Friday, September 23, 2011

On Scary Corrections

In the wake of gold's scary 12.5% three week correction from its all-time high (and having to stew in it all weekend), I thought I'd share with you some encouraging comments I found on another website:

1. Perspective

Is today *really* a down day for gold?

For $10,609.37 you could have bought the DOW on May 13, 2000. On June 6, 2006 you would have paid $10,706.37 of inflation-riddled dollars for your trouble. Today you'd pay $10,771.48 for that same DOW.

On the other hand, $10,609.37 of gold purchased on May 13, 2000 would have had a dollar value of about $21,660 on June 6, 2006. And today, Sept. 23, 2011, that same gold would have a dollar value of $63,552.

Choose gold. Hold gold. Don't worry. Be happy.

2. Why Gold is falling

I'm annoyed with myself for not factoring it in before but we can easily see the culprit impacting PoG here. Why of course it's Bonds!

How did we miss it? We credited the market with less nuance than it actually has in that it is discounting PaperGold relative to Paper Bonds as a liquid mid-term hold.

Can we still expect a reversal in PoG whilst Bonds drive inexorably higher under the weight of a tanking Stock Market?


3. "Do over!"

That reminds me of the comment I made earlier this week with regard to this pricing consolidation. I remarked that, due to gold's rapid run-up, a lot of people have been left on the sidelines with the sentiment that they have missed the boat.

Well, here's one of those happy circumstances where the boat has made a brief unlooked-for return to the dock. Now the question is, how many of these early boat missers will seize upon this second chance?

Some of them will, but mostly it's the well-seasoned gold-buying professionals who are busy "making hay" while the sun still shines.

Love the mixed metaphors.

4. "FIAT is the wrong play, but the masses don't care. When they see crash... they convert to cash."

More than chalking this behavior up to simple stupidity, I think more than anything this is a sign that that masses are hip deep in debt.

The person that on net is in the black -- that is truly a man of wealth instead of debt -- does not share this same bewildering behavior of preference for digits/paper in times of uncertainty or crisis.

Much of the financial system is a towering network of debt and obligations atop other debt and obligation. The man of wealth will use it to his advantage, sure, but only to a point. He does not build his house on a foundation of shifting sands -- of easily defaultable debt/paper.

5. Picking over the battlefield - better than being in the battle

If you look back at the pre-1987 event you will notice similar results. Because of a RAPID run-up in POG it sold off with everything else. You will notice that POG is still up on the year (look at a 10 year chart).

Contrast this with Argentina a few years ago. There was significant local demand for gold by anybody who could get any.

The bull market has not ended, the uptrend and fundamentals are unchanged. We have witnessed a garden variety correction (in ALL commodities) The speculators have been burned a bit. Practically speaking this is no different than the events of 2002 in gold stocks:

fundamentals + momentum players = avalanche.

Some likely are sitting on coins purchased at $X,XXX and over, well, too bad. On the other hand since we are in the 2nd inning of a 9 inning game there is little to worry about unless you played a leveraged game.

The situation has not changed- only the temporarily overbought and temporarily over-exuberant over-extended players have tripped up (with a little push perhaps).


The comments above are from between 6/13 and 6/16 in 2006, with minor editing on my part to disguise the date as well as to update #1. These comments were written in the wake of a very scary 21% four week correction from the recent high of $725 down to $567. Comments #3 and #4 were by Randy Strauss, aka TownCrier, and comment #2 was Sir Topaz. Here's one more by Randy:

TownCrier (6/13/06; 15:04:40MT - msg#: 145264)

Thanks for your recent series of good posts over the past week. Hiking up the Trail has given you a good view and a clear head to take it all in.

You've made an astute observation that marking ones tangible gold assets to the market price of PAPERgold is not a good idea. During the reign under which wild and woolly derivatives factor prominently in setting the price for the metal, the physical asset will not appear to demonstrate the steady performance that is expected of it day in and day out -- instead, as reflected in its pricing behavior, it will have the same reckless characteristics of its leveraged derivatives along with the panicky mood swings of the paper pushers. Reserve asset holdings in the form of physical gold (instead of derivative alternatives) would therefore only prove itself uniquely meritorious at such fateful time as the credit and derivative markets collapsed into default.

Valued arbitrarily at just $42/oz, it is apparent that the U.S. Fed/Treasury system holds its 8,000 tonnes expressly as an ultimate mitigation against a final calamity in paper. In the meanwhile, the U.S. rides high around the world on the prevailing illusion that dollars, appearing more stable than derivatives, may be reasonably held by everyone else as an alternative to gold, thereby giving Uncle Sam an unduly large audience to support his ongoing debts via the bond market.

ANOTHER system, of the type on which the ECB-euro system was modeled, recognizes that gold need not sit for its whole tenure underutilized until that final fateful paper/derivatives crisis calls it into action. By simply not using the frozen U.S. price, and instead regularly acknowledging the evolving market price of gold through time, they have established a framework by which the gold among their reserve assets can do some of the heavy financial pulling simply by nature of its steady capital appreciation as expressed in terms of the domestic politically-inflated currency.

We currently exist, however, in a world in which the banks of the mark-to-market model have yet to decisively dethrone or discredit the derivatives-based pricing of their key (politically neutral(!!), confer Russian desire) asset as a means to fully implement the stability benefits of their reserve architecture and the accounting thereof.

Getting back around to answering your question, as an outsider it is not for me to say how close the MTM system now has brought itself to the very brink of where cooperation (with the U.S.-dominated system) ends, being the point where the axe shall fall to bridge the gap for progressive movement forward. As we've severally discussed this with FOA, the rational expectation is for the derivatives market to perhaps initially enjoy a burst of naive exuberance to the upside, but then likely fail in a collapse to the downside as players realize that their paper could only ever be merely exposed as being a faulty means to an unobtainable end. The tangible wealth of physical gold was always the stealthy accumulation of the big players who dictate the terms of the game that everyone else eventually plays, several steps behind.

To be sure, the biggest players use (often SIMULTANEOUSLY) the PAPER markets for shorting (no fear, paper NEVER goes "to the moon") while exercising their longs in the PHYSICAL market to take command of the full benefits of actual ownership, and let the devil take the hindmost.

Could the market in gold derivatives see new highs in the cards? Sure -- there's a lot of naive money just waiting in line for its turn to be sheared, the price to be paid for a lack of insight or wisdom while attending the School of Hard Knocks. The definitive answer, however, I believe comes back to the point about where we have now arrived on the financial landscape with respect to international cooperation. If we are at the brink, gold derivatives will continue an officially preordained meltdown even as unfulfilled buyers chase their bids ever higher for metal on a physical market suddenly bereft of supply.

So, are we still in a cooperative environment? If we are, then us little folks will still have time to seek delivery of metal at derivative prices, and our smalltime success may encourage our neighbors to try to make up for lost time in another ill-advised chase for the derivatives. If cooperation has run its full course, the MTM architecture will be unveiled of its full potential as gold is suddenly revalued according to its physical stature, peerless among its papery reserve bedfellows. We would have to make do with what little metal we already have.

If a person woke up tomorrow morning to a news report announcing COMEX August gold futures down to $200, what would he think?

If he woke up the next morning and the contract was trading at only $30, THEN what would he think?

Throwing "good" money toward the purchase of a bad contract has rarely been a prudent means to increase your wealth, as the low price usually reflects the fact that you can't squeeze blood from a turnip -- you can't get gold from an out-of-favor (unsupported) derivative.


Speaking of neighbors, I have a friend who was almost ready to buy his first gold coins at around the $1,750 level. But by the time he got around to it, it was at $1,850 and kissing $1,900 a couple times. He figured he missed the boat and basically gave up on buying gold. So I just sent him this quote from Jim Sinclair's CIGA Eric today: "Anyone not buying here does not believe in the fundamental story. In my opinion, this will be a huge entry point by 2012."

Am I buying here? No. But only because I finished my buying a few years ago. I didn't buy very well by TA standards in 2008, but even my worst purchase then looks like a total steal today. Here's Randy on timing your entry point, written when gold was $510/oz:

TownCrier (12/7/05; 02:42:21MT - msg#: 138878)
On corrections

I had the pleasure earlier this evening having randomly encountered a friend at a coffee shop. Is seems like we cross paths on average about once every one or two months.

Each time, without fail, he picks my brain about the latest doings of the central banks and more especially about the gold market in general. And in fact, in anticipation of this latter line of questioning, I usually cut to the chase and offer the latest gold price as part of my salutation, such as today, "Hello Antonio! FIVE-ONE-OH."

For the past few years he's always been on the cusp of buying gold, but as the price has always been higher than it was previously, he usually expresses a mixed sense first of wonderment and ultimately of agitation (as though he's missed the last boat). Having taken no action during the lower prices, he almost always consoles himself, speaking his thoughts out loud (almost as if seeking my approval), that "I'll definitely buy on the correction".

Sensing that what he really needed was simply a bit more proactive dialogue than I had customarily provided (my personal conversational style is to merely inform and let people make their own decisions), my response to his "correction" comment finally turned the light on.

I suggested that while he was always sidelined waiting for the next "correction" he ought to give some consideration to the following possibility -- that in light of the various things I've previously talked about, the piddly "correction" that he always seems to be waiting for is of no account compared to THE REAL CORRECTION that he needs to tune into -- that being a relentless march to significantly higher prices as gold corrects for 70+ years of undervaluation by the world's banking system.

What a shame it would be for a would-be gold owner to stay sidelined, waiting for some insignificant degree of price-drop that never materialized. I wonder how many other people have consistently tried to save $20 by waiting for a "correction", only to discover that after a series of $5 intraday dips the price overall has moved $50 higher, again and again.

Nike has a good slogan for occasions like this -- "just do it"



I also have a couple interesting tidbits I wanted to share with you:

1. Remember in my last post I criticized Indonesia for including gold in its consumer price inflation index? Well, yesterday Bloomberg reported that they are now talking about removing gold from the CPI:

Gold’s Price Surge Skews Inflation Numbers Across Asia

In Indonesia, gold jewelry was the biggest contributor to a 0.93 percent increase in consumer prices in August from the previous month, accounting for 0.19 percentage point of the gain, government data show.

The issue doesn’t arise in developed nations including Japan, the U.S. and the U.K., or in Asian economies such as Singapore, Vietnam and Hong Kong where the metal is absent from inflation baskets or jewelry has a limited effect.

In Jakarta, Fauzi Ichsan, an economist at Standard Chartered Plc said that removing gold from Indonesia’s basket of consumer goods, was “theoretically logical.” At the same time, it could lead to speculation that the statisticians were under political pressure, he said. Yunita Rusanti, the head of the consumer-price statistic sub-directorate, declined to comment on whether gold jewelry should be removed from calculations.

2. At the LBMA Precious Metals Conference in Montreal this week, one of the presenters suggested: "The US should make a two-sided gold market at $20,000 per ounce."

It's on the last slide here:

And now, since I'm done buying, it's back to sleep for me. Wake me in October.



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costata said...

On Other Scary Corrections II

From a comment on the 24th by your Uncle costata:

I would be keeping an eye on SLV in the next few weeks ;) The "spiders" will need to take any surplus silver off the market if they plan to put the squeeze on the industrial users down the track.

Ed Steer reports - my emphasis - (h/t Dollar Collapse):

I was expecting big withdrawals from both GLD and SLV yesterday. Sure enough, GLD was down 155,725 troy ounces...but that wasn't nearly as bad as I was expecting. But the real shocker was silver...and I had to look at the number three or four times before I actually believed what I was looking at. For the second day in a row, an authorized participant had deposited another huge amount of silver. This time it was 3,699,316 ounces! That was after the 2.7 million or so ounces added on Monday!

Right on cue!

JR said...

Hi Wendy,

"...Sleepyhead, come on let's take a ride
To the easy plateau in the back of your mind
Up through the alley, take the door under the stairs
My head ain't feeling nothing but cats and rocking chairs
Bad nights lead to better days
It never happens but I think about it anyway
I want an easy plateau
Some place to hang my head
I want an easy plateau
Some place to hang my head
For awhile, for awhile, for awhile
For a little while..."

Cheers, J.R.

JR said...

The Bermuda Triangle of Currency

"...M3 used to include "large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets." [Wikipedia]
M2 includes smaller CD's, savings accounts and money market accounts. "M2 represents... 'close substitutes' for money." [Wikipedia]

Even M1, which is generally considered "narrow money", is still not money. It includes checking accounts, debit accounts and traveler's checks. While these types of accounts "spend" like money, they are still one step away. They are still a derivative of money because the banks do not hold all the money you think you have in your checking account in a segregated account waiting for you to spend it. They only hold a small portion of it. The rest they loan out or reinvest. So when you empty your checking account in the process of a large purchase, the bank must demand cash from somewhere else in order to pay for your purchase.

This demand for real cash actually affects the supply and demand curve of money itself. If everyone tried to empty their checking accounts at the same time this would create a HUGE demand for real cash, whether or not it is digital credits or physical paper FRN's. This is called a run on the banks. In the 30's, this happened when people took out physical cash to stuff in their mattresses. Today it could also happen if everyone maxed out their debit cards at the same time, spending the money into the market place.

In either case, this massive demand for real cash (whether it be digital or physical) exiting the banking system will create an upward spike in the value of the dollar. As long as you are simply "hoarding" your money in a checking account, you are not affecting the supply and demand of money. You are not affecting "inflation" or "deflation". In fact, you are not holding money. You are holding the promise of "real cash".

This "real cash" is best described as M0, or the Monetary Base. M0 is "currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply. The monetary base is sometimes called M0, but this denomination seems to imply that M0 is part of M1, which is not the case."

The important point here is the part of the Monetary Base that is not included in the M1, M2 or M3 measurements, namely "real cash" reserves (whether digital or physical). These are the reserves from which the banks can pay your vendor when you empty your checking account. And these reserves RELIEVE the upward pressure on the value of the dollar that a modern "bank run" would cause. In other words, they RELIEVE the risk of true deflation, even amidst a wide world of misunderstanding. In fact, they not only relieve one risk, but they become potential energy poised to create the OPPOSITE effect...."


costata said...


Thanks for the link to that story on rare earths. Very interesting read.


JR said...


"Friends, this is the perfect setup for hyperinflation, which is similar to "deflation" in that it happens during the WORST economic conditions, similar to "inflation" in name only, and in all practical ways, the same thing as "currency collapse".

Inflation/Deflation is the wrong focus, Currency Stability/Collapse is what we should be watching...

...This is part of my problem with the common understanding of economics; it is far, far, far more complex than anyone realizes. And it is far too complex for our simplistic understanding of "inflation" and "deflation". In fact, the discussion of these topics, "the debate", is so horribly flawed by simplicity and misunderstanding that it is simply worthless and pointless...

So forget about inflation versus deflation. Think instead about currency stability versus collapse."

J said...

"banks do not hold all the money you think you have in your checking account in a segregated account waiting for you to spend it. They only hold a small portion of it. The rest they loan out or reinvest. So when you empty your checking account in the process of a large purchase, the bank must demand cash from somewhere else in order to pay for your purchase."

My bank probably hates me as I play "hot potato" with my paycheck. I should set up a direct deposit to APMEX so I don't get their hopes up. =)

costata said...

Operation Twist

As JR attempted to point out to Team Photocopier in an earlier thread Bernanke wasn’t (and isn’t) interested in attempting to use the “money multiplier” to kick start lending as Steve Keen supposes. (Why is it that Steve and the debt deflationists seem to think that they are the only ones who understand the bank credit money creation process?)

As JR pointed out to Ash – Bernanke’s real (stated) aim was to control interest rates. Well guess what, according to Daniel Amerman here – mission accomplished with Operation Twist.

There is no longer any pretense of a free market when it comes to interest rates, but rather the Federal Reserve has taken near complete control of short term, medium term and long term interest rates.

Of course many at this blog disagree with Mr Amerman’s views about gold and Euro but that notwithstanding he is an insightful analyst in my opinion.

Motley Fool said...


Thanks for the SLV info.

It's good for my confirmation bias. :P


Edwardo said...

"Refreshing to see such honesty coming from a Fed President. Maybe you become more candid a few days before retirement?"

Yes, they do, in the main, become candid when there's no risk to themselves. Perhaps the most famous bit of candor came from none other than Dwight D. Eisenhower who, as he was leaving office, warned the nation about the Military Industrial Complex.

costata said...


And great for our "groupthink" too/also/as well when things happen precisely as predicted by ... um... us.

Motley Fool said...


I think you should give yourself a bit more credit there.

Afaik the silver corner concept was advanced by you; and in great detail.

The group merely contributed resistance for you to sharpen your thoughts on. :P


Biju said...


The SLV holdings of silver addition on 9/26(+0.87%) and 9/27(+1.16%) were not big compared to historical changes.

9/23/2011 : 317279386
9/26/2011 : 320054185.9
9/27/2011 : 323753501.1

compared to the changes on
8/23/2011 : 41.77 : +1.37%

What I am seeing is that in both GLD and SLV, this recent crash has not made much changes in their respective holdings unlike previous crashes. I don't know what this means. Have the spiders lost control ?

5/4/2011 : crash $ 39.31 : -4.78%
5/9/2011 : more crash to follow $37.07 : +3.0.3%

mr pinnion said...

Check out the New York Spot Gold (Bid) chart on the Kitco site.

There are wierd repeating paterns both on the way up and down.Strange, as i ve never seen that before.There is nothing natural about that chart.
Or am i looseing the plot?:o/


Motley Fool said...

Hey Ozzy

Humans have a natural tendency to see patterns in chaotic data.

I do agree it looks weird, but it's prolly a coincidence. :P


Ashvin said...

Costata: "As JR pointed out to Ash – Bernanke’s real (stated) aim was to control interest rates."

Here's the thing - no one who has seriously studied these issues cares what Bernanke's stated aim was or is. Despite being a brilliant economist, Dr. Keen is, as most academics are, relatively naive with regards to what's really happening here. I can tell you that no "serious" poster at TAE believes that Bernanke's real aim is to jump start the real economy via the "money multiplier effect" or even to simply control interest rates. "Controlling" (exerting significant influence on) interest rates is obviously an important factor, but the general strategy most likely goes much, much deeper than that.

Leaving that aside, my question is why Bernanke successfully managing rates is a positive factor in favor of near-term HI (with rates so low, will a small increase really get the money flowing)? Despite prevailing expectations among many people, including "deflationists" such as Rosenberg, the Fed didn't monetize any debt last week. If Bernanke is either unable or unwilling to make good on his "promise" next month or the month after that, then how many more times will ZH or other HI/staglation advocates post articles saying it will happen any day now? If he does make good, then how much will he have to monetize to truly undermine confidence in the dollar, in this current macro-environment? Those are the questions we have to answer with regards to the deflation vs. HI debate.

mr pinnion said...

Cheers MF.Looseing the plot,thought so.
Carry on.

JR said...

In *that comment* discussing BB's real aim - credit easing - "From the Treasure Chest", a FOFOA comment was posted that explained how BB's efforts to mange interest rates were indicative of the decline of confidence in the $ system, and we all know hyperinflation = the loss in confidence in the system. From the comment:

"With the context of BB's statements from above about the goal of "credit easing" not being targeting bank lending by pumping bank reserves and waiting for the money multiplier to kick in, *but instead* credit easing's goal being to keep dollars cheap (aka enable nominal performance in the credit market by making needed dollars available), lets look at this FOFOA comment, discussed above, where FOFOA makes clear BB is pumping money into the Eurodollar market to prevent the dollar from being bid up, aka to keep the dollar cheap.

"Remember back in 2009 the Fed swapped $500 billion with foreign CBs? That was for this same purpose. Those Eurodollars need to be serviced with Realdollars from time to time. But that $500 billion swap line has now been withdrawn. Today it is $0 which you can see on the Fed's balance sheet. Without that access to Realdollars from the Fed, Eurodollar players must bid up Realdollars on the exchanges, which the Fed doesn't like."

No mention of money multiplier, but FOFOA seems to get what BB is up too - pumping cash to keep money cheap as the inevitable need to convert non-traditional bank credit (e.g. "securitized debt") into cash (see that, converting debt, aka the contractual promise of more cash in the future, into cash) means a heightened demand for cash and thus a "shortage" of dollars. FOFOA writes:

"So now that we have this picture in our minds, what do you think the process of replacing "claims on someone else for Realdollars" with actual Realdollars (on the assets side of bank balance sheets) does to the value of the dollar? It lowers it. This is why the Fed is expanding its balance sheet. To keep dollars cheap. And you do that by slowly changing the very nature of the money supply, from credit money to base money. This is happening. It is not more money being created, it is money being fundamentally altered to keep it cheap.""


JR said...


Also from that linked FOFOA comment:

"The Fed has not created more money, it has simply changed the nature of existing money. Remember, FOA said that "...hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

During hyperinflation the entire money supply becomes "Realdollars" rather than bank credit backed by debt assets. So that is how I view all these "excess reserves held at the Fed", QEx and Swap lines etc.., as a step toward dollar hyperinflation....

...what do you think the process of replacing "claims on someone else for Realdollars" with actual Realdollars (on the assets side of bank balance sheets) does to the value of the dollar? It lowers it. This is why the Fed is expanding its balance sheet. To keep dollars cheap. And you do that by slowly changing the very nature of the money supply, from credit money to base money. This is happening. It is not more money being created, it is money being fundamentally altered to keep it cheap. "


BTW, glad you backtracked because here's a couple neat facts: BB's speech was on January 13, 2009 where he said:

""Incidentally, in my view, the use of the term "quantitative easing" to refer to the Federal Reserve's policies is inappropriate. Quantitative easing typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak, at least in the U.S. context. In contrast, securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors' portfolios, on a wider range of assets.""


Here is clown from November 2010 - well after BB's speech - pimping the same old tired money multiplier roving cavaliers of credit nonsense:

"Steve: The hyper-inflationists basically argue that government money creation will cause hyper-inflation. In this I think they’re unwittingly relying on the “Money Multiplier” model of money creation: the government prints $10, a depositor puts this in a bank account, the bank hangs onto $1 and lends out the other $9, which is deposited in another bank, and so on. Over time you turn $1 of government money into $10 total, which drives up demand for goods and services and causes inflation.

The Central Banks themselves are relying on the same model—especially Bernanke with QE1 and now QE2. So if the model actually worked, both Central Banks and the hyper-inflationists would be right: inflation would result and our current debt-deflationary crisis would become an inflationary one. The only difference is that the Central Banks think they can control and moderate the rate of inflation, and the hyper-inflationists think it will be a runaway process.

The trouble is, as I showed in the “Roving Cavaliers of Credit” post, is that this “deposits create loans” model isn’t how credit money is actually created..."

Meh - Ted Just Admit it...Nothing's Shocking

DP said...

"Clown"? Surely you mean "Copernicus"... :-P

Ashvin said...

Actually, I'm glad you backtracked, because here's an even neater set of facts:

1) As per your quote, Dr. Keen said that "hyper-inflationists" are relying on the "money multiplier model of money creation", which is certainly very true with regards to many of them, including those following Chris Martenson's site. He didn't say ALL HI advocates are, or, specifically, that FOFOA was.

2) He also said that "central banks themselves are relying on the same model". It is possible that either a) he is positing that as a common argument by politicians (including Obama) and pundits in favor of TARP/QE, which is absolutely true, or b) he actually believes central banks are implementing these policies with that goal in mind, OR c) both of the above.

3) Most likely it is c), but regardless, the additional question must be asked - who cares?? Regardless of what belief is floating around in Dr. Keen's head, it is irrelevant to his underlying substantive point about the money multiplier model. Since neither he nor you nor anyone else here supports that model as a mechanism of HI, there is no point in bringing his 2010 discussion with Chris Martenson up.

Instead, what should be discussed is both the willingness and ability of the Fed to "keep dollars cheap" through monetization and policies targeting IR, and therefore undermine confidence in the dollar to the point where the HI mechanism is rapidly transmitted into the real economy. As I understand it, FOFOA's (FGA's) argument predicts that all signs will point towards a deflationary collapse (appreciating dollar) for a short while until, all of a sudden, they don't anymore.

Right now, it seems that there is a massive, bright, flashing neon sign pointing towards such a collapse, through a combination of price action across assets, apparent limits on coordinated policy action and deterioration in sociopolitical confidence and mood. So that begs the question, are we going to get a surprise development that allows the "stagflationary" global economy to muddle along for a few more months or a year (or two), or should we be expecting the unexpected, massive reversal into dollar HI (paper-physical gold separation) to occur any day now?

Or perhaps we should be expecting the unexpected, with the expected, in this case, being a reversal from the expected.

(if you think about that last sentence long enough, it won't be sophistry anymore)

JR said...

Sweet comment to clown/copernicus' November 2010 ZH blowhardathon:


"Its painfully obvious Steve Keen has no idea what hyperinflation is, as he makes crystal clear in the above:

"Steve: The hyper-inflationists basically argue that government money creation will cause hyper-inflation. In this I think they’re unwittingly relying on the “Money Multiplier” model of money creation: the government prints $10, a depositor puts this in a bank account, the bank hangs onto $1 and lends out the other $9, which is deposited in another bank, and so on. Over time you turn $1 of government money into $10 total, which drives up demand for goods and services and causes inflation."

He is clearly confusing credit inflation with hyperinflation. Hyperinflation is what happens when credit growth stops in a credit/debt based currency, and is largely concurrent with massive debt deflation Keen describes.

Keen is unwittingly making the case for hyperinflation by demonstrating that its all about deleveraging and the collapse in debt."

JR said...

Its real hard to keep up with FOFOA and accurately recall what his views are on a whole range of matters, I know, so here is a link to a comment from this very thread quoting Just Another Hyperinflation Post - Part 1 explaining what hyperinflation is so we can perhaps resist the urge to wander about in the fields full of strawmen - its the collapse in confidence in the currency. And lets not confuse the causal chain - the Fed is "keeping dollars cheap" in response to the credibility deflation - the loss of confidence in the $IMFs system where the derivative debt instruments of fiat currencies as a store of value. The credibility inflation already occurred, Bernanke is simply trying to respond to its inevitable reversal.


"...First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash).

Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat...

...As FOA said, "As debt defaults, fiat is destroyed." Or another way to say is, "As debt defaults, fiat savings are destroyed."

But what is actually happening is the assets are being papered over with fresh base money. FOA: "hyperinflation is the process of saving debt at all costs, even buying it outright for cash." Or said another way, "hyperinflation is the process of saving debt-backed assets (MBS's etc..) at all costs, even buying them outright for cash."...

You see credit money is tied to the functioning of the economy and base money is not. As the debtors balloon deflates, so does the functioning economy, and so does the real world of goods that backs the money supply. Base money does not contract along with the economy like credit money does. And base money is the fuel in all hyperinflations while credit money vanishes!...

And now that you have a little bit of understanding about the difference between economically-tied credit money and base money (cash or its equivalent), as well as the power of fear and velocity, I want you to notice that the hyperinflations of the past have all played out with base money, not credit money, at the helm.


JR said...


"This is where all those "excess reserves held at the Fed" become very dangerous. You see, those are monetary base reserves, not credit money. They may not be physical cash yet, but they are contractual obligations of the Fed to print actual cash. And if velocity picks up in a panic, that's exactly what the Fed will have to do in order to keep the banking system from collapsing. Deflationists think this is a choice the Fed will have to make, but it is not.

It is already happening to a smaller degree with the Friday bank failures. Ever since the FDIC ran out of "reserves," every failed bank has been propped up with more fresh base money. "Saving the savers' deposits!" Converting them from credit money into base money in whatever amount exceeds the failed bank's marked-to-market assets.

So there is already enough fuel in the system to feed the fire when it starts."


From The Bermuda Triangle of Currency:

"So forget about inflation versus deflation. Think instead about currency stability versus collapse."

Unknown said...

Tripped down to the local coin guy an traded all my AG for AU (okay, there might be an oz or two lying around somewhere, but pretty much all). A pretty small pile of AU when all was said and done, but still... I realized I don't have to "be smart" and play the trade and get ahead of the next guy. Just listen for the air raid sirens and duck for cover.... I'm ducking, baby. I'm ducking!

Biju said...

Has Gold bottomed today ? If I had money, I will use present price of $1617 to buy.

costata said...


I re-read the Bermuda Triangle post that JR linked - as well as the comments. Some excellent exchanges. That has been the signal feature of this blog. The arguments over issues that have helped to hone our thinking on the topics discussed here.

As FOFOA has pointed out several times. The discussions in the comments have inspired many of his posts.

Others can scoff but there is an element of "think tank" here in the online and offline exchanges. Recall from FOFOA's Treasure Chest post he almost lost 50,000 e-mails from his archive.

That's a lot of e-mails isn't it?


Now more than ever it is physical gold demand that needs to be monitored in order to see where paper gold is headed.

IMHO physical demand is now firmly in charge of this market and the gold managers have some time constraints on their machinations. If they push the paper price too far below the level that can meet physical demand, for too long, the linkage will snap.

At the same time if the paper price runs too high, too fast they risk losing control in that direction.

costata said...

Charles Hugh Smith has written a thoughtful essay on the subject of entitlement.

I think CHS goes to the heart of the problem of changing course before it is too late. The soft option for the politicians is to deliver all of these "entitlements" on a nominal basis.

holdinmyown said...

Fed speak ... enough to make your head spin.

"The Federal Reserve has responded to one of two "Herman Cain Letters" I have sent (See here and here). The response was to my inquiry relative to the Fed's listing on their H4.1 weekly release of a line item: "Gold Stock" 0f $11.041 billion. I had asked to see the gold, or have it audited. The Fed responded: "The Federal Reserve Board does not own gold."

Their full reponse would have made Bernie Madoff proud. I reproduce it in full below and also reproduce my follow up "Herman Cain questions"."


JMan1959 said...

JR, Costata, DP, MF,

These last few posts are amazingly insightful and educational for me. So many times you guys illuminate what I failed to grasp on first reads of Fofoa's posts. I really appreciate the time you guys invest to clarify the info, and more importantly, tie the theories here into current events. JR, you are the Wikipedia of Freegold, and your ability to piece together Fofoa's gems of wisdom from multiple posts boggles my mind (and it's not all about Google skills--nice humility, but totally short sells your skills). Just wanted to say thanks to all you guys do--and keep the "lamps lit".

Texan said...

Ash, when is TAE going to allow comments? If you being trolled can't you just moderate them?

JR, nice link.

From where I sit, it look pretty clear that they are going to allow debt (and equity) to be destroyed. Especially in Europe. I never gave this a high probability until about 3 months ago when they failed time and again to address the underlying "who is going to pay this debt" issue. I don't think they planned it, just that the coordination problem is too multidimensional.

Combine that with a China slowdown and a Fed that realizes it is pushing on a string, and it increasingly looks like we are in for a depression. The denouement of which may well be HI, but not soon

Costata, agree. Futures market becomes less relevant every time they hike margins or blast the price. Everyone wants physical now anyway.

JMan1959 said...

Great chart in a Zero Hedge article showing how the bulk of US bond financing is now mostly us writing checks to ourselves:“crowding-out”-bond-market-vigilante
The article states that central banks have taken over the market, stripping it of market signals normally given by the bond vigilantes. It further states that the central banks are not yield sensitive. Can someone shed light on why this is? Granted, they don't have to follow the same rules as everyone else (as is evidenced by the Fed waiving it's on capitalization requirements and levering itself like AIG), but to say they are not sensitive to interest rates seems overstated. They can (will) lose money on treasuries just like anyone else when fear takes over and they lose control of the yield curve, so why describe them as not being interest rate sensitive?

JMan1959 said...

Meant to say "it's own capitalization requirements".

Motley Fool said...

Hey Joel

Their whole system is collapsing and you are worried about them being profitable.

They create the money my friend, they could care less how much they 'lose' as long as they retain power.

Look for fundamental reasoning, don't get too caught up in the superficial stuff. :P


DP said...

For "not yield sensitive" read "don't care if they lose $". ("What MF said.")

All they care about is keeping interest rates on the down-low in a feeble economy struggling under debt, and stopping bond prices from falling for other holders, so they might abandon them en-masse (collapse of confidence?).

JMan1959 said...

I am not worrying about them being "profitable", I gave that hope up a long time ago when they started their Ponzi scheme. I also understand they print money, and want to retain power. I am simply trying to understand why CB's would be perceived as "not sensitive to interest rates." It is not superficial at all, as it speaks to perceptions about CB (and therefore currency) stability.

Motley Fool said...

Hey Joel

I see. I went back and checked the ZH article. In that context they mean that the Fed does not care about making money. ("What DP said")

They are yield sensitive in that it has to stay at 0. ( for the reason DP stated) :P


Ashvin said...

I'm confident most everyone here understands the proposed "causal chain" of collapsing confidence in fiat currencies as a store of value. Indeed, it is the collapse of the ultimate ponzi scheme (well, almost, but we'll leave energy and environmental issues aside). It is clever to posit "credibility inflation" in the past as a reason why dollar HI must occur before severe deflation ever takes hold, regardless of what policies are implemented, but at the same time that the USG/Fed will be forced to implement certain policies.

When those policies come to pass, or when statements are made suggesting those policies may come to pass soon, we can revel in the fact that we were right. If they do not come to pass as expected, we can revel in the fact that it doesn't matter, because the currency's death warrant has already been signed. In fact, both of those sentiments are true, but our celebrations effectively marginalize the issue of when the death will actually occur (i.e. when the loss of confidence is actually transmitted into the real economy) and what will happen in between now and then.

If debt deflation is actually the process of people losing confidence in paper derivative instruments as stores of value, then we must figure out how long capital will continue to flow through the bottom of "Exeter's Pyramid" before it reaches gold. Once again, that invariably involves the question of how the fiscal/monetary authorities have and will continue to respond, and what effects their responses will have.

Motley Fool said...

Hi Ash

I don't pretend to be smart enough to predict the timing. :)

"as a reason why dollar HI must occur before severe deflation ever takes hold, regardless of what policies are implemented,"

You meant the other way around? And policies cant exactly be ignored. Only inasmuch as they will inevitably be more printing.


Ashvin said...


TAE is allowing comments whenever someone is around to keep a close eye on them and moderate if need be. The impersonator was actually researching people's past comments and writing styles to create fake comments by them, so it was not so easy to deal with the issue (especially on the horrible Blogger platform). I believe the plan is to transition to the new platform ASAP, where that joker won't be an issue, but until then the availability of the comment section may be sporadic.

Ashvin said...

"Exeter" = "Exter"

JR said...

Well said Texan:

"From where I sit, it look pretty clear that they are going to allow debt (and equity) to be destroyed."

Agreed on the margin sure wrt to debt, but that itself is a controlled demolition - they are paperign it over and allowing some to default but they are propping up the system and picking winners and losers. If they don't, it collapses - ala Iceland, or Thailand, or Argentina. We talk about OMG no QE but we're in ZIRP!

Sure the aftermath may be different in each case, sometimes drastically different. And the underlying forces that led to the collapse are not all the same. But the unifying feature is that each currency was overvalued, and it collapsed as confidence in its ability to perform as valued collapsed.

JR said...

The Waterfall Effect :

"Deflation Talk

Deflation is the shrinking of the money supply relative to the economy. It causes the purchasing power of money to rise and prices to fall. But according to our modern deflationists, today's deflation comes at a time of shrinking economy and rising money supply. According to them it is driven by the lack of demand from the collapsing economy, and it is defined by the falling price of assets like homes.

Robert Prechter is out and about today talking about the deflationary depression, with stocks, commodities and real estate all falling together. He says that we are just coming off a top the likes of which have not been seen in 200 years. He says that the best way to ride this out is in the "safest possible cash equivalents".

Basically, he sees this next major down-leg in the depression taking stocks, commodities and real estate down another 85%. He says that oil will ultimately fall to between $4 and $10 per barrel! The danger in making a prediction like this is while it may be fundamentally sound, it is still denominated in the dollar, a piece of paper with shaky credibility.

While I view Robert Prechter as extremely bearish, I must say that I agree with him to a certain extent. The extent at which I do not agree with him is the steady state of the dollar. Prechter views the world through his Elliot Wave cycle theory, which is not unlike Martin Armstrong. But the problem is that the waves he measures are against the backdrop of a steady state dollar.

Like Prechter, I expect all aspects of the economy will continue downward to depths below that of the great depression. But during the great depression, we did not have Ben Bernanke and we did not have a purely symbolic currency as a measuring stick. We had a gold-backed dollar.

Think about this for a minute. The average retiree on Social Security receives about $1,100 per month, or $13,000 per year. This is a dollar denominated promise. If the crash from top to bottom is 90% or more as Prechter predicts, this would give each and every Social Security recipient the equivalent purchasing power of $130,000 per year when purchasing real estate, the stock market or even commodities. Basically everything.

And this will be true not only for Social Security, but for anyone on the receiving end of a dollar denominated promise, including all pensioners, anyone with a tenured job, like teachers and government workers, and including everyone in Congress. Virtually everyone with an income or cash savings will see their purchasing power rise ten-fold!

The problem with this view is that the real economy right now cannot even afford to deliver real economic goods at TODAY'S dollar purchasing power, let alone another 800% rise in purchasing power, with Ben printing new ones the whole way there.

So Bob and I both see a waterfall approaching, but how can we reconcile our seemingly opposite views on deflation?

Currency is the key!"


Currency is indeed the key - its valuation won't survive a loss in confidence in its store of value function!

Deflationists can't get their heads around the fact that the value of the currency will fall as confidence in it erodes. People who owe money may demand dollars to service their debt, but the real deal is that the real wealth holders don't want dollars/dollar debt to store value.

This is Gold not bidding for dollars - ANOTHER taught us that gold prices dollars, and then dollars price everything else:

Another wrote "Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

JR said...

Here is some FOA:

""Yes, even my untrained eye can see that we are approaching the end of a currency life cycle. When all of the debt can no longer be rolled over, the world does not end. It moves on, into another fresh system! "


"Hyperinflation begins when pushing on the string no longer is an option. As you pointed out; "the consumer is binged out"! But there is more (smile).

We would not embark into such an obvious currency destroying process if we could drag the rest of the world with us into a cleansing recession. Call it an "almost deflation" where we start the inflation / deflation circle over for one more credit cycle. This is our record from most the dollar's life.

No country ever hyper inflates for the pleasure of the ruling class, as many want to believe. They / We inflate to keep the domestic system in use and do so because it's the last resort. In other words you are forced into it! Today, the advent of the Euro has created a currency competition that will allow world investors to run from any deflationary, restrictive policy the US can offer. Our currency will be lowered to non reserve status no matter what route we take."


"My above explained why a deflation cannot be in the cards. But if so, foreigners holding even government guaranteed paper debt in a deflating currency is little more than bookkeeping wealth if the actual goods buying power of the currency is compromised.

Yes, our US would continue to print dollars to service its debt, making the accounts look good. But, in such a deflation situation, foreign exchange controls are a 100% guarantee. Foreign held dollar assets would not come home, at least not at the same exchange rate one needs to become financially whole!

When the world begins to abandon a currency at the end of its reserve timeline, deflationary gains on debt instruments are an illusion of bookkeeping."


"Your presentation shows a lack of understanding about how exchange rate risk works during unsettled times. Failing nation states that have opted for a fully """""fiat currency"""""" (the US dollar) do not simply stand by and allow ownership of everything in the country to be transferred to foreigners. Or even local creditors for that matter.

Truly, the vast bulk of overall debt assets standing against US credit extending institutions dwarfs our ability to service with real goods. Even at vastly diminished prices. These debt structures are held for further fiat accumulation only. Truly a Western Thought concerning wealth. Once an economy begins to get into trouble, everyone flees these very instruments you stand by in your analysis."

JR said...

Deflation or Hyperinflation?

"The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth...

...While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash....

...If you want to think of a grand deflation as a deflating—or grand contraction—of economic activity that was previously "energized" by massive trade deficits, massive credit expansion, and the massive structural malinvestment that flows from those easy money expansions, well then I too am expecting a sort of grand deflation, in many of the same ways they are...

To the deflationist, "a dollar is a dollar" just like it is to ordinary people, bankers, company presidents and bond salesmen in the quote at the top. And even though the dollar has already lost almost 99% of its original gold purchasing power, Rick believes The Power Elite will make sure it stays strong until you have worked off every last dollar you owe...The dollar has a long, storied past. To believe "a dollar is a dollar" is to simply ignore its history...

...I am saying that they think the collapse of the dollar's financial system will strengthen the dollar itself and make prices fall in the end. This is a funny notion when you take the totality of the dollar's journey into consideration...

...In fact, globally, this debt far exceeds the ability for it to ever be paid (worked off by future labor), at least not at today's dollar purchasing power of .02 grams of gold. And yet it will be paid by someone, just as the deflationists promise! So the question then becomes, how can an impossible debt be paid?

Answer: if it cannot be worked off by future labor, it will be worked off by past labor, the net surplus of which was erroneously stored in debt and dollars...

...This is very important: Once hyperinflation commences it is characterized by a running shortage of cash, even though it appears like the opposite to the outside observer. The currency collapses in value against economic goods because the debt and the credit collapsed. There is no credit, only cash, and there is a shortage of cash for everyone, including the Elite and the government. So they, the Elite/government, print and print for their own survival while saying it is for yours...


So the dollar collapses and is gone (loss of purchasing power) or they try to manage the devaluation to keep it in use (loss of purchasing power - FOA says:

"In our time and for the first time in the modern US dollar history, the US will embark into a classic hyperinflation for the sake of retaining its own lessened dollar for trade use. As destructive as that might be to players in this financial house, it is better than immediate total economic failure. It will evolve in a form much like the course of any other third world country, if its currency too was suddenly deprived of world reserve status. We will, like people the world over, learn to live with it and live in it. Truly, our dollar and economy will not go away, but its function, use and value will change dramatically.

Thank you
FOA/ your Trail Guide"

DP said...

Ash: It is clever to posit "credibility inflation" in the past as a reason why dollar HI must occur before severe deflation ever takes hold, regardless of what policies are implemented, but at the same time that the USG/Fed will be forced to implement certain policies.

My reinterpretation: It is clever to posit credit expansion through past accumulation of dollar-denominated debt as global reserves was the necessary precursor to dollar HI and already having occured. The credit expansion was a necessary precursor to any monetary deflation event. The USG/Fed cannot tolerate severe deflation, and demonstrably have been and will continue to implement certain policies to repair failing credit (replacing it by base money).

Ash: If debt deflation is actually the process of people losing confidence in paper derivative instruments as stores of value

My reinterpretation: If HI is actually the process of people losing confidence in holding paper derivative instruments as stores of value


JR said...

Many use the word deflation to refer to a situation where a huge debt bubbles collapses and the real economy dramatically shrinks downward in what is often thought of as a deflationary depression, yet at the same time the value of the dollar rises. Cool - but the unicorn, the mythical nonsense in their story is the value of the dollar - it falls amidst this mileu.

The real economy can't afford to deliver goods at today's pricing so the dollar debt system must collapse. So if the dollar system can't afford to deliver at today's prices, how is the dollar's purchasing power gonna grow as the dollar system collapses because the dollar is overvalued? It won't. :)

Deflationists can't get their heads around the fact that the value of the currency will fall as confidence in it fails. People who owe money may need/demand dollars to service their debt, but the real deal is that the real wealth holders don't want dollars/dollar debt to store value. Its not what the broke and in-debt folks want that matters, its what the super-producers and giants - the folks with savings, or an excess of production over consumption - want to do with their savings that matters.

Think not "normal" inflation/deflation (aka is credit growing as needed or not), this is an issue of systemic collapse in the face of a loss of confidence - think normal inflation/deflation in a working credit system and contrast it with serve deflation caused by a collapse in confidence in a currency, particularly a collapse in the confidence of a currency to deliver value/store wealth as promised (to act as a store of value).

Severe deflation is hyperinflation, but the problem for "deflationists" is unicorns don't exist. As long as the credit system is functioning, credit deflation (aka mild deflation) makes dollars more in demand and ups their value. But for the credit system to keep functions, this system needs to offload their credit risk (securitized debt) so they can keep taking on new credit risk. The system stops functioning when savings stop delivering value to the system by saving in the system's offloaded securitized debt.

Ina nutshell, a currency derives value because wealth wants it, and a currency loses value because wealth shuns it. ANOTHER taught us that gold (real wealth) prices dollars, he explained "Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

Cheers, J.R.

Aquilus said...

Ok, so for some actual numbers I took a look at the Fed's latest base money and M1.

Interesting is the least I can describe it as: Monetary base and M1 graph

Although I cannot quite find the definition of what they call 'BASE' money - hopefully it's M0.

Either way, the increases are quite impressive, and suggestive of lots of base money being injected in.

Motley Fool said...

Hmm Aquilus

Global Central Bank US Treasury Debt Reserves

One of the few analysts I really respect for the data he shares. I think you may find it insightful.


Aquilus said...

Motley Fool,

Thanks for the link - looks very interesting.

What I'm after here (after re-reading FOFOA's Bermuda Triangle post again) is to update the numbers and see what happened to the base money since the article, and as much as possible WHY. And I confess I need some help with that :p

Aquilus said...


Beautiful distillation of the dollar value/deflation topic in your last comment. I just had to say it.

DP said...

All the M's charted on one page @SGS

Aquilus said...

Thanks DP. How could I have forgotten shadowstats? :p

Just looking at the base money increase Base money data:

2009-07-15 1703.827
2010-12-29 2026.357
2011-07-13 2719.824
2011-09-21 2655.238

We're talking about $1 Trillion jump. That's more than QE2 + MBS re-investments put together - a lot of lead in that balloon

DP said...

You noticed M3 (the reason to go to SGS not Fred) was basically flat over this same period of course. More of M3 was base, so we can deduce there was less credit. Simples.

Aquilus said...

"I see!" says the blind man. Thanks.

Texan said...


There is of course another solution to the social security benefits jump in purchasing power. It is to cut benefits.

And wages.

If you don't think this is real, well I can assure you it is very, very real. They are not recruiting Chrstie because he is in favor of a gold standard, let's put it that way (I have no idea where he stands on gold).

And outside of the billionaires, very few people actually
hold large amounts of cash. So for those that do hold large amounts of cash, and aren't particularly disposed to parting with it, there is another way to skin the cat besides having to buy a bunch of shiny coins.

It's a political decision, right? So who do you think is calling the shots right now? I think it's the Austerians...for now.

Just saying......

Silversem said...

This recent dip in the goldprice is a good buying opportunity. For gold and especially for junior goldstocks. The european drama will continue and with it the rise of the goldprice.

Aquilus said...


Just as anecdotal evidence, since I live in the US, I tried floating cuts by friends and family just to see the reaction.

Most of them fall into the category "do not hold large amounts of cash" but do have 401Ks, mortgages, car payments, etc. Salt of the earth people.

Generic cutting talk was received with enthusiasm. When we got to even the smallest specific cut to say medicare, social security, etc that impacted them, the tone changed to: "they can't take away something that they promised me - I worked hard all these years and got taxed to get that".

They (all 5 different persons) were furious at the idea that things they worked for and were entitled to (in their minds) would possibly be taken away. On the other hand, they shrugged as normal the idea of inflation eroding their purchasing power in their entitlements.

Just saying...

DP said...

@Aquilus, +1 - my experience here in the UK tallies with yours.

People "understand we must make cuts", but cannot accept any one thing that could and should be cut.


Texan said...

Aquilus and DP,

They won't start with the ones already receinvg benefits. This is a phase out. The under 50 crowd, slightly higher age entry level, caps based on other income, etc.

Boiling the frog.

Obviously if s&p collapses to 400 like prechter and Albert Edwards posit, cuts could be more drastic. There will be massive unemployment so it will provide a nice opportunity to make the cuts.

Some would say a perfect opportunity, almost as if it was planned......

Motley Fool said...


Perhaps if they had started doing this 20 or 30 years ago.


Not gonna happen.


JoyOfLearning said...

Hiya guys, just wanted to say how much I'm loving your thoughts. After many past posts I think I'm starting to understand more, which is quite exciting. Also I think it is in a past article comment that somebody mentioned When money dies by Adam Fergusson and though I did see some possibly iffy economic views there just learning that story there totally made me understand a lot of the views expressed here in a new light. Also I had to mention that the "a dollar is a dollar" mentioned by JR referencing deflationist views fits just so amazingly well with the "a mark is a mark" creed I encountered in the book just today... and many other similarities to current events. I always thought people have a funny way of thinking they're now smart, but people in the past must have been dumb...
Big thanks to all you guys, and especially Fofoa for helping me understand the importance of politics. I used to see the world only in economics, and not putting enough weight on the ability of the powers that rule to (try to) change the rules of the game.

Biju said...

u like this photo ?

funny rich girl :

DP said...

FOFOA (courtesy of JR, above):

Like Prechter, I expect all aspects of the economy will continue downward to depths below that of the great depression. But during the great depression, we did not have Ben Bernanke and we did not have a purely symbolic currency as a measuring stick. We had a gold-backed dollar.

The ruinous commodity price deflation in the 30's wasn't because the world ran to grab the dollar for itself. The world ran to gold, and the simplest way to get gold was to go through the dollar.

With no direct path to gold through the dollar, as today, there would have been no such massive global demand for dollars. The exchange value of the dollar would have sunk alongside the withering economy. There would have been no ruinous commodity price deflation in dollar terms. Only in gold terms. Just as it'll unfold now.

Here is your political will. Just about nobody votes for the alternative.

Biju said...

Today I went to buy Gold maples at my local coin dealer. He had like 40 coins 7 days ago but none available today.

One person cleaned it up few days ago. I had to settle for pamp gold bar.

Aquilus said...


I understand your point, but think of the Pavlovian conditioning of politicians and Fed officials to "do something" in order to keep themselves relevant.

Way before S&P 900 is reached you will have everyone that's anyone in the system screaming bloody murder, pounding their fists on the table, and beating their chests that they will do everything possible to restart the economy and help "hard working Americans".

You've seen this movie before I believe... :p

Anonymous said...


imo there are two main steps that the deflationists get wrong. First, a technical one, that they think the only way to get inflation is through credit expansion. Just listen to David Rosenberg (he is quite cool though). The other one is conceptional:

I used to see the world only in economics, and not putting enough weight on the ability of the powers that rule to (try to) change the rules of the game.

That's very well phrased. When the deflationists eventually understand what's happening, they will say "but they are cheating - if they had not cheated, I would have been right".

True. But that's not the point.

But beware, before they will eventually be proven wrong, solid assets can crash and phony assets can rise for quite a while. Just to increase the height of the subsequent drop - the market takes the direction of the greatest pain for most.

btw: Martin Wolf of the Financial Times, the personification of the UK financial establishment, is already crying for more money printing:


holdinmyown said...

Did the Bundestag really say no?

"...In any case, the vote merely ratifies the EU deal reached more than two months ago – itself too little, too late, rendered largely worthless by very fast-moving events.

The significance is entirely the opposite. The furious debate over the erosion of German fiscal sovereignty and democracy – as well as the escalating costs of the EU rescue machinery – has made it absolutely clear that the Bundestag will not prop up the ruins of monetary union for much longer."

Interesting point of view. But ultimately I believe that the ECB will PRINT ... PRINT ... PRINT! I know that this vote was about the EFSF expansion but ultimately it is about the bailout of the rest of Europe by Germany.

After all, the Euro was meant to be for spending ... not for saving.

Link here:


costata said...

Off Topic - h/t Bruce Krasting,1518,788462,00.html

Share Traders More Reckless Than Psychopaths, Study Shows

Particularly shocking for Noll was the fact that the bankers weren't aiming for higher winnings than their comparison group. Instead they were more interested in achieving a competitive advantage. Instead of taking a sober and businesslike approach to reaching the highest profit, "it was most important to the traders to get more than their opponents," Noll explained. "And they spent a lot of energy trying to damage their opponents."

Using a metaphor to describe the behavior, Noll said the stockbrokers behaved as though their neighbor had the same car, "and they took after it with a baseball bat so they could look better themselves."

The researchers were unable to explain this penchant for destruction, they said.

Wendy said...


I don't find that surprising at all. Personality disorders at the top, permeate down.

Wendy said...


"Let's take a ride to the easy plateau
Where the cold don't come and the wind don't blow
Moonlight flickers on the water below
The orange grove blossoms
In the orange grove
Bad nights lead to better days
It doesn't matter but I think about it anyway

I want a easy plateau
Some place to rest my head
I want an easy plateau
Some place to rest my head
For awhile, for awhile,
for awhile
For a little while"

Reminds me of fractals.

holdinmyown said...

Biju said:
"u like this photo ?

funny rich girl : "

That looks remarkably like Prety's sister!


Michael dV said...

Front Lawn dump coming
click on the Faster Pussycat Print article for a recent view on further QE...yep more money is needed to solve our problems

Edwardo said...


Edwardo said...

Speaking of the front lawn dump, a recent development-see below- comports with the view of the author of the whiskey and gunpowder report wherein he states that bonds will be sold hard in the next shock and awe money printing campaign.

Foreign Central Banks Massively Dump Treasuries
September 29, 2011
By Lee Adler

Foreign central bank dumping of Treasuries and Agencies reached record levels this week, far beyond anything seen in the 9 years since I started tracking this data. The last time anything remotely similar happened was at the top of the bull market in the summer of 2007, and those levels pale by comparison with what is going on today. Furthermore, this is no flash in the pan. This has been going on for 4 weeks, and has been growing for the past 3. Over the past 9 years, there has never been a time when FCBs were sellers of their Treasury and Agency debt for 4 weeks in a row. I do not believe that the bull market in bonds can survive under these conditions, regardless of what the Fed does. If the runs on European banks, bank paper, and sovereign debt subside, by even a little, it’s over.

Furthermore, this withdrawal of FCB liquidity from the US market, combined with no net new liquidity from the Fed, should keep stock prices under pressure. For months falling stock prices have gone hand in hand with rising bond prices and falling yields. Any reversal in the trend of bond yields may not be accompanied by a similar reversal in stock prices, or at least not to the same degree. We need to be alert for any signs of a shift in these correlations in the weeks ahead.

holdinmyown said...

Thanks for the link to Dr. Malmgren. Interesting thoughts.

Piripi said...


Further to your last comment, see this.

Dave Simone said...


No more bailouts from Germany?

Piripi said...


From your above link:

"to bailout the Eurozone members... the only collateral available is the insufficient gold reserve... there really is no meaningful collateral."

They're not really very lateral thinkers, are they?

Edwardo said...

Blondie, I know tone is difficult to gauge in these sorts of forums, but I do believe I detect just a bit of understatement from you. Indeed, If one can take that quote at face value it indicates a profound lack of imagination married to a very bad case of myopia.

And thanks for The Krasting link. I think we are much closer to the end of the bond bubble than Mr. Krasting does.

Piripi said...


It is safe to presume understatement on my part in far and away the large majority of my comments on this blog.

Chico_hawk said...

"As for speculators, the most extraordinary feature of the Reichsmark’s joyride was not any attack against it but quite the opposite, an incredible ("pathological,” it was later called) willingness on the part of investors at home and abroad to take and hold the torrents of marks and give real value for them. Until 1922 and the very brink of the collapse, Germans and especially foreign investors were absorbing marks in huge quantities. Only the international reputation of the Reichsmark, the faith that an economic giant like Germany could not fail, made this possible. The storage factor caused by the investor’s willingness to save marks kept the marks from being dumped immediately into the markets, and thereby for a long while held prices in check. The precise moment when the inflation turned upward toward the vertical climb was undoubtedly timed by no event but by the dawning psychological awareness of the German and foreign investor that Germany was not going to back its money. With that, the rush to get out of the mark was on. Like a dam bursting, the seas of marks flooded into the markets and drove prices beyond all bounds. The German government strove mightily to outflood the sea."

just one excerpt re: an account of the Weimar hyperinflation - some striking similarities (financing war via deficit spending rather than taxes, etc.) with the current US situation, tho some fairly significant differences as well (full employment, etc.)

the following blew me away.

"When the debacle was finally stopped, the old mark, which had once been worth a solid 23 cents, was written off at one trillion old marks to one new one of the same par value. The most spectacular part of that loss was lost in the mark’s final dizzy skid; all the marks that existed in the world in the summer of 1922 (190 billion of them) were not worth enough, by November of 1923, to buy a single newspaper or a tram ticket. "

mrbeyond said...

Word from Anonymous.

PA said...

My gold shorts have done fantastically well, and those friends of mine that I warned to sell their gold in November are very happy. I hope by now the people at this forum who are honourable will see more clearly about my previous warnings without their egos getting in the way. Did you notice that the most recent slides in the Shanghai market preceded the enormous drops in precious metals? They are linked, as I suggested before. Please pay attention to this: I would not be surprised by another short-term rally attempt in precious metals coming out of this decline. If we get it, that will be the last chance to get out of them. I expect the metals to be in broad decline that lasts until 2014-2015. The world's central banks are destroying asset values faster than they can print the money to paper them over

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