Saturday, July 18, 2009

A Little Perspective

The primary purpose of money is to bid on the real goods and services produced in the real economy without the need for direct barter exchange. In a sound money system the value of the money increases as the economy grows new goods and services on which to bid. This function allows money to have the secondary purpose of being a store of value over time.

For many decades now, we have lived in a system of credit money, where the money supply was allowed to grow along with the economy. As producers took out loans to create new goods and services, new money was created from thin air to match the value added to the system by the producer. The balance, or control in the system in case the producer died or defaulted for some other reason before he finished adding value was that the bank that issued the credit money would have to take the loss, the deficit, or "fill the hole" left when the producer failed to complete his contractual obligation. The money created at the start of the loan still circulated, but the bank now had to lose an amount roughly equivalent to the amount of value the producer failed to produce.

This control kept the system of money versus economic real value roughly in balance for a long time. But on the margin of the system was the temptation to the government and the base money printing authority to abuse the system by creating new money not matched by value added to the economy (base money or monetary base). This kept the money supply growing slightly faster than the economy at all times.

This race between money and real goods and services, with money supply always in the lead, removed the secondary function of money as a store of value. So to keep the system going, financial products were created which promised a supposedly high probability of keeping up with the money supply growth.

Scrip Clearing

Scrip is a temporary substitute for money. Because of these two qualities, "temporary" and "substitute", it is not a good store of value. Instead, it is a way to facilitate the exchange of real goods and services without the need for direct barter exchange, and without the presence of money. Today California is issuing IOU's which are a form of scrip. During the depression, many localities issued scrip because money was in short supply. (Click here)

But today's banking system is actually a very large and complex scrip clearinghouse that acts as the lubricant in the economic machine. Base money is roughly 10% or less of the total money supply. So the banks issue their own scrip (checks) with which to keep trade flowing.

Imagine a carpenter, a plumber and a painter. The carpenter banks at Bank A, the plumber at Bank B, and the painter at Bank C. All in the same day the carpenter works on the plumber's home, the plumber works on the painter's home, and the painter paints the carpenter's home. The carpenter writes a $500 check to the painter, the painter writes a $500 check to the plumber and the plumber writes a $500 check to the carpenter. The next day they each deposit their checks and that night the banks pass them around and make book entries. By the next day all debts are settle, all payments made, and no money was needed at all. The banks performed their function as a giant, complex scrip clearinghouse.

In the real economy this happens every day. And it only continues to function because of faith in the banking system of fractional reserves. It functions because people trust checks. If everyone had to withdraw cash to complete transactions, the fractional reserve system would crash.

This system has been expanded even further through the use of credit cards, another system of scrip clearing.

Base money becomes important in the clearing of the scrip clearinghouses. At the end of the day, any imbalance in the scrip clearing game must be settled with base money. This function is overseen by the Federal Reserve which holds large reserves of base money for each bank and transfers the ownership of that money to balance the imbalances.

Global Clearing

This same clearinghouse function is also needed in the global arena. The BIS (Bank for International Settlements) is the central bank of central banks. It is the clearinghouse of all the central banks of the world. It balances all international imbalances by transferring ownership of physical gold bullion deposits. Oh wait. What? It doesn't? Actually, there is NO adequate clearing mechanism for global imbalances. At least not for the last 38 years.

The global imbalance clearing mechanism is rather messy right now. Global imbalances are basically first settled in US$ base money which is then given back to the US government to spend on US Medicare, Medicaid, Social Security, government pensions, field mouse habitats and the US military global "peacekeeping" presence. And in exchange, the US government hands out Treasury Bills and Bonds to the various central banks.

This is today's global clearinghouse in a nutshell!

Why It Was So Important To Save The Investment Banks

The abstruse notion of money has been so confused over the last hundred years that almost no one understands what it once was. Today, 99% of the world stores its monetary savings in investment vehicles that are not really money. The very idea of money has been so corrupted that even the most conservative individual savers look at their "fixed income" brokerage statements and think, "this is my money". The fact of the matter is that there is actually NO money represented in that statement, even if it claims to have 10% in "cash".

This complete divergence from reality has taken nearly 100 years to accomplish. And now it is complete.

The fact of the matter is that now there is more money in the world than there are things to buy at current prices. And what's worse is that the money supply continues to grow even while the real economy contracts. This SHOULD be creating massive inflation in everything EXCEPT financial investments (of which there is no shortage). But instead the opposite seems to be happening.

How can this be?

It is because new financial investments are constantly being created by the financial industry to soak up the extra money, to keep it from bidding on the real economy. This is true for individual's money, for institutional money (like pension funds), and even for sovereign money (like China's foreign currency surplus). The financial investment industry is the giant TRAP that lures in the extra money with the simple promise of paying out MORE money! This is why it HAD to be bailed out and subsequently GUARANTEED against default.

Risk pricing MUST remain rigged!

If the risks of these "investments" were properly priced, interest rates would be sky high and the investments would be as cheap as dirt. There would be NO profit for the bankers to take home!

Now that the financial industry has been bailed-out and guaranteed, the very NATURE of financial risk has changed into something so terrible it is almost never mentioned. In fact, from what I can tell, I am one of only a handful of people that are willing to write about the true nature of today's investment risk.

But just because no one talks about it does not mean the global market "organism" doesn't smell it. It does! And this is why risk pricing MUST remain rigged. The market movers, shakers, makers and owners have quite a casino racket going right now. It is complex and computerized in the extreme. It is understood by few and managed by even fewer. Yet somehow it still masquerades as our global, capitalist free market.

Amazing, isn't it?

The fact of the matter is that a certain - specific - percentage of the global aggregate of default risk (which was certainly bearable because it only hits here and there) has been transferred to a much more demonic currency risk (which is totally UNbearable because it destroys EVERYONE)! The only thing left for the global market organism to digest is the actual SIZE of this transfer, a monumental task in the face of risk price RIGGING by diabolic forces.


In my opinion, this is the fuse. Lit and burning fast!

If you or I were to guarantee a financial asset we would want to make darn sure we wouldn't have to exercise that guarantee. Because if we had to, we would either have to give up some of our own wealth or we would have to produce real value into the economy to cover the guarantee. An insurance company faces the same danger when making guarantees. This is why it has highly paid underwriters who calculate the probability and charge the insured party enough premium to cover all claims, plus a profit.

But when the US government and the Federal Reserve make guarantees, they have none of the worries we mortals have. They each have their own way of printing new base money to cover the guarantees. In the case of the Treasury, it simply issues new debt to be purchased by the Fed. Because of this unique ability, these two entities feel very comfortable about making many guarantees. And over the past year, implicit guarantees have been issued on everything from your Chevy Tahoe to the entire money supply (all credit money is now backed by the implicit guarantee of new base money) to money market financial investments, to large insurance companies, and even to the largest financial institutions, which indirectly guarantees a mountain of financial derivatives.

Additionally, the federal government guarantees its own debt. This guarantee is supposed to be backed by the production of value into the economy through taxation, but today it is actually backed by the ability to create new base money in order to service the debt.

And finally, in the same way it guarantees its own debt (through base money printing, not taxation), the federal government implicitly (in some cases explicitly) guarantees all of its future obligations of Medicare, Medicaid, Social Security, government pensions and a global military "peacekeeping" presence.

I propose to you right now that the US government alone has guaranteed through its ability to expand the US dollar monetary base, more than the entire global monetary base combined (around US$5T); more than the entire value of all stock markets in the world combined (global equity markets estimated value US$37T); more than the entire globe produces in a year (global GDP estimated at US$70T); and even more than all the debt issued, both public and private, in the entire world (global bond markets estimated value US$83T).

In fact, because the mountain of derivatives that the guaranteed Too-Big-To-Fail banks play with is so large (somewhere between US$600T and US$2Q), I propose that the US government, without even realizing it, has verbally implied guarantees of more value than even exists on this planet! All in the name of "saving the system"!

Now, of course they don't plan to exercise all these guarantees. But that is not the point. This system of credit money ONLY works because the money supply has the ability to ROUGHLY track the growth or contraction of the real economy. And with these guarantees in place, monetary contraction is no longer an option.

Zimbabwe Versus the Dollar

The housing price crash has been called deflation. But let us look at it another way. You and I have lost some perceived wealth because we can no longer sell our houses for what we once could. But the other side of this equation is that much of the debt we took out (and even some that we have defaulted on) has either been made whole or guaranteed. So what has really been lost?

What if... the housing bubble was actually acting the same as the sponge we call the financial industry to suck massive inflation away from consumer prices? Remember, the money that was created from thin air when we bought our house is still circulating. And the debt hole that was created when prices crashed has been filled with new base money through TARP and other various "facilities", bailouts and guarantees.

The housing market is (at least for) now a dead sponge. And the financial industry is a dying sponge. So where is all the money going to go?

Recently I have read two arguments, by writers I respect, why the dollar system will not go the way of Zimbabwe. These are certainly not the full spectrum of arguments, but I think they touch on a couple good points, even if they are wrong.

The first argument is that reserve currencies are political, not market-based. And therefore the dollar's demise will be "managed" in a controlled fashion that may take another 10 or 20 years, with no sudden crashes. The one exception, this writer says, is if a geopolitical "mishap" happens.

The other recent argument was that it will take the US longer to get to "Zimbabwe-style" inflation since real productive assets in the US are not being totally seized, as they stole all the white people's farms in Zimbabwe.

The biggest weakness in the first argument is the terms "political" and "managed". These both mean "manipulated". Clearly the dollar is market-based because it is used to pay for real good in markets all over the world. It is also traded openly on foreign currency exchange markets. A currency like the SDR would be more purely political, but not the dollar. The dollar is simply "managed", as Another explained to us many years ago. And a simple "truism" about manipulation is that it cannot defeat the primary market trend for very long. And often when it does, the correction can be brutal.

The second argument is interesting because it deals with the economic side of the equation. It is true that Zimbabwe's slide into the depths of hell began in early 2000, when Mugabe tried to change the Zimbabwe constitution to give himself the dictatorial powers of additional terms in office, immunity from prosecution for all his friends in government, and the authorized government seizure of all white-owned land. When his referendum to change the constitution was defeated, he assumed those powers through force and violence.

Zimbabwe's economy began shrinking in 2000 and has continued to shrink ever since. It has been plagued by political turmoil, capital flight, monetary mismanagement and high inflation. The core underpinnings of the economy, agriculture and industry, have virtually disappeared since 2000.

From 2000 to 2002, the annual rate of inflation in Zimbabwe quadrupled. By 2006 the value of the Zimbabwe dollar had fallen by a factor of a million. In August of 2006 they introduced a new currency at an exchange rate of 1 new Zdollar for 1000 old Zdollars. This new Zdollar, at its inception, was only worth about a tenth of a US penny (Z$10=One penny). From there it fell even faster as the government funded EVERYTHING, including a LAVISH lifestyle for its leaders, with the printing press.

In less than two years the annual inflation rate rose from 1,000% to 231,000,000% by July of 2008.

I ask you: Is this history so different from the US? Look at the 8 year chart. Much of the core underpinnings of our economy were shipped overseas during the last 15 years. What is left is an economy driven by consumerism to the tune of 70%! Now even that is fading.

Shrinking economy! Monetary mismanagement! Government funding itself with the printing press! Lavish plans, one - after - another, coming out of Washington!

What if we are now living the above chart, and we are still in the first two years of the chart? Relatively flat, huh?

The last issue I want to discuss is the nature of Zimbabwe's money supply during the last years of its life. Credit had disappeared. Government debt disappeared. There was no interest rate high enough to lure in real capital. The entire money supply, M1, M2, M3 etc... was replaced with BASE MONEY! In hyperinflation, it is only BASE MONEY that matters! This is because hyperinflation IS currency collapse!

What if all of our government guarantees are used? Every "perceived" dollar becomes a real base dollar! When future liabilities are funded by the printing press, this is all BASE MONEY flowing into the system. When the Fed buys government debt, this is BASE MONEY the government is spending. And when a bank is bailed out by either TARP or the Fed, it is BASE MONEY being exchanged for bad debt that should have SHRUNK the money supply.

And what if... the mere GUARANTEE of all this debt actually changes its core NATURE to that of base money? I'm just saying what if. If this is the case then it is up to the markets, the producers of REAL ECONOMIC GOODS to determine the meaning. A monumental task in the face of risk-price rigging by diabolical forces, but not impossible.

In my view, the only hope they have to avoid this terrible fate (other than blind hope alone) is a FREE gold revaluation to preempt the market revaluation of everything. But I'm afraid they may mistakenly take matters into their own (incapable) hands and attempt a controlled devaluation through devious means (like a bank holiday). In any case, the dollar's immediate future is grim.

Monetary theory is FAR from being a settled science. We should not rest comfortably on untested, possibly false assumptions. Preparation for the worst while hoping for the best is the only sane course of action. Please be well.



Anonymous said...

@FOFOA : Outstanding ! Brilliant ! Bravo !

Allow me to add one element : The past 100 yrs of monetary history is to divide in 2 parts > First, the gold exchange system + fixed currencies. Second, the floating currency system.

The ABUSIVE (manipulative-interventionist) global $-power development was only possible because of this "floating" currencies' regime without gold exchange.

The stealth CB gold redistribution during the past 15 yrs, means that gold MUST come back into the drifting monetary system as to function as a fixed wealth standard. Freegold = Intact PP wealth. Then the exchange rates can float as much as they want and currencies can expand to outer space,...but freegold is fixed as your wealth standard !

Then freegold and currencies can develop a new free life between each other. Shall I trust freegold and store my wealth in it,...or shall I trust good/badly managed currency as a saving ( intackt temporary store of wealth) ???

WW-II was the reason why Euroland had to give in to the $-supremacy and had to submit to the $-regime.
We were divided and others came to rule.

Today, the East is increasingly victim of this floating regime and is building opposition to it.

It is this opposition and the efforts to crash this opposition that will dismantle the entire scheme as you brilliantly describe.

Anonymous said...

Italian gold reserve taxing !?

If one accepts that gold wealth reserve can be taxed, can this (free)gold possibly be (remain) an INTACT PP wealth reserve tangible !?

One should only tax (regulate) NON wealth fiat digits !

Cfr. No VAT on bullion !

Martijn said...


This is what I ment when I said "they are coming for us" some days ago.

They are discussing ways to steal from goldowners.

Makes the stories of gold confiscation etc. a little less unlikely, doesn't it?

Martijn said...

Good post fofoa. Interesting theory, as I said before. I am still thinking about it for a bit.

For now: Some fun on housing

Shanti said...

My dearest - Compliments - for this outstanding piece of information !

"The art of war teaches us to rely not on the likelihood of the enemy's not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable. - Sun Tzu -"

FOFOA said...


I think you misunderstand ANON. The message is the opposite. Anon's message is that this is a CONTROLLED evolution (under the umbrella...). Taxation and confiscation of gold in the freegold future are both HIGHLY unlikely.


Martijn said...

Taxation and confiscation of gold in the freegold future are both HIGHLY unlikely.

I do not believe that fight has already been fought. Freegold is a solution, but I am not 100% assured of it having already been decided.

Some powers in the Eurozone certainly see the potential of freegold and might even subscribe to it, but I do have some reservations on the strenght of the umbrella.

Italy probably just used the gold tax proposition as a means to stress their position rather then it being very seriously considered, but I still see other forces that would welcome gold taxation and like means.

FOFOA said...

The idea of holding money as a means of storing wealth has NEVER EVER been taxed. For example, if you had a million dollars in a shoebox three years ago you could have bought a McMansion in a very nice neighborhood. But if you didn't buy one, and you still have that shoebox, today you can by TWO McMansions! That 100% gain in PP is not taxed! Money is the one holding that is never taxed, even if it goes up in value.

Once fiat currencies are exposed for what they really are, gold will be viewed differently. The two monetary functions, medium of exchange and store of value, will be forever severed. Gold will fill the latter and it will be viewed as money for the storage of wealth. This is "the wealth reserve concept". To imagine that gold will continue being a mere taxable asset as it is now stretches the imagination, especially when you consider the monetary reserve position of the central banks.

The strongest concepts do not require an umbrella. Anon believes there IS an umbrella, and I believe that whether or not there is doesn't matter. Even a weak umbrella greatly strengthens an already strong concept!

It is very easy to feel insecure as a gold owner in today's climate of anti-gold spin. But you have to understand that the climate and the spin will REVERSE 180 DEGREES once the failures of fiat are exposed for all to clearly see.

Martijn said...

Money is the one holding that is never taxed, even if it goes up in value.

If nobody knows you have the money it is not taxed. Here in Europe, money in a savings account is taxed (they call it wealth tax), albeit at a relatively low rate.

Anonymous said...

" Gold-Angst ", does indeed exists.
And the majority still has a goldmetal-aversion (bullion in possession).

Is the result of decades' gold marginalization by the monetary mismanagers (vulptures).

But the goldprice-behavior since 1999/2001 (€-birth and WAG/CBGA) is of such a nature that goldmetal in possession should NOT be feared or disliked, anymore.

The deliberate goldprice crashing from 1994 to 19999/2001 (ATL), is over.

A repeat of the goldprice explosion of the 1974 > 1980 scenario, will NOT happen ! Gold will never be in a bull/bear market again. Gold's status is in an organized transition process.
A "revaluation", with emphasis on VALUE and NOT on price !

The silent/invisible (low profile)gold advocates know damn well the " failures of fiat (system) ".

A/FOA and now FOFOA have extensively explained what happened during the past 7 decades and the dramatic changes for gold that are now evolving.

The main problem with the general public is explaining what -wealth and value- exactly are.
Unfortunately, it is when one's digits crash in one way or another that one understands very quickly what real wealth/value, is. Too late of course.

This dilemma is the main reason why the *moneymasters* always get away with their fiat Ponzi fraud for a very long time.

I understand Martijn's hesitation and doubt. :)))

Martijn said...

A "revaluation", with emphasis on VALUE and NOT on price !

(The main problem with the general public is explaining what -wealth and value- exactly are.)

Gold can function as a store of value. However, to translate value into todays (economic) world is has to go through the fiat-system, and hence be priced. So the revaluation of gold as a value-oriented perspective as its main driver, but its changed status should over time manifest itself in its price.

As for my hesitation and doubt: I do not doubt the validity of the arguments presented. I do however continue to wander whether I (we) see all that is relevant (and would advise anyone to doubt that too)

FOFOA said...

I just came across this post on a Middle Eastern investment forum. The poster appears to have been closely following (since last September at least) public developments that lead him to the conclusion of an organized dollar devaluation...

"I've been emailing with Bob Chapman since May, he is now in agreement with me about Coordinated Global Currency Realignment within the next 6 month's."

Also linked was a video of Bob Chapman discussing a devaluation and possible bank holiday, recorded two days ago:

Part 1/4
Relevant clips: 5:05 - 6:27 and 9:00 - 10:48

Part 2/4
Relevant clip: 2:00 - 10:10

Martijn said...

They used to put up another title... Interesting fun on the dollar.

Anonymous said...

Question Please -

If one were to put some fiat currency into gold/silver how much is enough?

Everyone says buy gold, buy silver and get out of the US$ but how much is enough. I have none so does anyone offer a direct answer to my question?

Thank You

Anonymous said...

I am sure when considering who the "money masters", the gold smiths are/were that gold will come back to his true value as money! You only have to look how they always LOVED and whorshiped gold. The fiat money was just for the interim time to enable them to get gold out of the heads of the stupid gojim.I only ssay 2% of US population represented at 70% in bankster high milieu. Now that the herd have forgotten what gold is,except for rings and teeth and they had had enough time and bubbles to accumulate enough of it, gold will get reinstaured to his true and legitim role. That I am sure. How long it will take - that's another matter. I hope not too long.


Anonymous said...

Anon 4:54

it depends on many factors:
how many in the family,age, what plans, living standard/country ... Nobody can tell you that. But I think gold 30 - 40 onces should be quite well for a single.Of course more is even better!


Anonymous said...

Hi Fofoa!

My sincere congratulations too! And thanks!
Bob Chapman has very interesting views upon "manged" future (global research ca.). I hadn't imagined you might agree with them, do you?


Anonymous said...

Define "devaluation".

The USD floats among other currencies (whose governments are busy doing much what the US Government is doing). Sure there is some posturing, but more or less, Governments don't have the power to sustain their currency for long if the world is thumbs down on it.

I welcome abrupt changes when they are deserved (as now). However you haven't presented a rational case for how a sudden meltdown in the US Dollar will occur.

Hell, the Chinese have undertaken their own bubblemania now. Repeat... they are amped up, printing & speculating far above anyone else now. The Chinese apparently are blowing their own likely to burst on them.

Exactly WHO is going to come gunning for the US Dollar?

Describe one plausible scenario.

FOFOA said...

Does it really have to be a describable entity? How about an organism comprised of and driven by the self-interest of many (millions of) different entities?

Anonymous said...

During the gold-exchange era up until 1971/1973, nation states officially devalued their currency continiously !
Devaluation = Decline in PP.
When an "internal" devaluation was needed, it was against gold. When an "external" devaluation was needed and agreed with others, it was against other currency (ies).

During that era a lot of CB gold was "exchanged". Between states, as CB reserves or to satisfy rising private demand.

Read : " The flight of international capital " Brendan Brown.

But since 1971, w're NOT on the gold-exchange system anymore. Euroland started to work on EMU. First there was the ecu and later the euro.
The dominating $-system, in contrast with EMU, still wanted a dollar as good/better than gold,...and EMU severed this link and introduced the concept of freegold wealth reserve, where rising (free floating) gold reserves function as a currency's wealth collateral.

The $-system wants the goldprice frozen and EMU doesn't want to systemically devalue its currency against gold in order to have internal (!) price stability and genuine growth.

But the entire world has been floaded with $-units that bear no creditworthy collateral anymore.
The non-US world doesn't want these $-units on its territories being burned as worthless paper.

It are the freegold wealth reserves that will have to compensate for these astronomical global $-losses.

So, don't expect the US counterparties to force the goldprice up,...because of the wealth reserve concept that is opposite the dollar as good/better than gold. It will be the dollar's internal and external PP crash that will bring gold to its right revaluation and compensate all the $-losses.

The dollar is inded the US' currency,...BUT NOT OUR PROBLEM ANYMORE !
Freegold reserves will replace the dollar losing its reserve status/function.

Anonymous said...

Bernanke's "exit" magie !?

Or, does one put toothpaste back into the tube ?

These so called academics keep infantilitizing us without any shame. Baaahhhh.

Martijn said...

Here is some of that Brendon Brown book.

Anonymous said...

" Road to ruin " :

>>> Again the Big Catch-22 from yet another angle...

Martijn said...

Here is more on delaying factors.

Bernanke will start babbling about soaking up cash. As always, first some fools in the market will start spreading the word that "this is great news", others will believe it, and it will take a while before the start to see that Bernanke cannot really deliver on his promises.

These games are likely to continue for a while, supported of course by ppt (Goldman) interventions and the like.

Martijn said...

On that Ambrose article linked by anon:

Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.
This is the road to corruption.

No doubt Ireland has been the victim of a savagely tight monetary policy e_SEmD given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.
He is correct here. Demographics are key. You should read the article (pdf) on the site of Daniel A. Arnold for a basic understanding of its influence.

France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.
This is one of the reasons Italy has been rubbing the gold-issue recently.

The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 e_SEmD beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.
Ambrose is always good at this: Japan's future does not look bright - no lie there - but it is not unlikely that Britain or the US will blow up first. However, not a word out of Ambrose...

The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".
!!! What is this? Again here is more on tightening the money supply. As I said before, this is more MOPE. They are unlikely to deliver on their promises, but it sure will buy time, it will.

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.
Ambrose needs to do a lot more arguing to get me to believe that...

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.

Some sense in this. Spending should indeed be cut, and companies (and banks) should be allowed to collapse. As for Ambrose's fear: the spending he fears has arguably already been done by guaranteeing loans into the money supply.

General remark: all the liberal talkers (e.g. Peter Schiff) etc. arguing that unhealthy companies should be allowed to go bankrupt might overlook one thing. If we do allow those guys (e.g. banks) to go bankrupt, be aware that they will be bought by Arabs and Chinese. This is the power struggle on a higher level that is hardly mentioned by those guys.
Do we really want Arabs and Chinese controlling our pension funds (what is left of them) and other investments? I am not arguing we don't, but I am also not convinced we do...

Anonymous said...

Martijn : Analyse the notion " financial industry ".
On WHAT exactly is this "industry", based !?
My answer : NOT even based on air,...because air is a life nescessity.

The FI is based on NOTHING ! Who is going to "invest" in a Ponzi industry,...that needs to be strictly -controlled- as to not collapse immediately ?

I am still amazed by the fact that even wise/educated people cannot come to the conclusion that the entire FI is one Big Fraud !

People always believe lies on condition they are big enough...

Martijn said...

I am still amazed by the fact that even wise/educated people cannot come to the conclusion that the entire FI is one Big Fraud !

People always believe lies on condition they are big enough...

This is exactly why I have some doubts about how fast the collapse will be. MOPE is lied-based-economics, and so far it seems to work for a least a bit.

And trust me, if we all agree that the sky is green from now on, it will be green. That is also how this world work.

Basically the ontological notions of objectivism (realism), subjectivism and relativism seem relevant here. We are arguing from an objectivistic stance: the fiat-currency-based system has had its best time. However, the world seems more relativistic: if enough people believe it, so it will be.

Shanti said...

Martijn 4:48

I agree that your point could be a idea on paper, but nothing more than that.

In reality think about sandpeople who have value in the form of black stuff would you think they would support your view....?

Anonymous said...

Actually the word "industry" in financial context is nothing more than an injury to people working in real industry. It's an euphemism for scum or in better days - business.


Martijn said...


I am not arguing that we will avoid the collapse of fiat.
What I am arguing, and have argued before is that for every person that does understand the system and has his value stored in either black or yellow gold there is most likely at least one other person that (believes he) has stored his value in fiat.
Now you can look at the logical constructs only and argue that gold is the only real store of value and the like, but remember: many people have been able to (at least temporarily) store value outside of gold since 1971.
Perhaps the length of that period is an argument for a collapse rather tomorrow that in a year, but I would like you to notice the strength the fiat-system has had to survive this long.
Do not forget that the end of the dollar and even the end of fiat has been called many times, even as far back as 1971.
That is what I mend when I argued to always ask yourself whether you really are seeing all that is relevant.
As Jim Sinclair said: markets can stay irrelevant longer than you can stay solvent
Perhaps markets are not that irrelevant. Perhaps the reason that you think them to be is that you've missed a crucial part of the big picture. Not understanding something and hence calling it irrelevant does seem like the easy way to me.

So: I am certainly not arguing that the dollar and the fiat-system will survive. All I am doing is asking myself whether I have really seen it all, and I don't believe I did.

Martijn said...

Actually the word "industry" in financial context is nothing more than an injury to people working in real industry. It's an euphemism for scum or in better days - business.

I know quite some people working in the financial sector that are in a sense rather intelligent. And they really do put in effort and work long hours.

Perhaps their energy is misdirected, and perhaps they produce little value to the world. Perhaps they are even unethical; again I would not disagree.

I do however find it hard to believe that on the long run nothing will come out of their work. I don't think so.
The financial world is a complex realm. I would rather believe that the "work" that the financial system is doing know will provide for an interesting base of knowledge in the future. Perhaps not even finance, perhaps their modeling knowledge will serve in setting up space missions or something else we cannot as of yet contemplate.

I do believe we face an interesting future altogether.

All this does not mean I intend to sell any of my goal btw. All I am trying to say is that there is a bit more to the world than paper and gold, and that it is not always easy to maintain a good overall perspective while specializing in a certain topic (finance/gold).

Shanti said...


Folowing your reply, one could conclude that the marked has been - MANAGED - and that both entitys had some kind of profit to maintain the current situation. Value of GOLD hidden in OIL pops up in my mind spontaniously..!

I sugest you read the archieves of ANOTHER, a lot of your questions will be answered.

Shanti said...

POO, €, POG all up

Looks like an entity does not manage anymore....

Martijn said...

Folowing your reply, one could conclude that the marked has been - MANAGED - and that both entitys had some kind of profit to maintain the current situation. Value of GOLD hidden in OIL pops up in my mind spontaniously..!

Now you are assuming that there are only two entities running the market.
I may agree that there are at least two entities in the market. Not that they are the only ones running the show.

As I have no absolute oversight I am not able to falsify such a statement, but I am reluctant to agree.

I wonder what it is that I haven't seen.

In "accepting" a theory (such as that of another/foa) there are at least two steps:
1. Check whether the theory holds any ground at all. This is done by finding confirmation in the real world
2. Check the completeness of the theory. In other words: look for shortcomings or outright falsification.

Will all due respect: so far I have found many that propagate this gold/oil theory mainly working on finding confirmation.

My point is that this can lead to a bias (the well-known confirmation-bias) and most of all this does not guarantee completeness.

Again: I tend to agree with another's theories, and I also agree that the current financial system is far from sustainable and that it may even be on the verge of collapse. However, I would also be the first to agree that I am not all-knowing and that I am very likely to be in for surprises.

Anonymous said...

When " investors " (INVESTORS-!) use the financial markets (risk capital), they need liquidity to freely come in and go out.

That's where the financial industrialists have the logic right to make a profit on this provision of liquidy.

But when the liquidity providers manipulate and intervene in the markets, has no "market" (MARKET-!) anymore.

Same for a market driven economy : When cartels and monopolists manipulate the economy,...there is no market-economy anymore.

That's why we rather talk about FI (finance capitalism) and collusive political economy.

It is the system that is increasingly defaulting as all systems came and went (growth and decline).

Today I label this Crisis as a Systemic Debt Crisis that is running its final coarse.

W'll see if and when this view materializes ???

Tekin said...

@ Martijn

My expectation is neither the end of the world nor the end of fiat. Historical observation and common sense suggests that the fiat money system tends to build large amount of debt thru time, and periodically, the balance sheet is "balanced" by upward valuation of gold - the only CB asset which is not the obligation of another party. It looks like, this is what Roosevelt did in the 1930s by re-valuating gold from 20 to 35 dollars. Therefore, I believe, we do not need "Reserve Currency Status Wars", China or Russia to expect gold revaluation at some juncture. It looks like it is a standard procedure within fiat money management.

What complicates the problem at this point of history, is that, other countries, namely BRICs are openly challenging the reserve currency status of the dollar. This brings up the possibility that, a revaluation of gold (dollar devaluation) may trigger the loss of reserve status of dollar completely.

To be a reserve, or not to be a reserve. This is the problem. Therefore, we may reformulate the gold revaluation requirement, from the point of view of dollar system managers as follows: "What is the optimum rate of devaluation which will cause minimum loss in the reserve status?"

It is quite possible that, they might have a line of thought which similar to the following: "Reserve Status is associated with economic and military strength. Since the US has voluntarily sacrificed its industrial strength by outsourcing, the only remaining US pillar is the military strength. However, the loss of national industrial strength would eventually lead to the loss of military strength (Standard observation on the final times of all empires). Therefore, it is better to do the revaluation now, before the military strength evaporates".

Please note that, I am not suggesting that this is the only plausible continuation. However, the HSL rumour and JS countdown adds weight to this argument.

Tekin said...

Further thoughts... Freegold for whom?

Hegemonic powers have their own citizens and also their colonies. It is said that states would never voluntarily give up their power to print their money, hence digital/fiat money is expected to survive. This would compromise the citizens of hegemonic powers. However freegold would liberate the colonies from their hegemonic powers. The question is: "Is there an inconsistency in here?" Why should a hegemonic power settle its deficit with its colony in gold and thus liberate it?

It is more likely that the world would be divided into zones of hegemonic powers. Assume that country A has positive trade balances with China and US. If country A can get gold from China, but gets dollars from US, it is a US colony. If it gets gold from US but Yuan from China, it is a Chinese colony.

I believe that freegold would not be for everybody. Only the hegemonic powers would be eligible for freegold.

Martijn said...

It looks like, this is what Roosevelt did in the 1930s by re-valuating gold from 20 to 35 dollars.

Perhaps you have a point there. That is after all almost a doubling of the price.

Martijn said...

What complicates the problem at this point of history, is that, other countries, namely BRICs are openly challenging the reserve currency status of the dollar. This brings up the possibility that, a revaluation of gold (dollar devaluation) may trigger the loss of reserve status of dollar completely.

Most likely so. For various reasons it is not desirable that a global currency is managed by a single nation.
The loss of its reserve status is inevitable for the dollar. Either sooner or later.

Shanti said...


Appreciate your (academic) approach,
Please note i ventilate my opinion and do not either have a cristal ball.

There are certainly more entity's as you suggest, but in essence it comes to, 2 main powers. Call them the pro and contras. When these 2 collaborate in a manner to win both, you can imagine we probably will never find any evidence.

I suggest to add one extra step.

3) Check from the outcome/results of what is happening and who will benefits the most.

Finaly i bet, you can count on surprises ;-)

Martijn said...


I agree on the third step. And I might agree that those two powers you mention are important forces. I certainly agree that the evidence will be hidden.

Another interesting speculation on the ruling forces: the Peking-Washington connection.

Martijn said...

Whitehouse delaying budget update

Martijn said...

The Bundesbank posting they're seeing the start of the recovery.

Those greenshots are persistent to say the least.

Martijn said...

As for the surprises: I'd certainly give WWIII a very reasonable chance.

FOFOA said...

It can be assumed that in our modern world fiat currencies are necessary to enable the vital flow of commerce to a waiting world of 6.75 billion people, without the need for direct barter exchange.

What is NOT necessary is that this vital flow of commerce continue in the unbalanced, lopsided way it has been going. An imbalance that is both made possible by, and reinforcing to, the notion of a relatively stable US dollar even in the presence of massive monetary inflation.

The real world's acceptance of this merry-go-round game of ships loaded down with real goods and oil sailing to the US and then returning, riding high in the water, loaded only with paper financial products, has reached its nadir. No matter what new paper the colluding central banks manufacture, the producers of the world want something more in exchange for their goods. They want to >>own<< ! They are no longer happy simply being serviced by a financial industry that has now shown its true weakness!

The value of the currency does not matter in its trade function. The producers are free to bid for more and more dollars with their products as more and more dollars become available. Right now we are in the middle of the process by which the producers of real goods are REJECTING the rigged pricing system which does their bidding for them.

We can clearly see this process in the opening of local exchanges in the middle east as well as the new currency and barter deals of the BRICS. This is a clear REJECTION of rigged (relatively stable) pricing in a currency regime being openly inflated to the sole benefit of its new messiah and his grand schemes.

Fanciful theory hits hard pavement when ships must leave port bearing real goods. For now, the golden marketplace is still delivering the goods that allow these ships to sail. But for how much longer will dollars be redeemable for gold at current prices? This is where the recognition of the larger trend, the evolution of gold's function, comes into play.

Exactly how close are we to Fekete's "permanent backwardation" where no physical gold will be offered in exchange for dollars? We have been flirting with this state of being for 8 months now.

And when we DO hit that wall, perhaps NO physical goods at all will be offered in exchange for dollars!

To this end, some have prepared. The Euro-zone now has its own currency with golden reserves. Dubai has its own regional exchange. The BRICs have their own deals in place to keep the flow moving once the dollar (and the Western banking system) fails to lubricate the wheels of commerce.

So what do these preparations tell us? What do the CB gold actions of the last decade tell us? What does the gold price action of the last 8 years tell us? What does Medvedev with his gold token tell us?

I think they all tell us that the vital flow of commerce is under imminent threat from Washington DC. Not because of military might, but because of dollar mismanagement. They tell us that the world has ALREADY prepared for this seizure at the national level. And these preparations have been ongoing for quite a while. Only now are they being publicized!!

The question that remains is what preparations are needed on the individual level? Do you trust your government to provide all your needs once your digits disappear? Do you trust your financial industry pension plan administrators to give a SHIT about you once the plan is decimated? Do you trust your local grocery store to generously provide for your family's needs once the trucks stop rolling in?

The system wants you to trust that it has EVERYTHING UNDER CONTROL. It wants you to believe there is no IMMINENT threat. It wants you to think that there are hidden elements that you cannot see and know, so don't worry, SOMEONE is looking out for you. It wants you to think that all that matters is silly MOPE confidence. It wants you to think "if enough people believe it, so it will be." Think twice before you swallow this POISONOUS pill!

FOFOA said...

Drudge --> Bailouts could cost U.S. $23 trillion

This is all new base money. There is no way to add $23T in real value to the economy, even if the entire US worked as slaves for 2 years with 100% tax going to the bailout, it is impossible because less than 30% of the US GDP is from production. It would take 5 years of 100% slave labor from the entire US workforce at last year's levels just to pay for the bailouts. At current levels, who knows. 8 years? And this does not count any of the other social or monetary guarantees.

This is the road to Zimbabwe!

If true, the US bailouts ALONE represent a 29-fold increase in the US$ monetary base from the start of the crisis.

"To save the system!"

FOFOA said...


See Drudge for links.

Martijn said...


Check out the the comments from David Alexander on the Market Skeptics post on the breaking USD index.

Interesting stuff on China.

Martijn said...

Also interesting to notice: while the US was shipping off its production capacity to China making the nation less valuable in many ways, the companies involved in the redistribution of production capacity wealth were registering handsome profits.
Therefore, US treasuries seemed like a good investment - Uncle Sam was reporting fat profits. Now that the tango unfolds, we can see that part of the collateral has been shipped off. Arguably it has been replaced by high educated smart human capital which will prove to be of great importance in the future, but I very much doubt that.

So, the moral of the story is that the income from selling off production capacity was reported as profit by Uncle Sam and many did not notice - until soon. I cannot deny that there is some pressure on the USD.

Anonymous said...

Hi Fofoa!

I wonder if you had some thoughts on HJR27 10th Amendment? What could it bring in case of currency breakdown?

Could every state print its own "new money"? Could US disintegrate? Or is it only a superficial measure some states have signed?


FOFOA said...


Some pressure?

Even a diamond anvil could not produce the kind of pressure that is on the dollar right now. Just because it's not obvious in TA doesn't mean it's not there!

The profligate spending, guaranteeing and bailing-out by the Fed and the Treasury is so wrong on so many levels that ALL market pressures are being projected and focused directly on the denominating unit itself. It is the only way to make things right. And the market organism wants to make things right!!

When a demigod goes berserk with its preternatural power and cannot be contained, the very power itself must be neutralized. Think Samson's hair.

I think even Karl is starting to get it!


The US federal government IS the demigod that will be neutralized. It is not America, just its centralized power monster. Market forces are organizing on many fronts to neutralize this berserk monster. The dollar is one front. State sovereignty is another.


Gary said...

This is a fascinating blog. I regret not finding it sooner; I have a lot of catching up to do.

Martijn said...


That is some pressure indeed.


Martijn said...


The total potential Federal Government support could reach up to $23.7 trillion..

How sure is that? "Could reach up.." does not necissarily mean "will reach up...", or does it?

Martijn said...

Much of the government assistance is backed by collateral and Barofsky's $23.7 trillion estimate represents the gross, not net, exposure that the government could face. No one has suggested that the full amount will be used.

Because of declining participation in short-term loan programs and because some infusions of money have been repaid, the maximum amount actually spent has declined to a current outstanding balance of $3 trillion, Barofsky said.

Barofsky's $23.7 trillion estimate represents the maximum exposure that the government would face if all eligible applicants requested the maximum assistance at the same time. It does not account for the fees and other costs that some of these programs charge and for the collateral that many of the programs require that participants provide.

I am not saying that we're only talking loose change here, but 24T might not be the most realistic figure on this one.

FOFOA said...

Funny Martijn,

I read the opposite as you in articles like these. But then I don't parse the words of a reporter or a bureaucrat for truth. If anything its the opposite.

Here's how I read it (overall):

The fact that he narrowly qualifies this count as "a series of bailouts, bank rescues and other economic lifelines" is telling because I am looking at a much broader picture of monetary and fiscal mismanagement.

$2T is how much has already "gone out the door" under the NARROWEST definition of "gone out the door". $2T is what you get if you just count things like the portions of the stimulus bill already spent, TARP and a few bailouts. But you must also IGNORE the other $2T the Fed passed out in exchange for toxic bank assets, as well as the OTHER other $1T to $2T of QE.

Unless you think it stops there, you must then start counting the other promises our WISE ONES have made.

Apparently, $23.7T is the amount that is currently countable. Sure, there will be some collateral or toxic assets publicly owned and mismanaged in exchange for some of that money, but I still say it is new base money going out, and real economic goods coming in, leaving the productive economy for the monster's lair at inflated public prices.

So I would say that $23.7T is a good STARTING point, or a MINIMUM. Some things we can be pretty sure it does NOT include because they are either larger than $23.7T or they are currently unknowable are the 100% implied guarantee of the FDIC. The guaranteed service and sale of future government debt. The guaranteed service of future social obligations. Future acts of Congress (Health Care?). The implicit guarantee of the Too-Big-To-Fail within the sacred Financial Paper Products Industry. Future unknown corporate bailouts. Future unknown State and Local bailouts. Etcetera, etcetera.

The emergent pattern is pretty clear now. "The system will be saved at ANY cost, including the viability of the dollar!" I am more sure now that the government will go to insane extremes than I was even 6 or 9 months ago when I was pounding this point in my blog posts. I am not fooled one bit by Obama's "restraint" with CIT and California. And I am glad that someone has done count so we have a starting point from which to add on everything new that pops up!


FOFOA said...


Welcome. Somehow I missed your comment before. Catch up and join the fun! I have actually been to your blog a few times.


Tekin said...

Since the currency in circulation is not gold, I believe, it misleading to say that one should save in gold under every conceivable circumstance.

Have a look at the following chart:

Save in gold when StockMarket/Gold ratio is declining. Otherwise, save in paper. It is not true that "This time, it is different. "This is not a permanent plateu". This is not "the end of history".

The governments would not give up fiat money, hence the oscillations of the above graph would not go away.

FOFOA said...


1913-1971 the dollar had absolute control over the price of gold through the gold standard. 1973-1980 the dollar temporarily lost control. 1980-2001 the dollar had strong control over gold through subterfuge. 2001-present the dollar's control has been limited to a controlled ascent.

If gold had been free to float against REAL inflation during those times, your Dow/Gold chart would look quite different. Sometimes, yes, the DOW beats real inflation, but not by much, and not very often.

Once the dollar loses reserve currency status it will no longer be able to manage the price of gold. No one will. Gold will reveal true inflation, and it will compete directly with more risky investments like the Dow.

There will be times when the Dow returns more than inflation, sure, but because it will be measured against REAL inflation it will not be as big as that chart makes it seem. It will be a small reward for taking a risk. And it will be balance by periodic losses as well. This will be the contest between paper and Freegold.


Post a Comment

Comments are set on moderate, so they may or may not get through.