floating FX idea, I decided, in preference to asking some dumb-ass questions, to re-read Fiat 33 and Dirty Float again. Holy crap, what a difference it made to read it the second time around. I highly recommend a re-read for others.

I think I now fully understand that Freegold is not about the re-monetisation of gold, but instead it is about the de-monetisation of gold. I know that this has explicitly been called out before, but some of us are a bit slower than others, and finally understanding the role and the mechanism of the FX adjustment provided missing "how" link that my brain needed.

Thanks again FOFOA.

MatrixSentry said...

Many of us old timers have read the blog multiple times. In my case I needed a few laps to get it, but I had an impression baggage load to shed. I have found that it is helpful to read a new post for the sheer enjoyment first. Then let it simmer for awhile, then come back for a slow and critical read. The 2nd time through always produces a better level of understanding. Most posts end up being read 3 or times in my case.

So RTFB and then RRTFB!

One Bad Adder said...

This Currencies - Paper-gold Chart....http://stockcharts.com/h-sc/ui?s=$ONE:$USD&p=W&yr=3&mn=0&dy=0&id=p00442183054 ...indicates a current and genuine market contempt for anything that is not $USD related.
The surprising thing (to me) is how friggin S L O W L Y this is all taking to reach an inevitable conclusion.

One Bad Adder said...

BoJ ...or for that matter Swiss or ECB S/T Interest can slip (slightly) into negativity ...however -
The Air in the $USD tyres "must" stay positive.

Where the Rubber meets the Road - http://stockcharts.com/h-sc/ui?s=$IRX&p=W&b=5&g=0&id=p21169584853.
FWIW.

M said...

@ runningloves

Good insight.

One would think that between all these CB deals, that something would go wrong but they seem to have the trains running on time.

Why did they even bother letting that last little bit of pretend capitalism blow up in 2008 ? Well... I guess they didn't. The Bush stimulus checks in 2007 was the first QE.

Whatever .... Just like leading up to WW1 and 2, the market could never correct the imbalances, overcome the market rigging and restore some sanity to the financial would before the political side of things blew up. I suspect we will have war Keynesiansm then post war Keynesiansm before the market can overcome these forces this time too.

runninggloves said...

ok if gold is getting demonetized....
so when was gold monetized?
it must have been not monetized before since some group of people must have monetized it.
if gold was monetized sometime during the past, then there must be a time when gold was free.

runninggloves said...

holy christ.......
if medium of exchange is pure fiat
and all savings is in gold......

liquidity crisis can no longer exist, because extra purchasing power would just flow into the value of gold instead of flowing into currency thus tightening transactional medium.
can recessions occur with freegold?

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

under freegold
since savings is not in paper government cannot do collect much purchasing power out of seigniorage by printing paper
but...
if gold is priced so dearly, dont mines have seigniorage rights? would government allow that? or maybe government can be in bed with miners. if governments monopolized mines and were able to mine something that is dearly priced, would that be pseudo seigniorage with a physical gold as a proxy?

the difference of printing paper to finance government vs monopolizing gold production financed with less paper to recover more paper to finance government would be?

Attitude_Check said...

Is the significant drop in Gold price, the beginning of a revulsion of levered paper contracts? Is the timing of the opening of the physical Shanghai Exchange and this drop related? Are insiders preparing for a possible COMEX/LBMA default driven by arbitrage between the paper contracts and the beginning of a "true" spot market. Is the window opening wider, or is it all just another bump in the road?

MSC said...

A version of this story is being shown on BBC1 news here. But rather than as a 'warning' the TV comes across as a total sales pitch to buy bullion for home delivery or storage at the Royal Mint. No mention of paper gold alternatives on the TV...just a warning that prices go down as well as up...

http://www.bbc.com/news/business-29313210

I was very suprised to see physical being punted on the evening news here.....

Michael dV said...

The future relationship between mines and governments is in question. The big mistake would be to assume they will be the same.
I'm not sure governments will look at gold any differently than they would any other source of funding. They will want it all, as they always have.
In freegold however the ability to get people to put wealth into government bonds will be severely diminished.
Savers will have a much better option.
So far I have seen any efforts to shortcut this process. I'm sure once they realize what has happened they'll try.
The hungry collective won't change much I'm betting.

Reality Show said...

The UST's official price keeps gold monetised.

runninggloves said...

under freegold speculation will become alot less profitable

doesnt india have "freegold" since people hold it in reserves and get loans against their yellow metals?

does freegold imply loss of faith in paper; so alot credit is destroyed; so does that imply half of household expenditures go towards food?

anand srivastava said...

runninggloves:
India does not have freegold. It just behaves as if it was in freegold :-).

Seriously, for freegold, as FOFOA has said, Gold must not be shackled by artificial supply of paper gold. For gold to be free, the price of gold must be determined by the flow of the physical, not paper proxies.

anand srivastava said...

runninggloves:

Lets see what happens if everybody saves in gold.
So gold becomes very expensive. The price of food does not change. For the price of food to increase, people will have to demand quality food. Currently, people eat JUNK. They don't care what they are eating. Manufactured food will always be much more cheaper. Food that is grown with love will always be much more expensive. Spend on food that is grown with love, and you will spend half your income there, now.

Rob said...

re MSC
I phoned the Royal Mint last week when I was buying some numismatics for presents and their website went down.
I also asked them why they don't sell bullion coins and they said that the new website had been live for a week.
http://www.royalmintbullion.com/

So, I think that this has to be due to public demand and the rise of the likes of BullionVault.
I think it also means that gold is not on the UK governments radar at all.
It makes me feel a little more confident that there would not be any sequestration in the UK.
It would be difficult and embarrassing for a UK government to take gold Sovereigns, with a 500 year history, from a vault that you have paid the army to guard.

Motley Fool said...

Runninggloves

"can recessions occur with freegold?"

Yes, recessions are correcting imbalances due to malinvestment. Now whist current manipulated metrics make malinvestment easier, it is more a function of mass psychology, and as such will still occur...however they are likely to be less severe for the most part.

"if governments monopolized mines and were able to mine something that is dearly priced, would that be pseudo seigniorage with a physical gold as a proxy?"

Yes, we expect mines to be nationalized and governments to capture the seigniorage of the form of 'printing'.

"the difference of printing paper to finance government vs monopolizing gold production financed with less paper to recover more paper to finance government would be?"

That gold will be a barometer showing government excess printing, which will impact currency exchange rates.

"doesnt india have "freegold" since people hold it in reserves and get loans against their yellow metals?"

No. http://fofoa.blogspot.com/2011/02/how-is-that-different-from-freegold.html

"so does that imply half of household expenditures go towards food?"

No.

Hope that helps.

TF

MSC said...

@Rob,
Royal Mint is 100% owned by HM Treasury. so I saw the piece on the BBC at prime time almost like an official bullion sales pitch to UK citizens.. It is tempting to think this could be related to an anticipated change in the function.of gold in the near future...

runninggloves said...

we would probably see a whole bunch of proxy wars first then high or hyperinflation before freegold arrives.
the assumption is that stateman do not exist today.
what better way to get reelected during war time and more printing, benefits

the state might not be able to stop the process, but it doesnt mean they wont try to delay it

runninggloves said...

since most CB balancesheets are trashed

how about some backdoor agreement between the major CBs to acquire a sum of gold
then together coordinate a revaluation to whatever that # is.

whether if a CB tries to cheat are acquire more than agreed upon is another issue

runninggloves said...

if government forces credit into the system
then a substitute of private sector willingness to lend currency credit is made into private sector willingness to hold a currency credit

so does credit always require the consent of the public? the odd thing is that seems like most of the people that hold currency believe they are holding an asset free of counter party risk when it fact they are still creditors in some shape or form.

one more thing ; those with mortgages on real estate, will they walk off scott free or the government will try to do some kind of claw back tax like post weimar germany?

anand srivastava said...

runninggloves:

CBs won't need much gold post freegold. It will be very expensive, and most of the settlement will be done by the citizens directly, by buying selling gold. Gold is only for a security in case of a crisis. With the high price, not much will be required. It will be better that the gold be distributed among the citizens. Yes India is in a very good shape for such an eventuality. But we probably will become like US, spending spending, and not producing enough. We are already almost there :-P.

vizeet srivastava said...

runninggloves:
India doesn't have freegold as gold is not free at global scale. But India has too many people both rich and poor who thinks like Giant.

Michael dV said...

RG
I am aware of attempted claw back attempts in the late1790s in France. What happened in Weimar? Did it work?

Jeff said...

India?

http://www.hindustantimes.com/india-news/mumbai/50-tonne-gold-smuggled-into-india-in-10-days-30-reached-mumbai/article1-1267634.aspx

runninggloves said...

@Micheal dV
they did raise real estate taxes after the mark became defunct.

runninggloves said...

speaking of 8000 tonnes of gold just how much is that?
with specific gravity @ 19.34
turns out its 7.5 meters cubed=24.6 feet cubed.
so all this can fit inside a 2000 sq ft house? which is quite typical in the states

why is it 8000 tonnes sound so big; when taken on a volume perspective so small? or maybe my calculations went wrong somewhere

50sQuiff said...

Gentlemen, with my thirst for gold finally sated (at a nice round number of ounces) I've decided to hedge my stack by starting a tech venture. My business is discussion forum software (the best around, no less) and you can find it at PlushForums.com.

I bring this up here because I'd like to know if there's any appetite for a new gold/econ discussion forum with a Freegold bent. All the other PM forums tend to be about bulls, bears and trading, which is distracting nonsense for the most part.

I would host it for free using our new platform. I also own the novelty domain "gld.pm" which I've been itching to do something with.

Perhaps it could become a private invite-only community, with resident cult members, hoarders and jerks comprising the initial user base. From there, everyone would have a number of invites to distribute each month. Who invited whom would be public record, so you would effectively "vouch" for new members. Worth a thought anyway.

Can you let me know if you're interested? I hope our host doesn't mind me asking here.

Quiff

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