Sunday, November 6, 2011

Moneyness


Have you ever wondered what money really is? You'll notice that everyone you read has a strong opinion about what money actually is, but who's right? Is money really just one single thing and then everything else has varying levels of moneyness relative to real money?

Is gold real money? Or is money whatever the government says it is? Or is it whatever the market says it is? Is silver money in any way today? Are US Treasury bonds money? Is real money just the monetary base? Or is it all the credit that refers back to that base for value? Is money supposed to be something tangible, or is it simply a common unit we use to express the relative value of things?

Is money really the actual medium of exchange we use in trade? Or is it the unit of account the various media of exchange (checks, credit cards, PayPal) reference for value? Should the reference point unit itself ever be the medium of exchange? Some of the time? All of the time? Never? Is money a store of value? And if so, for how long? Is money supposed to be the fixed reference point (the benchmark) for changes in the value of everything else? Or is it simply a shared language for expressing those changes?

So many questions, right? And how often have you seen these questions even asked, let alone answered? Is money something that changes over time? Or is money's true essence the same concept that first emerged thousands of years ago? And probably the most important question: Does the correct view of money produce answers that are vastly superior to the blind conjecture prescribed by all other views?

Answers

I wonder if it's even possible to answer all these questions in one post. It's a neat challenge in any case, isn't it? As I said at the top, everyone has a strong opinion about what money actually is. So "everyone" will probably disagree with what I write. But that doesn't mean they are right and I am wrong. I want to challenge you to use your own mind and see for yourself. Take what I say and then take what they say, compare, contrast, analyze and then decide for yourself. The prescription produced by my view is quite simple. And only you can decide if it is vastly superior to their blind conjecture.

The Pure Concept of Money

According to Webster's the word 'money' emerged in the English language sometime during the Medieval period in Europe, maybe around the late 1200s. Wikipedia suggests a possible etymology originating with the Greek word for 'unique' or 'unit'. The Western term for physical coins that emerged sometime around the late 1500s was 'specie' from the Latin phrase for "in kind" or "payment in kind," meaning "payment in the actual or real form." The word 'currency' came a little later from the Latin word for current or flow, and was married to the money concept in 1699 by the philosopher John Locke who described the "circulation of money" as a flow or current of monetary payments made in specie.

Etymology is important, because with money or "the moneyness of things" we are talking about a vital concept that predates the word by thousands of years. And it's only by understanding the pure concept that we can see the ways the word has been bastardized by the two camps over centuries. The meaning we commonly assign to words may change over time, but that never changes the original concept underlying the emergence of the word in the first place.

Case in point: Is 'money' equal to 'wealth'? Is "gathering wealth" the same as "gathering money?" In the 1950s a Seattle engineer named Howard Long was deeply distressed that his beloved King James Version of the Bible just didn't seem to connect with people when sharing the Word of God. Long felt he needed a new translation that captured the truths he loved in the language that his contemporaries spoke.

It took a couple of decades, but Long's passion became the New International Version (NIV), a completely original translation from Hebrew, Aramaic, and Greek texts that was finally released in 1978. The King James Version had been translated into English and released 367 years earlier, in 1611. Here is one verse as it appears in each version:

Proverbs 13:11 (KJV) Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase.

Proverbs 13:11 (NIV) Dishonest money dwindles away, but whoever gathers money little by little makes it grow.


I use this only as an example of how we sometimes change words to fit our modern understanding, not as any kind of a criticism of the NIV. To be fair, there are many more verses where the NIV does not remove or replace the word 'wealth'. Here are a few other translations of the same verse, which I think will help to illustrate my point about words and concepts:

Proverbs 13:11 (English Standard Version 2001) Wealth gained hastily [or by fraud] will dwindle, but whoever gathers little by little will increase it.

Proverbs 13:11 (Wycliffe Bible 1395) Hasted chattel, that is, gotten hastily, shall be made less; but that which is gathered little and little with hand, shall be multiplied.

Proverbs 13:11 (Young's Literal Translation 1862) Wealth from vanity becometh little, And whoso is gathering by the hand becometh great.


And, just for fun:

"Think now, if you are a person of "great worth" is it not better to acquire gold over years, at better prices? If you are one of "small worth", can you not follow in the footsteps of giants? I tell you, it is an easy path to follow!" --ANOTHER (THOUGHTS!) 1/10/98

The point is, your modern understanding of 'money', and the pure concept of money that emerged long before the word, may be substantially different things. I'll go even further to say that the modern understanding of money is so confused and disputed by the two opposing money camps that the only way we can hope to have a clear view of what is actually happening today is by reverting our understanding to the original concept, before it was corrupted by the two camps.

So now let's go back to the etymology at the top of this section because, while it does not set the pure concept, it does reflect it from a time more proximate and a meaning less corrupted than now. And I should note that etymology is a somewhat subjective and inexact science, kind of like interpreting what you find at an archeological site. So I'm using it only as a tool that helps me share with you a concept, not as proof of the correctness of my concept. There is no proof at this time. There is only the use of your own discerning mind.

If we look at the specific etymology I highlighted, we are pretty close to the pure concept which I will confirm from a couple different angles. 'Money' is a "unique unit" that we use as a kind of language for expressing the relative value of things other than money. The modern example would be "dollar". Not "a dollar," not a physical dollar, but the word "dollar" as it is used to say a can of peas costs a dollar, or my house is worth 100,000 dollars, or you owe me a hundred dollars. If you give me two grams of gold you won't owe me a hundred dollars anymore. You don't have to give me actual dollars. That's just the unit I used to express the amount of value you owed me. That's the pure concept of money.

This is where it gets a little tricky and mind-bending. The actual physical dollar, that physical item we call "a dollar," is not money in and of itself. In other words, it is not intrinsically "money". It is only money because we reference it when expressing the relative value of goods, services and credit. If we stopped referring to it, it would cease to be money even though it would still be a dollar. Can you see the difference? Like I said, it's tricky.

A dollar is just a thing, a tradable item. And it will continue being that same thing even if we stop referring to it when expressing relative values. It will still be a dollar, it just won't be money anymore. Therefore it is not money in and of itself. It is just a thing. Take the old German Reichsbank marks from 1923. Some of them still exist. They are still marks with lots of zeros. But they are no longer money. We can still trade them. I might trade you a few Zimbabwe notes for an original mark, but that obviously doesn't make them money. The same goes for gold. Gold is just a tradable item.

We could be using seashells as money. If we were, then all the seashells available for trade would be the monetary base. That's the base to which I would be referring when I said you owed me one hundred seashells. A single seashell would be the reference point, the unique unit, but the whole of all available seashells would be the base around which money flowed. You could pay your debt to me with either an item that I desired with a value expressed as 100 seashells, or with 100 actual seashells. So if the total amount of seashells available (the monetary base) suddenly doubled making them easier for you to come by, I'd be kinda screwed. Of course I'd only be screwed if the doubling happened unexpectedly between the time I lent you the value of 100 seashells and the time you paid me back.

Getting back to our etymology, the concept behind the term 'specie' meant actual units of the monetary base. In the 1500s, that was the total of all metal coins-of-the-realm available for trade. That was the monetary base of the day and the term 'specie' arose as a way to express payment in the monetary unit itself rather than payment in bulls, or hats, or anything else. But original concept aside, the meaning of the word became married to coins and stuck to this day:

Specie: 1610s, "coin, money in the form of coins" (as opposed to paper money or bullion), from phrase in specie "in the real or actual form" (1550s), from L. in specie "in kind," ablative of species "kind, form, sort"

Notice it says "coins… as opposed to… bullion." That's because while gold coins were referenced in the use of money at the time the word 'specie' emerged, gold bullion was not. "Gold" was not money in and of itself. It was just a thing; a tradable, barterable item. Notice also that it says "money in the form of coins." The coins themselves were also not money in and of themselves. They were only called money because, in that coin form, they were the monetary base that was referenced when expressing the relative value of everything else at that time. Some of those gold coins from the 1500s and 1600s still exist today. Today they are not money, but they are still gold coins. Can you see the difference yet?

Now remember, there's no right or wrong at this point. There's only the usefulness of a perspective in delivering the correct analysis of what's actually happening today and the best prescription for your personal action. But you can't use a perspective until you get it. Then, and only then, you can use your own mind to decide if it is the correct perspective and then act upon it. Later it will be proved correct or incorrect, just as Another said: "time will prove all things."

But in support of this particular view of the money concept, I'd like to direct your attention to Gold Trail Three where FOA went to great length explaining the historical precedents for this view found in the archeological record. Some of this history has been rewritten in hard money text books to fit the modern meaning of words, while the actual historical record—and FOA—tell a different story about the underlying concepts.

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Sidebar Post-within-a-post

FOA on the Concepts of Money and Wealth


Beginning on the third page of The Gold Trail, FOA presents a number of cases in which the hard money camp has corrupted the interpretation of money-related archeological finds in order to make them fit a modern agenda. By projecting modern biases on antiquity, this camp leaves us with estimates of the volume, value and role of ancient gold that may be entirely wrong.

FOA explains "his group's" contentions along with the archeology and sound logic that backs them. And in so doing, he leaves us with an alternative interpretation of the historical record that I think can only be properly viewed by letting go of some of our modern hard money dogma.

For example, the amount of gold that existed in, and made it out of antiquity is probably overestimated. So, if anything, there’s likely less than the current estimates of all gold available today. And gold probably carried a much greater value in antiquity than Hard Money typically assumes. Less gold, circulating as a tradable good (not hoarded, not money) at a really high value relative to everything else. Gold’s primary utility was that you could travel to far-away markets with a great amount of tradable wealth in a small package. It was essentially the trade good that was preferred "on the road," not at home in common everyday trade. It was too valuable for that.

The way gold was used, the way it was valued, the reason why we find more silver, copper, and bronze coins buried at the ancient sites, all this and more has been misinterpreted by our hard money teachers because they project modern thoughts onto the ancients in support of their modern policy prescriptions. FOA said "to understand the value of gold, we must remove ourselves from present time thought and think of gold as the Ancients did." Gaining FOA's ancient perspective is helpful in understanding the ultimate moneyness of gold in Freegold.

I went through GT3 again (for probably the fourth time) just to pull a few tastes and give you the flavor of this masterful piece of conceptual dissemination by FOA:

Gold, that wonderful metal that has all the unique qualities to function as our one and only wealth medium, and we just can't use it without altering its purpose. You know, the Lydians had it right, back around 430 BC. They didn't struggle with the concepts of money, like we do today. They just stamped whatever pieces of gold they found laying around and kept it for trade. There was no need to clarify for certain that their gold money needed properties of "utility", store of value, medium of exchange, etc. etc.. They didn't need to identify these qualities were in gold before they stopped questioning if it was safe to use gold as savings. Gold was owned and the knowledge that people owned it and carried it for trade was alone enough to make it "worth its weight as wealth".

You see, back in antiquity there existed another property that could override our need for modern definitions of tradable wealth. That property was found in the one identifying mark of wealth that transcended all ages; real possession!(smile) This factor and this one factor alone had the ability to activate all the other modern attributes of money properties, even when the knowledge of these attributes was unknown in the ancient era. Come now, Alexander the Great didn't know about "utility" did he? (grin)

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Wealth.

As a means of example; think about art work for a moment? That fine painting that graces your main prominent wall. It's tradable for something, isn't it? Perhaps that Renoir for the acreage down the street. That use would cover some of the medium angle, right? A little bulky, but the large value makes it no more or less cumbersome than five gold bricks.(smile) Utility? Just watch your friends stare at it for hours. Store of value? A Renoir? We don't even need to discuss this.

But, one more thing, is it wealth? Of course it is. You see, it is wealth because you possess it, and the very knowledge that you possess it is held by others.

These paintings command a value, a price, a demand, precisely because every one of them is possessed by an owner. In the world of wealth, worth is enhanced because the supply is lessened by this "possession attribute". And possession is how most people in antiquity understood wealth.

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Many hard money philosophers have pointed their finger at others for the fiat situation we use today. It was the bankers and governments, the kings and cohorts, big business and robber barons or some communist manifesto that forced us to use this type of money. Well, you may not like the process and consider yourself above or apart from it all. You may even declare all of them evil. But, in the end, one fact remains; society may govern itself in many ways over thousands of years, but it has never stopped the evolution that corrupts the use of real money as official money.

Over time and life spans gold has been brought into official use countless times. Only to be bastardized by forces, we as peoples can never control. After every failure and ruination of much wealth, the cries always return to bring gold back as money. Once again to begin the long hard road that leads to the same conclusion. Gold coins, then bank storage, then gold lending, then gold certificate use, then lending of certificates, then certificates are declared paper money, then overprinted, then gold backing removed, then price inflation, then,,,,,, we begin again. But this time it's different the hard money crowd say. Yes, it is. Only the time has changed.

For the better part of human existence, gold alone has served all of the best functions of tradable wealth. But as soon as we call it our money, human nature takes over. Yes, we can call it a stock or a bond, a piece of land or a painting, a car, boat or antique, but just don't label it as money.

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Going back over #56 "The Gold of Troy":

You noticed that I structured that discussion in a way that makes the independent mind wander about. Let's pull those thoughts together and move along.

We found that history had left us with some conclusions that were, it seems, never concluded. Archaeology had never been approached by someone like us, with a different hard money perspective. Yes, all the records were there, but most every paper written on the subject appeared carbon copy. They all projected our modern sense of money into the economic structures as they existed back then. "Of course, we are today more complicated", our history papers said,,,, so,,,,,, allowing for that difference "the ancients still operated back then the same as us now". How neat!

Yes, our teachers "called our perception of money, their money and our perception of goods, their goods" in the same context we can use now. They said "hey, they were using hard money to buy and sell from each other, just like we once did" Again,,,,, how neat"!

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For us, as hard money "Physical Gold Advocates", to understand the value of gold, we must remove ourselves from present time thought and think of gold as the Ancients did. Not as money but as little tradable hunks of metal. Gold for goods, straight up, as the citizens of Troy did!

It's the Physical Gold Advocate's "advantage", because while he is waiting for the real value to emerge, the real value that we know existed in antiquity has never gone away! It just doesn't have a marketplace to show it. It will.

I use the phrase; "our advantage of owning the metal", because buying physical gold for today's currency,,,,,,, is like buying a lifetime wealth option that never expires. The commission one pays for this gold coin position, in the form of what we call today's price,,,,,,, may one day go to almost zero as our paper market structure fails from the discovery of real price.

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So, with the Athens, Macedon, Tarentum and Antiochus to name a few, began the world's first coins. Gold coins? Yes they were, but money as we know it? Our view of how these people viewed and used this gold money is, we believe, far different from what gold scholars teach. And its impact on estimates of existing modern gold supply and use is enormous.


All throughout these early times, prior to BC and into some AD, people didn't see these gold coins as we think of money today. These various gold coins had tremendous value, but they were just gold pieces. They were wealth for trade like everything else was. That's simple logic, I know, but the vessel of oil, for instance was just as tradable as a gold coin. In fact, within most of the medium sized city states of that era, barter of like goods was just as good or better than gold coin. One's life was better if he owned wealth he used.

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More to the point, this logic made these guys spenders of gold, rather than savers! If you had gained gold in trade, for your services or goods supplied, you had no reason to save it. There was no other money that needed to be hedged against value loss.

It's becoming more and more apparent that average people of that time quickly traded (spent) their gold for something useful of value, for both them and their family. They didn't have the excess we know today. In modern nomenclature; this logic dictates that a much smaller amount of gold money circulated and circulated faster than many supposed.

For longer savings, even for those of above average means that had all they wanted, people tended to spend their most valuable gold coins first, while saving the least valuable (bronze, silver, iron) for emergencies and later use. To us, today this sounds strange, but place yourself in that time. It was better to build your most useful and needed store of things while times were good.

Therefore, you traded the gold, which brought the most equal trade, first. If things got so bad that one had to dig up the stash, you were trading for last ditch things anyway. Kind of like wrapping up and burying beef jerky to get you thru a pinch. This use of lower metal is supported. Remember, lots of things served as money objects then. Even much later, AD, it was common in Rome to trade big iron bricks that were forged as a bull. Its use was in trade for "one bull" or something of that animal's value.

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When evaluating lifestyle wealth, back then, many often find themselves comparing things in a relative mode with today's perspective. In this position we think the mark has been far missed for gold worth. It's possible that gold payment, in these early times amounted to a huge premium compared to today. The various goods and lifestyle conditions in existence indicate a much higher relative worth for their goods of daily life. Thereby giving gold a much greater relative worth within one's life also. If a one stater Darius of gold, from Cyrus of Persia was worth a very valuable vessel of oil, why utilize the effort to find gold just to trade for some oil. Better to skip the gold production and make the oil. This was the norm for thinking by people not trading on the road, living "within local" city states. Indeed, outside the need to pay armies, a much smaller amount of gold did the job much better than us modern thinkers thought was necessary. Further, the use of oversea warfare and trade perhaps lost more gold into the ocean than we will ever know.

Consider these possibilities well. In that gold today is in a much lesser existence, compared to modern goods supply and lifestyle enhancements, when comparing it to its value in life in the past. It's true worth as a wealth medium could be a 1,000 times higher! For it to return to its ancient position of true asset wealth, for trade outside the modern currency realm, we can see where its European benefactors have once again placed it "On The Road" to much higher fiat currency prices.

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Back then, there was no other currency. No paper moneys or banks. One had no need to save gold as a hedge or savings account. Your wealth was in the useful things contained in the world around you. Those little hunks of metal were just that, little hunks of gold that everyone knew had trading value. They were not money, not the way we think of money today. They were just a beautiful metal, gold.

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The Lydians, Greeks and Romans all held gold. From Parthia through Rome and on to the Visgoths, Lombards, Normans and Franks, they all held gold as wealth. It was wealth first and traded as what we call money second. Possession identified that gold as real wealth, even if that ownership was for but the moment of a trade.

From the earliest times right into the Old World periods of Europe, gold served as the most valued wealth asset one could use in trade. It was by far the largest unit of tradable wealth in circulation that could be counted on to bring a premium in trade while shopping between cities. It moved, it flowed and it traveled. It was indeed, always "on the road"! Lesser metals and other tradable wealth assets always competed with gold for its trading function, but only gold made the best "on sight" trade. When given the choice of other "almost moneys", gold would always bring an extra slice of meat or fuller basket of cloth.

The irony of gold use over most of its earlier periods was that few average people kept it for long. Hence the seldom discovery of gold coinage where average people lived (see my earlier posts). To be sure, it represented wealth to these commoners, in good form and to the highest degree. Yet, their possession of this wealth usually constituted only a short time period. This short ownership occurred because gold did, would and could trade so much better for the needed things in life. For the worker, service wages paid in gold meant you just got a bonus or raise and the time had come to finally buy what you couldn't afford if paid in other means. If these people saved at all, it was usually in the form of the lesser metals (see my other posts).

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If gold was so valuable back then, there must have been a bunch of it saved and transported into our modern time?

No, not really! We used to try and extrapolate all the gold that was mined and turned into jewelry, bullion or coin. If it was so good for coin and trade, civilizations must have saved every ounce, we thought! But something kept nagging at our conclusions. Something that kept turning up over and over at our digs.

Some of you have seen the Gold of Troy pieces or other fine examples of old gold craftsmanship at other museums. Ever notice how good they were at making gold so long ago? From intricate bracelets to rings, head dress items to fine cups, even the most thin of leaf. Some of it was so small we had to use magnifying glasses to see the work clearly.


This gold in jewelry and art work form was the other major form of traveling wealth. In many of our recent findings we now think that jewelry and coin traded places as easily as getting your check cashed today. Throughout the ancient land, gold centers occupied the trade routes. Any gold that rested for too long was quickly recruited into a form that worked for the next traveler. In fact, evidence now points to all forms of gold ownership, not just coins, being a short term proposition for the average man. Indeed, contrary to what we thought, the fingers of all mankind did, through the ages, touch gold!

Now place yourself in that time. You work for Rome in the army, a fighting man. Not all of you were paid in lesser metals, many of you were relatively better off. You did carry some of your wealth with you in the form of gold coin or jewelry. In the case of a Roman soldier, a gold ring was very probable. When you went into battle, did you leave your few gold items laying in the tent? Or did you wire them back to a Swiss bank for safekeeping until after the battle? (big grin)

What we are finding, in the form of molecular fragments at battle sites, leads us to believe that most wars were fought with most wealth possessions worn or in pockets. Gold included. To make a long story short, we now believe that a great deal of early gold was scattered on trails, in the sea and during every war. In fact, rubbed, scraped and powdered to the four winds.

Because gold was so valuable in long trade, extremely small creations were carried as jewelry. Much smaller and much more able to be lost than other larger units of the lesser metals. The nature of so much of this gold was that it was easy to be lost and dispersed. Especially considering the modes of travel back then. We as museum visitors see all the magnificent pieces displayed. What we don't see are the countless broken, partial and fragmented items that are never offered for viewing.

Knowing what we know now, we believe that a very large portion of gold was lost and scattered on a yearly basis. Add to this the fact that most gold mining brought almost the same return as making many of the goods it purchased and we can see how gold was and is over counted. Where it was once taken as fact that all gold was looted and remelted, we now think that gold stocks were lucky if replaced.

By the time of the great gold coinages in Europe, the gold that flowed into these major commerce centers was all there was left in the world!

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The real issue is our misunderstanding and misuse of the term "sound money". That thought has been bantered around for hundreds of years. Truly it does not exist except in the minds of men.

Money, the term, the idea, perhaps the ideal,,,,,,, is something we dreamed up to apply to one of our chosen units of tradable wealth. Usually gold. We could take almost every item in the world and use it in this same "money fashion". Still, this form of trading real for real is just exchanging wealth. It isn't exchanging money as we understand money.

Gold is no different than anything else you possess as your wealth, it just so happened to be the most perfect type of tradable wealth in the world. So it evolved to be used the most and eventually labeled in the same function of what we consider to be "sound money".

Now, consider that all wealth is represented in and of itself. You cannot reproduce wealth through substitution, like giving someone five pieces of copper for one piece of gold and then have them think they now have five pieces of gold! This is the process we try to perform within the realm of man's money ideals. We have always debased trading wealth by duplicating it into other forms and calling all of it, collectively, "our money".

This duplicating, this replicating, this debasement is the result of taking the concept of a credit / contract function (paying in the future) and combining it with the concept of completing a trade at the moment. Think about that for a moment?

As an example, I'll give you a paper contract to pay you later for some oranges and you give me the basket of oranges. Better said, I just gave you modern man's actual concept of money.

Or I trade you a basket of apples "or gold" for those same oranges and the deal is finished, done! We have been taught to think that this is also the concept of money trade.

The first uses what our currency system has evolved into, what is really money in our mind. Where the second uses no credit form at all and is more comparable to trading real wealth as the ancients traded using gold.

Contemporary thought has always blurred these two notions; saying that these two methods of trading are one in the same and both forms use the same idea of what we think money is.

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This is the road ahead. A fiat no different from the dollar in function, yet a universe away in management. A wealth asset that also stands beside this money, yet has no modern label or official connection as money. In this way modern society can circle the earth, to once again begin where we started. Having learned that the concepts of wealth-money and man's money were never the same.

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They are not trying to Un-money gold! They are going to un-Westernize gold so it performs its historic function of acting as a tradable wealth holding. No longer following the Gold Bugs' view that governments need to control gold so it acts like real money in the fiat sense. Truly, the BIS and ECB are today "Walking In The Footsteps Of Giants"!

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Gold will no longer be able to successfully carry the Western name of Money so as to allow for its political price fixing. A process that, it seems, has been with us for generations. Enslaving millions of hard workers by always officially classifying the terms and value of both their paper currency and their metal savings. Always inflating both items for the good of society's never ending political agenda.

Allowing FreeGold to circulate as a wealth asset would denominate its true worth through the much larger real demand of "Wealth Possession" instead of paper possession. Such a gold scale would measure our world reserve currencies against each other instead of against our Western concept of gold as official money. But, in addition, on a higher level, prevent any one country from subjugating other nation states through fiat dominance. To more fully grasp the impact of "Possession" and why ancient gold was worth so much more as FreeGold; hike again that part of our trail (FOA (04/18/01; 20:20:06MT - usagold.com msg#64) Lombards, Normans and Franks.)

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We were first alerted to the "gold is money" flaw years ago. When considering the many references to gold being money, in ancient texts, several things stood out. We began to suspect that those translations were somewhat slanted. I saw many areas, in old text, where gold was actually more in a context of; his money was in account of gold or; the money account was gold or; traded his money in gold. The more one searches the more one finds that in ancient times gold was simply one item that could account for your money values. To expand the reality of the thought; everything we trade is in account of associated money values; nothing we trade is money!

The original actual term of money was often in a different concept. In those times barter, and their crude accounts of the same, were marked down or remembered as so many pots, furs, corn, tools traded. Gold became the best accepted tradable wealth of the lot and soon many accountings used gold more than other items to denominate those trades. Still, money was the account, the rating system for value, the worth association in your head. Gold, itself, became the main wealth object used in that bookkeeping.

This all worked well for hundreds and perhaps thousands of years as fiat was never so well used or considered. Over time, society became accustomed to speaking of gold in the context of money accounting. Translations became all the more relaxed as gold and money accounting terms were mingled as one in the same. It was a subtle difference, then, but has become a major conflict in the money affairs of modern mankind; as gold receipts became fiat gold and bankers combined fiat money accounting with gold backing.

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To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item. In proper vernacular; a 1930s style US gold coin was stamped in the act of applying the money concept to a real piece of tradable wealth. Not the best way to use gold, considering our human nature.

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By accepting and using dollars today, that have no inherent form of value, we are reverting to simple barter by value association. Assigning value to dollar units that can only have a worth in what we can complete a trade for. In effect, refining modern man's sophisticated money thoughts back into the plain money concept as it first began; a value stored in your head! Sound like something that's way over your head of understanding? I'll let you teach yourself.

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You use the currency as a unit to value associate the worth of everything. Not far from rating everything between a value of one to ten; only our currency numbers are infinite. Now, those numbers between one and ten have no value, do they? That's right, the value is in your association abilities. This is the money concept, my friends.

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A fiat trading unit works today because we make it take on the associated value of what we trade it for; it becomes the very money concept that always resided in our brains from the beginnings of time. In this, a controlled fiat unit works as a trading medium; even as it fails miserably as a retainer of wealth the bankers and lenders so want it to be.

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For thirty years fiat use evolved on its own to embrace the non-wealth trading aspects of "the money concept". Leaving in its wake a world of worthless dollar debt as people bought wealth outside the "money concept" anyway. We are, today, in a transition away from that dollar mess and much of our wealth illusion will be passing from our grasp in the process.

In every way, society is trading its way back to where it started. In the process, gold will find a new value from its history in the past:

"A wealth of ages savings for your future of today."


End Sidebar
_________________________________________________________

Well, there you have it! The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."

But what does this have to do with me in 2011? I can almost hear you thinking this question now. Well, I'm going to share a secret with you. The big secret is that the people's money is simply credit. And by "the people's money," I mean our money, the real producing economy's money. The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies. Let me explain.

Today's monetary base is a clearly defined thing. It is all physical currency plus reserves held at the Fed. We the people cannot have electronic base money. We cannot open an account at the Fed. Only banks and the government can. We use commercial bank credit and private credit to keep the economy churning. The reference point of our credit is the base. We reference that base when we transact in "dollars".

Private and commercial bank credit appears and disappears spontaneously all the time, all throughout the real economy. This is what actually lubricates the economic engine; having a base of stable value to which we refer in monetary transactions. Private credit is generally cleared using bank credit. And bank credit is cleared using the monetary base. But all credit denominated in dollars refers to that base and relies on a stable unit value or price stability.

It is the banks' job (both commercial and central banks) to make sure that bank credit (the people's money) and base money (the banks' money) are fungible. That is, they are always freely and equally exchangeable. But of course they are two separate things, credit and base money, with two very different volumes. Under normal conditions, there's a lot more credit money floating around than there is base money. So keeping them fungible can be a juggling act on occasion. But for the most part, we the people choose to hold bank credit as our money rather than cash. And, in fact, it is the limited availability of cash in the system (its relative "hardness") that keeps our money stable in unit value.

Think about it this way: We are free to choose cash at any time. And when we go to the bank to exchange our credits for cash, we put that bank under pressure to come up with cash that is relatively "harder" to come up with (more limited in volume) than credit. Let's say, for example, that "demand deposits" (those that can demand cash on the spot) are ten times larger than the total volume of cash in the system. Is this good for our money? Yes, because it means that the reference point unit we use is in limited supply, which keeps a vital tension on the overall system. The operations the bank must do to come up with our cash (sell off some value) maintain value in our credits.

Say the base volume is one trillion dollars, which is about what it was in October of 2008. That means the base unit reference point for all dollar credit in the world is one one-trillionth of the base volume, all the available above-ground dollars ever mined throughout all of history. Then imagine you doubled that base to two trillion dollars. The unit reference point will have been cut in half, from one one-trillionth to one-half of one one-trillionth of the base volume.

Like this: Remember the "reference kilo" in Reference Point Revolution?


Say you've got a contract or a credit for a kilo of gold. Now obviously the total volume of gold can't be doubled overnight like the dollar base was, so what would be the equivalent effect? Well, it would be like someone cutting that reference kilo in half. Your one kilo contract, since it is denominated in kilos, refers to this unit reference point that has just been cut in half. It has suddenly become twice as easy for your creditor to deliver on his obligation. And, by the way, the volume of the dollar base has more than doubled since Oct. 2008. It's now at 2.7 trillion, which means the unit reference point was actually given a 63% "haircut" in three years, from one one-trillionth to little more than one-third of one-trillionth of the total volume.

Now, before you start arguing your own favorite economic pet theory, let me remind you that there is no right or wrong at this point. There's only the usefulness of a perspective in delivering the correct analysis of what's actually happening today and the best prescription for your personal action. But you can't use a perspective until you get it. Then, and only then, you can use your own mind to decide if it is the correct perspective and then act upon it. Later it will be proved correct or incorrect, just as Another said: "time will prove all things."

Clearly the 63% destruction of the dollar unit reference point over the last three years did not immediately translate into a 170% rise in prices at the grocery store. And I wouldn't expect it to. It never works like that. Henry Hazlitt explained it like this: "The value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the increase in the quantity of money, whereas, in the late stage of inflation, the value of the monetary unit falls much faster than the increase in the quantity of money."

If you have a large 401K, IRA or pension fund full of credits for dollars, you may be taking comfort in the fact that the 63% haircut in the very unit your retirement nest egg references has not yet shown up at the stores where you shop. But the fact remains that the dollar has been debased. That's why they call it debasement. The base is diluted by expanding its volume which reduces the value of the unit used for reference relative to the volume of available units.

There are, of course, plenty of economic theories out there that are wholly designed to distract your attention away from this plain and obvious debasement and to tell you why it doesn't matter, and how the presently slow price inflation is proof that it doesn't matter if they debase your money and your life's savings. Some will tell you that the apparent fungibility of credit and cash means they are the same thing. And some will even try to tell you that the base unit reference point derives its value from the volume of credit rather than its own volume, and that the base volume is essentially meaningless. But I think that if you are keeping your wealth in the form of money, sheep being periodically sheared is an image worth keeping in mind.

The Pure Concept of Wealth

Another concept of concern today is that of 'wealth'. As FOA emphasized in the sidebar, the fundamental property of wealth is that of "possession." It is by this property that wealth is identified, and thereby it becomes 'wealth'. "In the world of wealth, worth is enhanced because the supply is lessened by this 'possession attribute'. And possession is how most people in antiquity understood wealth."

Have you ever noticed how the super-rich seem to stay super-rich no matter how much money they spend? Not only that, but they seem to get wealthier the more they spend! They buy amazing super-homes, expensive antique furniture to fill the homes, and priceless artwork to hang on every inch of their fancy walls, yet somehow they retain their wealth.

That's not to say that they don't also participate in the Western tradition of "the something for nothing game" we call the paper markets. They do, but that participation does not constitute their 'wealth'. Yet we, the commoners, are told constantly, by state-approved financial advisors, to put our entire nest egg at risk in this "something for nothing game."

We can't afford that nice furniture and art that the super-wealthy buy, so we buy low-priced crap from China that is worth half what we paid for it the minute we walk out of the store. What is going on? Is it possible to imagine a new monetary system that would put common people on equal footing with the super-rich when it comes to possessing our wealth?

FOA (05/06/01; 20:30:52MT - usagold.com msg#69)
A Tree in the Making

In this world we all need much; blessings from above,,,,, family,,,, home,,, friends and good health. But after all that, one must have currency and an enduring, tradable wealth asset that places our footing in life on equal ground with the giants around us,,,,,, gold! Understanding the events that got us here and how they will unfold before us is what this GoldTrail is all about.


I know I keep repeating myself, but this post is specifically designed to encourage independent thought; to let your mind wander about, freed from the confines of modern dogma. If you were able to wrap your mind around the pure concept of money, you may be starting to sense the danger, at least conceptually, in holding your lifetime's-worth of accumulated wealth as money. Because when they double the base, they are diluting all of “our” money by half, even if “our money” outnumbers the base by 10:1 (bank credit), 100:1 (all credit), 1,000:1 (credit derivatives) or whatever. It is credit's reference point they are abusing to ease their own discomfort, and our money they are debasing. And the more money you are holding when they do this, the greater your share of the loss.

To contrast these two important concepts, money and wealth, notice that, conceptually, money is not the item that is referenced, and the item (e.g., a dollar bill) is not money in and of itself. It only obtains moneyness by the fact that it is referenced in valuing other items. True wealth, on the other hand, is, in fact, the item itself. A wealth item is wealth, in and of itself, by the mere fact that it is possessed.

The easy money camp always wants the savers to store their wealth in money, so they can loot those savings by debasing the referenced unit which eases their discomfort. Meanwhile the hard money camp always wants the debtors' deficit spending to be denominated in real wealth. The problems with this approach are myriad.

So here’s an interesting question: What do you call a monetary system where physical gold wealth (not credits denominated in ounces issued by a commercial bank, but the actual physical stuff) sits on Line 1 of the Eurosystem’s monetary assets? There’s no silver there on line 2, no copper, no oil, no GLD or PHYS, no mining shares, no antique furniture or Renoirs, just 400-ounce bars of physical gold bullion and a few minted gold coins. Official purchases and sales of gold (changes in the volume) are publicly reported every week, and its value is updated every quarter.

What do you call that system? And what do you call the gold in that system? How would you describe gold's moneyness in such a system? And why hasn’t Greece sold its gold yet to end the discomfort? Why do we mainly hear politicians proclaiming "the euro will survive." Why do we rarely if ever see the central bankers sweating "the survival of the euro"? Aren’t they worried about the survival of their reference unit? Or do they simply understand moneyness better than the rest of us?

MMT

If you read my whole sidebar like I hope you did, you saw where FOA described in the broadest terms how we arrived at our latest iteration of easy money. Here it is again:

Gold coins, then bank storage, then gold lending, then gold certificate use, then lending of certificates, then certificates are declared paper money, then overprinted, then gold backing removed…

How's that for covering a lot of years in one sentence?

Depending on which camp you're in, as long as you haven't grasped the pure concepts of 'money' and 'wealth', there's a whole spectrum of descriptions of how "modern money" works with varying degrees of uselessness in practical applicability, both macro and micro. On the hard money side, you'll find lots of criticism of "fractional reserve banking," "thin air money," "borrowed into existence," "credit money is a pyramid scheme" (it's not, the concept of money has always been a credit reference to a base unit), etc., etc… Hard money descriptions of modern money are overwhelmingly critical because, of course, the easy money camp has been in charge for a long time now.

Obviously I think the hard money camp misses the mark in its policy prescriptions, but you've got to understand that they can only address today's issues in the counterfactual subjunctive. In other words, "if A had been true, then B wouldn't have happened or the outcome would have been better." But A isn't true. A being "if only we had hard money today."

But it's over there in the far corners of the easy money camp where you'll find some truly repulsive arrogance by those who unfortunately have the luxury of using true antecedents in their modal logic. Like this: "If it is true today that USG deficit spending is not technically constrained by taxes and borrowing because it issues its own currency, then structural trade deficits are not only sustainable, good and loved by our trading partners, but necessary. 'Austerity', or producing more than we consume at times like these, on the other hand, is a total disaster." That's the logic. Here's the arrogance:

"As a current account deficit nation, the US government can appropriately be thought of as a net currency exporter. This means that we send pieces of paper over to the foreign nations in exchange for goods and services." (Cullen Roche)

"We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services." (Cullen Roche)


And why doesn’t China just buy other American stuff?

"They have attempted to use their dollars to purchase other USD denominated assets, but the US government has squashed those efforts. So, instead of leaving these pieces of paper to collect dust in vaults, they open what is the equivalent of a savings account with the US government." (Cullen Roche)

"Anyone who uses the term [monetization] in the context of the Fed’s contribution of government spending does not understand how the modern monetary system works." (Cullen Roche)

"This is basic macroeconomics and the debt-deficit-hyperinflation hyperventilating neo-liberal terrorists seem unable to grasp it." (Bill Mitchell)

"The Fed is not printing money. They are merely swapping treasuries for deposits." (Cullen Roche)


Someone should explain to these guys the meaning of the phrase, "never look a gift horse in the mouth." It means that when someone gives you a free horse, you shouldn't inspect it too closely in front of the giver.

Of course this is MMT, or Modern Monetary Theory I'm talking about. Even Paul Krugman noted the arrogance of these theorists in his latest blog post about MMT (my emphasis):

"First of all, yes, I have read various MMT manifestos — this one is fairly clear as they go. I do dislike the style — the claims that fundamental principles of logic lead to a worldview that only fools would fail to understand…"

I bring up MMT not because it is entertaining to make fun of their misguided (and often repulsive) arrogance, but because of the inauspicious rise of their extreme easy money theories right at the tail end of history's grandest easy money experiment. I find it to be a handy platform from which to explain how the ancient concepts of money and wealth are still more relevant to the near-term outcome than a few accounting identities that thrive solely in the monetary plane, and do so with reckless disregard for the real power of the physical plane.

One of the main tenets of MMT is the accounting identity that roughly states the amount the USG deficit spends (government spending in excess of the taxes it takes in) is always equal to private sector net savings plus the trade deficit (exports minus imports, or stated another way, our trading partners' net dollar savings).

This is generally explained with the analogy that the USG spends money into existence and taxes money out of existence. So if the USG (God forbid) taxed as much as it spent (or spent as little as it taxed), there wouldn't be any extra USG money for us mere mortals to save. So by spending more than it takes in, the USG is graciously giving us money for savings. And then, the USG issues Treasuries in an amount equal to that deficit spending (extra money for us to save Woo hoo!) to give us an interest-bearing exchange for our net-production.

To be fair, MMT consistently reminds us it is only describing and not prescribing a monetary system. Fair enough. But the presence of the trade deficit and our trading partners' presumed need for dollar savings should probably set off your alarm bells. If so, MMT wants to calm your worry with these soothing words:

"In a world with global trade we are certain to have trade deficit and trade surplus nations." (Cullen Roche)

In other words, we are simply a trade deficit nation. That's just who we are. Get used to it, and then embrace it! After all, it's pretty cool to get free stuff:

"…the US government can appropriately be thought of as a net currency exporter. This means that we send pieces of paper over to the foreign nations in exchange for goods and services." (Cullen Roche)

It's pretty neat the way accounting identities work. They are always true because, by definition, they must be true. They are like saying, "the amount of widgets sold equals the amount of widgets bought." You can't really dispute them as they are framed. But it is in the static assumptions that go into the careful monetary plane framing that flaws can be found. The physical plane can be much more dynamic than they assume.

For example, what if all the private sector net-producers decided to save in gold instead of USG debt? Since the accounting identity we're talking about includes our foreign trading partners like China, I'm essentially asking what happens if they (and we) stop buying Treasuries. Remember that Cullen says it doesn't matter:

"We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services." (Cullen Roche)

In other words, if they don't buy our Treasuries (run a capital account deficit), then they'll just stack the Benjamins. In other words, that's just the way it is. See? It's an accounting identity.

But then a reasonable person might point out that the USG still issues Treasuries equal in amount to all its deficit spending. And if we and the Chinese aren't buying them, then the Fed has to, so it makes up a cool name like QE2 to disguise the real purpose of the purchases. Not so fast, MMT says. The Treasury does not need to issue debt in order fund its spending. When it spends, it simply credits private sector accounts with new credit money and the banks with new base money. There is no direct connection between sales of Treasuries and money spent other than a myth in our confused minds.

In fact, during the debt ceiling debate in late 2009, MMT actually advised them to stop issuing Treasuries and just keep spending:

"The anti-deficit mania in Washington is getting crazier by the day. So here is what I propose: let’s support Senator Bayh’s proposal to 'just say no' to raising the debt ceiling. Once the federal debt reaches $12.1 trillion, the Treasury would be prohibited from selling any more bonds. Treasury would continue to spend by crediting bank accounts of recipients, and reserve accounts of their banks. Banks would offer excess reserves in overnight markets, but would find no takers—hence would have to be content holding reserves and earning whatever rate the Fed wants to pay. But as Chairman Bernanke told Congress, this is no problem because the Fed spends simply by crediting bank accounts.

This would allow Senator Bayh and other deficit warriors to stop worrying about Treasury debt and move on to something important like the loss of millions of jobs."
(L. Randall Wray)


I want you to notice a small detail in the above quote that probably slips by most people. Wray writes (my emphasis): "Treasury would continue to spend by crediting bank accounts of recipients, and reserve accounts of their banks."

Out here in the real world of the productive economy, when we spend, only the account of the recipient gets credited. Not the reserve account of their bank. The "reserve account of their bank" is that commercial bank's account at the Federal Reserve Bank. Remember? You and I can't have accounts there. Only the banks and the government can. Our spending is netted out in the system each night and the imbalances between banks are cleared with those substantially smaller reserve accounts.

I imagine there's a good reason Randall Wray was careful to include this small technicality in his piece. That's because raw government-created money through deficit spending is fundamentally different from "our money." Government spending adds one unit of credit money (our money) to the system as well as one unit of base money (their money). The bank receiving the deposit gets a reference point unit asset to match the liability it takes on.

So the volume of the base is expanded when the government spends, and it is likewise contracted when the government taxes and/or sells Treasuries to the private sector (including our trade partners like China). But when the government spends in excess of those two operations (taxing and debt selling), the base volume is simply expanded. And MMT apparently sees no difference between the true concept of money (all that 100s of trillions of credit denominated in a single reference point unit) and the base which it references. Take QE2 for example.

Super easy money camper and activist Ellen Brown writes in IS QE2 THE ROAD TO ZIMBABWE-STYLE HYPERINFLATION? NOT LIKELY:

"Unlike Zimbabwe, which had to have U.S. dollars to pay its debt to the IMF, the U.S. can easily get the currency it needs without being beholden to anyone. It can print the dollars, or borrow from the Fed which prints them.

But wouldn’t that dilute the value of the currency?

No, says Cullen Roche, because swapping dollars for bonds does not change the size of the money supply. A dollar bill and a dollar bond are essentially the same thing."


This is part of the flaw in MMT’s view. Bonds are credit (the economy’s money) denominated in (referencing) the base unit (the dollar). Swapping credit for base units dilutes and debases every single credit dollar in the world, all quadrillion of them if you included derivatives.

When the private sector (plus our foreign free stuff suppliers) buy bonds, the USG is essentially spending credit money rather than expanding the base because "the credit to the reserve account of their banks" that Randall Wray mentioned above is deleted when the private/foreign sector buys a Treasury bond. Spending credit money does not dilute the base and debase the reference unit. But when the people (or banks) that bought those bonds swap them with the Fed for cash, the base is diluted and the reference unit is debased. So Cullen is wrong. A dollar bill and a dollar bond are not essentially the same thing.

Back in June, talking about QE2, I wrote something very similar to what Cullen says. See if you can spot the subtle difference.

Cullen: "There is not 'more firepower' in the market following QE. All that the Fed altered was the duration of the U.S. government’s liabilities. The Fed took on an asset (treasurys) and also accounted for a new liability (the reserves). But this transaction did not change the net financial assets in the system. The point here is that from an operational perspective the Fed is not really altering the money supply."

Me: "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.'"

So, just to recap, MMT says that neither selling debt to the Chinese nor QE (selling it to the Fed) is actually necessary to fund government deficit spending. The government spending actually happens first, therefore it is independent of, and not reliant on, either of those financial operations. And to this point, I think we can all agree with MMT's description of the process as it exists in the monetary plane, although it is clearly not the only correct description, and certainly not the whole story.

Here's the thing, the act of government deficit spending without either counterbalancing taxes or Treasury sales to the private/foreign sector, and the act of Fed quantitative easing, both change the nature of the money supply in a way that all other "normal" activities do not. They debase "our money" by expanding "their money" in volume to ease their discomfort. And this kinda gets us to the driving thrust of MMT; that MMT sees little to no danger of this monetary plane debasement spilling out into the physical plane with deadly consequences for the dollar.

There is, however, one area in which the danger is at its all-time peak today. And that is the US trade deficit as viewed from the physical plane. But before we get into that, let's take a look at a couple neat charts that Cullen Roche uses to visualize the monetary plane accounting identity that underlies his theory. Cullen calls them "sectoral balances," meaning the monetary plane balance sheet of three different sectors: the government sector (USG), the domestic private sector, and the foreign sector.

What I'm going to try to do is to help you see the physical plane reality of these charts. They are so neat and balanced in the monetary plane, yet they represent an immense imbalance in the physical plane that, because of the credibility inflation of the last 40 years, leaves the dollar vulnerable to spontaneous hyperinflation. More on that in a moment.

In this first chart, I want you to pay special attention to the dashed blue line. In the monetary plane, that line represents the amount of US paper our foreign trading partners are taking in each year. When they take in dollars, those show up as a current account surplus on their sheet and a current account deficit on ours. Then when they trade them in for Treasuries they show up as a capital account deficit on their sheet and a capital account surplus on ours. But the easiest way to understand this blue line is in the physical plane. It represents the trade deficit; the amount of free stuff we got each year in exchange for nothing but paper. As Cullen says, "the US government can appropriately be thought of as a net currency exporter." So the blue line is our "currency exports."


Here's a link to our Balance of Payments (BOP) from 1960 through 2010:

www.census.gov/foreign-trade/statistics/historical/gands.txt

The first column is our trade balance. A negative number means a trade deficit. I'm sure the MMT folks reading this are getting tired of me calling it "free stuff," but that's what it is, which I'll explain in more detail later. Foreign central banks were literally supporting our trade deficit for their own reasons for the last 30 years. You'll notice we went into deficit in 1971, with the only blips up into surplus since then occurring in '73 and '75.

You've probably heard it said that the US has become a "service economy" as opposed to producing all the real stuff we used to produce. Well, if you look at the second and third columns, the goods column and the services column, you'll see the inflection point of that transition was also in 1971. So all those negative numbers in the first column really do represent real goods, the kind of stuff that gets packed into containers and physically shipped to the US.

In 2010 you'll see that our trade deficit was $500 billion. That number comes from a $645B deficit in goods, and a $145B surplus in services. In 2011 we are on track for a trade deficit of about $565B (monthly data). For the last decade, our trade deficit range has been $400B - $750B per year. The average for the decade is $581B per year, or $48.5B per month.

Now this second chart really shows the monetary plane symmetry that MMT loves. The whole point of the accounting identity is that the balances of the three sectors (government sector, domestic private sector and foreign sector) must net out to zero. One person's savings is another person's debt, or so the story goes. Remember what I said about widgets? "The amount of widgets sold equals the amount of widgets bought." Well the accounting identity behind this chart is essentially just as simple: "the amount of debt sold equals the amount of debt bought." If you're going to save, then I have to deficit spend (create debt notes) for you to hold as your savings. Neat, huh?


On this chart, the bottom is the amount of debt sold and the top is the amount of debt bought. All that red on the bottom is the government sector selling debt. The green on the top is the foreign sector buying that debt. The blue, which seems to jump around, is the domestic US private sector either buying (top) or selling (bottom) debt (think: MBS). What I want to draw your attention to is this last bit of blue at the end:


What this section, roughly encompassing the last three years, apparently shows is that 1. The debt sold by the USG jumped dramatically, 2. The debt purchased by the foreign sector decreased, and 3. The domestic US private sector apparently picked up the slack dropped by the foreign sector. I propose to you that "the domestic US private sector" in this case was mostly Ben Bernanke and the Federal Reserve. I do understand that MMT interprets QE as something other than money printing, but I would like you to read this paragraph from Wikipedia on the specific amounts of quantitative easing:

"The US Federal Reserve held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession. In late November 2008, the Fed started buying $600 billion in Mortgage-backed securities (MBS). By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy had started to improve, but resumed in August 2010 when the Fed decided the economy wasn't growing robustly. After the halt in June holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012. The Fed's revised goal became to keep holdings at the $2.054 trillion level. To maintain that level, the Fed bought $30 billion in 2–10 year Treasury notes a month. In November 2010, the Fed announced a second round of quantitative easing, or "QE2", buying $600 billion of Treasury securities by the end of the second quarter of 2011." (Wikipedia)

Now, before we move on, I want to draw your attention to three curiosities to which I will be referring:

1. Using the latest data for the last three years, the dollar monetary base expanded by $1.7T and the US trade deficit (free stuff inflow) was $1.5T over the same time period.

2. For fiscal year 2011, the trade deficit was $540B and "QE2" was $600B over the same time period.

3. For the last year, Chinese Treasury holdings are perfectly flat (same amount held in Aug. 2011 as in Aug. 2010) and Hong Kong holdings are down by $26B.

The Debtor and the Junkie

The USG may be a dealer in the monetary plane, but it is most definitely a sketchy junkie in the physical plane. The USG thinks (and truly believes) that the key to rejuvenating the US economy is trashing the dollar as a short cut to increasing exports (reducing the trade deficit). But what it can't see (nor anyone that focuses solely on the monetary plane for adjustment) is that the huge trade deficit the USG wants to quit is actually its own heroin fix. This is a deadly combo for the US dollar.

MMTers don't think very highly of "hyperinflationists". They call us "hyperventilators" and such, although I shouldn't really bunch myself in with the others. I think my description of hyperinflation is more in line with reality than others I've read. See here, here, here, here and here. But in this post I hope to show you where the MMTers go wrong on hyperinflation, and to show why—and how—dollar hyperinflation is the only possible outcome.

The "debtor" I had in mind for my section title was Weimar Germany in the early '20s, not the USG today. The USG is the junkie. Weimar Germany owed war reparations, a debt resulting from WWI that was essentially denominated in gold. This was a debt in a hard currency (hard as in difficult, not hard as in solid), unlike the USG who owes its debt to others in its own currency. MMT got that part right. The USG cannot be forced into involuntary default on its own currency debt. And because of this property, USG debt is a monetary plane illusion when viewed from the physical plane. It is a great store of nominal value, and a terrible store of real value.

Where MMT derails from the description track and goes careening off the prescription cliff, the message is usually about the admirable goal of full employment. You know, the Fed's other mandate. Indeed, L. Randall Wray's book is titled Understanding Modern Money: The Key to Full Employment and Price Stability. But the bottom line is MMT's untested theory that the USG could pay for full employment (hire anyone who wants to work) through raw monetary base expansion while enjoying the same relatively stable prices of the last 30 years. And their best defense of this shark jump proposition appears to be debunking the hyperventilators.

In Zimbabwe! Weimar Republic! How Modern Money Theory Replies to Hyperinflation Hyperventilators (Part 1) Randall Wray writes:

"MMTers are commonly accused of promoting policy that would recreate the experiences of Zimbabwe or Weimar Republic hyperinflations. These were supposedly caused by governments that resorted to “money printing” to finance burgeoning deficits—increasing the money supply at such a rapid pace that inflation accelerated to truly monumental rates." (Wray)

He goes on to explain how the hyperventilators have it all wrong. He shows how hyperinflation is more about an increase in money velocity than volume; that hyperinflation begins with a loss of confidence, not too much money. Any of this sound familiar? Then he beats a gold bug straw man or two before explaining to us how modern money really works. Here's the most important part to understand:

"You cannot print up Dollars in your basement. Government has to keystroke them into existence before you can pay your taxes or buy Treasuries." (Wray)

Notice he mentions taxes and Treasuries. This is important to understand. Government money, which is the monetary base the economy uses as its reference unit, is expanded when the USG spends, and only contracts when you either 1. pay taxes, or 2. buy Treasuries. He wasn't just throwing those out as two examples of how you might spend your money. Those are the only two checks on base money expansion. But the sneaky thing that MMT does is to marginalize the importance of those two methods of contracting the base. Like this, as if it's no big deal, a mere afterthought:

"Usually the treasury then sells bonds to let banks earn higher interest than they receive on reserves." (Wray)

The basis of MMT is that government spending (base money expansion) is not conditional on 1. taxing or 2. borrowing that money (base money contraction). Expansion is not conditional on contraction. This is obviously true because the base has been expanding. But armed with this epiphany, along with the "obvious fact" that the hyperinflationists don't understand how modern money works, they jump to the conclusion that contracting the monetary base after the government has expanded it is a fool's errand. And so they go to great lengths to marginalize the need for contraction, especially when unemployment is rising and the economy is in recession.

As it stands, our government still operates on the "antiquated" condition that taxes plus borrowing must equal spending. So we periodically raise the debt ceiling and we keep issuing Treasuries to match the entire budget deficit. But QE is the new way to reverse the base money contraction that happens when these Treasuries are sold. The Fed simply buys them from the banks and credits the banks with the base money that was deleted when they were purchased.

From an accounting perspective, this QE operation has the same effect as if the government had spent more than taxes and borrowing combined, or as if the government reduced taxes while keeping debt and spending constant. So armed with this epiphany, MMT is able to marginalize QE as a mere fiscal operation rather than the "helicopter drop" those silly hyperventilators like to talk about. "Fiscal operation" sounds pretty innocuous, doesn't it? But it's not quite that tame.

What I'm going to show you is that there's something quite dangerous to the dollar that is already well underway. From an accounting perspective, there's not much difference between QE and the easy money prescriptions coming from some of the MMTers. And these seemingly innocuous "fiscal operations" are actually born of necessity arising, not in the monetary plane, but from the physical trade deficit.

Unfortunately, the USG/Fed believes that trashing the dollar will help the domestic US economy as a kind of short cut to growing exports and thereby increasing wages and consumption demand. In other words, if we could just make our products cheaper overseas through monetary plane operations, we could sell more real stuff and thereby we'll have more money and all will be peaches and cream.

But the problem is that, net-net, the US consumes everything it produces and then some. This intractable problem cannot be solved in the monetary plane, except through dollar hyperinflation! Here's some more FOA:

"I point out that many, many other countries also have the same "enormous resources; physical, financial, and spiritual" that we have. But the degrading of our economic trading unit, the dollar, places the good use of these attributes in peril. Besides, the issue beyond these items is our current lifestyle. We buy far more than we sell, a trade deficit. Collectively, net / net, using our own attributes and requiring the use of other nation's as well. Not unlike Black Blade's Kalifornians sucking up their neighbors energy supplies (smile). We cannot place [our tremendous resources] up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert. Also:

NO, "this country will not turn over and simply give in" as you state. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not its currency system. Around the world and over decades other fine people states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over-valued dollar that we spent without the pain of work."
(FOA)


That was written a decade ago. In the month that was written, the US as a whole (Government sector plus domestic private sector) was living above its means to the tune of $31.3B. That year we were living above our means by $361B. In the decade since that was written, we have maintained an average "excess consumption" of $48.5B per month and $581B per year. But here's the thing—in the most recent third of that decade (2008-2011), the domestic US private sector actually has crashed its lifestyle more or less. The economy is in recession and unemployment is up over 9%. Yet the government sector expanded its "lifestyle" to take up the slack!

Remember these from my 2009 post No Free Lunch?





And for something a little more recent, here are two headlines I saw on Drudge just last month:

DC area tops US income list; average fed employee makes $126,000 a year...
Reid says government jobs must take priority over private-sector jobs...

No wonder we're maintaining that trade deficit!

So I thought I'd come up with my own "physical plane identity" (kinda like an accounting identity in the monetary plane) for "living above our means." Here's the legend:

USG=US Government sector
USP=US Private sector
BOP=Trade balance for both sectors combined

We know how much the USG is living above its means. That's the budget deficit. And we also know how much the USG+USP combined are living above their means. That's the BOP. So the "identity" looks something like this:

USG+USP=BOP

The annual USG budget deficit (how much the USG lives above its means, with means equaling taxes) is about $1.4T. And the BOP is about $565B. So we get this:

USG=$1.4T
BOP=$565B
$1.4T+USP=$565B

Or stated another way:

USP=(-$835B)

So the US private sector is actually living below its means by $835B if we isolate it from the government sector. The government sector, on the other hand, is living way above its means with 60% domestic support and 40% foreign support. Stated another way, the US private sector is providing the USG with $835B in goods and services in excess of taxes, or 60% of USG's "deficit consumption."

Viewed this way, there's only one way to reduce that trade deficit (inflow of free stuff): reduce the size of the USG monstrosity. Unfortunately, the USG is totally incapable of voluntarily shrinking itself, especially because it issues its own currency! The real problem, the heart of the matter, the reason why the dollar will and must hyperinflate, is that the US trade deficit, on the physical plane, is structural to the USG who issues its own currency. Simple as that.

Here's what we get whenever the USG pretends to crash its own lifestyle:





I can almost hear the MMTers screaming at their computer screens, "he doesn't understand how modern money works!" ;)

Of course, MMTers don't think the USG should crash its "lifestyle" at all. They think the USG needs more deficit spending right now. Because deficit spending is not constrained by taxes and/or borrowing and the hyperventilators don't understand how modern money works so currency collapse can be essentially ignored. Are you starting to catch on yet?

MMT is all about how it works from a monetary plane accounting perspective with reckless disregard for why it works and why the dollar monetary plane has stayed connected to the physical plane (no hyperinflation) as long as it has. That last part, of course, is what this blog is all about. MMTers, like most modern economists, think the physical plane services the monetary plane, not the other way around. They think you can fix problems in the real world by simply controlling the monetary world. Why? Because everyone wants money, of course!

But herein lies the problem of what money actually is to the real economy. Money is our shared use of some thing as a reference point for expressing the relative value of all other things. And by expanding the base you don't simply create money, you destroy the moneyness of it. As MMT explains, the base is expanded when the government deficit spends, and it is likewise contracted when the Treasury sells debt to anyone other than the Fed. Those of you who read FOFOA regularly know the story of why the dollar has not yet collapsed, but here's a very brief version for the rest of you.

The US has enjoyed a non-stop inflow of free stuff including oil (a trade deficit) ever since 1975, the last year we ran a trade surplus. In the 1970s, following the Nixon Shock and the OPEC Oil Crisis, the US dollar went into a tailspin. Because the US dollar was the global reserve currency, this was bad news for the global economy. If the dollar had failed then, without a viable replacement currency representing an economy at least as large as the US, international trade would have ground to a standstill.

Europe was already on the road to a single currency, but it still needed time, decades of time. So at the Belgrade IMF meeting in October of 1979, a group of European central bankers confronted the newly-appointed Paul Volcker with a "stern recommendation" that something big had to be done immediately to stop the dollar's fall. Returning to the US on October 6, Volcker called a secret emergency meeting in which he announced a major change in Fed monetary policy.

Meanwhile, the European central bankers made the tough decision to support the US dollar, at significant cost to their own economies, by supporting the US trade deficit by buying US Treasuries for as long as it took to launch the euro. As it turns out, it took 20 years. After the launch of the euro, the Europeans slowly backed off from supporting the dollar. But right about that same time, China stepped up to the plate and started buying Treasuries like they were hotcakes. This may have been related to China's admission into the WTO in 2001.


Then, sometime around 2007 or 2008, the dollar's Credibility Inflation peaked. The growth of the "economy's money" (credit denominated in dollars) hit some kind of a mathematical limit (expanding to the limit was wholly due to FOFOA's dilemma) and began to contract. Since then, China has slowly backed off from supporting the dollar. We now know that China is more interested in using its reserves to purchase technology and resource assets wherever they are for sale than bonds from the US Treasury. China is also expanding the economic zone that uses its monetary base as a reference point in trade settlement to the ASEAN countries.

Meanwhile, the junkie USG has kept the free stuff flowing in by expanding the monetary base. Sure, China still wants to sell her goods to the US, but she's no longer supporting the price stability of the last 30 years by recycling the dollar base expansion back into USG debt. Cullen says:

"We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services." (Cullen Roche)

While technically true, one has to wonder at the consequences of them not buying our bonds, no?

"They have attempted to use their dollars to purchase other USD denominated assets, but the US government has squashed those efforts. So, instead of leaving these pieces of paper to collect dust in vaults, they open what is the equivalent of a savings account with the US government." (Cullen Roche)

So does that mean they're just stackin' 'em up now to collect dust rather than going after real resources wherever they are for sale in the world?

Okay. So the USG doesn't owe a hard debt like Weimar Germany did in the early '20s. But perhaps she has developed a structural addiction; a need for something that's just as hard as foreign currency—real stuff from the physical plane. Here is L. Randall Wray describing Weimar:

"The typical story about Weimar Germany is that the government began to freely print a fiat money with no gold standing behind it, with no regard for the hyperinflationary consequences. The reality is more complex. First, we must understand that even in the early 20th century, most governments spent by issuing IOUs—albeit many were convertible on demand to sterling or gold. Germany had lost WWI and suffered under the burden of impossibly large reparations payments—that had to be made in gold. To make matters worse, much of its productive capacity had been destroyed or captured, and it had little gold reserves. It was supposed to export to earn the gold needed to make the payments demanded by the victors. (Keynes wrote his first globally famous book arguing that Germany could not possibly pay the debts—note these were external debts denominated essentially in gold.)

The nation’s productive capacity was not even sufficient to satisfy domestic demand, much less to export to pay reparations. Government knew that it was not only economically impossible but also politically impossible to impose taxes at a sufficient level to move resources to the public sector for exports to make the reparations payments. So instead it relied on spending. This meant government competed with domestic demand for a limited supply of output—driving prices up. At the same time, Germany’s domestic producers had to borrow abroad (in foreign currency) to buy needed imports. Rising prices plus foreign borrowing caused depreciation of the domestic currency, which increased necessitous borrowing (since foreign imports cost more in terms of domestic currency) and at the same time increased the cost of the reparations in terms of domestic currency.

While it is often claimed that the central bank contributed to the inflation by purchasing debt from the treasury, actually it operated much like the Fed: it bought government debt from banks—offering them a higher earning asset in exchange for reserves. For the reasons discussed above, budget deficits resulted from the high and then hyper- inflation as tax revenue could not keep pace with rising prices. Finally in 1924 Germany adopted a new currency, and while it was not legal tender, it was designated acceptable for tax payment. The hyperinflation ended."
(Wray)


Let's happily skip over the fact that Wray compares the German central bank during the Weimar hyperinflation to the Fed today when he writes: "actually it [the Reichsbank] operated much like the Fed: it bought government debt from banks." I have a better comparison I want to try. I want to try a little word replacement game with Wray's Weimar description. Let's replace Germany with the USG and the war reparations debt with a trade deficit addiction and see how it looks. Other than these few substitutions, I'll leave Wray's descriptive words alone:

"The USG had endured 30 years of foreign-supported trade deficit and developed an addiction to free stuff. To make matters worse, much of its productive capacity had been shipped overseas during this time period. The US private sector could not possibly support the USG’s addiction to real goods.

The nation’s productive capacity was not even sufficient to satisfy domestic demand, much less to support USG demand. Government knew that it was not only economically impossible but also politically impossible to impose taxes at a sufficient level to move resources to the public sector to satisfy the USG’s insatiable addiction. So instead, it relied on deficit spending through raw base money creation. This meant government competed with global demand for a limited supply of importable goods—driving prices up. At the same time, the US private sector had to pay the same higher prices without the benefit of issuing its own currency to buy needed imports. Rising import prices forced the US economy to consume more of its own domestic goods, which increased USG’s reliance on imports, and since foreign imports cost more in terms of the domestic currency, this increased the cost of the USG’s addiction in terms of domestic currency."
(Me)


Now I want you to think especially hard about that last line, "…this increased the cost of the USG’s addiction in terms of domestic currency." This is the key to understanding why we are headed toward all-out, balls-to-the-wall, in-your-face wheelbarrow hyperinflation. This is it, the point I'm trying to get across to you.

That inflow of free goods that is structural to the status quo operation of the US government is more dangerous to a monopoly currency issuer than the war reparations debt in Weimar Germany. The USG is incapable of reducing that inflow of real goods voluntarily and so the non-hyperinflation of the dollar requires it to flow in for free. And it has been, up until recently.

Today we are debasing our monetary reference point in defense of that inflow of goods from abroad. And, at this point, it is entirely attributable to the USG alone, and not to the US economy at large which has contracted, unlike the government. MMT says that Bernanke's QE is a simple like-kind swap of paper for paper, or money for money. Cullen: "What they’ve essentially done via QE2 is swap 0.25% paper for 2% paper and call it a day." In a sense, it is. But it is removing newly created credit money (debt created by the USG) from the system and replacing it with newly created base money. By increasing the volume of the base which credit references for value, simultaneous with a constant inflow of necessary goods, we are in essence devaluing—or more precisely debasing—the credit money flow that flows in the opposite direction of the goods flow. The fact that this doesn't show up immediately in consumer prices is perfectly normal.

Henry Hazlitt: "What we commonly find, in going through the histories of substantial or prolonged inflations in various countries, is that, in the early stages, prices rise by less than the increase in the quantity of money; that in the middle stages they may rise in rough proportion to the increase in the quantity of money (after making due allowance for changes that may also occur in the supply of goods); but that, when an inflation has been prolonged beyond a certain point, or has shown signs of acceleration, prices rise by more than the increase in the quantity of money. Putting the matter another way, the value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the increase in the quantity of money, whereas, in the late stage of inflation, the value of the monetary unit falls much faster than the increase in the quantity of money. As a result, the larger supply of money actually has a smaller total purchasing power than the previous lower supply of money. There are, therefore, paradoxically, complaints of a 'shortage of money.'"

Again, I want you to think about that last line or two, "As a result, the larger supply of money actually has a smaller total purchasing power than the previous lower supply of money. There are, therefore, paradoxically, complaints of a "shortage of money."

So what does the supply of money have to do with the catastrophic loss of confidence that is hyperinflation? Yes, the catastrophic loss of confidence drives prices higher. This makes the present supply of money insufficient to purchase a steady amount of goods (USG junkie fix). True balls-to-the-wall hyperinflation requires a feedback loop of both value and volume. Value drops, so volume expands, so value drops more…. Without the feedback loop, you simply get the Icelandic Krona or the Thai Baht. With the USG in the loop, you get Weimar!

Think about a debtor who owes a hard debt to a loan shark versus a junkie who owes a regular, ongoing, hard fix to himself. Which one is worse off? Which more desperate? As I wrote above, this intractable problem cannot be solved in the monetary plane, except through dollar hyperinflation!

Big Danger in "A Little Inflation"

I just received an advance copy of Jim Rickards' new book, Currency Wars (thank you Steve and Jim). And while I haven't had a chance to read it yet (because I've been working on this post), I have it on good authority that Jim thinks the Fed is actually targeting 5% annual inflation right now while saying 2% or a little more. This sounds credible to me.

So what's the danger in a little inflation?

If the dollar sinks, like they (the USG/Fed) want, sure, our exportable goods will become relatively cheaper abroad (even though their price here won't drop) and their (our trading partners’) exportable goods will become more expensive here. This will appear as good old-fashioned price inflation, since we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs. And while the domestic private sector has already crashed its lifestyle somewhat, the currency issuer has increased its "lifestyle" to compensate.

The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar.

One of the strongest arguments that the USD will not hyperinflate like Weimar or Zimbabwe is that the USG's debt is not denominated in a foreign currency. If it were, this would be a different kind of hyperinflationary feedback loop we were facing. If all the USG debt was in a foreign currency and the dollar started falling on the foreign exchange market, that debt service would lead to hyperinflation. But that is not the case. So it’s not the FX market (monetary plane) that is the big danger to the dollar.

The dollar is the global reserve currency, so it is the physical plane that is the biggest threat to the dollar in the same way the FX market was a threat to the Weimar Mark. And it is not the nominal debt service that is the threat like it was in the Weimar Republic, but it is the structural (physical plane) trade deficit. To the USG, that is the same threat as nominal debt service denominated in a foreign (hard) currency was to Weimar Germany.

As the German Mark fell, there was "not enough money" to pay the debt. And with a little inflation, there is "not enough money" to buy our necessities from abroad.

Not Enough Money

On October 6, the Bank of England released this publication announcing a £75 billion increase in QE. In the press release, they mentioned inflation:

"CPI inflation rose to 4.5% in August. The present elevated rate of inflation primarily reflects the increase in the standard rate of VAT in January and the impact of higher energy and import prices. Inflation is likely to rise to above 5% in the next month or so, boosted by already announced increases in utility prices. But measures of domestically generated inflation remain contained and inflation is likely to fall back sharply next year as the influence of the factors temporarily raising inflation diminishes and downward pressure from unemployment and spare capacity persists." (BOE)

That same day, Mervyn King made headlines saying "the UK was suffering from a 1930s-style shortage of money."

"There is not enough money. That may seem unfamiliar to people." he told Sky News. "But that's because this is the most serious financial crisis at least since the 1930s, if not ever."



It should be obvious from this video that Mervyn King, at least, does not get that expanding the base which debases the economy's money is not the best response to "not enough money." You don't have enough money, so you make what you've got worth less? Perhaps he meant the monetary base is too small for the credit clearing system. He did, after all, reference the 1930s rather than the '20s. But, sadly, that's not the case because he clearly said "we are injecting 75 billion (with emphasis reminiscent of Dr. Evil) pounds directly into the British economy." But in King's defense, he's doing no different than the Fed or the Reichsbank:

"While it is often claimed that the [Weimar] central bank contributed to the inflation by purchasing debt from the treasury, actually it operated much like the Fed: it bought government debt from banks…" (L. Randall Wray)

"In proportion to the need, less money circulates in Germany now than before the war." (Julius Wolfe, 1922)

"However enormous may be the apparent rise in the circulation in 1922, actually the real figures show a decline." (Karl Eister, 1923)



_________________________________________________________
Sidebar Post-within-a-post

FOA on Inflation>>Hyperinflation

I know this post is long. But just remember that no one is forcing you to read it, certainly not me. I give freely of my time to put these together for you… to share deep concepts that I believe are vital to your financial well-being. So enjoy the length, don't despise it. There is no filler here. It is all pure gold. But if you're one who prefers short sound bites, I'm also on Twitter @FOFOA999. ;)



I handpicked some more quotes from FOA that many of you have already read. But perhaps they will have a deeper meaning today, given a new perspective on moneyness. These are all from his last month of regular posting in 2001. And, clearly, dollar price inflation was on his mind that month.

People like to say that A/FOA got it wrong, because the timing didn't seem to play out exactly as they inferred it would. But I would like to proffer another view. Perhaps FOA was unaware of the lengths to which the PBOC was prepared to go in supporting the dollar and the US trade deficit over the next decade.

China was admitted into the World Trade Organization on December 11, 2001, one month after these posts. And it wasn't until 2002, after FOA stopped posting, that China really began to ramp up its trade with the US and to purchase US bonds in size. From '99 to '01 China's Treasury holdings were flat at around $50B, but from 2002 they began a parabolic rise that has now ended and is once again flat.

So if China has backed off from supporting the dollar today, in the same way that the European CBs had backed off right when FOA wrote these posts, well then perhaps they are more relevant today than the day they were written. So with that thought in mind, enjoy!

FOA (10/3/01; 10:21:26MT - usagold.com msg#110)
The makings of a dust storm

For decades hard money thinkers have been looking for "price inflation" to show up at a level that accurately reflects the dollar's "printing inflation". But it never happened! Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles. We gasped in horror at these numbers, but these rates never came close to reflecting the total dollar expansion if at that moment it could actually be represented in total worldwide dollar debt. That creation of trillions and trillions of dollar equivalents should have, long ago, been reflected in a dollar goods "price inflation" that reached hyper status. But it didn't.

That "price inflation" never showed up because the world had to support its only money system until something could replace it. We as Americans came to think that our dollar, and its illusion of value, represented our special abilities; perhaps more pointedly our military and economic power. We conceived that this wonderful buying power, free of substantial goods price inflation, was our god given right; and the rest of the world could have this life, too, if they could only be as good as us! Oh boy,,,,,, do we have some hard financial learning to do.

++++++++++++++

Over the years, all this dollar creation has stored up a massive "price inflation effect" that would be set free one day. Hard money thinkers proceeded to expect this flood to arrive every few years or so; the decades passed as those expectations always failed. Gold naturally fell into this same cycle of failed expectations, as the dollar never came into its "price inflationary" demise.

A number of years ago, I began to learn from some smart people about the real political game at hand and how that would, one day, produce the final play in our dollar's timeline. Indeed, you are hiking that trail with us today; us meaning Euro / gold / and oil people. All of us Physical Gold Advocates that have an understanding about gold few Americans have ever been exposed to.

++++++++++++++

Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

++++++++++++++

The relatively small "goods price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.

++++++++++++++

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect, "Politically NO", "Structurally Yes"!
…To this end, I have been calling for a hyper inflation that is being set free to run as a completed Euro system alters Political perceptions and support. That price inflation will be unending and all-encompassing. While others call, once again, for a little bit of 5%, 10%, 15% price inflation, that lasts until the fed can once again get it under control,,,,,,,,, I call for a complete, currency killing, inflation process that runs until the dollar resembles some South American Peso!

++++++++++++++

FOA (10/5/01; 10:55:19MT - usagold.com msg#112)
Discussing the World with Michael Kosares

When it came to using fiat money in our modern era, it made little difference what various inflation rates were in countries around the world; 50%, 100% 1,000%,,,,,, they went right on playing with the same pesos. There have been countless third world examples of this dynamic, if only we look around. Mike, look at what happened in Russia after they fell,,,, the Ruble stayed in use and function with 6,000% inflation. My god they still use it now.

… The ensuing domestic price inflation will waste away all buying power of dollars overseas.

++++++++++++++

FOA (10/8/01; 08:04:08MT - usagold.com msg#113)
Gold on the trail.

The US placed its money into this current equation in 1971. Then it failed to accept the internal price inflation that over-printing its money demanded and a remarking of its gold reserves would expose to the world.

… While hard money historians, to the man, clamor for a return to honest government and a dollar backed with gold; they leave out an important step in the process that history says will never be skipped. Once a nation embarks down a road of inflating its currency for local political use, the cast is set for a constant redenominating of the money unit; that is "real bad" price inflation. However, modern economic evolution has presented an even more profound reply. Once a nation embarks down a road of inflating its currency for international political use, the cast is set for the world to find said fiats useful limits, then drop it from use; that is super price inflation as a result of fiat replacement. To this end we come.

… This incredible currency expansion will break out into the open with real price inflation as never before witnessed in the US. In turn, foreign holders of dollar-based assets will, not only, demand price performance of their "paper gold" hedges, even as they are compelled to shift a larger portion of their asset bases into Euro positions.

… As dollar price inflation roars, and physical gold demand soars; the dollar gold markets will completely fail their past hedging purpose as they become locked into a political cash settlement mode. A mode that forces an ever expanding discount against spot physical trading in Europe and the world.

++++++++++++++

FOA (10/9/01; 10:05:48MT - usagold.com msg#117)
PIZZA,,,, Bronco's,,,,,, Tonne of Yellow Metal,,,, and USAGOLD: Ha Ha,,, a gold advocates dream come true (ssssmile)

Dollar hyperinflation and super high gold prices are closer than many think.

++++++++++++++

FOA (10/15/01; 07:49:09MT - usagold.com msg#120)
Continuing from my last talk:

It's no wonder that Alan Greenspan has commented so often on the need to control derivatives yet has no workable plan to counter their function. Truly this dynamic was created to counter his function and few can understand this! In effect, the dollar was placed on a one way street that required it to be inflated into infinity. All as a means of protecting dollar originators; the US banking system. Dollar leverage, that is actually US liabilities, is now built up endlessly. This all points to a nonstop, end time need for an uncontrollable inflationary expansion by our fed.

…Now, we will follow this trend in an accelerated fashion, until all derivative process is exposed as nonfunctional outside a massive hyperinflationary policy.

++++++++++++++

FOA (10/20/01; 08:50:20MT - usagold.com msg#122)
Taking broader steps: heading towards a clearing

Our evolution of thought will find its roots in an inflationary financial crisis that is now beginning to unfold in dollarland. In fact, "all" dollar hedging systems will most likely meet the same fate as the effects of a real, serious price inflation in local US markets escalates.

… Once real inflation begins to demand that these hedges truly spread financial risk with real performance, resulting in a pile up of loses, the political solution used time and again will return as the time honored utility that saves the day:

------change the rules------!

… ECBMBs (European Central Bank Member Banks) never really sent out very much real gold; they just lent their good name to the BBs. That means cash pooling for the loans also. So, when a new currency transition workout proceeds, the members of the ECB are receiving Euro cash in payment for gold loans. In hindsight; it will be seen that they lent the commitment to sell gold only long enough for US inflation to end the dollar's timeline and bust its dollar system.

++++++++++++++

FOA (10/25/01; 09:30:26MT - usagold.com msg#124)
A quick report and comment from my office on the trail.

As the gap between inflation rates and returns on Euros grows, that currency will be seen more and more like a world class money. World class; in that the Central Bank is more driven to keep the money strong and not base its policy on local politics the way the US does.

---- Remember: Unlike the Fed, which has a mandate to boost jobs, the ECB's main task is to combat inflation.------

… Truly, if the dollar IMF system can be the reserve for all internal US banking assets; then the Euro could easily do the same in Europe. Especially as US inflationary money printing eventually drives our price inflation rate to a level that makes dollars and dollar debts, outside the US, valueless assets! Paying back those debts will be like tossing a nickel where one once launched a bill to settle a debt.

… Of course I own dollars and will likely keep using them right thru any super inflation. I never expect the dollar to disappear. Most hard money investors, with extra funds to hold, also have that same view.

++++++++++++++

FOA (10/26/01; 09:01:38MT - usagold.com msg#126)
Still at the Trail House

Somewhere in the middle of all this; real savers will supply Euroland with a solid base of credit wealth that can be borrowed without driving their local price inflation thru the roof. Then: other national economies will have a market that shares realistic price levels for all goods. Then; all economic systems will begin a non-inflationary expansion that centers around Euro use! All of this period will mirror our (US) internal coming inflationary expansion that limits our ability to import or export. Think about it.

++++++++++++++

FOA (10/26/01; 21:21:33MT - usagold.com msg#127)
A few comments on comments!

…Only trouble is that they never understood that fiat inflation using a world reserve currency, like our dollar, is different from other systems. We buy cheap social policy and economic expansion with the blood and sweat of foreign productivity. I bet Old Breuer thinks its ok for a business to buy $1.00 running shoes from asia and sell them in Dollar land for $120.00. Then he would point out that shoe inflation is only running at a few percent because those shoes went up $3.00 last year. Oh well.

The Euroland Germans, and the ECB studied our ways for a long time and now fully understand how to attract other nations into a fair game. The Euro will become a "world standard" more so than a reserve because they want it to be a fair currency that's accepted for its value. For the Euro to gain American financial acceptability later, it will do so because it will be the "last man standing" when this inflation storm resides.

… Can't push that string? Pick it up and heave it in a third world like inflationary pitch. That ball will fly, brother,,,,,, oh will it fly!

… Japan is a different problem. They have been locked into the US dollar economy for so long that they cannot escape. There is simply no way that China will let them into the Euro house. The HK / China central bank system, also known as Big Trader, simply wields too much economic sway between Asia and Europe. In historical precedent, the orient express always headed to Europe and never saw "The Japans".

Actually, Japan doesn't want to go there and has risked a decade of time waiting for some economic change in the US. I have said from way back, that Japan will go down with our (US) inflationary tide. They will waste away their dollar assets following our lead. Those that think that these peoples want to be part of a third world currency block do not know them. I do,,,, but that is another story.

++++++++++++++

FOA (11/2/01; 12:35:27MT - usagold.com msg#128)
Gold,,,,,, Gold,,,,, Who has the Gold?

Now, for the hundredth time they say: "Mises is correct, the markets cannot be faked, so a little deflation will follow this inflation!"

Baloney! The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of Their last 30 years of hard money success.

… Gold must rise in value many many times just to regain its wealth barter asset value. Perhaps $10,000 to start. Then, it will run with any and all dollar inflation,,,,, even Euro inflation that ECB people openly admit must be a part of a dollar to Euro transition.

++++++++++++++

FOA (11/3/01; 14:39:16MT - usagold.com msg#129)
An "inflationary depression" is in the cards -- a "price deflation" doesn't have a chance!

When a currency system comes to the end of its reserve use, I'm speaking politically, its domestic market will come to a point where it can no longer export "real price inflation" in the format of; "shipping its excess currency outside its borders". This happens because internal money inflation, that is super currency printing, is increased so much that it overwhelms even its export flow. Worse, even that export flow later tumbles as the fiat falls on exchange markets.

The effect is that local "passive inflation", built up over decades and fully reflected in "Sir John's" paper assets, spreads out as "aggressive inflation" and hyper price rises begin…

Remember; in political inflation's, money is printed to save the assets as they are currently priced;

… The politics of wealth today is centered around gold bullion and only gold bullion: that is where the wealth and power will be manifest: this is where the gains will be! To bet on the rest of the hard market is to bet against the coming inflation making your asset whole!


End Sidebar
_________________________________________________________

Conclusion

This post represents about seven weeks of bouncing around Thoughts and ideas, and close to a hundred emails with Costata and JR. Thank you to both of you! A lot of time went into this, and I think I've included everything I wanted to, but I'm sure I'll think of something else as soon as I hit publish. ;)

And so now, let's look back at the questions I set out to answer in one post. Let's see if I hit my target:

1. Is money really just one single thing and then everything else has varying levels of moneyness relative to real money?
2. Is gold real money?
3. Or is money whatever the government says it is?
4. Or is it whatever the market says it is?
5. Is silver money in any way today?
6. Are US Treasury bonds money?
7. Is real money just the monetary base?
8. Or is it all the credit that refers back to that base for value?
9. Is money supposed to be something tangible, or is it simply a common unit we use to express the relative value of things?
10. Is money really the actual medium of exchange we use in trade?
11. Or is it the unit of account the various media of exchange (checks, credit cards, PayPal) reference for value?
12. Should the reference point unit itself ever be the medium of exchange?
13. Some of the time?
14. All of the time?
15. Never?
16. Is money a store of value?
17. And if so, for how long?
18. Is money supposed to be the fixed reference point (the benchmark) for changes in the value of everything else?
19. Or is it simply a shared language for expressing those changes?
20. Is money something that changes over time?
21. Or is money's true essence the same concept that first emerged thousands of years ago?
22. Does the correct view of money produce answers that are vastly superior to the blind conjecture prescribed by all other views?

Alright, well maybe I didn't answer them all as specifically as you thought I would. But what I hope I did do was to provide you with some food for thought and encouragement to use your own mind in answering these questions for yourself. Sure, I could have simply answered them all in a checklist. The post would have been a lot shorter if I had done it that way! But what's that old saying about giving a man a fish, you feed him for a day, but teach him to think for himself in concepts and he might just discover Freegold before it is upon us? It's something like that anyway.

Sincerely,
FOFOA

FOA: My friend, our message and our position is that we are in one of the most exciting times of all the history of gold! We have seen that during times with the most radical transitions, the majority are usually defending the wrong asset. This unfortunate situation need not impact everyone today. If better judgment is the result of a full understanding, then some who read here will be exposed to tools that could help them avoid the mistakes of our Western hard money majority.

For Western Gold Bugs today, their culture, their system and their recent knowledge is all ensconced within the last 30 years of paper wealth. Yet they are using a hard money defense, written by masters preceding our modern era. They struggle to use that logic out of context, as it is thought to apply to this gold market today. These two precedents are leading them to reflect their gold values in some form other than physical ownership in possession. This mistaken detour from gold's true purpose will once again prove, by reality, the value of owning real gold.

Standing aside this group is the Physical Gold Advocate. For them, for us, these times will contain the greatest gain in real wealth ever seen. For those who are falling behind, gold is still within your grasp.

TrailGuide








Funky dollar bill
U.S. dollar bill
Funky dollar bill
U.S. dollar bill

You go to school
To learn the rules
On how to love and live your life
But think about it twice
The pusher push, the fixer fix
The judge acquits
The junkie leads his life
For the dollar bill
For the dollar bill
U.S. dollar bill
Funky dollar bill
U.S. dollar bill

You don't buy a life, you live a life
A father learns much too late
He was a-never home
He worked two jobs, never stayed at home
He had to, 'cause
His love life was gone
For the dollar bill
For the dollar bill
For the dollar bill
U.S. dollar bill

It'll buy a war
It will save a land
It pollutes this air
In the name of wealth
It'll buy new life
But not true life
The kind of life
Where the soul is hard
My name is dollar bill
Funky dollar bill
U.S. dollar bill

542 comments:

«Oldest   ‹Older   201 – 400 of 542   Newer›   Newest»
Michael H said...

Karl Denninger on limiting one's exposure to fraud, post-MF Global:

http://market-ticker.org/akcs-www?post=197384

(To avoid having your money stolen by the brokerage)"... you move all of your liquid cash to Treasury Direct. Buy short-term T-bills with it on the way in (e.g. 4-week) which will pay zero and sweep to CofI (Certificate of Indebtedness); this gives you a "cash stash" of essentially infinite size that pays no interest, but should be safe. If the Treasury screws you then the problems are beyond risk management. We'll leave it at that."

I wonder if there's any public numbers out there that would show us if there is a jump in balances at Treasury Direct, as a sign of declining confidence in the financial sector by big money.

JR said...

From an email:

"The US is a consumer economy. We consume things, no one more than the USG. It is deceiving when we look at numbers on a page, like the budget deficit ($1.4T). What that really means is that the USG requires $1.4T more goods at today’s prices than we, the taxpayers, provide. And when I say “requires” I mean it consumes this much “extra” goods every year. It either borrows them (and then consumes them) or it prints money to buy them and consume them.

It’s a bit tricky to think in terms of actual physical piles of goods when talking about these big numbers, but think of it this way. When we are talking about something going in to the USG, we are talking about a pile of physical goods at today’s prices. But whenever we talk about something going out, like debt service payments it’s always just paper."


The USG needs goods to consume. Its their fix. They have to obtain the goods from the physical plane to feed their consumption needs. The domestic economy does not provide enough goods, hence the structural trade deficit. The USG needs goods from abroad.

So what's the danger in a little inflation?

If the dollar sinks, like they (the USG/Fed) want, sure, our exportable goods will become relatively cheaper abroad (even though their price here won't drop) and their (our trading partners’) exportable goods will become more expensive here. This will appear as good old-fashioned price inflation, since we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs. And while the domestic private sector has already crashed its lifestyle somewhat, the currency issuer has increased its "lifestyle" to compensate.

[...]

"... it is the physical plane that is the biggest threat to the dollar in the same way the FX market was a threat to the Weimar Mark. And it is not the nominal debt service that is the threat like it was in the Weimar Republic, but it is the structural (physical plane) trade deficit. To the USG, that is the same threat as nominal debt service denominated in a foreign (hard) currency was to Weimar Germany."


A little bit of inflation (the dollar depreciates/sinks a little) means "we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs." And from there the USG is off, as they have a need they must feed.

JR said...

L. Randall Wray has commented:

Do you seriously believe we face a situation in which bond holders or sellers of products or services to the US govt are going to refuse dollar credits to their bank accounts? LRWray

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

But as Jeff has pointed out, FOFOA has described hyperinflation as:

"Hyperinflation is initiated when the physical plane stops bidding on the monetary plane with physical goods. Not when the monetary plane bids up the physical plane with lots of paper. The latter is the necessary reaction to the former."

and

"Remember this: in hyperinflation the physical plane FEARS the monetary plane because it is crashing. It is not GREED that drives the prices up, "give me more credits for this apple." It is FEAR of the credits, "get those credits away from my apple"... "but wait, sir, here I can double my offer, two wheelbarrows of cash for your apple."

Jeff said...

Can't let you have all the good quotes, JR.

Here Rickards channels FOFOA:

Rickards replied, “You know you talk about the London Gold Pool, London Gold Pool was a price fixing operation, gold manipulation operation conducted by the major G7 countries throughout the 1960’s..So today the effort is secret. This secret gold pool is going to be no more successful than the official gold pool of the 1960’s. The question, of course, is timing and I don’t see it going beyond the next couple of years.”

http://tinyurl.com/c5lo5aj

Jeff said...

Friend of Another on London:

Just as none of the governments, that supported the oldLondon Gold Pool never wanted to re-value the gold price upward in their currencies, they willnow be forced to accept an open gold market evaluation!...

In 1968, on 15 of March, the US asked for the closureof the London gold markets. On 1 of April it reopened, fixing in dollars for the first time. Thistime I expect the official dollar gold markets will not reopen for a long time...

Without a functioning "dollar / paper gold marketplace, gold will gravitate to the oil price until"gram parity" is reached. I expect that long before we reach parity, physical gold trading will outprice the paper market. Confirmation of the "visible" gold bull market, that everyone needs so badly, will appear when London closes for good...

The emergence of the BIS as the trading organization for cash based trading once the LBMA(mutant ninja derivative of the old London gold pool) is closed, should provide a market for theproducers and buyers to meet.

Do we see the beginnings of a new official gold market being traded through the BIS system.One could almost see where the gold is moving into the EMCBs and only being traded and valued in Euros. We have promoted this shift for some time and anticipate it to grow as Euro use in the international community expands. This lack of CB bullion liquidity will eventually starve the London paper gold system, mostly a dollar settlement system for the maintenance of dollar gold prices.

Jeff said...

rickards and jim grant:

http://www.bloomberg.com/video/79944740/

rickards audio:

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/11/12_Jim_Rickards.html

Yannick said...

Freegold coming...

Investors Fleeing Bonds, Savings Spur Record Flows Into Gold: India Credit

"Investors in India are withdrawing from government bonds and national-savings schemes to pour record amounts into gold. "

[...]

“There is asset-switching, and people are betting more on gold as it is a safer asset and offers a hedge against India’s high inflation and the economic uncertainty affecting the world,” Debasish Mallick, the Mumbai-based chief executive officer at IDBI Asset Management Ltd. that oversees about $1 billion, said in an interview on Nov. 9. “Investing in gold is a very prudent asset-allocation strategy.”

[...]

"Funds that invest in gold have more than doubled from 35.2 billion rupees at the end of last year, while those that buy sovereign debt have shrunk 26 percent from 41 billion rupees, AMFI data show."

[..]

"Europe’s debt crisis will spur demand for gold, according to San Mateo, California-based fund ASA Ltd., which invests in mining companies. The value of bullion held by the Reserve Bank of India has climbed 27 percent this year to $28.7 billion, more than the 24 percent increase in gold prices, suggesting that the monetary authority is boosting its reserves of the metal. "

"Tasneem Lokhandwala, a 27-year-old freelance assistant director of movies in Mumbai, says she moved money out of bank deposits into gold funds after bullion prices fell 11 percent in September. "

mr pinnion said...

Rickards says there are four possible outcomes to this fiat paper dwarf slapping contest(i m paraphrazing here).
No mention of Freegold.
And i think he MUST know about Freegold.

The first three are Blaa,Blaa,Blaa and the fourth is chaos, and he says that he thinks number four is the most likely.I wonder if by chaos he means Freegold.Because the transition to freegold will , in my opinion,cause a hell of a lot of chaos.

Regards
Ozzy

costata said...

Yannick,

Great snippets. Thank you.

Cheers

costata said...

Hi All,

A few threads back I mentioned that we were considering the following:

On a personal level we are considering using paper silver to by-pass the AUD's weakness with a view to rolling it for gold to hedge an exposure to AUD that matures next year. Using silver as a "call option on gold" to borrow a phrase from Stewart Thomson.

Our favourite Yeti nudged me about this, pointing out that having flagged this possibility I should keep anyone following my comments informed about what we decided to do.

We ultimately decided that the GSR wasn’t providing a compelling argument to use silver as a “call option on gold”. Frankly we don’t like the fundamentals for industrial silver demand. A GSR in the early to mid fifties did not offer the upside we were looking for.

Before I describe what we decided to do I want to emphasize this purchase is not part of our “Core” holding. We reached our target level of physical gold some time ago and since then we have been using our money to pursue some of the things we postponed back then. We are talking about shrimp size amounts here, not big bucks.

This exercise is about hedging the purchasing power of Australian dollars between now and the end of 2012 not adding to the core. So with that caveat in place, here is what we decided to do and our reasoning. The first point I want to make is that we used borrowed AUD to fund the transaction not cash on hand. The aim of the exercise is to “time shift” the receipt of this AUD exposure which matures next year and hedge it now.

We used these funds to purchase paper gold using the Perth Mint unallocated pool certificate program. The borrowed funds are secured against other assets, not the gold certificate, so we can do what we like with the paper gold without needing to renegotiate the loan. If, in the extremely unlikely event, this loan was called in before the end of 2012 we could pay it out from cash flow and keep the certificate.

If the GSR blows out we can roll some of this paper gold for paper silver with a couple of phone calls. If the AUD falls steeply against the US dollar while gold remains flat in US dollar terms we can convert some of the paper gold to cash and payout the debt early if we wanted to. If the AUD falls hard and gold climbs in USD terms we can do likewise. The flexibility appealed to us.

We can ask the Perth Mint to fabricate the metal backing the certificate. This should place us ahead of the queue of non-certificate retail buyers if worst comes to worst. If the paper gold market collapses before the end of 2012 it would not bother us provided the Perth Mint continues to supply physical. In effect we have locked in a quantity of Perth Mint gold at the AUD price we paid.

If the cash value of the certificate collapsed along with the paper price of gold and the Perth Mint could not, or would not, supply fabricated product we could afford to let the certificate sit in a drawer for a long time while, say, a class action ran its course. If, in the most extreme case, we were forced to cash out at a loss it would be very annoying but it would not break us.

Yannick said...

Hi,

Regarding the nuclear option, let's look at the upcoming events:
The situation deteriorates in Italy, but also Spain & France, with buyers strike, and the EFSF funds them at first but also has its own problems at getting money. At some point, it can no longer fund them. End of the road. Since the others countries out of eurozone can have their deficit funded by printing, their bonds do not suffer (yet).
At this point, there is no option left but to see the ECB print. Now if they were to use the nuclear option at this time, setting a bid for gold at e.g. 10k€ for big players, wouldn't that be too early? Shouldn't they wait for a point in time when confidence in all worldwide bonds begin to fade and when it is no longer seen as a eurozone-only problem?

Now, if it is indeed too early for the nuclear option, they will have to print. Borrowing is then becoming possible but difficult in the eurozone (since they will probably keep the pressure for austerity).
At this point I guess, with develeraging & base money printing, inflation start to kick in, investors start to flee bonds and go into gold like what is happening in India now (see my previous comment), and we have freegold.

I guess my main question is, in what situation would you see the use of this nuclear option?

tripper said...

I'd like to add my 2 cents to the topic of paying your mortgage during hyperinflation. Sorry to dig out the old topic, but only now I had the time to browse through the comments.

I live in a country where only the young generation does not remember the times where all people where millionaires but struggled to get by. Our hyperinflation was not as bad as in Zimbabwe, but still:
- savings of millions of ordinary people that struggled to save every penny were wiped out within months
- those lucky few that took on mortgage paid them off with 1 or 2 months worth of salary
- hyperinflation was followed by years of high 'ordinary' inflation

So it played out as Max would expect. Debtors paid of their debts with ease.

But it is extremely dangerous to assume this will repeat.

The result of this hyperinflation is that there is no such thing as fixed rate mortgages in my country. Also, because of high interest rates, the most popular type of mortgage loans are the ones denominated in foreign currencies, mostly swiss franc.
Additionally, banks can demand full repayment of the loan at any time if certain conditions are met.

So if the value of the real estate collapses (we are in the middle of real estate bubble that did not burst like in many other countries), currency is devalued, rates go up and salaries lag behind, the debtor is toast and the probability of loosing his house goes through the roof.

Not only that, the debtor is in for the whole value of the loan. So if the bank forecloses on him, sells the house for 30% of value, the debtor is still on the hook for the other 70%. This means that he (and those family members that signed on as a guarantee for the loan) will never own anything for the rest of his life.

What I'm trying to say is that the impact of hyperinflation on individuals can vary greatly from country to country. As far as I know, for most of the people in Europe, it's not so easy to default on their debt. For many of them, hyperinflation will literally mean enslavement to the bank.

IMHO, HI in Europe would be much, much more dangerous than in US.

Max De Niro said...

RE: Jim Rickards,

FOFOA mentions above that Rickards sent him an advance copy of Currency Wars. Therefore, Rickards has obviously heard of FOFOA and must have knowledge of Freegold.

Rickards never talks about Freegold, he publicly advocates a fixed gold standard, which is obviously nothing like Freegold.

Therefore, either he dismisses Freegold as unlikely/wrong and prefers a gold standard, or he knows about it, but doesn't want to directly talk about it for some reason and sees the best way to get to it would be to promote gold ownership by exposing the problems going on today, touting a gold-related solution, causing people to buy gold, inevitably leading to Freegold.

He is publicly saying very controversial things like the US stealing European gold. Perhaps this is just a propaganda tactic (he's into his sneaky beaky war strategy, after all) to get gold talked about more, to promote physical gold ownership, as it makes it clear that contract ownership is not enough, only actual physical control will do the job.

Imagine if the US did steal European gold, what would happen to US citizens in Europe? Regardless of rationality or law, many US citizens would get lynched, US businesses would be boycotted or attacked. It would get really nasty and would backfire bigtime on the US. This doesn't seem like a real possibility, so that suggests Rickards is simply using it as a sensational tactic to get gold discussion and recognition going.

JR said...

Max,

Therefore, Rickards has obviously heard of FOFOA and must have knowledge of Freegold.

Rickards follows FOFOA's twitter thread, so yeah.

Rickards never talks about Freegold, he publicly advocates a fixed gold standard, which is obviously nothing like Freegold.

Are you sure? Jim is selling a book so yeah he will sensationalize things, and he will pander to his audience, but...

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

Article about Rickards
"In Chapter 11 of "Currency Wars," Rickards puts forth four possible scenarios as an outcome of today's financial crisis.

The first is that the world becomes one with multiple reserve currencies, where the "dollar is still important, but less important than the Euro, and Chinese currency has risen to take a larger position."

The second is that a new global money, the special drawing right, issued by the IMF, and would be in control by the G20.

In this case, each country would still use its own currency, but international trade and finance would be in this special drawing right, or SDRs.

The third scenario, and the one that Rickards says he favors most, is a return to the "gold standard."

"You know what your money is worth and you don't have to worry about Fed policy," he said.

"If you go back in history, the Roman Empire, the Republic of Venice, those empires that lasted the longest had gold-based currency," he said.

The final scenario presented is "chaos."


cont.

JR said...

wiki says:

"The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard. First, the gold specie standard is a system in which the monetary unit is associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal. "

I dunno, Jim says "gold standard" but does not reference the classical pre WW1 gold exchange standard or gold bullion standard. Instead, he references old world economies, Romans and Venice... I dunno, make me sorta think about this:

The Lydians, Greeks and Romans all held gold. From Parthia through Rome and on to the Visgoths, Lombards, Normans and Franks, they all held gold as wealth. It was wealth first and traded as what we call money second. Possession identified that gold as real wealth, even if that ownership was for but the moment of a trade.

From the earliest times right into the Old World periods of Europe, gold served as the most valued wealth asset one could use in trade. It was by far the largest unit of tradable wealth in circulation that could be counted on to bring a premium in trade while shopping between cities. It moved, it flowed and it traveled. It was indeed, always "on the road"! Lesser metals and other tradable wealth assets always competed with gold for its trading function, but only gold made the best "on sight" trade. When given the choice of other "almost moneys", gold would always bring an extra slice of meat or fuller basket of cloth.

Moneyness

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

Jim:

"You know what your money is worth and you don't have to worry about Fed policy"

The New Global Reserve
"Basically, this is the direction the entire non-dollar world is heading. This new system is not being built on the foundation of any single nation-state or economy. In the future, any one fiat or its attached economy can fail completely without bringing down the whole system. This is what stability is all about. It is the separation of the money concept from both gold, the tangible, tradable physical wealth reserve, and from the albatross of the hungry nation-state."

JR said...

Max,

I think this is pretty spot on:

He is publicly saying very controversial things like the US stealing European gold. Perhaps this is just a propaganda tactic (he's into his sneaky beaky war strategy, after all) to get gold talked about more, to promote physical gold ownership, as it makes it clear that contract ownership is not enough, only actual physical control will do the job.

Imagine if the US did steal European gold, what would happen to US citizens in Europe? Regardless of rationality or law, many US citizens would get lynched, US businesses would be boycotted or attacked. It would get really nasty and would backfire bigtime on the US. This doesn't seem like a real possibility, so that suggests Rickards is simply using it as a sensational tactic to get gold discussion and recognition going.


That sounds about right - and to sell more copies of Currency Wars too.

Maybe such talk ultimately get some German politician to make rumbles about calling their gold home so this doesn't happen - sneaky beaky indeed.

JR said...

FOFOA raises some issues pertinent to Rickards' speculation in Confiscation Anatomy - A Different View. Some of these issues include international procedure protocols, claims of perpetual entities that never go away and international law as it relates to such claims.

Because of its past history with gold, the US cannot make any such bold moves on gold as Rickards assumes without opening itself up to some international nightmares that cannot be predicted.

"The US government will never take this risk! It will never expose itself to this legal nightmare! The US is already a golden outlaw!"

Jim likely understands this stuff. He also likely understand why KimK is all over it - controversy often brings what attention whores desire. Jim likely understands the gold's gotta flow. The US can't simply confiscate Germany’s gold and ship it elsewhere. The US would be forced to the black market.

JR said...

From Confiscation Anatomy - A Different View:

"If the coming dollar collapse takes the first waterfall route and hits the riverbed, how would an insane and illogical confiscation play out? Well, if the US dropped out of the BIS to secure sovereignty over its confiscated gold, the BIS would halt all international dollar traffic and probably try to use those dollars to buy gold on the international free market. The dollar would be instantly dead.

But what if the dollar falls all the way to the pits of Zimbabwe hell? What if the US simply declares the dollar dead, confiscates the gold, and then starts a new gold backed currency? Wouldn't that work? I will tell you now that it would never be accepted on the international market as an exchange contract for gold! Even at $10,000 or $100,000 an ounce. The world is not that stupid. The US has defaulted on its gold obligations to the world TWICE now. The first default was 41% and the second was 100%. What will it be next time? No, the US will never be trusted to issue paper promises for gold again! Freegold is the only option!

The US government and the US dollar is caught up in this massive Catch-22 because of its own past cheating actions. This is why a future gold confiscation is simply not in the cards. This is why the Fed will appear more and more INSANE in its futile attempts to save the current system, all the way to the fiery bottom. And this is why freegold is the only possible end to this system.

Bottom Line: It takes AAA credibility to gain the confidence needed to run a fractional reserve paper gold scheme. The US government spent all of its credibility on a failed scheme long ago. And now the current COMEX scheme will face the same fate, thanks to the inflating of paper contract supply to meet demand, far in excess of physical supply, in the sole support of the US dollar printing authority that needed support since it had already defaulted TWICE!

And when the dollar finally collapses in value, a THIRD and final default will take place. The US government's existing dollar-denominated debt of $11 trillion will become instantly worthless.

And once the printing press source of funding is gone, the US will be forced to settle its trade deficit with real money on a 1 to 1 basis, no more fractional reserve shenanigans. If this is done centrally, as it is now, then the government will face a whole world of claims saying the gold already belongs to them. For its past sins, the government cannot take this chance."

Jeff said...

The freezing of customer segregated funds is having a chilling effect on global financial markets. It also has a less obvious but significant impact on the day-to-day operations of farmers, mining operators, ranchers, and other commodity consumers and producers...If this bankruptcy is managed the same way as Lehman's, it will be the end of the United States as a viable jurisdiction for commodity trading.

By subordinating customers with collateral in segregated funds to creditors of MF Global's estate, the Trustee is essentially making the creditors the beneficiary of a criminal act.


http://www.typhoncap.com/mfglobalwhitepaper.pdf

Does this paper make you want to hold unallocated gold through a bullion bank?

Edwardo said...

With apologies to rodents, Rickards has the appearance and aspect of a rat in my view.

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

Hi jeb,

Who wrote the post about money creation that you mentioned?

If you cannot remember the name of the author, can you remember the name of the blog?

You wrote:
Here is a thought, if physical gold becomes locked up, and the common man sees the value in it, how will he react?

Can you expand a little and make the point of your question clearer?

Cheers

jeb said...

Costata, my above question was leading toward silver being bought up when gold became unavailable. I deleted the comment after I found the idea had already been flogged to death. But in saying that, I am a believer in unintended consequences, and in what form will they arise.
The post about money creation was i n the comments section, it was a series of scenarios in which credit or base money either stayed the same, destroyed or created, It was in the context of whether the federal reserve was creating new money supply or changing the type of supply.

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

2 days off and so many things happened:

"10 November 2011 - Lorenzo Bini Smaghi leaves the ECB for Harvard University

Today, Lorenzo Bini Smaghi, Member of the Executive Board and Governing Council of the European Central Bank (ECB), informed President Mario Draghi that he will resign from his position prior to the end of his term of office on 31 May 2013 to join Harvard University’s Center for International Affairs on 1 January 2012. Mr Bini Smaghi has been a Member of the Executive Board and Governing Council since 1 June 2005.

President Mario Draghi warmly thanks Mr Bini Smaghi for his contributions in the field of European and international monetary and economic affairs over many years. Throughout his mandate, including in taking his decision, Mr Bini Smaghi has upheld the independence of the ECB. Mr Draghi expresses his gratitude for Mr Bini Smaghi’s outstanding contribution to the work of the ECB and his dedication as a member of the Executive Board and Governing Council for more than six years."

http://www.ecb.int/press/pr/date/2011/html/pr111110.en.html

jeb said...

As I work my way through these blogs I will have a few questions, questions that baffle me but I'm sure you can help out..
It has been said that as value falls, volume increases so value falls..a feedback loop.
But
If the stock market falls and people sell stocks for USD, won't that feedback loop break as value increases?
I hope these questions aren't to mundane, i have a lot of material to cover on this blog and hope to be able to add something of value at some time.

mortymer said...

IMF(s) is still with us so lets consider what is going on in there:

IMF Executive Board Discusses Criteria for Broadening the SDR Currency Basket
Public Information Notice (PIN) No. 11/137
November 11, 2011

http://www.imf.org/external/np/sec/pn/2011/pn11137.htm

On October 28, 2011, the Executive Board of the International Monetary Fund (IMF) discussed a staff paper on Criteria for Broadening the SDR Currency Basket.

http://www.imf.org/external/np/pp/eng/2011/092311.pdf

JR said...

ECB's Jens Weidmann interviewed by FT

"FT: If funding to Greece did stop, the ECB would have to decide how to deal with the Greek banking system. How should the ECB should act in that kind of case?

JW: I don’t want to speculate what would happen if somebody decided this way or another way. Regarding the role of the eurosystem [of eurozone central banks], I will just confirm to you that we will act according to our mandate and provide liquidity to solvent banks and ensure price stability – this is our task. It’s the task of governments to ensure that banks in Greece are solvent. We provide liquidity to solvent banks against adequate collateral.

[...]

FT: What’s the way out now for Italy? Yields have risen to unsustainable levels. Does Italy need a bail-out?

JW: You are rushing to conclusions in saying that the interest rate levels are unsustainable. Of course this level may not be sustainable in the long run if there is a lack of fiscal discipline and economic growth remains low. But in the short run I do not think it is such a big an issue. What we are facing in Italy is an acute confidence crisis, and only the Italian government can resolve that crisis by implementing what has been announced. Italy is very different from Greece in a lot of respects. I’m confident that Italy will be able to deliver.

[...]

FT: With its bond buying, is the ECB trying to help Rome, or put pressure on Rome?

JW: It’s not about helping Italy or penalising Italy. The ECB Governing Council has always stressed that the Securities Markets Programme is about ensuring the monetary policy transmission process. But it comes with risks. The risks are reflected in our balance sheet. There’s also a risk that you mute the incentives that come from the market. Recent experience has shown that market interest rates do play a role in pushing governments towards reforms. You have seen that in the case of Italy quite clearly.

[..]

FT: Isn’t the problem with the eurozone that there is no stabilising anchor and only the European Central Bank can perform that function?

JW: There was such an anchor, the stability and growth pact. It was just that this pact was not respected, it was softened.

[..]

FT: Can you explain why the ECB cannot be lender of last resort?

JW: The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.

I think the prohibition of monetary financing is very important in ensuring the credibility and independence of the central bank, which allow us to deliver on our primary objective of price stability. This is a very fundamental issue. If we now overstep that mandate, we call into question our own independence."

JR said...

"(Reuters) - Bundesbank President Jens Weidmann said on Monday international pressure for the European Central Bank to play a bigger role in tackling the euro zone debt crisis must end as it could undermine the ECB's hard-won credibility.

[..]

Weidmann, who sits on the ECB's 23-member Governing Council, said such pressure must cease. The ECB could not be used to finance governments or prop up insolvent banks.

"Monetary policy cannot and must not solve solvency problems of states and banks, this has to be decided by national parliaments," he said in a speech at Euro Finance Week in Frankfurt.

"The participation of monetary policy for fiscal policy purposes must come to an end," he added.

"Should monetary policy further stretch its mandate to deliver price stability or even violate forbidden rules of fiscal financing, nothing less is at stake than its credibility, which it has worked hard to gain over decades, and in the face of opposition."

[..]

"With every setback suffered by governments to solve the crisis, the pressure has risen on monetary policy regarding its role as the only potent actor," Weidmann said.

"This threatens to completely blur or even eliminate the boundaries between monetary and fiscal policy," he added.

[...]

"Italy can master the current difficulties on its own," said Weidmann. "It is just a matter of political will," he said"

Reuters article

JR said...

Hi Jeb,

It has been said that as value falls, volume increases so value falls..a feedback loop.
But
If the stock market falls and people sell stocks for USD, won't that feedback loop break as value increases?


Because money leaving the stock
isn't quite what the feedback loop is about.

Hopefully some others can chime in as well, but one big idea is its more about the failure of the idea that the derivative debt of modern currnecies is a good place to store wealth.

The bond market dwarfs the stock market, no? And why are people demanding dollars- to hold them for value or to use them as a pass thru, a means to move from the monetary plane (storing value in debt) to the physical plane (to purchase real goods).

Good luck!

mortymer said...

@JR:
Yours rhymes with:

Mr Noyer evaluates the role of the euro as a new stable currency for Europe
Speech delivered by Mr Christian Noyer, Vice-President of the European Central Bank, at the “Seminar on the euro” organised by the European Union Chamber of Commerce in Korea and the Federation of Korean Industries in Seoul and Pusan, Korea on 7 and 8 July 1999.
...
"...The Eurosystem neither promotes nor hinders the development of the euro as an international currency. We consider that the international role of the euro should develop through the interaction of market forces..."

http://anotherfreegoldblog.blogspot.com/2011/11/chn-mr-noyer-evaluates-role-of-euro-as.html

"...Among the important determinants of the international role of the euro two factors stand out, namely the size of the financial market and confidence in the currency. It is widely recognised that a large degree of openness of domestic financial markets normally also leads to a substantial use of the currency by foreign investors. At the same time country-specific risk features such as political risks can reduce the international use of the currency. Let me emphasise that the euro is backed by an environment of monetary stability with a medium-term orientation and which may be seen as providing sound conditions for the further enhancement of the international role of the euro..."

Source: http://www.bis.org/review/r990712a.pdf?frames=0

DP said...

Hi Jeb,

What are bonds? They're a claim to a fixed amount of currency, to be delivered at a predetermined time in the future, exchanged for cash now to obtain a yield paid along the way as compensation for the fact the lender can't spend the lent money until the bond matures and they get their money returned to them by the borrower. At least, that's how one hopes it'll turn out.

What are stocks? They're a claim to a share of the profits from a business providing real goods and services to the economy.*

So the former is the promise of a one-time fixed number of credits, denominated in a unit of steadily falling (by-design) value. [And IMO denominated in a unit of, at some point, catastrophically falling (not-by-design) value!] Meanwhile, the latter is a perpetual call on a share of the profits to be found in supplying things to the real economy.

Stocks are not as good as gold, but they're also not as bad as bonds. Lots of people are going to look at the enormous paper currency bonfire at some point, think to themselves maybe they'd be better off with some quality stocks instead. As JR noted already, the global bond markets drawf the global stock markets.

Of course, to me (and hopefully you?) both stock and bond holders are relative losers until the dust eventually settles. Stock holders will look good nominally perhaps, but in real terms... way behind gold. But who can blame anyone for not understanding that? This stuff is really pretty simple, but hard to get your head around at first. Few see why they should put in the effort to think through where we're going.

Voluntarily curtailing my prolix tendandies again now, your question was about falling stock prices. I foresee money flooding out of bonds and into just about anything that makes itself available and has some kind of a link, no matter how tenuous, to the real value found in the real world. Including [some!] stocks.

Everything is relative. Choose your denominator wisely.

Cheers!

* let's assume you are a classy stock-picking act, not only going for well-run businesses supplying goods and services that will actually be of some use to the real economy and in demand from it going forward, but also looking for managers who will show prudence in the issuance of more shares in future so your slice of the pie won't be too badly diluted out towards worthlessness. Good luck!

Max De Niro said...

Hello people,
The mentions of silver as a tool for the defence of the precious during HI got me thinking.
I have a question regarding tax liabilities during HI.

If I sell an ounce of silver, say a Canadian Maple, for £100billion, then I am liable for capital gains tax at 20/40% of the capital gain of say £99,999,999,990. Now, given the shortage of cash, I cannot put aside enough currency in order to meet this tax liability when the tax man comes a knockin. I would have thought that the only person that could give you currency in that amount at this time would be a bullion dealer and so your transaction is likely to be recorded and made available to the taxman.

Now, this might be possible, if you save a Maple for the very end of the HI, which you then sell at the top and this meets all of your liabilities, but you would have to be incredibly fortuitous in order to be able to time this perfectly, especially given all of the other pressures that living through a time of HI would bring.

Has anyone else considered this possibility, and if so, any thoughts?

Max De Niro said...

With regard to QE. If the Fed buys a bond that has been trading down, deflating the credit money supply, and replaces it with Fed base money credits, held at the Fed, then this is deflationary no?

Credit money supply, albeit deflating credit money, has been removed from the system, so that none of it is circulating and is replaced by non-circulating base money, held at the Fed. The Fed cannot force the seller of the bond to spend or loan against this base money credit, so this may in fact not become inflationary. What is the trigger that forces the increased base money (balances at the Fed) to start circulating, or to start being loaned against, which would create the inflation necessary to start off the loss in confidence leading to HI?

DP said...

Max: I would have thought that the only person that could give you currency in that amount at this time would be a bullion dealer

Forgive me for not engaging in a new "just how awesome is silver as an investment, compared to gold? Silver FTW!!!" debate for now... :-)

But this particular Thought of yours, above, I felt was perhaps worth a little focused attention, since you brought it up.

Where does the bullion dealer get the currency in that amount?

Who is really buying? Bullion dealers can't print their own currency to buy your bullion from you, any more than Greece can print euros to pay its bills. Their other regular person customers (like you, me, Max Keiser and his merry band of men) are selling to buy food and firewood. Few "regular people" are going to be able to part with cash after they've burned quickly through what they already had at the onset of HI.

This is why I often like to include a link to a video of someone riding their sweet pimped-out lawnmower into town. Silverbugs don't get that nobody's going to be buying their silver from them when they really, really need to sell. Think they're selling their stash of Maples to go out and buy an Escalade and keep it fed with gas? Yeah? Who's buying?

So, I restate my question just one more time: Who is really buying?

And in the answer you come up with to this question you will see, I'm very hopeful, exactly why it is that gold will leave silver in the dust.

So I would say perhaps keep back a gram of gold post-transition to settle the tax bill for your sales of silver in-transition. Or just have a shitload of canned goods, physical cash, and useful stuff like that at home, in readiness. That's probably the best way to minimise your tax bill - and eat for cheap! But TBH, I suspect that in Bartertown, the tax man doesn't hear your screams so well...

jeb said...

JR and DP, thanks for the replies. My understanding, or lack of, tells me, that as money falls down the monetary plane it will pool in USD, on its way through to the physical plane, but, then I thought that would cause the USD to rise in value, and may halt the fall to the physical plane. Markets are a psychological beast, and if you have something that is rising in value vs other items, would you buy or sell USD.
I'm not into stocks or bonds, after reading benoit mandlebroit and nassim taleb I became to scared to take on that risk.

Max De Niro said...

DP,

Thanks for your reply. I take it that you don't consider silver to be even worth using as a hard asset to simply hold its value through HI and hence be useful to cash in periodically to buy necessities that you hadn't or couldn't store (perhaps like fresh vegetables)?

I was only considering silver for this function. I thought it might be useful as it is a globally traded commodity with an established market of dealers and it is a convenient way of storing some buying power in a compact space.

Is there another commodity or item that you would consider to be a better store of value (for HI times only), that is similarly compact and tradable by barter or for cash in a more regulated marketplace?

JR said...

Very good thoughts Jeb!

"My understanding, or lack of, tells me, that as money falls down the monetary plane it will pool in USD, on its way through to the physical plane, but, then I thought that would cause the USD to rise in value,"

Consider this from Big Gap in Understanding Weakens Deflationist Argument:

"If the financial system collapsed tonight and wiped out everyone's assets, their 401Ks and IRAs, their pension and trust funds, the US dollar would spike on the currency exchange like never before. I could imagine it rising well above 100 on the USDX, maybe even to 150, as all that financial sludge frantically unwinds. As you say, many will simply be wiped out as much lower valuations are imputed onto their 401Ks. They will never see it coming; never get the chance to withdraw that retirement money and use it to bid up real goods. So what? Do you really believe this will cause the dollar's purchasing power to rise?

What do you think will be the Fed's response? I'll tell you. It will make sure that the supply of dollars matches the demand. It will do another emergency $500 billion swap with foreign CBs to calm the foreign exchange market. It will expand its balance sheet once again to make sure there is plenty of liquidity here at home. And it will start buying whatever crap the primary dealers bring to its window. It will flood the markets with fresh Fed liabilities (obligations to print more cash) in a futile attempt to quell demand as the dollar goes to 100, 110, 120… up, up and away.

But no matter what quantity of financial assets are wiped out, the cash in the system will remain. And the obligations for more cash printing will remain. And that's all the cash it will take to spark the most amazing hyperinflation the world has ever seen, as the fear turns from 'running out of dollars' to 'running out of food' in the wake of a devastating financial collapse."


Two key questions:

Do you really believe this will cause the dollar's purchasing power to rise?

What do you think will be the Fed's response?

DP said...

JR: Two key questions:

Do you really believe this will cause the dollar's purchasing power to rise?

What do you think will be the Fed's response?


So... any deflationists in da house wanna take these?

The Dork of Cork said...

I disagree - in a sov money system both cash and bonds are really the same thing from a commercial bank perspective.
One has a time factor and the other can be used for local commerce transactions but both are backed up by a captive CB.

They both appear on a commercial banks asset side of its balance sheet unlike credit deposits.

In the euro system goverment bonds are more like another financial asset as although they are displayed as a asset , they are also a risk - for example a Irish sov commercial bank might hold Italian bonds that may default - that will not happen in a closed sov banking system although the UK sov banks are caught up in this euro mess also.

In the UK banking system of the 60s for example much more of commercial banks assets were domestic gov bonds and much less property and foregin bonds.
But Ireland was very late to this game as our banking system was behind the times until 1987 - this ment we could not feed into the oil matrix.
In 1987 we had a banking IMF Coup with Irish faces.
Before that time central gov funds as a % of GNP was between 10% & 12% - this ment the banking system was 8 to 10 leveraged.
This declined to 8% by 1995 - post 1992 the Euro structure began to form until we reached 2.5%ish between 2002 & 2008 - this was a 40 to 1 leverage.
Its now gone back up to 5.8%.

You see from a MMT perspective if I buy a post office bond or if a bank buys a gov bond that money is destroyed - i.e. leverage is taken out of the banking system.

My experince of the irish debacle informs me of this truth as we were very fiscally conservative staying below the 3% rule until implosion - its obeying all the rules that got us I am afraid.

Although I disagree with MMTers on the final settlement of foregin transactions there understanding of the banking system and thus the tranmission mechanism to the real economy is very solid.

This euro "austerity" is merely transfering a oil surplus towards the US & its terrible pegged twin China.
In this monetory system all currency must be spent although its better to do it wisely - otherwise somebody else will spend it for you.

The stock of Euro capital both Human & mechanical is just depreciating under this foolish policey.
For the first time I have exchanged my euros for dollars - the Goldman boys / US Treasuary is all over Europe.
The Gaullist nature of the Euro was just a optical illusion - its a inside inside job.
Real European capital has imploded over the last 20 years.

DP said...

Max,

I'm just saying that I don't know who's going to be buying. No CB is printing cash to buy silver that I can see. Just about nobody else will have any money I reckon - and those who do will I suspect be enjoying the tailwind of going for gold instead.

TBH I find that silver isn't really anywhere near as easy to get rid of as gold, even today with a shrimp army of silverbugs supposedly lined up to take it from me. Lots of places that love to take your gold, won't even look at silver. Even jewellers aren't interested unless you have a decent weight to get rid of, in my experience.

Perhaps the local farmer will take it in barter for some eggs and milk. It is at least more durable than eggs or milk, so he'll have to get rid of those for something or another, or instead he'll have to put them out on the fields to get rid of them. So yes, perhaps there are still some people willing to accept silver in trade.

My view is silver will quite possibly maintain its value fairly well against staple goods, relative to cash. But personally I think it will fall in relative value against stuff like food, because in a depression industrial demand will fall off a cliff, the Keiser Report and its followers will have moved on to talking about the leverage of corn seed or something like that I daresay, the CBs aren't even interested, and you and I are trying to get rid of what we have rather than looking to get some moar. But silver will likely still, in spite of all these handicaps to its ascent, be rising massively in cash value at the same time as it falls in relative real value... like almost everything else.

How much tax would be due on a barter trade with a farmer, say a Maple for a half dozen eggs or something like that? Or with that dodgy guy you met on the street corner with a couple of "only slightly out of date tins of sardines" - feeling lucky? Did that trade ever even happen?

Don't get me wrong, I do have a little silver kicking around the place still (I used to have quite a lot). I'll probably just keep what's left now; it might be handy, it might not. It's not hurting anyone where it is.

JMan1959 said...

Hey DOC,

Good to see you back again. Don't agree with you on the Euro demise, but love your Irish rants.

All,

Just wondering, if Europe doesn't find alternative funding, why wouldn't the ECB just go ahead and print? Given their superior architecture, they can easily outlast the Fed and the IMF dollar system in an inflationary environment. I am assuming, of course, that they could somehow get the Germans on board, but that may be a long putt. Also, have heard differing views on Germany's ability to weather a Euro exit storm (big hits on Euro denominated bonds and exports, etc...). Just curious on the thoughts here.

Clyde Frog said...

I'm confused. Are bonds money?

I thought I was starting to get somewhere when I came to believe

1. base money is the only "real money" that anyone can "spend"

2. credit money is a derivative of base money. The right to fleetingly use some of your bank's base money just for the moment of settling any transactions between you as the buyer and someone else as a seller. The base money reverting back to credit money at the seller's bank once the transaction is completed. The banks move around the reserve balances at the CB in the middle of the night so that all of their books balance again the next day.

3. bonds are long term derivatives of credit money, taking those rights to fleetingly use the bank's base money from their current owner and transferring them to the borrower until the bond has been repaid

So I sort of see base money and credit money are both part of "the broad money supply". My confusion stems from the idea someone put in my head that the bonds are also part of the money supply? Is this right? Perhaps I misunderstood and they are not "part of the money supply", but they do have a kind of "moneyness". That people think of a bond they own as still being "their money", even though they gave their money to the borrower when they bought the bond. My brain hurts.

DP said...

Max: If the Fed buys a bond that has been trading down, deflating the credit money supply, and replaces it with Fed base money credits, held at the Fed, then this is deflationary no?

A bond will pay out the fixed face value at maturity, assuming the borrower can keep up the interest payments until then and has the funds available to complete (or is able to roll it over).

The deflationary aspect is the leaking out of credit money as the bond changes hands for less and less money each time. As each holder of the bond passes it along at a loss to the next, the difference between what they paid and what they got for it at the sale, is the amount of credit money that deflates out of the system. So far so good.

If the Fed just kept out of the, supposedly free, market and allowed this to happen on a large scale, this would create a systemic deflationary problem for the $IMFS.

Because they are unable to tolerate this unfolding, they step into the market to bid up the price of the bonds. This is them preventing deflation - sticking a finger in the hole to plug the leak in the dike.

At some point in time, eventually, the banks will revert to type and try to leverage up their base money reserves as much as they dare. Either just through sheer bloody greed, or because they are beaten with a stick by those hapless pols. Unless before that time the general public grow a collective brain, get uneasy about their ability to perform and run on them instead, taking out cash and more likely speeding it around the economy in note form than putting it in deep storage, under the mattress.

And that's to say nothing of the mountain of unfunded liabilities past pols have already promised the waiting public, who aren't going to be too happy about losing out... particularly while there is another nice party waiting in the wings with open chequebook. QE, it's what's for dinner. And breakfast. And lunch. And dinner again. An...[/prolix]

oldinvestor said...

JR said...
From an email:

"The US is a consumer economy. We consume things, no one more than the USG. It is deceiving when we look at numbers on a page, like the budget deficit ($1.4T). What that really means is that the USG requires $1.4T more goods at today’s prices than we, the taxpayers, provide. And when I say “requires” I mean it consumes this much “extra” goods every year. …

When we are talking about something going in to the USG, we are talking about a pile of physical goods at today’s prices.

They have to obtain the goods from the physical plane to feed their consumption needs. The domestic economy does not provide enough goods, hence the structural trade deficit. The USG needs goods from abroad.”


Actually, I do not think this is exactly accurate. The trade deficit is real, but to imply that it is all attributable to the expenditures of government is not exactly true.

First of all, the majority of the government expenditure goes for transfer payments, such as social security, medicare and other transfer payments. These show up as income to individuals. They of course, can spend some of this on “stuff”, but with the aging of the population, the proportion of stuff people buy will decline.

Next, from the remaing government expenditures, a very large proportion goes to salaries of government employees, a large proportion of which is the 2 million plus military personnel, along with the employees of all the various government departments.

So let’s look at what remains. Really, the largest government purchaser of stuff is the military. For the most part, the hard goods( think of ships, planes, tanks, ammo, etc) is built in the US, and so again, this is a flow-through transfer payment to US companies, and once again, the majorety of this will be paid out to employees as income.

So what is it actually that the US government spends on “stuff”?

One component of stuff is the proportion of our oil imports that the government, again largely the military, purchases. However, recall that the US is the second largest producer of oil after Russia, ahead of Saudi Arabia, so that fraction is not as large as most think.

Another component of stuff is the energy and food needs of all of our foreign military bases.

Bottom line, stuff is a relatively small proportion of what our government spends.

Having said that, I am not sure this impacts the larger analysis of the dynamics of the initiation of hyperinflation. I will leave that to those much smarter than myself.

JR said...

Hi oldinvestor,

I think maybe you are glossing over the significance of what it means for the Government to consume something.

One of the biggest things the USA consumes are the salaries and transfers payments of its employees and dependents. The USG enables all these people to consume goods, without producing a commensurate amount of goods to consume. The USG effectively enables a huge percentage of the population to consume without those individuals having engaged in meaningfully productive activity. These goods have to come from somewhere. This is part of the HI feedback loop - the G can't cut consumption, it needs to provide its employees/ dependents the ability to consume.

As the USG's consumption is more than we import, I think we can say that the trade deficit is attributable to USG's consumption. In effect, the USG is consuming goods/services and not offering goods/services in return, but instead is largely offering debt or base money reserves. Do you see this?

Cheers, J.R.

JR said...

Hi Jman1959,

You comment:

"Given their superior architecture, they can easily outlast the Fed and the IMF dollar system in an inflationary environment"

I'm not sure I follow you here, can you expand? Are you suggesting the Eurosystem could in effect re-link the nation state and yet not hyperinflate?

Cheers, J.R.

Anonymous said...

James Rickards. If I remember correctly, he was one of the lawyers for LTCM who negotiated the bail-out in 1998. There was a rumour that LTCM was short 400 tonnes of gold, and you can indeed see the collapse of LTCM in the GOFO and gold lease rate charts. So I suppose he knows much more about bullion banking than most of us.

On the other hand, it seems he still does some consulting for the US government, and so he may not be too keen on explaining to him how they will eventually fail - or he may still hope they can turn things around before that happens.

Finally, I can imagine that the US will think about seizing the European gold. Rickards repeatedly said that they could take the European and give the Europeans certficates in turn.

But then what? If they want to return to a gold backed dollar, this works only if the gold backing is credible. If they indeed try to back their existing dollar with gold, this would most likely involve shipping a few thousand tonnes to China in exchange for their currency reserves. But then why wouldn't the Europeans immediately redeem their certificates?

Also, this consideration renders Rickards' price target of 7000 dollars per ounce a bit questionable. There are about 8000bn dollars overseas. If half of them are redeemed as a consequence of the crisis and the US are willing to part with half their gold, you get a price target of 30000 dollars per ounce. But then there is also all the other debt, and so even that number is most likely too low.

Victor

JR said...

Hi Clyde,

I don't think Treasury bills are part of the money supply. From "moneyness:"

"So the volume of the base is expanded when the government spends, and it is likewise contracted when the government taxes and/or sells Treasuries to the private sector (including our trade partners like China).

[..]

So we periodically raise the debt ceiling and we keep issuing Treasuries to match the entire budget deficit. But QE is the new way to reverse the base money contraction that happens when these Treasuries are sold."


Do you see how the USG selling bonds reduces the supply (volume) of base money? Does this help you understand?

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

Because its so good:

"Well, there you have it! The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."

But what does this have to do with me in 2011? I can almost hear you thinking this question now. Well, I'm going to share a secret with you. The big secret is that the people's money is simply credit. And by "the people's money," I mean our money, the real producing economy's money. The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies.

jeb said...

JR, Today at work, I thought I had found an answer to my question. As money falls down the monetary plane, it would leave behind bonds that need to be purchased and broken banks that need to be bailed out. We know that these bailouts are devaluing the reference point, so while the dollar would rise, it would also fall just as fast as holders are chased out by the knowledge they're being debased. It must be at that point it falls into the physical plane. Does this make any sense? It fits with me but I lack any real knowledge on the creation of credit and base money.

"Two key questions: Do you really believe this will cause the dollar's purchasing power to rise?What do you think will be the Fed's response?"

Im unsure on the first question, the second question will be the feds attempt to save the debt at any cost including buying it outright for cash. But the fed is a tricky beast and may shift the goalposts.

dojufitz said...

This one is for any Aussies.....just look at the prices of these places.....and the acres.....what would places like these be worth in Victoria Australia?

http://www.georgiarealtysales.com/oldedward.htm

costata said...

Euro

I recommend this essay to everyone. (h/t Financial Sense) A few snippets below.

Is the EMU's problem the lack of a centrally planned, political FU? (Fiscal Union)

The Euro Area – False Dilemmas and False Choices

Pater Tenebrarum writes:
Is it really true that a 'fiscal union' is a sine qua non without which a monetary union can not work? Actually, no. If one thinks this through, one soon realizes that this is in fact nonsense.

From about 1815 to 1915, the whole world used a single medium of exchange (namely gold) to no ill effect - without ever establishing a 'fiscal union'. How come this worked so well for an entire century, but can allegedly not work at all nowadays?


He also quotes Sean Corrigan of Diapason Commodities:
“When you and I, as neighbors, do business with one another, we are effectively co-members of a monetary union, too, yet we seem instinctively to manage without ever having to agree to pool our household finances — that is, to engage in an interpersonal fiscal union — as a way of ensuring that we can both continue to accept the same medium of exchange.

So, if it works for individuals, why is it any different if one clan trades with another, or one village, one canton — or one whole nation?”


I don’t necessarily agree with all of their remarks but I think they have identified the core issue at the heart of the debate. Is higher monetary inflation (and risking hyper-inflation) a valid solution to a debt problem in Europe?

oldinvestor said...

JR,

I think we are talking about different things. In my original post, the one and only point that I wanted to make is that the US government does not purchase a lot of physical, tangible stuff.

Since one of the core principles in the discussion about the actual mechanism of a possible coming hyperinflation is something to the effect of “physical stuff will quite biding for dollars”

Since I think that I made my point that the US government does not consume a lot of physical stuff, then talk that the government would initiate hyperinflation via that route would seem questionable. That is the one and only point I was trying to make. In the economy as a whole, however, that is a different story

Michael dV said...

apologies if this is a duplicate recommendation, I haven't been keeping up with comments but this is interesting..a possible 4 Phase ending for currencies with ramifications for metals:
http://www.marketoracle.co.uk/Article31493.html
found on Martenson dated 11/11/11.
speculative but feasible

costata said...

dojufitz,

F-RPG Clubhouse?

Love the house. Mrs costata wants it for Christmas. Do they deliver?

Cheers

JR said...

Hi oldinvestor,

I know :) That's why the one and only point I made in my post was to explain why it was wrong to claim the "US government does not consume a lot of physical stuff."

Do you see why you are wrong? I do.

costata said...

Russian CB Gold Reserves

Some stats below on this from this article. (h/t Macrobusiness Blog commenter) There’s a question at the end for mortymer and the other sleuths of the FOFOA blog. Absent any concrete explanation I would like to put forward a couple of speculations about possible reasons.

Russian CB gold buying - key stats (my emphasis):
>> Target 100 m/t per year
>> 2011 YTD 90 m/t purchased
>> 2011 Oct. 1 852.14 tons, up from 789.9 tons on Jan. 1
>> 2010 reserves increased by 24% to 25.2 million troy ounces.
>> The Russian gold reserve target is claimed, by some, to be 10 per cent of total reserves (widely quoted as Putin's aim).
>> 2010 gold as a percentage of total reserves increased by 2.4 percentage points to 7.5%.

I highlighted the increase in 2010 because (if memory serves me) the Russian CB added 150 m/t that year. Mine production in Russia has been increasing rapidly in recent years and is currently somewhere around 200 m/t per year.

Now the interesting thing to me is that the Russians announced in 2010 that they would only buy 100 m/t per year from 2011 onwards. A one-third reduction from the previous year despite:

1. Not yet having achieved their target level of gold reserves and;

2. Having more than enough local production to allow them to source more than 100 m/t per year and;

3. Growing mine output and substantial prospective ground for new discoveries in the Russian far east.

Now this article appears and it seems that the Russians are doing what they claimed they would do. So this is my question: Why did the Russians reduce their rate of gold reserve accumulation?

Some ancillary questions come to mind as well. Why announce the decision? Why did they choose 100 m/t? Was there any other development, toward the end of 2010, in Russian government policy and international agreements that could have influenced their decision?)

Anonymous said...

costata,

I don't know the answer either, but I have two comments:

1. Why would it make a difference for them whether the gold is in the ground or in the vault. In Russia, the government has equally easy access to both. So it would make sense to mine at the economically optimum rate, even if they get their gold somewhat slower.

2. Do we know how much gold is in private hand inside Russia? At some point it would make sense to target the total amount of gold in your country rather than just the official gold. (I am still thinking that the ECB is perhaps not doing their best job on that front yet).

Victor

mortymer said...

Costata:

"Why announce the decision?"

Let me answer you by similar question:

"Why were CBs announcing their intentions many times when they were sellers?"

Nickelsaver said...

There's a hole in the bucket, dear liza, dear liza...

This song pretty much says it all.

In the end it is pretty clear that the monetary system has a hole in it that can't be fixed.

That gold is the only secure way out of it.

This blog is much like the song. It goes 'round and 'round still never filling that hole. The more that it is talked about, the more glaring that hole seems.

I come to this table with my own bias. I am not a brilliant man. I have read all of the A/FOA/FOFOA that I can. Rereading it wont make me smarter. Anyway, I am convinced on all points, save one.

I do not believe that the Euro will survive as the medium of exchange.

I do not believe any paper will survive.

I am convinced that the EU and the ECB will survive as the strongest players. And I believe that out of the EU will come a "one world government". I believe that a leader will emerge out of the EU that will unify, not only the EU, but the entire world.

I believe that the currency of the new government will be digital and that allegience to this leader will be a requirement to partake in the new system.

I know that this is a significant tangent from the normal discussion on this blog. I welcome reply on my own blog.

And I would like to thank FOFOA. I have learned more in the last month about money than I can say.

Nickelsaver

dojufitz said...

Mrs costata,

i made a booboo - this was the link i intended to post.....check it out.....amazing....what a rip off Aussie homes are.....and alot alot of these places need no work....all painted and just move your stuff in.....

http://www.georgiarealtysales.com/historicalhomes.htm

mortymer said...

@costata: one more, it depends what you take as a benchmark year.

Here is some interesting file from Lbma, unfortunately not dated:

http://www.lbma.org.uk/assets/alch34_russiangoldrush.pdf

...ok, its May 2004:
http://www.lbma.org.uk/pages/?page_id=98&title=alchemist_2004

FOFOA said...

QBAMCO: "…hyperinflation that peels the skin off your face. It will be mandated first by governments that need new money to satisfy their promises and generated by banking systems that need to be made whole…"

And it includes a very nice shout-out to yours truly. ;)

www.ritholtz.com/blog/2011/11/plastics/

mortymer said...

In general I dislike pages where there is nothing on them - smells not good to me but QB provides good writing:

http://www.scribd.com/doc/52483956/QBAMCO-Apropos-of-Everything-I

http://www.scribd.com/doc/53526093/QBAMCO-Apropos-of-Everything-II-III

...but in August 2011...

http://gata.org/files/QBAMCO-YourGoldTeeth2-08-2011.pdf

"Over the last two months we have scaled out of our bullion plays and re-allocated towards miners we know and about which we are enthusiastic. Three of our precious metal miners were acquired in 2010. Last month, one of our miners, Northgate Minerals, a Canadian firm in which we built a decent stake over the last few years, agreed to be acquired at almost a 50% premium. Like many other miners we hold, NXG had been very profitable for the Fund even before that announcement.
We think the assets owned by certain miners will encourage more transactions or else they will be re-priced in step-shift fashion by the markets. (It is reminiscent to us of base metal miners in the spring of 2009.) Our only metric for staying long precious metal miners is that their inventories remain cheap to above-ground physical gold, which in turn remains cheap to past and future money and credit growth."

Clyde Frog said...

Thank you, JR.

"The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies."

If I understood you correctly, you are telling us when the government gets paid taxes or sell a bond they take base money from the buyers banker, not credit money from their own banker like everyone else does.

Thereby taking the base money full circle: they asked the Fed to create it in return for a bonded loan; they spent the base money into the economy and it got transferred to the reserves of the vendors bank (the vendor got banker credit, not base money); someone pays the government some money (taxes or successful sale of more bonds, base money goes from the buyers or taxpayers bank to the government); they retire the loan on the Fed books, the base money is extinguished.

So whenever the government takes in taxes, that is deflationary because they are sucking base money back out of the banking system.

When they sell a bond successfully in the market, that is deflationary because they are sucking base money back out of the banking system.

Not only do deficits not matter, they are required for the continuance of the system. No deficit means deflation.

When they cannot sell a bond in the market at a rate of interest they are prepared to pay, they have to choose between A not spending what they intended to after all (allow deflation), or B making the Fed inflate the base money volume to monetise the bond (QE, fight deflation). Option B is the only politically acceptable choice. It seems clear to me that Bernanke will do anything to "make sure 'it' doesn't happen here".

More and more people realise that option B is the only choice, base money is going to be expanded if that is what it takes to enable the government to keep spending, leading to them losing confidence in the system as a means to store value. So they withdraw from it by moving into real, non-financial assets rather than financial assets such as bonds. Which adds to the contraction of the credit money supply and also exacerbates the governments problem in trying to sell bonds in the market, which increasingly leads to them having to make the Fed buy their bonds with fresh base money. A feedback loop.

And the ECB are hoping that they can guide as many people as possible into the real, non-financial asset: gold. Which would avoid a terrible hyperinflation in all real goods, if they are successful.

Now its easy to understand all those diagrams in the Greece is the Word post! AHA!

DP was right, you really ARE a super sharp shooter!

Thank you again.

DP said...

Was JR's point to oldinvestor not that the people employed by the government use a lot of resources in their lives, even outside of work, and they are paying for all of this with money that comes to them from the government?

Lot of people working for the government directly costs a few dollars already. Add in all the other people working for private companies that provide goods and services to the government and its employees, pretty soon you're talking about real money.

mortymer said...

via jsmineset:

"JRG International launches Emirates Investor Savings Plan
United Arab Emirates: Saturday, November 12 – 2011 at 12:22

JRG International Brokerage DMCC, a leading broker and clearing member of the Dubai Gold and Commodities Exchange, announced the launch of a novel scheme to encourage savings culture through systematic investment in "Visions of Dubai" gold coins on November 11, 2011.

A first of its kind concept, "Emirates Investor Savings Plan," has been designed as a glowing tribute to the visionary leadership of His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, on the occasion of the nation’s 40th National Day.

Through the revolutionary savings plan, JRG International will financially support investors to own "Visions of Dubai" series of gold coins — exciting mementos of Dubai that are truly representative of the visionary leadership of the Emirate — through affordable and systematic monthly investments."

http://www.ameinfo.com/280745.html

JMan1959 said...

Hi JR,

No, my question wasn't assuming the ECB relinked to the nation state. I am just saying that even if the ECB went Keynesian on us and chose to monetize/socialize the European debt, they would still be likely to win the race against the IMF dollar factions due to a healthier (MTM gold) balance sheet, and that they could actually accelerate the dollar's demise by accelerating inflation.

Jimmpy said...

Speech from Yves Mersch (ECB)
Please note the subtitle on page 2 :
“Currency without a state”

http://www.bis.org/review/r111025b.pdf

JR said...

JMan1955,

Indeed Another spoke of the euro as the new enemy of the dollar, as the dollar had defeated gold in the 1970s by means of not having any alternative to the dollar but a collapse to gold available at this time.

But as the $IMFS failure looms, Another has also pointed out the Euro can also be viewed as sort of a hope or best outcome in the face of an unenviable alternative of "no paper asset of world economic system will survive, nothing!"

5/22/98 ANOTHER (THOUGHTS!) page 4

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


Not a good thought, no?

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

You comment:

I am just saying that even if the ECB went Keynesian on us and chose to monetize/socialize the European debt, they would still be likely to win the race against the IMF dollar factions

But could the Euro lose the race against itself? MTM gold is not a magic talisman. Its certainly a big part of the idea that instilling confidence in your currency is what its all about, but its not the whole story. The severed nation state idea is kinda central, and its basically the idea that the Euro won't/can't go "Keynesian on us" because they are beholden to a multitude of interests. Unlike the dollar, which is a creation of one government.

Jens Weidmann said above:

"I will just confirm to you that we will act according to our mandate and provide liquidity to solvent banks and ensure price stability – this is our task. It’s the task of governments to ensure that banks in Greece are solvent. We provide liquidity to solvent banks against adequate collateral. "

Do you think confidence could be lost in the Euro if they went "Keynesian on us"?

Do you not see the task of surviving a $IMFS failure would be quite a challenge, despite all of the Euro's advantages. I think the Euro will survive, but its not a walk in the park. They have to be careful I think? And you think?

Cheers, J.R.

JR said...

JMan1955,

Maybe ponder this from Sidebar #2 in Moneyness:

"FOA (10/25/01; 09:30:26MT - usagold.com msg#124)
A quick report and comment from my office on the trail.

As the gap between inflation rates and returns on Euros grows, that currency will be seen more and more like a world class money. World class; in that the Central Bank is more driven to keep the money strong and not base its policy on local politics the way the US does.

---- Remember: Unlike the Fed, which has a mandate to boost jobs, the ECB's main task is to combat inflation.------"

JR said...

ooops, 1959!

Max De Niro said...

JR,

Given your encyclopedic FOFOA knowledge, I would be very interested to know what your top ten FOFOA posts are - in terms of importance, insight etc, rather than the ones with the best music choices :)

DP said...

@JMan1984: What JR said! :-)

Edwardo said...

"Visions of Dubai" gold coins, eh?

Somehow I doubt those visions include
Filipino girls and similar unfortunates who go to Dubai with the idea that there is economic opportunity only to find that they have become, more or less, slave labor.

DP said...

@DP: What Max said! :-)

Edwardo said...

Recapitalization seems to me to be the key word in the paragraph that comes at the end of Mr. Krasting's blog post.

The air is leaking out of the balloon at a rate that makes a mockery of these attempts at recapitalization unless they unleash gold. The massive black hole that is the international monetary system is pulling the world towards the gold revaluation event horizon at an accelerating rate.

http://brucekrasting.blogspot.com/2011/11/thin-ice.html

Remember that all night conference by the EU deciders on October 26th? Central to that meeting was the commitment that the EU banks would undergo a recapitalization of E106b ($150b) by June 30 2012. The EU banks have had their assets impaired by at least that amount in just the past two months.

sean said...

Here is an interesting article by Alf Field given as Keynote speech at Sydney Gold Symposium 14-15 Nov 2011. Admittedly it's mostly a personal story of his path to enlightenment, with the main point of interest being his list of 7 "brutal truths" which the modern generation will have to face, having not had exposure to monetary history (in the West).

They are:
"THE BRUTAL TRUTHS

1 The slate needs to be wiped clean and a new sound monetary system introduced.
2 That will require the elimination of all debt, deficits, unfunded social entitlements, the US Dollar as Reserve currency, and the big one, the $600 trillion of derivatives.
3 To eliminate these problems by default and deflation will cause a banking collapse and untold economic pain, leading to riots and political change.
4 Politicians are appointed for relatively short terms and opt for the easy solutions.
5 While politicians continue to have the ability to create new money at will, they will do so in order to prevent a melt down on their watch.
6 Consequently the odds point to governments wiping the slate clean by generating enough new money to eventually destroy their currencies.
7 The new international monetary system is likely to involve precious metals. It will have to be money that people trust and that governments cannot create at will."

which syncs rather well with FO/FO/A at least until point 6.7
But I find it interesting that other people are climbing the same mountain via different trails.

burningfiat said...

Thanks Sean,

Alf Field also say in the same article:

It is likely that gold will be the new unit of measurement or standard of value against which the performance of other assets will be judged. The challenge will be to find assets that perform better than gold.

Nice, huh? Alf seems like a sensible Elliot wave practitioner...

/Burning

Max De Niro said...

sean,

I'm not sure that 6 and 7 aren't in sync with FOFOA.

Destroying a currency is destroying something that exists for a purpose. What purpose does currency fulfil?
It's main purpose is to buy oil and gold.
So, many countries will destroy their currencies as they will not easily fulfil this function.

The new system will involve precious metals (well, one), it is money (it has moneyness). People will trust their currencies again and governments will not be able to print at will, as they cannot hide the consequences, as they can today.

ampmfix said...

It always seemed to me (since starting to investigate the gold bull market), and I am more convinced each day, that TPTB aren't as stupid as many people proclaim, they are probably forcing gold to reappear on the monetary scene by destroying willingly but surreptitiously the actual fiats. Their actions are showing that, in my opinion, but they cannot speak up the truth. And if it is not TPTB, then it must be whoever pulls their strings...

FOFOA said...

Tackling the Trade Deficit!

Reuters – "President Obama’s National Export Initiative, which calls for a doubling of the nation's exports to support creating two million jobs in the next five years, was launched to encourage small businesses to grow through exporting. And while the idea of entering foreign markets can seem daunting, the launch of Export Now eliminates the biggest challenges of doing business abroad by affordably bridging the cultural and financial gaps of complex foreign markets, such as China."

"Export Now has signed up several customers in advance of its launch…" and they are (drumroll please)…

Feelgoodz Flip Flops – comfortable natural rubber flip flops that are 100% recyclable and biodegradable

Lion Brand Yarn – a family-owned and operated yarn business and a beloved American brand since 1878

Wizard Wall – a cling film that serves as an instant repositionable white board

Cequent Washdrops – an effective and environmentally-friendly way to wash a vehicle that doesn’t require a rinse or a hose

And now the Chinese will have something they can buy with all those pieces of paper with old dead white men on them. Reminds me of Bitcoin and Alpaca socks! In fact, socks and flip flops anyone?

Via Twitter. Retweeted by the U.S. Dept. of Commerce!

2000 Flushes said...

Very interesting, FOFOA. Taking these undoubtedly fine products into account, the future appears increasingly clear:

1996-2000: Tech bubble
2002-2006: Real estate bubble
2005-2008: Commodities bubble I
2009-2013: Commodities bubble II
2011-2012: POTUS candidate botox bubble
2013-2015: Repositionable cling film bubble
2013-2016: Flip flop bubble
2014-2016: Yarn bubble
2018-2020: Tulip bubble
2021-2023: Bubble soap bubble
2023: Worldwide nuclear war
2023-2025: Dosimeter bubble
2024-2085: Stalinist death camp bubble
2085: Experimental nanobots breach containment and consume entire planet, turning it into grey goo
5328930283: Aliens arrive and institute Freegold

JR said...

Well done Clyde,

"Not only do deficits not matter, they are required for the continuance of the system. No deficit means deflation.

When they cannot sell a bond in the market at a rate of interest they are prepared to pay, they have to choose between A not spending what they intended to after all (allow deflation), or B making the Fed inflate the base money volume to monetise the bond (QE, fight deflation). Option B is the only politically acceptable choice. It seems clear to me that Bernanke will do anything to "make sure 'it' doesn't happen here".

More and more people realise that option B is the only choice, base money is going to be expanded if that is what it takes to enable the government to keep spending, leading to them losing confidence in the system as a means to store value. So they withdraw from it by moving into real, non-financial assets rather than financial assets such as bonds. Which adds to the contraction of the credit money supply and also exacerbates the governments problem in trying to sell bonds in the market, which increasingly leads to them having to make the Fed buy their bonds with fresh base money. A feedback loop."


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

Here's some backstory from FOA

"The world is heading towards a huge financial / currency crack up, but it won't work out with gold coming back into the money game. This very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can.

When you look at who they are reaching for; every one of these blocks wants gold moving higher to shelter their dollar trading losses. None of them expect to unload dollar reserves because our end time trade deficit won't permit it. They can't just send the dollars to each other, buying their own goods that would never exhaust the external dollar float. Hell they now have their own money to do trade with, the Euro.

The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!

The ensuing domestic price inflation will waste away all buying power of dollars overseas."

JR said...

More from miner49er via FOFOA in Dilemma 2 – Homeless Dollars

""Regarding your musings re: dollar repatriation, it can be a tough one to answer. The obvious take is of course as you express, that without use for dollars, they would simply find their way back to US shores, and help drive (hyper-)inflationary pressure. Yet, if you will permit me also to think out loud for a moment ;->..."

So, do these orphaned dollars eventually come home to roost in the US domestic markets? We will be told that.......

The strategy of the level-headed is to slowly remap the globe financially. This involves as much as possible a SLOW transformation from one currency paradigm to Another. These dollars en masse will not return home. They were born in exile and will die in exile. We will hyperinflate ourselves, and won't need help from overseas...

JR said...

A bigger snippet:

...The really big holders of dollars are the central banks. What they do with their reserves will make or break. Their influence over other banks and financial institutions will also largely dictate the destiny of these dollars. In the gold standard, the currency acted as something of a title deed for a specific good at a specific price. Central Banks could and did take these "receipts" and claim gold from each other. In this day, there is nothing for CBs to "claim," as these dollars are no longer "title deeds." Rather, they are like non-expiring calls for things on demand, at the variable and going price. CBs are likely to neither a) dump them on the forex markets, as this would simply devastate the currency, and risk dreaded instability globally -- something banks are NOT prone to do; or b) race to our markets to try and buy things (like gold), as this would also be fruitless, since a market revaluation for this action would instantly make gold unpriceable, and it would not even be offered. Again, why engender the instability?

Without a certain weapon in the arsenal of the euro's design, the foreign CBs would indeed be over a barrel. Previously they were forced to evermore be on a dollar standard, since they would realistically only opt for this as the lesser of two evils. The alternative of saying no to the dollar at that time, would only have meant a return to a gold standard, and the politically unacceptable bone-crushing depression that would follow (as well as instability). In 1979, the European CBs began marking their gold reserves to market. This one act demonstrated immense foresight, and would provide the escape valve from the rock-and-hard-place no-win choices between eternal dollar support, or global depression.

Quietly, the euro-system banks have been divesting themselves of dollars. Collectively they retain something like 211 bn. currently. (This is not a large amount relatively speaking, but consider fractional reserve lending, and quickly we perceive the immesity of euro-dollar infestation.) This decline in dollar holdings is desired to take place concurrently with a rise in the price of gold to offset this. Spoonfeeding dollars into the system won't crash it, as well a slow commensurate rise in gold. The discipline that they have thus far maintained is indicative of the tectonic movement of the geopolitical strata. Ideally there will be no rash or even discernible activity. The perfect result is to simply keep shifting these plates until we wake up one day and the world has been remapped. Reality of course is that there are points of friction that cause tremors of unpredictable frequency and proportion all along the way. At some point critical mass will be reached, and the dollar contract markets for gold will no longer be able to contain its price as market perception on a large enough scale discounts paper parity with the real metal accordingly. It is at this juncture that the gold reserves of the CBs will provide immense expansionary leeway, as they are for a season revalued constantly upward. This bona fide liabilityless reserve base will make the ECB member banks the premier lending institutions to fuel the economic growth of the euro zone, and those align themselves with it...

Wendy said...

Costata,

Re: Russian gold.

Something has been nibbling at my brain for the last week or so, namely the US agreeing to allow Russia to join the WTO. Might this explain what could be happening with Russian gold? Is Russia to replace China, in terms of providing support to the US on US terms.

I'm sure this is just pie in the sky, but I have to wonder.....??

Wendy said...

and DP that would be my response to your earlier of thoughts regarding what happens now that China has backed off.

JR said...

FOFOA from "Moneyness" filling in the rest:

"The US has enjoyed a non-stop inflow of free stuff including oil (a trade deficit) ever since 1975, the last year we ran a trade surplus. In the 1970s, following the Nixon Shock and the OPEC Oil Crisis, the US dollar went into a tailspin. Because the US dollar was the global reserve currency, this was bad news for the global economy. If the dollar had failed then, without a viable replacement currency representing an economy at least as large as the US, international trade would have ground to a standstill.

Europe was already on the road to a single currency, but it still needed time, decades of time. So at the Belgrade IMF meeting in October of 1979, a group of European central bankers confronted the newly-appointed Paul Volcker with a "stern recommendation" that something big had to be done immediately to stop the dollar's fall. Returning to the US on October 6, Volcker called a secret emergency meeting in which he announced a major change in Fed monetary policy.

Meanwhile, the European central bankers made the tough decision to support the US dollar, at significant cost to their own economies, by supporting the US trade deficit by buying US Treasuries for as long as it took to launch the euro. As it turns out, it took 20 years. After the launch of the euro, the Europeans slowly backed off from supporting the dollar. But right about that same time, China stepped up to the plate and started buying Treasuries like they were hotcakes. This may have been related to China's admission into the WTO in 2001.

Then, sometime around 2007 or 2008, the dollar's Credibility Inflation peaked. The growth of the "economy's money" (credit denominated in dollars) hit some kind of a mathematical limit (expanding to the limit was wholly due to FOFOA's dilemma) and began to contract. Since then, China has slowly backed off from supporting the dollar. We now know that China is more interested in using its reserves to purchase technology and resource assets wherever they are for sale than bonds from the US Treasury. China is also expanding the economic zone that uses its monetary base as a reference point in trade settlement to the ASEAN countries.

Meanwhile, the junkie USG has kept the free stuff flowing in by expanding the monetary base. Sure, China still wants to sell her goods to the US, but she's no longer supporting the price stability of the last 30 years by recycling the dollar base expansion back into USG debt."

Wendy said...

BTW I don't know how some of you guys keep your multiple personality disorder in check ;)

JR said...

Hi Max,

Of the top of my head these stick out but there is lots I am missing.

Debtors and Savers
Credibility Inflation
Big Gap In Understanding Weakens Deflationist Argument
Euro Gold
Moneyness
Once Upon a Time
Return to Honest Money
Life in the Ant Farm
Costata's Silver Open Forum
Synthesis
Focal Point Gold
Greece is The Word
Its the Flow Stupid
Who is Draining Gld
Kicking the Hornet's Nest
Freegold Foundations
Of Currency Wars
The Shoeshine Boy
Metamorphasis
Relativity: What is Physical Gold REALLY Worth?
Living in a Powder Keg and Giving Off Sparks
Shake the Disease
Bondage or Freegold
Money Talk Continued
Confiscation Anatomy - A Different View
The Waterfall Effect


Sorry, I don't count too good

JR said...

P.S.

The Value of Gold
"It's the Debt, Stupid"
Bitcoin Open Forum - Part 3
The View: A Classic Bank Run

costata said...

VTC and mortymer,

Thank you for responding to my question about the Russians. It may simply be a "blip on the radar screen" but for reasons that I cannot quite put into words at the moment I feel this is an important development.

I will post another comment about this at some point.

Cheers

costata said...

Hi Wendy,

Just saw your comment:

.... so, namely the US agreeing to allow Russia to join the WTO.

Please point me to any links that you have on this.

Thanking you in anticipation.

costata said...

New EU Regulations For Ratings Agencies

The Wall Street Journal reports that "The European Union set out proposals for strict new regulations on credit-rating firms...".

WOW! (my emphasis)

The proposals also make it easier for investors to sue credit-rating firms for ”gross misconduct.” In these cases, the burden of proof would be on the rating firms to show they didn’t breach rules.

Twitter

I will also be Tweeting this from costata001 as I have been doing lately with other material I find newsworthy, topical and/or informative. In most cases I intend to continue posting a comment here first, for regular readers of the blog, before tweeting it.

mortymer said...

@Costata:
There is/are another point(s) of view to this. Yes, there was the announcement that they will be acquiring this and this amount and then there was less next year; but perhaps the CB reconsidered other policy goals than just concentration of gold in CBR? Like e.g. having some gold in commercial banks, spreading, reaching the influence to other surrounding friendly countries helping to create their reserves to have a stable trade area? It could be also connected to the previous year (?) announcement that they will acquire from local banks & maybe they just had a paper(?). Who knows, too many "if" with too little info for me.
Sergei Ignatyev is no light weight, in office from 2002.
http://www.cbr.ru/eng/today/directors_board/print.asp?file=ignatiev.htm
It is also needed to look at the overall sum of the foreign reserves which declined.
http://www.vtbcapital.com/russia_calling/2011/moscow/content/news/656562/

Eurosystem and Bank of Russia hold frequently high-level seminars and their reserve accumulation started about the same time when ECB reached to them. If my memory tells me right, it was the Helsinki meeting in 2004?

mortymer said...

Yup:
Joint Eurosystem - Bank of Russia Seminar, Helsinki

Dinner address by Jean-Claude Trichet, President of the European Central Bank, Helsinki, 25 May 2004.

http://www.ecb.int/press/key/date/2004/html/sp040525_1.en.html

mortymer said...

BTW:
rating agencies, bis and how is gold perceived, footnote n.32 on the page 22:

"32 However, at national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the process of collection can be risk-weighted at 20%."

http://www.bis.org/publ/bcbs118b.pdf

e.c. said...

Open letter to "Il Giornale"(italian newspaper) Director
(my apologizes for ny not perfect english ;-)

Egr. Director,
while being neither a member nor an elector of the PDL party I am writing to protest against the ousting of the Cav. occurred this week. We have seen a full-blown coup. All the evidence I possess, pointing to qualify professor (With a lowercase p) Monti as a straw man that represents the interests of the global banking lobby, which first sold us a loan (thanks to financial advisor Prodi (always with the lowercase p), on terms favorable to us initially (-16 % of interest)
http://www.zerohedge.com/article/step-aside-greece-how-gustavo-piga-exposed-europes-enron-2001-focusing-italys-libor-minus-16

and then sent us the evil dragon Draghi and nutty prof. Monti as official collectors.
But who is this evil entity? It's called Goldman Sachs, has a nick name that says it all: Vampire Squid.
We were not to take candy from a stranger, let alone a vampire squid, and now we are in the position of the cafè owner that asks for a loan to the mafia, then he can't pay and mafia puts an own man at the cash register with broad powers.
Berlusconi distracted by the women was kicked badly out of the office, yet at the table seems to me that he has the best hand. He was 'the victim of a conspiracy and everything that has to do is expose it. Why not? He is afraid of losing something?
He has a future ahead, but must change, must become a nationalist leader, Eurosceptic, anti-globalization, has to become the patron of honest money (money that is not based on debt, that has become toxic). He could govern and give the Economic Department to every economist that is just not Keynesian, "Friedmanite" (otherwise we do the end of Pinochet's Chile), Ricardian (stop importing Chinese junk), and he has to express thoughts of sense .... in other words, we should search in the Austrian school of economy camp.
And now we see on the horizon, new taxes and the sinister profile of the yacht Britannia, which approaches our shores.
http://www.disinformazione.it/svendita_italia2.htm

Our ancestors were better than us. In the place where I live they gave the buccaneers only time to set foot on the ground, because they slaughtered them unceremoniously on the beach in 1529.
Instead, we open the door for attackers and hold out the red carpet.
Giuliano Ferrara is right when he says that today the war is fought with the spread! Indeed now the war is fought with SigmaX ...
http://www.zerohedge.com/article/here-are-most-actively-traded-names-goldmans-dark-pool-or-why-big-money-fascinated-italy

Sigma X is like the Death Star in Star Wars destroying entire planets, is a monstrosity, a dark pool, something that goes against life, liberty, against men and nobody says anything, but instead Consob (italian SEC)puts on the grill small traders who short the ailing banks.
Sigma X is always 6 months ahead and the next is excellent candidate to ruin is UK
http://www.zerohedge.com/article/sigma-x-trading-suggests-european-contagion-may-be-shifting-italy-uk


...to be continued

e.c. said...

...part II

What do they want to do now GS and JPMorgan and other global bankers? ... This:

http://www.gordontlong.com/2010/Article-Extend_Pretend-Shifting_Risk_to_the_Innocent.htm

Shifting the risk to the innocent, place their burden on our shoulders.

It'sunfair, it is shameful and has to be prevented, now!

Berlusconi should do like his friend Putin did, who is not the Christ, but that nonetheless in the nineties kicked out the oligarchs from the temple.

But Italy is not Russia, not oil and mines. And then, why the vampire squid is around us? ... When the devil caresses you wants your soul ...

The soul of Italy is located in the basement of the building the Bank of Italy, where there should be 2500 metric tons of gold. Gold, not a trash smelling euro note.

What is gold to a bank? You must know, Director, that the gold for a central banker (and therefore also for the global vampire, who is a central bank shareholder ), is like kryptonite to Superman. His worst enemy and competitor ... One alternative currency that can not be diluted and print at will, a water that quenches thirst forever and not as the paper money that is like the adulterated wine which is good for only the innkeeper who sells it.

Putting it's hands on our gold the banking lobby will have a reserve asset in which to dilute its monstrous growing debt, and we will have an escape route less ...

So what I propose to Berlusconi?

We do default, we keep the gold and give the banksters the middle finger. In our position we are among the strongest countries in the world.

We do not behave like the Native Americans who gave away real wealth for a mirror.

But it takes courage to do this.

Berlusconi, do you have balls?



A greeting and that the soul of De Gaulle (the last true European statesman) protect us.

mortymer said...

@ e.c.
75% of economical activity in EU is financed via banks.
Good luck in proposing domino default.
There is only one "easier" way and it is a slow transformation from debt into equity based system.

Clyde Frog said...

Thank you JR.

"These dollars en masse will not return home. They were born in exile and will die in exile." (miner49er)

But where were they born, if not inside the USA? Or did he mean they were born inside the USA but immediately exported, with an expectation of never returning? "Exporting inflation."

So if in the past US monetary inflation was being exported via the trade deficit and the recycling of that exported currency into US bonds, but now Europe and China have stopped buying the bonds. Does this mean that the inflation of the dollar money supply now largely remains within US borders instead? Aha! Now I understand why the USA will hyperinflate themselves, not needing help from overseas.

Oh my god! I just realised that the exact same thing is also playing out for my beloved UK as well! Until right now I was hoping I would establish the pound is more like the euro than the dollar, but I finally see this isn't the case. I think I am finally ready to take your advice and follow in the footsteps of the ECB - buy some gold.

Thank you AGAIN!

DP said...

@ClydeFrog: From where I'm sitting you're making some pretty rapid progress — as JR said, well done! ;-)

However... just a small note...

I think I am finally ready to take your advice and follow in the footsteps of the ECB - buy some gold.

I think on closer inspection, you'll discover that the ECB have over the years sold quite a lot of gold (albeit at a declining rate, which appears to have now levelled out to roughly nothing). What they have left, however, has expanded massively in value.

Bonne journée, mes amis!

Clyde Frog said...

Thank you DP.

Now I'm a little confused, because I had been working on the assumption the ECB are buying gold but you're saying they are selling.

I am next going to read the article you linked because at this point in my own personal journey I think I need to decide whether I should buy gold or euros with my pound savings, before they get wiped out!

Thank you.

mortymer said...

Yup, on personal level: learn about monetary issues, work hard, create value, create surplus, get rid of debt, enjoy life, buy gold; learn to manage or you will be managed (pick your order).

DP said...

@ClydeFrog:

It IS confusing — so please don't feel bad! Keep going, you're doing OK. :-)

When I said the ECB had been selling their gold for years, really they have kinda sold some of their gold more than once.

They leased it out. The ECB really still had the gold, but someone borrowed for a while the concept of that gold to sell to someone else in the market who wanted to buy the concept of gold but not actual physical gold.

Some of these parties leasing were gold miners, needing cash flow in order to fund their mining operation, intending to return mined gold at the end of the lease. A legitimate plan.

Many of the parties wishing to lease this "gold" from the ECB did so because they were speculators, confident the price of gold would go down and they would make a nice spread between the price they could sell the "borrowed gold" and the price they would have to pay later to find more in the market when it came time to return the gold to the ECB at the end of the lease.

They were wrong. The price has kept on going up instead. Worse, there is a limited amount of actual gold available to buy in the market [at these prices], so those parties having to return gold at the end of the leases have more and more trouble finding it (which feeds back into a higher price).

To help solve this problem of supply in the market, the ECB moved to SELLING (rather than leasing) them gold for cash, which they immediate shifted from their right hand to their left, then handed it back to the ECB to settle the expiring lease.

Now I am just getting all prolix again. And worse, reinventing a wheel — because Victor and Blondie already started the ball rolling on this same discussion just back in October. :-)

Clyde Frog said...

Thank you for the encouragement but now my brain is starting to hurt again DP. Its not even lunch time yet. Does the pile of reading assignments ever stop growing?

But thank you. I will have to put this together with all the rest and drink it in more deeply. Hopefully after I've enjoyed a cup or two I hope I can read the tea leaves and they will tell me: euros or gold?

Motley Fool said...

Clyde

Well I can tell you, but there is a difference between being told and knowing.

In telling the answer is gold.

TF

DP said...

Well, only you can decide what you need to do, ClydeFrog.

But, FWIW, when I read my tealeaves I always seem to find the future is clear. I just remember every time I run the video, about a quarter of the way into the story the man gets a wall of paper dropped all over him like a tsunami. Simples*!

Bonne journée, mes amis!

* H/T Crack

Clyde Frog said...

Thank you Motley Fool and DP for your short cuts.

You are right Motley Fool, it is better to know than to be told. What if the adviser is wrong?

Time to brew my tea.

Thank you again everyone!

JMan1959 said...

Here comes QEU1. Looks like Germany may "temporarily" abandon their hard money stance, convincing their citizens that a "little" temporary loosening (can you spell 3 trillion, lol...) won't hurt. I know many here don't think it will happen, but politicians have often proven their skill and propensity for doing the wrong thing, as long as it prevents the pain from happening on their watch. What Fofoa has predicted for the US may soon be playing at a European theater near you (they will sacrifice the currency to save the system, but never vice versa.) Lets see if it happens, and then lets see if it remains "temporary" (or they get addicted and go full retard).

DP said...

@JMan1955 RT @darenpa72 A weak economy is a great place to print money and weaken your currency. bit.ly/tzHWSR

Michael H said...

JR,

That's a terrific list. I would add

Deflation or Hyperinflation?

Clyde Frog,

On the question between holding Euros or gold: keep in mind that most of the discussion here is about how the Euro will be the preferred medium of exchange, not store of value.

Wendy, costata,

My goodness, that's all we need, is for Russia to start buying US Treasuries hand over fist and giving support to the dollar system for another decade.

Wouldn't that be a bit of irony on a global scale? What's next, Iran will join the WTO and support the dollar after Russia has had enough?

Clyde Frog said...

I am starting to get a sense that perhaps you all think the answer is gold! However, I will keep stewing my tea for a while, as I look around for places I could buy a little gold if that is what I decide I ought to do.

I am really glad I found this website - you all seem so awesomely helpful and you ask for nothing in return! What a refreshing change.

Thank you again everyone!

Motley Fool said...

Clyde

FOFOA has saying ( which I may be paraphrasing) which is : Buy as much gold as you understand ( I think he may have said 'feel comfortable with' as opposed to 'understand').

So. Buy what you want, but make your own choices. :)

TF

JR said...

Three ideas Clyde,

The Euro nations selling gold helped establish credibility that physical gold will flow. From It's the Flow, Stupid :

You see, the European gold reserves are far better, far more credible than the US gold reserve, simply because they engage in a two-way gold market, and have for decades. The US gold has been hoarded and locked away for more than 30 years, never deployed in case of emergency. The European CB's took a lot of flak for selling gold over the past two decades, but that action is precisely what makes them so much more credible (and valuable!) than the US gold hoard. Any trading partner knows full well that if all else fails, gold will be paid.

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

The ECB/BIS supported/inflated the paper gold market for different reasons.

FOA (08/13/01; 07:24:30MT - usagold.com msg#96)

...As most of you will no doubt agree, almost all gold discussion still centers around "the dollar's war with gold". Truly, the evolution of this story will be how that war ended then and now the dollar's war with the Euro began! A very large part of that war strategy, employed by the ECB/BIS, was to let the dollar/IMF faction hang themselves by expanding and supporting the whole arena of this dollar paper gold market. Inflating the gold marketplace with so much "paper gold" that we would eventually have to bankrupt ourselves just to keep the dollar in the war game against the Euro.


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

The Euro, like all fiat currencies, will have to devalue. The devil is in the details, but the Euro hopes to do it without blowing up the currency system by in largely devaluing against gold. In Freegold the hold euros or hold gold debate will be a different matter, but until then:

"Others of you are here looking for "concrete, actionable advice." Fine. Here it is: Buy. Physical. Gold. Now. Simple is as simple does."
Freegold Foundations

Clyde Frog said...

To Motley Fool: Thank you for your good advice. I will be sure not to get too excited when I have made my decision (I think I have made my decision with the help of everyone today but I am already trying to stop myself getting too excited and will wait until a little time has passed and I feel I more fully understand the reasoning!)

To JR: This is certainly going to be a very strong brew of tea tonight. I may need some paracetamol before lights out. But I think my initial understanding of your 3 ideas makes sense when I add it to what I already had.

Thank you!

JMan1959 said...

DP,

Very apropos, a cool song too. Still trying to figure out if that is a girl skunk or a boy skunk. Hoping it's a girl cause I think she's kinda cute, and it would be really embarrassing if I am wrong, lol...

Wendy said...

Costata,
Here's a link
http://www.businessweek.com/news/2011-11-15/u-s-agrees-to-russia-joining-wto-u-s-trade-official-says.html

MichaelH, perhaps it's not treasury purchases that the US demands from Russia, perhaps they would prefer some physical, to deal with their "deep storeage" issues (shortage of physical??)

I'm sure I'm fantisizing here, but I really have to wonder what's up with this.

DP said...

So you're wondering if maybe you like lady boys eh? :->

Panic over!

Anonymous said...

I seem to remember FOFOA saying that the possibility of gold confiscation is remote. I am not so sure about that, but this is admittedly coming from someone who holds zero trust in the USG.

I just finished Jim Rickards new book Currency Wars and indeed he sees a play for the gold reserves held in the US under the guise of "emergency authority" to stabilize a global meltdown in the dollar. Once secured, the gold would be used to back a new dollar that is greatly devalued. Eventually he sees gold offered back to its original owners at the new and improved price denominated in new USD. Presumably private owners of gold would also get the new and improved price in exchange, but oops there would be a 90% windfall tax on the transaction.

If something like this were to occur, holders of physical would have to continue to hold their gold or somehow transact in a market that is not subject to the tax. This possibility does not deter me in anyway from buying physical because 10% of something is better than 100% of nothing.

I am searching for FOFOA's discussion of confiscation (JR?) and am quite interested what the feelings are from participants of the blog. It seems to me that government will take the path that most benefits continuing government. So I am interested specifically in how choosing not to confiscate, either outright or through taxation, would be perceived as more beneficial. Perception is after all very important, government is well known for making hideous decisions and trying to glean what their actions will be based on the merits of the argument is pointless.

Government's self interest will ultimately drive its response IMO.

JR said...

Hi matrixsentry,

FOFOA raises some issues pertinent to Rickards' speculation in Confiscation Anatomy - A Different View . Some of these issues include international procedure protocols, claims of perpetual entities that never go away and international law as it relates to such claims.

Because of its past history with gold, the US cannot make any such bold moves on gold as Rickards assumes without opening itself up to some international nightmares that cannot be predicted.

"The US government will never take this risk! It will never expose itself to this legal nightmare! The US is already a golden outlaw!"

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

The US can't simply confiscate Germany’s gold and ship it elsewhere. The US would be forced to the black market. From an email:

"Yes, the gold needs to flow. And no, the US could not simply confiscate Germany’s gold and then use it to buy stuff from Germany (or anyone else for that matter) again. In fact, by confiscating Germany’s gold, the US would contaminate its ability to trade with gold period. The USG would effectively be reduced to a black market operator, dealing with shady dictators willing to take unlawful deliveries of US coin-melt gold (that needs to be purified to enter the global markets) in the dark of night. "

JR said...

According to the TIC Data dump from November 16, 2011,
Russia owns only 94.6 billion in US securities as of September 2011, down from 173.3 billion last September.

ForLiberty said...

I like the comments better than the article. FOFOA, you gota try to be shorter and clearer, man. You successfully turned my crystal clear idea of what money is into complete confusion. Thanks.

On the bright side, reading the comments here is like reading only the important stuff from all newspapers and websites in the world at once! Thank you everyone for your contribution.

Michael H said...

ForLiberty,

"You successfully turned my crystal clear idea of what money is into complete confusion."

If I may be so bold: perhaps your 'crystal clear idea' was not as crystal clear, or as correct, as you had first surmised?

Piripi said...

Matrix Sentry said:

"Government's self interest will ultimately drive its response IMO. "

We could alter that sightly to result in an equally accurate statement:

Government's self interest will ultimately drive its demise.

@DP,

That particular leasing conversation has not been concluded, but is on my to do list. Its just not at the top, nor is it currently getting much closer.

DP said...

@Blondie,

Oh goodie! I can't wait now! :-)

Good to see you BTW. ;-)

Anonymous said...

Concerning Russia replacing China, perhaps someone can come up with a back of the envelope calculation on whether this could work:
1. cumulative trade deficit of the US 2000-2010
2. cumulative foreign reserves monetized by China 2000-2010, which proportion of this was US$
3. present trade deficit of the US
4. present trade surplus of Russia - that's an upper bound on how many US$ they can buy

My first reaction was Russia is too small. But perhaps some combination of Russia, Brazil and a few others will do.

Victor

Anonymous said...

@Blondie

Indeed.

@JR

Thanks! I knew you would deliver. The embedded blogger archive is a pain.

After reading that post again I can see that the defaulted gold can never really be put into play as long as the true owners still consider it an unpaid debt. There would be a run on it straight away. Therefore, the government could rightly believe the gold is more secure on the asset side of a balance sheet where the decision as to its disposition remains within its purview.

Anonymous said...

@Blondie

Indeed.

@JR

Thanks! I knew you would deliver. The embedded blogger archive is a pain.

After reading that post again I can see that the defaulted gold can never really be put into play as long as the true owners still consider it an unpaid debt. There would be a run on it straight away. Therefore, the government could rightly believe the gold is more secure on the asset side of a balance sheet where the decision as to its disposition remains within its purview.

costata said...

Wendy, JR et al,

Thanks for the feedback on Russia. As always, great links mortymer.

I have some digesting and research to do but I will come back to this discussion with some thoughts to share.

I will say one thing though. This is not, in my opinion, a repeat of the deal with China to buy USG paper. The bi-lateral trade flows don't make sense in the same ways. Also the TIC data that JR provided refute that notion.

This is quite a different situation IMVHO.

Cheers

ampmfix said...

Confiscation:

- If you buy to a dealer that reports it, and gov comes after it: "sorry but I lost it". Assuming there is no torture from the authorities, that will work, you might have to spend some time in jail though, but it will be worth it (unless you live in a country where they can throw in jail for life for such a thing, then you don't live in that country in the first place). This is key, you need to live in a country where everybody cheats (like the Club Meds or Latin America regarding tax evasion issues, NOT the USA with the dreaded IRS), so penalties are lower.
- If you buy it to a trusted private party (a friend, I have done it): nobody knows you have it.

- If you want to sell it: private parties again.

What's the problem?

This is like taxes, there are always ways to escape the oppressor.

Motley Fool said...

The political pressure on the ECB to start running their printing presses seems to be at a all time high. They are being assaulted from all sides, including Deutsch bank.

Should be fun to see what happens next. ^^

Indenture said...

JMan: The Euro currency will not be sacrificed like the dollar because the Euro was created to replace the dollar. The nuclear option would be used before the Euro would be allowed to fail.

Jeff said...

Victor,

Russia is not small in one very important way; oil. They are the new Saudis, at least for now.

That is not to say Russia is interested in buying US paper; they clearly aren't. I think they are planning to come to RPG with a strong pimp hand, in gold and oil.

DP, play that funky music.

Anonymous said...

MF,

Should be fun to see what happens next.

If you watch the daily politics with the view that the ECB will eventually pave the way for a revaluation of gold, then you might have the impression that they are getting impatient and try to speed things up.

Last week, Ives Mersch (ECB) gave an interview to an Italian newspaper that they were rethinking whether to continue buying Italian bonds if Italy does not address their budget deficit. Then, two days later, they stop the bond purchases and send Italian interest rates through the roof.

A few days later, almost everybody in the ECB (Mersch, Jens Weidmann, Jurgen Stark) give interviews to various newspapers saying that the ECB is not the lender of last resort and that they will not rescue governments by printing money. Today, Jean-Claude Juncker says he is worried by the German (!) debt level.

Predictably, bond yields have been creeping up. The banking system is in panic mode as you can see from the reaction by Deutsche Bank and from persistent calls by 'famous economists' for the ECB to guarantee specific interest rates on government bonds - which is something not even the Federal Reserve has done (yet).

Victor

Motley Fool said...

Victor

I have noticed that, yes. It has me curious.

It seems like they are trying to do everything in their power to speed this along, while walking the fine knife edge of plausible deniability.

As a caricature, "Yes off course, I am trying to help... oops sorry, how did that happen..wait let me help..."

This is why I simply watch in amusement. Watching in panic gets boring after a while. :P

TF

Anonymous said...

MF,

further, if we assume this is true. Imagine you had the choice, what would be better (a) for the world, (b) for Europe, (c) for you personally? If the transition is (1) by a slow and painful death of the old financial system, dragging on over another decade, or (2) by a sudden crash all going up in flames at once?

There are thousands of arguments on both sides, for example, (1) allows you to accumulate more gold than your adversaries (retail gold sales in Europe are much higher than in America). But (2) might be less painful in terms of the real economy. The existing financial sector, for example, will be squeezed and will have to shrink by at least half. Same with many government departments and agencies. As long as we are in the old system, the laid-off people would remain unemployed simply because there is hardly any organic economic growth left.

After a sudden crash, however, everyone would have the advantage of a fresh start without any legacy debt. Countries whose government has just defaulted, for example, often have surprisingly high honest growth (i.e. not induced by credit expansion).

Just thinking.

Victor

Motley Fool said...

Victor

Make no mistake. The debts must be paid at some point. The longer this goes on, the worse it will be for the population as a whole in my view.

I'm not quite ready, but a fast burn would be infinitely kinder than a dragged out affair followed by a bigger fast burn.

Freegold today.

TF

Motley Fool said...

Something I think should be read : Remembering to remember

Hmm, blondie, you perhaps would appreciate this.

TF

Anonymous said...

I am still waiting for the day on which the Federal Reserve monetizes euro zone government bonds.

They might even get a special deal, avoiding any haircut (as in the latest agreement on the Greek debt) and eventually being paid off in gold equivalent (post-revaluation). So they would acquire an honest reserve asset that can be used to defend the dollar when the time comes.

I wonder whether they understand this. I am also curious on how they will explain this to the American public.

Victor

JMan1959 said...

@ Victor,
Is the US not already monetizing Euro bonds, via IMF contributions?

@Indenture
Good point, but could they not print to socialize the losses and then exercise the nuclear option?

DP,
I'm still "Fallin" for the girls:
http://www.youtube.com/watch?v=Urdlvw0SSEc

Anonymous said...

JMan,

yes, via the SDRs, that's sort of true. But everyone is doing it, and so it does not immediately affect the euro/dollar exchange rate. I wanted to say I am waiting for a direct move by the Fed.

Quote from 'Currency Wars':

In ordinary gold trading, a large bloc trade of as little as ten tons would have to be arranged in utmost secrecy in order not to send the market price through the roof [...]

Victor

jeb said...

http://mobile.reuters.com/article/idUSTRE7AC15K20111116?irpc=932

From the above article, apoligies if you can't open the link its off my android tablet. This quote catches my attention
" However, many analysts believe such a move now represents the only way to stem the contagion, despite the potential risk of inflation from printing money."
Under-estimating or just plain not understanding risk has been a promoting factor in this crisis.

mortymer said...

@costata:
For your digestion, a little spice in the form of study material :o)

#RUSSIA AND WTO#
http://www.wto.ru/en/newsmain.asp

Snip:
16.11.2011 8:59:41
"Russia believes the United States must immediately scrap the 1974 amendment of Jackson and Vanik, which restricts Russian trade with the US under the now preposterous pretext that Russia hampers the repatriation of Russian Jews to Israel..."

11.11.2011 21:47:41
"The U.S. President Barack Obama has urged the Congress to end the application of the Jackson-Vanik amendment amid Russia’s much-anticipated accession to the WTO..."

IMHO the accession was long overdue and a process of many years of negotiation and does not necessary have the tit-for-that connection with the decrease of gold accumulation. Q would be how much was dig out and how much of it went abroad and that could be tracked in some export data. VTC touched this with q of the "gold in ground" note.

mortymer said...

Aims and objectives of accession

"Currently there are 140 member countries in the WTO and in the nearest future this number will increase. This means that almost every nation aspiring to create a modern and effective economy and to participate in the world trade equally strives for WTO membership. Russia is not an exception.

The WTO membership offers a range of benefits. Enjoying these benefits is, pragmatically, the goal of joining the WTO. By acceding to the WTO Russia pursues the following goals:

Improvement of existing conditions for access of Russian products to foreign markets and provision of non-discriminatory treatment for Russian exporters;
Access to the international dispute settlement mechanism;
Creation of a more favorable climate for foreign investments as a result of legal system change in accordance with the WTO standards;
Expansion of opportunities for Russian investors in the WTO member-countries, particularly, in the banking area;
Creation of conditions for growth of domestic production’ quality and competitiveness as a result of increased flows of foreign goods, services and investments to the Russian market;
Participation in negotiations of the international trade agreements taking into account national interests;
Improvement of the image of Russia as a competent international trade participant.


The objective of the accession negotiations is to achieve the most favorable conditions for Russia joining the WTO, i.e. the best balance possible between the benefits of accession and the concessions in forms of tariffs reduction and domestic market opening. According to German Gref, The Minister of Economic Development and Trade, the balance of rights and obligations of Russia during its accession to the WTO should contribute to its economic growth and not vice versa."

http://www.wto.ru/russia.asp?f=target&t=9

mortymer said...

Stages of accession:
http://www.wto.ru/russia.asp?f=etaps&t=10

WTO agreements:
http://www.wto.ru/documents.asp?f=sogl&t=13

costata said...

mortymer,

Thanks for the links. I'm not suggesting a link to the reduction in the rate of accumulation of gold reserves by the Russian CB and Russia's acceptance into the WTO.

The amounts of gold are too small to make any meaningful difference to supply. I think this is peripheral to any deal for support from the USA.

But it is worth noting that Russia has been seeking to join the WTO (or its predecessor trade agreements) since 1993. I agree this is long overdue. But this is a sudden shift in US policy. Why now?

Cheers

mortymer said...

China's Shandong Gold Offers $1B for Brazil's Jaguar Mining

"China's Shandong Gold Group, the parent of Shandong Gold Mining and a big gold producer, has made a $1 billion offer to acquire Brazil's Jaguar Mining, two sources close to the deal told Reuters on Wednesday..."

http://www.ibtimes.com/articles/250529/20111116/china-s-shandong-gold-offers-1b-brazil.htm

mortymer said...

@costata:
"But this is a sudden shift in US policy. Why now?"
-> IMO the shift in the point of view to US is a correct one.
Why would a bad boy start to behave?
Maybe a certain realization?
Loosing ground on many fields, slowly deteriorating of the negotiation position...
You certainly noticed the news about US positioning troops in Australia.

mortymer said...

Latin American Gold Production up 10% in '11 - Analysis

"Latin American gold production should increase more than 10 percent this year, Metals Economics Group said Wednesday.

The MEG report says about two-thirds of Latin American production is from primary gold mines and the rest is from secondary sources, mostly copper and silver mines..."

http://www.ibtimes.com/articles/250516/20111116/latin-american-gold-production-10-11-analysis.htm

mortymer said...

G20 must Advance Currency Reform: WTO's Lamy

"Brazil has raised eyebrows among trade diplomats in Geneva by suggesting that it could retaliate against imports priced in weak currencies in the same way that it would hit back at goods being unfairly dumped on its market.

Brazil has also asked the other 152 members of the WTO to support a study of the interaction between trade and currencies, widely seen as the first step in a gradual process of banning the use of currencies as a weapon in trade."

...

"What we need is an international monetary system which facilitates international trade, cross-border investment and a better allocation of capital across nations," Lamy said.

http://www.ibtimes.com/articles/226403/20111006/g20-must-advance-currency-reform-wto-s-lamy.htm

mortymer said...

Interesting to follow:
http://www.chinagoldsummit.com/gold/agenda.html

mortymer said...

FT: Central bank gold buying at 40-year high -> Third-quarter net bullion purchases reach 148.4 tonnes

Max De Niro said...

Costata,

The tone of your question "Why now?" suggests that America is letting Russia into the WTO. (I may be wrong of course, it's difficult in type).

Perhaps Russia is forcing its way in and America is actually making concessions, rather than demands?

costata said...

MDN,

No one gets into the WTO without America's approval.

mortymer said...

It’s All About Gold Now

"At the beginning of this month, the G20 met in France to try to find a way to solve the European sovereign debt crisis. It ended with world leaders in disarray over a way to come up with a solution. At first blush, it appears that nothing of any importance came of the meeting of the 20 leading economies of the world, but that is not the case. It was widely reported the G20 came up with the idea that Germany might put up its gold reserves to back a bailout fund called the European Financial Stability Facility or EFSF. Of course, Germany, with its more than 3,400 tonnes of gold (number 2 in the world), quickly shot that idea down. End of story? Quite the contrary–the gold story is just beginning to get interesting.

You see, the G20 did something accidentally that was very important, and that was confirm that gold has a place in the monetary system, especially in times of extreme turmoil. Why doesn’t the EU use sovereign bonds to back the EFSF? They are considered a store of value and are held as reserves in many European banks. The simple answer is the world is waking up to the fact that debt can’t back up debt. ..."

http://usawatchdog.com/it%E2%80%99s-all-about-gold-now/

...and a bit of rhythm to it:
*Turn around, footsteps concealed, revealed*
http://www.youtube.com/watch?v=d1R91rBTJBE

mortymer said...

@Wendy:
For who is stepping in place of China in purchases of US debt...

http://cnsnews.com/news/article/fed-now-largest-owner-us-gov-t-debt-surpassing-china

So simply FO/A just did not put this into equation, or did they?

Note the other news that Germany and Eurozone despite the debt servicing still grew in average 0,5%.

So would this be the place for a quote that "nobody can hold a hand for long under the falling stone"?

A4: "ANOTHER: Mr. Powell, In the time before us, China will trade in Europe with "great intensity"! As this trade develops, little use will be found for use of dollars in trade and little purpose for to devalue the yuan, except for the revenge against neighbor nations. A good purpose will be found to trade dollars for gold! The gold could be sold to ECB or gold could be held for reserve of 15% or higher to match Euro group reserve requirements! Much will be the future for this position! As such the Yuan may become part of Euro Group basket, yes?

I think, in the future, for one to make their currency lower against the dollar will be as:" trying to hold the hand one meter below a falling stone"?

[Mrt: Note how China was buying also S.Korea and Japanese paper. :o) Very good Go game indeed.]

mortymer said...

Today is a good day to re-post.

"8/10/98 Friend of ANOTHER

Michael Kosares,

It has taken some time to send this, but now I can also offer my thoughts to your questions.

Your statement: "As a matter of long term policy, do you believe that ECB will "sell" gold to defend the Euro or "buy" gold to defend the Euro? Each of course would entail a different course of action with respect to reserves of the new national bank. Along these lines,will ECB buy gold from its member treasuries, or will it simply force them to transfer it to ECB coffers if needed to defend the Euro? I am prompted to ask this question in view of your assertion that there will be much selling of Euros to defend the dollar. If the Euro, as you suggested, is being printed to buy dollars isn't this just another manifestation of the U.S. exporting its inflation? It appears to me that the Euro will need to be defended -- and not with dollars -- but with gold! "

Michael, I believe the most difficult part in understanding the modern gold market is overcome by seeing all the various political factions involved. Essentially and basically, the largest pro gold groups are those who want a world currency that is not subject to the performance of the American economy. At this moment and in this period of economic history, all currency reserves held by foreigners (non-Americans) is a debt of the US Government and by extenuation through tax collection, a debt based on the ability of the American economy to function profitability!

In essence, America has told the world that as long as the business of this country is functioning, your wealth, as represented in Marks, Yen, Pesos, etc. is backed with performing US debt. It's like saying, "as long as your neighbor, next door, does not loses his job, you will not lose all your money! Most people would be surprised at how clear this is, outside the USA sphere of influence. This, the largest of the pro gold group, is largely made up of countries with economies that have no need to sell most of their production to the US. The business of these communities would not totally fail without the American engine. Yes, they would slow down, but not collapse, as trade with other countries would continue. To add what was said before: If your neighbor loses his job, you can still trade with the other people in the town, as long as the currency system is not based on your neighbors debts!"

[Mrt: Take no doubt CBs & oil are closely watching what´s going on with the growth in EU area.]

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

...cont...

9/3/98 Friend of ANOTHER

Michael,

Poland and China are good customers for the BIS. This is real physical gold they are taking out of circulation, not the pay me back when you have a chance lease deals. They really do have the IMF/Dollar countries over the barrel. Under these conditions it's easy for them to drain the Canadian gold reserves. Soon, these goldless countries will be left with nothing but high yield US dollar treasury notes. Later, when new issues of this paper is yielding 15%-20% these Central Banks will wish for the day when they held an asset that offered no return! Gold!..."

[Mrt: See my previous post about 40y record in CB gold purchases in 3rd/4; FT.]

Michael H said...

victor,

"if we assume this is true. Imagine you had the choice, what would be better (a) for the world, (b) for Europe, (c) for you personally?"

I like this line of thought, but I'm having trouble fitting in one piece: the european banking sector. Do we assume the ECB and the european commercial banks have a common interest, or do we assume that the european banks are about to get thrown under the bus?

"I am still waiting for the day on which the Federal Reserve monetizes euro zone government bonds."

I wonder if the Euro situation is a game of chicken between the ECB and the FED. Whoever prints first, loses.

Jamesneo said...

Why WTO for Russia: maybe because US wants better access/concession to Russian oil/gas as US seem to be outbidden by the rest of the developing countries like China and India

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

The Fed has pumped nearly 2 trillion into the system since the Spring of 2009. Not Sterilized.

QE 1
"To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."

QE2 and QElite
"The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month."

The 2 billion or so in QE has more than tripled the amount of base money in the system since March 2009. The Monetary base has increased by nearly 2 billion, from 800 million to approaching 2.8 billion.

Here is a visual image of QE.

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

Since May 2010 ECB's Securities Markets Programme (SMP) has purchased about 200 billion euros (they have bought since Silvio stepped down and those transactions have not cleared so not yet in the stats).

And all of the ECBs transactions have been sterilized. Its illegal for them to do so unsterilized. Yet there is already a court case in the ECJ against the ECB claiming the SMP is illegally monetizing debt. The climate is not lets go pump money. I have read that in the lobby of the Bundesbank is a framed trillion Reichsmark note. Anybody confirm?

burningfiat said...

Martin Armstrong on FED vs. ECB:

http://www.martinarmstrong.org/files/Fed%20v%20ECB%20%2011-17-2011.pdf

Martin sees no way for the ECB to recapitalize. Is he missing the obvious (for us FOFOA readers) solution?

/Burning

holdinmyown said...

I have a question for anyone who cares to consider it. I have been thinking about what may cause the BIS/ECB to go nuclear with physical gold auctions. What has come to mind is that if there was a prolonged period (more than 2 quarters?) of declining M2M ECB reserve valuations or even a steep deline in one single quarter-end the BIS may have enough cover to claim that the $IMFS gold valuations are no longer valid. Of course I am assuming that physical gold sales would be virtually non-existant at these lower paper gold valuations.

So if European trade (the 27 nations together make up the world's largest trading block)implodes due to a recession caused by ECB refusal to print and the Euroland bond rates climbing to unsustainable levels, could we see all markets (equities, bonds [except UST which are well bid by the Fed], commodities and paper gold) all fall drastically due to a European auterity-induced super-recession? Might this be enough cover for the BIS/ECB to employ the nuclear option? And finally, at what POG would this occur or does the POG even matter? Is it the POG or (as I suspect) the non-availablility of physical gold the key to trigger FG/RPG?

OK so I guess that is more than one question.

HMO

Unknown said...

fofoa,

Collapse of the Euro. Lot's of talk about "when", not "if". You seem to think that it won't happen. Do you have some theories that would prevent it?

Allen

Anonymous said...

Michael H,

Do we assume the ECB and the european commercial banks have a common interest, or do we assume that the european banks are about to get thrown under the bus?

In the long run, the banks will end up under the bus. Take a look at the revenue of the financial sector as a share of GDP, or at the total balance sheet of the financial sector as a share of GDP, from WW2 to today. There is a huge anomaly, and the financial sector is too large by a factor of 2 or 3. In the long run, this will (have to) be reversed. The question is in which order.

I wonder if the Euro situation is a game of chicken between the ECB and the FED.

When Greek got their 'voluntary' 50% haircut and then Papandreou went on TV and announced the referendum, MF Global went bust. I don't know how reliable Zero-Hedge eventually is, but they got this one right about a week in advance. Now they say that Jefferies and Black Rock are under pressure. Perhaps this is what everyone is waiting for. Perhaps another bankruptcy with haircut to the unsecured bondholders will do the job.

Victor

S said...

@mort

http://www.bbc.co.uk/news/business-15768867


@costata
IMHO the Russia WTO deal has everything to do with Missile Defense (NATO), Iran and Nord Stream - see recent action by Gazprom and BASF-Winter on Sud Stream

mortymer said...

@S: Nice to see you after a long time. I hope you are doing well.

Nice. Thank you.

Even if everybody in CR knew that the regime was no good, or they found out, it took 40 years for it to rot out. I was 13y. Amazed as I was back then.

It is all sideshow the match is really only between 2 sides: gold versus dollar. Debt versus equity. Math wins.

Ore em' said...

comments

Ore em' said...

JR,

That list just illustrates how big this topic is. When I'm introducing others to the concept, I often start with "Gold is Money". Perhaps I'm way, way off, although I can't recall if the question you were answering was more related to the best place to begin, or the best articles in general.

JR and everyone,
Has anyone else thought that there should be a wiki on Freegold? Once caveat to that is that editing should be limited to those who have demonstrated insight on the topic. The obvious choice here is to have JR and Costata (and a few others, you know who you are) act as mods. Pages could be huge, with references to FOFOA et. al.

costata said...

Will Italy Default?

History says no according to this writer (my emphasis):

Sovereign default is almost always a choice – a matter of appetite to pay, rather than ability. Britain and France were not out of assets in the 1930s, any more than Greece is out of assets now. Because it is a matter of choice, it is a reflection, as much as anything, of culture and history.

Italy simply has no history of peacetime sovereign default. It doesn't do it. Instead, it has a history of having borne very large government debt to GDP ratios and paid. That is one key reason it has found it possible to build up such a high debt to GDP ratio.


Another important consideration in discussing the prospect of default is the condition of the government’s budget. I linked to this interview from Spiegel Online in a previous thread where it was pointed out:

"Our primary balance is positive," he notes, "more positive than that of most other euro countries." In fact, thanks to high taxes, the Italian treasury takes in more than it spends -- but only if the interest payments for existing debts are factored out. (My emphasis)

This is one of the key differences between Greece and Italy. Even with the haircuts on their debt Greece cannot balance its budget. And BTW those haircuts of 50 per cent are also a much lower percentage of the overall sovereign debt of Greece than the headline figure suggests. This “financial crisis” is still a wrangle over who will wear the losses not about whether there will be losses.

Also from the same article (page 3) consider the average maturity of Italy’s debt (my emphasis):

"There will be a 20-percent rollover next year," says Marco Valli, chief economist for the euro zone at Italy's UniCredit, in Milan. This means that one-fifth of the government's debt matures next year, and that it will presumably have to be refinanced with new loans bearing less favorable terms.

But, for Valli, this is still no reason to be concerned. "Italy has an average maturity of about seven years on its debt." In other words, newly issued Italian government bonds will mature -- that is, come due for repayment -- in an average of seven years. "This means that the impact of current high-risk premiums will only be felt in the long term. This makes things much easier to deal with."


Sharp contrast with most of the reporting in the mainstream media isn’t it?

Motley Fool said...

costata

Much more balanced yes. However I'm not sure that it matters. It would seem fundamentals stopped being of any import long ago. In these markets the perception of the majority is key, facts be damned.

TF

Motley Fool said...

costata

Much more balanced yes. However I'm not sure that it matters. It would seem fundamentals stopped being of any import long ago. In these markets the perception of the majority is key, facts be damned.

TF

Max De Niro said...

Thanks for that list JR,

I'm putting together a must-read list for some friends who are starting to ask questions about what the hell is going on.

It's great for me too, as I need to go back and do another re-read again me thinx.

Wandee said...

I’ve pretty much read all of FOFOA’s posts going back several years. Although not with the depth they deserve. It’s excellent work, the contributors to the site are extremely intelligent and I fully get the freegold concept. I agree it should be the most natural outcome of our current situation. My question is when the dollar crisis plays outs am I to understand that the USG and military will close up shop, bring all the troops home, mothball the fleets, and shut down the huge bureaucracy and vast police state they’ve been building up?

2000 Flushes said...

Wandee: It's not so much that the USG will shut it all down, as it will just stop functioning, like an engine that has run out of oil. The length and depth of the disruption depends on the willingness of USG to free its own gold. A police state requires workers, and workers don't like to work for free. The military, at least, has laws against desertion, but who will remain around to enforce them?

Nickelsaver said...

Great question Wandee. IMO some things need to happen before the dollar dies. And I don't believe it dies in one day. Government and military need money to function. With the onset of HI, USG will have to make choices.

With power shifting to the EU, perhaps some of the USM will come under the control of UN and ultimately the EU, probably not. Germany is calling for an elected President of the EU. If the EU starts to look more like THE WORLD POWER, and governed as such, we could see the USG start to make concessions to them, and ultimately give up sovereignty. Most likely, there will be WAR!!! And with the dollar being worth little, USA may have few allies.

This creates a survivalist scenario for US.

M said...

@ Holdinmyown

"So if European trade (the 27 nations together make up the world's largest trading block)implodes due to a recession caused by ECB refusal to print and the Euroland bond rates climbing to unsustainable levels, could we see all markets (equities, bonds [except UST which are well bid by the Fed], commodities and paper gold) all fall drastically due to a European auterity-induced super-recession?"

That implies a super rally in the Euro currency doesn't it ?

M said...

"I wonder if the Euro situation is a game of chicken between the ECB and the FED.

When Greek got their 'voluntary' 50% haircut and then Papandreou went on TV and announced the referendum, MF Global went bust."

So the ECB knocked off a Fed primary dealer...

ECB 1 FED 0

Piripi said...

A little insight into China here... a bit of an eye-opener.

costata said...

Blondie,

That piece certainly does paint China in a different light. Thanks for the link.


MF,

I take your point. Market players have their own agendas but I think at some point fundamentals will reassert themselves.

Cheers

costata said...

It Hardly Seems Fair, Does It?

I guess we can put this in the “stuff they lied to me about” file ie. the stock market as a leading indicator. It can sit there right alongside weak currencies leading to export success, low interest rates leading to economic growth, the paradox of thrift, the neutrality of money and, I suppose, just about all conventional economic wisdom.

But there is, in fact, no correlation between a country's economic growth and real returns on its sharemarket, the chief investment officer at Vanguard, Gus Sauter, says.

The quote comes from this article in the Sydney Morning Herald. Here’s a few more (my emphasis):

A good case in point is that of China which, despite low double-digit economic growth every year, has a sharemarket that is 60 per cent below its pre-global financial crisis high of October 2007.

Visiting Australia last month, Sauter referred to Vanguard research showing the correlation between long-run economic growth and long-run sharemarket returns is approximately zero.
The results echo those of other studies over the years.

Sauter says the lack of correlation between share returns and economic growth was also evident in developed markets. The US economy grew 17-fold during the 20th century and the British economy grew sevenfold but their sharemarkets produced the same annual average return of 10.1 per cent.


Developed markets too! Oh dear!

Wendy said...

Thank you Mortymer, I'll think long and hard about that. However I still have an unfounded issue with what has be classified as "deep storeage" stuff. This would have to be resolved if the US is to deploy its gold (in my unfounded opinion).

Interesting article Blondie, hope that guy lives to see tomorrow ;)

Anonymous said...

costata,

Developed markets too! Oh dear!

That's actually quite well known. The phenomenon is called 'Siegel's constant': The long term average of the real return on equity is about 6% annually - this is true for a variety of countries and markets, independent of their growth-rates and independent of many other factors. Long term means you need to average over several full cycles of the stock market, i.e. way more than 50 years.
There is a very good and easy to read book on the topic: "Valuing Wall Street" by Andrew Smithers and Stephen Wright.

The point with growing economies is that existing companies expand and raise capital or new companies are founded and taken public. A growing economy does not mean that the shareholders of the existing companies earn a higher return - at least not on average. On the other hand this empirical result suggests that even in a stagnant or shrinking economy, the shareholders will still (on average) get their usual real return on equity.

When you hear this story for the first time, you will have a number of questions. Most of them are answered very nicely in Smithers-Wright.

Victor

costata said...

VTC,

Thank you for that explanation of Siegel's constant. Illuminating.

I will have to add the Smithers-Wright book to my reading list.

Cheers

costata said...

Giving “Ghost Cities” A Whole New Meaning

Further to the story that Blondie linked earlier about China’s economy not being as rosy as it is portrayed I thought some of you might be interested in this essay from Charles Hugh Smith. It caught my eye in June, 2011.

CHS pinpoints a very weak link in the China story. The emigration of wealthy Chinese and their families. He also provides links to some articles about the outflow of wealth. For your convenience I have included links and quotes below.

Secret money transfers from China? (my emphasis)

Almost all of the funds supporting emigration applications were spirited out of China in violation of Beijing’s strict rules. The country leads the world in illicit fund transfers, according to Global Financial Integrity, a nonprofit. The estimated total of China’s outbound flows from 2000 to 2008 was a staggering $2.18 trillion.

On business and investment emigration (my emphasis):

According to a new study, a majority of Chinese who have more than 10 million Yuan ($1.53 million) worth of individual assets find the idea of real—estate investment a lot less tempting than so—called "investment emigration." Nearly 60% of people interviewed claim they are either considering emigration through investment overseas, or have already completed the process, according to the 2011 Private Wealth Report on China published by China Merchants Bank and a business consulting firm Bain & Company.

The richer you are, the study suggests, the likelier it is that you resort to emigration. And among those who possess more than 100 million yuan, 27 % have already emigrated while 47% are considering leaving.


So where is all that money? IMHO all around the globe. Good luck to anyone considering going to war with “China” they might have to start by nuking Vancouver.

mortymer said...

@Wendy
"...However I still have an unfounded issue with what has be classified as "deep storeage" stuff..."

Do you remember my allegory with the boat on the sea comparing anchor and compass?
Think of the deep freeze as a ballast weights for a big boat whose captain knows that it needs to do difficult turns. Then you know. :o)

Motley Fool said...

@Wandee

Not without a fight. ;) aka 2000Flushes

@Blondie

Thanks for that article.

@costata and VtC

I will have to add that to my list...after I have spent some time reading up on it. :P

DP said...

RE: costata/CHS/China/emigration

How many of my fellow Western business-owning bloggers are regularly approached WRT valuing their business for sale as a going concern? I must get a mail like that perhaps once a fortnight.

If only I thought my businesses were really worth more than their NAV to anyone but me, I would sell of course... perhaps after a little asset stripping... :)

Anonymous said...

FOFOA you should at some stage write more on the nuclear option.

Anonymous said...

I mean specifically the nuclear option.

Max De Niro said...

FOFOA,

At some stage, you should write a book!

All,

Could somebody give me an idea of what is the biggest driver of a contraction in the base money supply? Would this be if a bank, or other entity with a reserve account at the Fed, buys Treasuries?

mortymer said...

@d2thdr

Trail Guide (8/26/2000; 21:44:27MT - usagold.com msg#: 35584)

----4) Can we look to the breakup of operations at the London Bullion exchange as the next signpost along the trail? -------

Several outcomes:
Look for paper trading to slow further, physical becomes rare

or paper prices surge in a super run then quickly shut down as physical prices run away

or paper open interest surges as shorts try to cover before more players come to know about the condition of the markets.

or paper prices plunge to less than $100 as all physical trading stops. Then markets shut as physical prices leap

http://www.usagold.com/goldtrail/archives/auxiliarytrail.html

Anonymous said...

HI Mortymer,
Its not for me that I request our favourite Yeti to write this. I request this for the masses who keep asking these questions.

mortymer said...

FOA (10/26/01; 21:21:33MT - usagold.com msg#127)
A few comments on comments!

"...Well sir,,,,,,,, we should all think about this for a bit? It's awful clear, to anyone that has just a little of the facts, that the paper gold markets cannot ever be converted into physical gold. The numbers would be????,,,,,, That's just a rhetorical, don't even try to put a real number on it.

You see, all the armchair gold bugs hold onto their paper leverage and cheer for some big paper short covering blow up. A paper squeeze that forces the "virtual" price of gold way up. But, who exactly is it that is going to be a threat to the paper Bullion bank market? You,,,,, me,,,,,, that man
behind the tree?

What if me and a thousand others came up with a 1 trillion in cash and used it to lock down paper contracts to deliver us 1 billion ounces of gold. The paper gold market has the means to match our commitments dollar for dollar. I mean, they could put the money up, not gold ina a vault, and get
on the other side of us,,,,, margin to margin.

OK, now we stand face to face. Even if we had enough free cash to pay for delivery,,,,,, what jurisdiction would let us settle; England, US, South Africa, Canada,,,, who? No, we would be told to cash out and buy our gold on the tiny physical markets. In a Hunt like joke,,,,,close out would come and we would eat it, big time. Even if we broke even, how exactly would we exchange our cash for metal in the tiny bullion markets without driving the price to the moon?

The reason I play this out, in text, is for others to understand that there ain't gona be a run up in paper gold. That market is a derivative style currency support and it was never set up to be a big time deliver machine. Its control will end when the currency system, it's built on, fails and takes the "virtual" gold market price with it,,,, to the floor! But, long before that plays out, the real bullion markets will get extremely thin and build up a huge premium to contract settlement. It will do this because some financial disorder will invalidate, and most likely, force an official deferral in physical delivery; indefinitely. From there the show will proceed..."

http://www.usagold.com/goldtrail/

mortymer said...

All has been said, is written, all is there, just take the time, read, think, nothing we have been doing is new.

Max De Niro said...

Mortymer,

I've been thinking about that aspect of what we all talk about here.

The physical gold does seem to be flowing still. There has reportedly been huge demand for it all over the world, unsurprisingly, and yet the markets are still functioning.

What will it take to break the paper gold markets I wonder?

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