Sunday, October 4, 2009

How To Dig a Hole To China

Since winning WWII, we in the West have been the driving force of the greatest era of peacetime growth, prosperity, expansion, technological advancement and human achievement the world has ever seen. Right? Well, without knocking the wonderful experience of the last 60 years, let us take a look at how this boom was financed.

In my last post, I began with the difference between equity and debt (or credit). Here are three illustrations I drew to conserve a few words...

(To be continued...)

Down to Brass Tacks

IronHead asked about my Thoughts on a Freegold price discovery mechanism. Peter Asher then suggested (through some old posts) that if gold was declared to be "international legal tender", then there would be no "price", simply exchange rates between gold and various international fiat currencies.

Let me first tackle the legal tender issue. Legal tender only kicks in once a debt is established, like when you eat in a restaurant before paying. It relates to the settlement of that debt. But I view legal tender rules as they relate to two separate functions, cash and credit. We are already free to barter amongst ourselves on a small scale. Craigslist even has a barter section! What is stopping you from paying for second-hand merchandise with your gold? If you make a business out of it you will probably run into trouble with the IRS, but not for small individual purchases. But for larger cash deals which require official registration, like purchasing a car or a home, you must pay in dollars so that the government can collect the appropriate tax.

In Freegold I imagine that these types of cash purchases will be explicitly allowed in gold, in order to collect the tax. Otherwise governments will run the risk of revenue lost to a black market. By allowing cash purchases in gold, the government can track and tax a certain segment of commerce that would otherwise go underground during a crisis. Much like the arguments for legalizing illicit drugs. But I wouldn't go so far as to call this legal tender. More like "allowed tender".

The credit deal, or debt portion of legal tender is the contractual protection offered by the court system. I imagine that this will not change. Courts will only be able to enforce settlement in dollars. You can't force a closed tractor factory to deliver a tractor it never made, but you can force it to pay the equivalent in dollars. You can't force a barren mine to dig up gold it never had in the first place, but you can force it to liquidate assets and pay in cash. In this way, gold will not be legal tender and will not trade as a currency as a means of price discovery.

No, price discovery will be through physical delivery only. Price discovery will be strictly on the cash market.

When I buy gold from my dealer face to face (the only true cash market), he quotes me a price based on his ability to replenish his stock immediately. Usually he phones his supplier and receives a current quote. This will be the price discovery mechanism. Each gold dealer will rely on his most trustworthy supplier. And that supplier will rely on his supplier. And so on. This will create a network of gold dealers that will monitor the flow of Freegold in and out of the system. If the price is too low, then no gold will be flowing in and too much flowing out. If the price is too high, then everyone will want to sell and there will be no buyers. This global network of gold dealers will efficiently set the physical price based on immediate physical restocking after any purchase.

And on the inflation/deflation debate... Forget about it. For us savers, just focus on the dollar and gold. When you hear about a "dollar devaluation", what that means is an across-the-board price inflation based solely on PAST monetary inflation. That is the very definition of a dollar devaluation. Jim Sinclair has offered some important information recently. (See: "The New Definition Of The Dollar" and "The Non Safe Haven US Dollar")

What he is saying in a nutshell is that some Global Giants with very deep pockets have rationalized that gold is going up and the dollar is going down. And in order to make themselves some ENORMOUS profits, they will be turning their considerable market-moving weight to work with, rather than against, this trend. He has given us a specific date when this will all start happening in earnest. And for those of you that have read "Our Crowd" as he advised, you know how he gets his information.



SatyaPranava said...

is there a link to the "our crowd" reference?

JR said...

Birmingham, Stephen (1967). Our Crowd: The Great Jewish Families of New York. New York: Harper & Row.

Sinclair on his lineage:

Martijn said...

Anonymous said...

How much tin should be necessary if you need billions of cans in case we go to war? Crazy?
I don't see this as a usual speculation.


MichaelB said...

@Martijn, Anonymous
As China and other developing nations require metals to make packaging, build infrastructure, appliances, automobiles, buildings and other durable goods and capital investments, at rates no longer associated with the past, and partly in response to massive stimulus and monetary injections, and partly to satisfy new, technology-enabled material desires from the West, as supply and supply routes are imperiled by any serious sabre-rattling or the mere beatings of the drums of war, and as metal supply in high grades becomes more costly to mine and always subject to energy markets and government controls, base metals would appear to be even more an object of speculation, harding, investment and nationalization IMHO.

MichaelB said...

Typo: "harding" = hoarding
But I suppose after getting their base metal house in order there IS "harding".
Yes, I can live with that. :)

FOFOA said...

Rob Kirby discusses the Zero Hedge "Smoking Gun" article.

Anonymous said...

Interesting article, this paper heard rumors that meetings have already been held to end the role of the dollar in the oil market.

Anonymous said...

yes just reading that on drudge report and jsmineset... hmmmmm

Martijn said...

Hehe. Came here to post the independent article as well. Good one.

Martijn said...

On the smoking gun article: more evidence of what we already new.

Wonder if and when they'll loose control. As long as people continue to buy paper gold they can continue to print.

We should work even harder to convince people to switch to physical. Fofoa seems to be doing a good job there.

Anonymous said...


Here is the latest update from the Web Bot project. They have been right more often than wrong. So take your pick.

"Heads up! Reality Change Ahead!

in running our MOM (model of modelspace) cleanup of the lexicon prior to tuning, it became apparent that October 25, 2009 turn in emotions globally will be dominated by a [lock down/implosion] of the [planetary financial/banking system]. The data suggests that such things a [currency trading] and [commodities trading] as well as many other [digital trading forms] will be [suspended]. Some will never resume, or if they do, they will be in entirely different forms. There may be a [banking lock up] in many countries emanating from the USofA outward. There may be [inter bank lock downs] in which [central banks] and [wealth storage clearing houses] will not be able to function. There are data sets suggesting that the rapid shift into building tension language on the 25th originates from and is propelled by the [financial system implosion] that then morphs over into [dollar rejected by all] a mere 10/ten days (more or less) later. There may be shut downs of all kinds of banking activity within the USofA and the rest of the anglosphere.

The [sudden/urgent travel] of the [administration (obama et al) minions] in early November, under this MOM background load shows up as being about [desperately trying] to get the rest of the [planet] to [loan] the actual [resources/wealth] to [restart] the [USofA banking system].

This MOM data set can be wrong in a way that the larger modelspace can not. The MOM set is so small that if it is wrong it is usually widely so. However, the data sets here are so focused, and bring in such crisp emotional shifts relative to the same days (10-25-2009), that it made sense to prepare this note.

If correct, this is the beginning of "The Big One" relative to the dollar and the central banking system. Everything else in the modern world depends on this it will be a big one throughout all of the social infrastructure.

If MOM is correct, then the [dollar death] will be way more dramatic and waaaay shorter than i had first thought. MOM is showing very dramatic language shifts (albeit against a much smaller background) for not only October 25, but also in a very sharp crocodile tooth pattern from November 4 through December 10th indicating a very very emotionally choppy time.

So, heads up! Reality shift (time/event bump) just ahead. If MOM is correct, there will be some additional levels of [visibility] on October 10th through the 15th that will put a focus on the 'trigger' that will show on October 25th and beyond.


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

They have been right more often than wrong. So take your pick.

That would depend on how you count right and wrong. They had for instance predicted that as of the start of 2009 lots of people would start to "mysteriously" disappear. Quite far fetched, That did however not happen, and the same holds for numerous other predictions. So although it might be fun to read those reports, I would advise to take them with a grain of salt.

In this particular case we on this blog have been advising to protect against high impact financial events by owning gold, and that advise continues to hold as far as I am concerned.

Martijn said...

From Max Keiser:

Yes, this is the most important story I have read in all the years that Max and I have been making films about the Death of the Dollar. And it is because the author of the article, Robert Fisk, who will not only be very well connected in the region, doesn’t often (if ever) write about finance or commodities, he’s not going to have any particular position to promote.

This will make an impact.

Anonymous said...

Here come the denials...

The Independent report is “absolutely incorrect” and there has been “absolutely nothing” of that nature discussed between Saudi Arabia and other countries, al-Jasser said...

Japanese Finance Minister Hirohisa Fujii said at a news conference in Tokyo today that he “doesn’t know anything about it,”

Martijn said...

Just like a big river that changes course it all starts with some small streams. With aricles like those above in main stream media those small streams are well underway.
When those streams grow big enough the transition usually speeds up and the end is generally a large breakthrough. The tension for that seems to be building up as we speak.

Martijn said...

According to Mish we're dealing with a ridiculous hype.

S said...

I have had to stop reading MIsh - his analysis has been correct up to a point. He harps on the CPI as if it is a measure of anything one way or another. The inflation deflation debate is a joke - this article will serve to focus the mind on the real action in the fx market. A move away from the dollar is certain without drastic action that would retard almost every policy ebdorsed by the US. The problem for the us is zugszwig - every move is a loser either economically or geopolitically - barring military action. Iran ought to be gettingmore nervious by the day.

Anonymous said...

S-agree with you on Mish. He has good analytic skills but is not an imaginative thinker, not to mention very pig-headed.

Martijn said...

Some words from Mr. Max Keiser

Jennifer said...

I agree with the comments about Mish; however, there are reasons to expect an equity crash around the 19th so let's not get too premature with talk of hyperinflation - wait until the end of the month :)

Martijn said...


It wouldn't be impolite to list some of those reasons here if you feel like it.

Jennifer said...

For some reason (insider networking maybe) stocks tend to suffer the week after Legatus holds their gatherings. Most recently;
4 October 2008 in Seattle Washington
7 February 2009 in the Bahamas
8 May 2009 in Washington, D.C.

Interestingly, the keynote speakers at Legatus gatherings are usually connected to the stock/sector which is to see the most severe debasement. For example, in May the keynote speakers were Supreme Court Justice Antonin Scalia, along with House Minority Leader Congressman John Boehner. Inside employees of Fifth Third Bank, headquartered in Boehner's Ohio congressional district, have donated substantial sums to his election campaigns. In the weeks leading to the May Legatus meeting Fifth Third was pumped (share price $3.85 on Monday, May 1st was $8.49 by the end of the week - just a day before Boehner's keynote speech.) By the end of the following week, Fifth Third was down to $7.02.

Of course much of the Legatus story is in the realm of conspiracy, but they do seem have an uncanny ability to jinx the markets, even from their founding, in the fateful October of 1987.

Their next meeting is October 16-18 in Israel, so we'll see what happens. Maybe nothing, of course.

Tablemaker said...

Gold hit an all time high today, $1042/ounce -
anyone else excited/nervous?

S said...


Articulate more on the Legatus conspiracy...

Martijn said...

anyone else excited/nervous?

Nope, not really. This won't be the big one yet. I have indicated before that it takes a lot of stones to change course of the international financial river.
Many pebbles have been tossed in already and even some pretty impressive rocks, but but not enough to break the dikes yet.

Apart from that gold going higher is not something unexpected, so I'm not all that excited. Gold is not my identity or anything, I hope to get my excitement from other things, although I can understand that days like these have an impact on people.

@Jennifer: thanks for the info!

Jennifer said...

There's so much conspiracy info about Legatus - if you're interested it's not hard to do the research. Here's a little background from Wiki on the founder Tom Monaghan, owner of Domino's Pizza and the Detroit Tigers, "Monaghan is a Catholic with a particular interest in pro-life causes and the appointment of pro-life Justices to the U.S. Supreme Court.... In 1987 Monaghan received Holy Communion from Pope John Paul II in his private papal chapel at the Vatican.... He has also committed to spending what remains of his $1 billion fortune on philanthropic endeavors.

In the past year, both Tony Blair and (notorious political opportunist) Newt Gingrich have converted to Catholicism so there may be some insider networking going on. It happened during the Roman Empire so it's not without precedent ;)

Incidentally, Sonya Sotomayor was nominated to the Supreme Court on 26 May, a couple weeks after Antonin Scalia gave his Legatus keynote address. I recall a NYT article linking Sotomayor to a Catholic philanthropic organization with ties to Legatus, but unfortunately I can't find it now.

Martijn said...


With regard to potential upcoming events, what is your view on the relative importance of the US?

Is ask this because all things considered the US is inhabited by a mere 300 million people, versus over 2 billion in China and India. Even if we count Europe to the Western its population comes nowhere near that of Asia.

What I am saying is that there is a large part of the industrialized world that is willing to continue its daily routine regardless of what happens in the US. Off course some things will have to be changed, some routines altered, but in the end those people should be able to live quite well without the US consuming most of there production.

What I'm saying is that believe the importance of the US (or the Western world if you prefer) to be grossly overvalued in most of the doom scenarios I've been reading.

S said...

Sonya Sotomayor is a NY liberal so Legatus failed on that count. The only thing that makes sense via the org conspiracy - if you view the war on terror as part of a broader economic mosiac, which is currently playing out, namely on the energy side in MENA/Southern cone - is using the vatican as a conduit to prepare for the inevitable devaluation of the dollar eg money laundering. The vatican played a core role in the cold war - especially PJP II.

If the devaluation and printing is so obvious to everyone - it is obviosu to the Fed and the US Gov't. The question is how are they positioining for it as it is almost 100% certain that they arre indeed doing so or have done so. The obvious thing to do is to set up a shadow hedge offshore that would ensure some offset via the derivatives complex. In turn this makes the story coming out of china repudiating the derivatives hedges via fx a huge story. GS trading down $7 at one point on rumor of large derivative loss.

Anyway, solaris investments Fitts a while back had that argument out there that trillions has been misplaced via the Pentegon. She also talked about the rampant impropriety at the GSEs.

Tekin said...

@ Jennifer

Googling “Legatus gatherings” yields “BLACK MONDAY: Mysterious Poster Says Big Stock Market Crash Today" at page 2. Curiously, I follow the link.

which further links to a google forum:

The forum reveals that a poster named reinhardt is the source of the information.

@ Jul 18 2008, 11:36 am, he declares that the crash would be in September, also linking the Legatus site.

@ 12:07 pm, he reveals that Legatus is the successor of Opus Dei, and links the name of David Tice to Legatus.

@ 12:29 pm, he gives a timeline going back to 1999.

@ 12:54 pm, he gives a timeline going back to 1278. He makes fun of Dan Brown for not being aware of Legatus.

@ 4:09 pm, he makes an important post:


"Does stuff only happen around/after their pilgrimages"
good question
from what I have seen the local (non-Rome) junkets tend to attract a
significant gathering of politicos in whatever area they take place
and the local stocks of companies in those locales and states are
affected in a negative way on a smaller scale
it took me a while to determine that the Rome visits were the big ones


The Legatus meeting is scheduled in Israel:

Therefore, we should be looking for something local. What about Persian Gulf failures, Jim Willie was writing about?


Question: Angles & Saxons who also happen to be protestants appear to be innocent bystanders in this scheme of things. Isn't that strange?

Anonymous said...

Martijn and Tablemaker: There are some people - I know of at least two - who went to 100% gold years ago and are now living off their savings, unable to work. For them, days like today are very exciting, even if it is not "the big one". It is exciting for me too, to think about what must be happening in places we cannot see.

Martijn said...

It is exciting for me too, to think about what must be happening in places we cannot see.

That is true indeed; these are not boring times at all.

Anoniem said...

Better read this one.

FOFOA said...

Hi Martijn,

You said, "more evidence of what we already knew."

But the point is not what we know, but how that information flows out into the public consciousness as well as to some Giant decision-makers.

Click here --> ScreenCap

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