Tuesday, April 3, 2012

Peak Exorbitant Privilege

"Importing more than you export means lots of empty containers. That visual manifestation of our trade deficit is what drivers see as they pass the Port of New York and New Jersey on the New Jersey Turnpike. In the first eight months of 2010, the port saw the equivalent of 700,000 more full 20-foot containers enter than leave.

45% of containers exported from port operator APM Terminals’ Port Elizabeth facility (part of the Port of New York and New Jersey)
are empty, a reflection of the trade imbalance."


In the wake of WWI (1914-1918) there was an international movement in Europe to return to the stability of fixed exchange rates between national currencies. But all of them had been inflated so much during the war that reestablishing the peg to gold at the pre-war price would have implied an overvaluation of currencies that would have led inevitably to a run on all the gold in the banking system, monetary deflation and economic depression (good thing they avoided that, eh?). At the same time, they feared that raising the gold price would raise questions about the credibility of the new post-war regime, and quite possibly cause a global scramble into gold.

This "problem" with gold was viewed at the time as a "shortage" of gold. And so one of the stated goals of the effort to solve this problem was "some means of economizing the use of gold by maintaining reserves in the form of foreign balances." (Resolution 9 at the Genoa Conference, 1922) To economize means to limit or reduce, often used in conjunction with "expense" or "waste". So to "economize the use of gold" meant to limit or reduce the use of gold.

Meanwhile, the United States had emerged from the war as the major creditor to the world and the only post-war economy healthy enough to lend the financial assistance needed for rebuilding Europe. And so even though the U.S. wasn't directly involved in the European monetary negotiations that took place in Brussels in 1920 and Genoa in 1922, it was acknowledged that any new monetary order was likely to be a U.S. centered system.

The Genoa negotiations were led by the English including British Prime Minister Lloyd George and Bank of England Governor Montagu Norman who proposed a "two-tier" system especially designed to circumvent "the gold shortage". The British proposal described a group of "center countries" who would hold their reserves entirely in gold and a second tier group of (unnamed) countries who would hold reserves partly in gold and partly in short-term claims on the center countries. [1]

The proposal was named the "gold-exchange standard" (as opposed to the previous gold standard). In 1932 French economist Jacques Rueff proclaimed the gold-exchange standard that had come out of the Genoa conference a decade earlier "a conception so peculiarly Anglo-Saxon that there still is no French expression for it." [2]

The gold-exchange standard that officially came into being around 1926 (and lasted only about six years in its planned form) worked like this: The U.S. dollar was backed by and redeemable in gold at any level, even down to small gold coins. The British pound was backed by gold and dollars and redeemable in both, but for gold, only in large, expensive bars (kind of like the minimum gold redemption in PHYS is 400 oz. bars but you can redeem in dollars at any level). Other European currencies were backed by and redeemable in British pound sterling, while both dollars and pounds served as official reserves equal to gold in the international banking system. [3]

Since only the U.S. dollar was fully redeemable in gold, you might expect that gold would have immediately flowed out of the U.S. and into Europe. But as I already explained, the U.S. emerged from WWI as the world's creditor and the U.S. Treasury in 1920 held 3,679 tonnes of gold. By the beginning of the gold-exchange standard in 1926 the U.S. was up to 5,998 tonnes and by 1935 was up to 8,998 tonnes. By 1940 the U.S. Treasury held 19,543 tonnes of gold. After WWII and the start of the new Bretton Woods monetary system, official U.S. gold peaked at 20,663 tonnes in 1952 where it began its long decline. [4]

In Once Upon a Time I wrote, "Once sterilized [at the 1922 Genoa Conference], gold flowed uncontrolled into the US right up until the whole system collapsed and beyond." My point was that before the introduction of "paper gold" as official reserves in the form of dollars and pounds, the flow of physical gold in international trade settlement governed as a natural adjustment mechanism for national currencies and exerted the spur and brake forces on their economies. But after 1922, this was no longer the case.

After 1922, the U.S. provided the majority of the reserves for the international banking system in the form of printed dollars. And as the world's creditor and reserve printer, dollar reserves flowed out and gold payments flowed in. From the start of the gold-exchange standard in the mid-1920s until 1952, about 26 years, the dollar's monetary base grew from $6B to $50B while the U.S. gold stockpile grew from 6,000 tonnes to more than 20,000 tonnes. [5]

The Roaring Twenties was not just a short-lived period of superficial prosperity in America, it was also a time when a great privilege was unwittingly granted to the United States that would last for the next 90 years. And I say "unwittingly granted" because the U.S. did not even participate in the negotiations that led to its privilege. As Jacques Rueff wrote in his 1972 book, The Monetary Sin of the West:

"The situation I am going to analyze was neither brought about nor specifically wanted by the United States. It was the outcome of an unbelievable collective mistake which, when people become aware of it, will be viewed by history as an object of astonishment and scandal." [6]

I should pause here to note that gold standard advocates and hard money campers will quickly point out that the post-1922 gold-exchange standard is not what they want. They want to return to the gold standard of the 19th century, the one before WWI. But that's not my position. And anyway, it's not gonna happen and even if it would/could happen, it would not fix the fundamental problem. Just like time, we move relentlessly forward and, luckily for us, the future is much brighter than the past.

Now, back to this privilege which, in the end, may turn out to be more of a curse. In order to really understand how the gold-exchange standard and its successor systems, the Bretton Woods system and the current dollar standard system translated into a privilege for the United States, we need to understand what actually changed in the mid-20s as it fundamentally relates to how we use money. I will explain it as briefly as possible but I want to caution you to resist the temptation to make judgments about what is wrong here as you read my description. As some of you already know, I think there is only one fundamental flaw in the system and it was present even before the gold-exchange standard and the U.S. exorbitant privilege, but that's not the subject of this post.

What changed?

People and economies trade with each other using money – mainly credit, denominated in a national currency – as their primary medium of exchange so as to avoid the intractable double coincidence of wants problem with direct barter. So we trade our stuff for their stuff using bank money (aka fungible currency-denominated credit) and the prices of that stuff are how we know if there is any inequity or imbalance in the overall trade. When we periodically net out the bank transactions using the prices of the stuff we traded, we inevitably come up short on one side or the other. And so that imbalance is then settled in the currency itself.

But because different countries use different currencies, we need another level of imbalance clearing. And that international level is cleared with what we call reserves. So, in essence, we really do have two tiers in the way we use money. We have the domestic tier where everyone uses the same currency and clearing is handled at the commercial bank level with currency. And then we have the international tier where everyone doesn't use the same currency and so trade imbalances tend to aggregate and then clear with what we call "reserves" (aka international liquidity) at the national or Central Bank level.

This is built right into the very money that we use, and have used, for a very long time. To see how, we will regress conceptually back to how our bank money is initially conceived. And because most of you have at least a basic understanding of the Eurosystem's balance sheet from my quarterly RPG posts, this should be a fairly easy exercise. If not, RPG #4 might be a good place to catch up quickly.

Recall this chart from Euro Gold:

It shows the change, over time, in relative value of the two kinds of reserves held by the Eurosystem: 1. gold reserves and 2. foreign currency reserves. And in RPG #4 I explained the difference between reserves and assets on the CB balance sheet. Assets are claims against residents of your currency zone denominated mostly in your own currency. Reserves are either gold or claims against non-residents denominated in a foreign currency.

In our regression exercise we'll see the fundamental difference between reserves and assets. Reserves are the fundamental basis on which the basic money supply of a bank is borne, while assets are the balance sheet representation of the bank's extension of credit. Changes in the ratio between reserves and assets exert opposing (enabling/disabling) influences on the ability of the system to expand.

So, now, looking back at the very genesis of our money, we've all heard the stories of the gold banker who issues receipts on the gold he has in his vault, right? Well, that's basically it. Money as we know it today ultimately begins with the monetization of some gold. The Central Bank has some amount of gold in the vault which it monetizes by printing cash.

Gold | Cash

For the sake of this exercise, let's say that the government deposits its official gold in its newly-created CB and the CB monetizes that gold by printing cash which is now a government deposit. So let's simplify the balance sheet even more. CB = Central Bank, R = reserves, A = assets and C = cash (or also CB liabilities which are electronic obligations of the CB to print cash if necessary, so they are essentially the same thing as cash within the banking system).


That's reserves (gold) on the asset side of the balance sheet and cash (the G's deposit) on the liability side. Now the G can spend that cash into the economy where it will end up at a commercial bank. Let's say COMMBANK1 = commercial bank #1, C = cash (or CB liabilities) and D = deposit.


Now that the G spent money into the economy, our first commercial bank has its own reserves and its first deposit from a government stooge who received payment from G and deposited it in COMMBANK1. In the commercial bank, cash is the reserve on the asset side of the balance sheet whereas cash is on the opposite side, the liability side, of the Central Bank's balance sheet. Also, all the cash issued by the CB remains on its balance sheet even after it has left the building and is sitting in the commercial bank (or even in a shoebox under your bed).

At this point we have a fully reserved mini-monetary system. Both the CB's and the commercial bank's liabilities are balanced with reserves. The CB's reserves are gold and the commercial bank's reserves are cash or CB liabilities. That's fully reserved. But let's say that the economy is trying to grow and the demand for bank money (credit) is both strong and credible. So now our banks can expand their balance sheets.

As credit expands, the asset side will be balanced with assets (A) rather than reserves (reserves are gold in the case of the CB and cash in the case of COMMBANK1). Also, I'm going to put the CB under the commercial banks since it is essentially the base on which the commercial bank money stands.


Here we see that our CB now has an asset and a reserve. The asset is a claim denominated in its own currency against a resident of its currency zone, and the reserve is the gold. Let's say that the CB lent (and therefore created) a new C to the government. Meanwhile, our commercial bank COMMBANK1 has had two transactions. It has received the deposit from a second government stooge and it has also made a loan to a worthy entrepreneur.

So on the COMMBANK1 (commercial bank) balance sheet, the A is a claim against our entrepreneur and the two Cs are cash reserves. The first C came in when our first stooge deposited his government paycheck and the second C came in when the second stooge deposited his payment which G had borrowed (into existence) from the CB. The three Ds (deposits) belong to our two stooges and the entrepreneur.

I'm not going to go much further with this model but eventually, as the economy and bank money expands, we'll end up with something that looks more like this:






And here we have a simple model of our monetary system within a single currency zone. There are two observations that I want to share with you through this little exercise. The first is the tiered nature of our monetary system even within a single currency zone. And the second is the natural makeup of a Central Bank's balance sheet.

You'll notice that one thing the Central Bank and the commercial banks have in common is that the asset side of their balance sheets consist of both reserves and assets. Remember that assets are claims denominated in your currency against someone else in your currency zone. But you'll also notice that the commercial bank reserves are the same thing as the Central Bank's liabilities. So the Central Bank issues the reserves upon which bank money is issued to the economy by the commercial banks.

The fundamental take-home point here is that reserves are the base on which all bank money expands. CB money rests on CB reserves and commercial bank money rests on commercial bank reserves which are, in fact, CB money which is resting on CB reserves. So you can see that the entire money system is built up from the CB reserves.

The deposits (D) in the commercial banks are both redeemable in reserves and cleared with reserves (reserves being cash or CB liabilities). Deposits are not redeemable or cleared (settled) with assets. If a commercial bank has a healthy level of reserves it can expand its credit. But if it expands credit without sufficient reserves for its clearing and redemption needs, it must then go find reserves which it can do in a number of ways.

Notice above that we have 25 deposits at 5 commercial banks based on 10 commercial bank reserves. Those commercial bank reserves are Central Bank liabilities which are based ultimately on the original gold deposit. Before 1933, gold coins were one component of the cash, and CB liabilities were also redeemable by the commercial banks in gold coin from the CB to cover redemption needs. So the commercial banks (as well as the Fed) had to worry about having sufficient reserves of two different kinds. As you can imagine, this created another level of difficulty in clearing and especially in redemption.

Clearing and Redemption

Very quickly I want to go over clearing and redemption and how they can move reserves around in the system. Here's our simple system once again:






Now let's say that one of our depositors at COMMBANK5 withdrew his deposit in cash. And let's also say that another depositor at the same bank spent his money and his deposit was therefore transferred to COMMBANK4 and that transaction cleared. Here's what it would look like:






A few quick observations. There are now only 9 Cs in the commercial banking system even though there are still 10 Cs outstanding on the CB's balance sheet. That's because one of them is now outside of the banking system as on-the-go cash in the wallet.

Also, notice that COMMBANK4 received its sixth deposit which cleared and so COMMBANK4 received the cash (C) reserve from COMMBANK5. This transaction bumped COMMBANK4 up from being 40% reserved to 50% reserved. But because COMMBANK5 had to deal with two transactions, one redemption and one cleared deposit transfer, COMMBANK5 is now out of reserves.

In this little scenario, COMMBANK4 is now extra-capable of expanding its balance sheet, while COMMBANK5 needs to forget about expanding and try to find some reserves. To obtain reserves, COMMBANK5 can call in a loan, sell an asset for cash, borrow cash temporarily while posting an asset as collateral, or simply hope that some deposits come his way very soon. But in any case, COMMBANK5's next action is, to some extent, influenced by its lack of reserve.

This is an important point: that as reserves move around, their movement exerts some influence on the activities of both the giver and the receiver of the reserves.

International Clearing

Now let's scale our model up and look at how it works in international trade. Commercial banks deal mostly in their own currency zone's currency. But in today's fast-paced and global world we have a constant flow of trade across borders, so various currencies are also flowing in all directions. Some international commercial banks handle these transactions, but as you can imagine, clearing and redemption becomes a bit more complicated.

You might have a deposit (D) at COMMBANK5 in the U.S. being spent in Europe somewhere and ending up at a European commercial bank where it is neither redeemable nor clearable as it stands (currently denominated in dollars). The U.S.-based COMMBANK5 will transfer both the C and the D to the European bank. The European deposit holder who sold his goods to the U.S. will want his bank to exchange those dollars for euros so he can pay his bills. So the European bank will look to either the foreign exchange market or to its CB to change the currency.

If trade between the two currency zones was perfectly equal at all times, there would be an equal amount of euros wanting to buy dollars and vice versa. But we don't live in a perfect world, so there's always more of one or the other which is why the exchange rates float. If, instead, we had fixed exchange rates, the CBs would be involved in equalizing the number of euros and dollars being exchanged, and then the CBs would settle up amongst themselves using their reserves, which was how it was before 1971.

But even today, with floating exchange rates, the CB's still do get involved in what we call the "dirty float" to manage the price of their currency on the international market. This is essentially the same process as during fixed exchange rates except that they don't maintain an exact peg, but instead they let it float within a range that they deem acceptable. And the way they do that is essentially the same way they did it back in the fixed exchange rate system of Bretton Woods and before. They buy up foreign currency from their commercial banks with newly printed cash.

Or, if there's a glut of their own currency in foreign lands trying to get home, then they have to buy back their own currency using up their CB reserves. Which brings us to the makeup of a CB's balance sheet, most pointedly its reserves. And the take-home point that I want to share with you here is the difference between finite and infinite from a CB's perspective.

From the perspective of a CB, its own currency is infinite while its reserves are finite. So if there's a glut of foreign currency in its zone, it has no problem buying up as much as it wants with printed cash. In fact, theoretically, a CB could buy up foreign currency that is accumulating in its zone until the cows come home. On the other hand, if there's a glut of its own currency abroad, its buy-back power is finite and limited to the amount of reserves it stockpiled earlier.

So why do it? Why does a CB spend its precious reserves buying its own currency back from foreign lands? What happens if it doesn't? Currency collapse is what happens. If there's a glut of your currency abroad and you don't buy it back, the market will take care of it for you by devaluing your currency until it becomes impossible for you to run a trade deficit. And this is a painful process when the marketplace handles it for you because it not only collapses your trade deficit to zero, it also tends to bring your domestic economy to a standstill at the same time, a double-whammy.

And this is how the monetary system above scales up to the international level. While the commercial bank reserves (Cash) are good for clearing, redemption and credit expansion within a currency zone, only the CB reserves work in a pinch on the international level. And if the CB runs out of reserves, the currency collapses due to market forces and, therefore, the commercial bank reserve (Cash) upon which commercial bank money is expanded devalues, and so bank money, too, devalues. It is all stacked upon the CB reserves from whence the first bank money was born.

And as you can see above, the natural makeup of a CB's reserves is gold. But that changed in 1922.

Now obviously there are a myriad of directions in which we could take this discussion right now. But the direction I want to keep you focused on so that I can eventually conclude this post is that when a Central Bank's finite reserves are ultimately exhausted in the international defense of its currency, its local commercial bank's reserves (Cash) are naturally devalued by the international market. And with the commercial bank reserves being what commercial bank deposits are redeemable in, so too is local money devalued.

But in 1922 they "solved" this "problem" with the introduction of theoretically infinite reserves.

As we move forward in this discussion, I want you to keep in mind my first fundamental take-home point which was that reserves are the base on which bank money expands. Commercial banks expand their bank money on a base of Central Bank-created reserves. And (as long as there is trade with the world outside of your currency zone) the Central Bank's reserves are the base on which the commercial banks' reserves stand. So the corollary I'd like to introduce here is that theoretically infinite reserves lead to theoretically infinite bank money expansion.

Of course it doesn't take a genius to figure out that infinite money expansion does not automatically translate into infinite real economic growth. And so we need to look at who, in particular, was the prime beneficiary of these newly infinite reserves.

In 1922 the Governor of the Bank of England which had around 1,000 tonnes of gold at the time (less than the Bank of France which had about 1,200 tonnes) proposed economizing the use of gold by declaring British pound sterling and U.S. dollars to be official and recognized reserves anywhere in the world. The "logic" was that dollars and pounds would be as good as gold because they would be redeemable in gold on their home turf.

Three Fair Warnings

The reason I went through this somewhat-lengthy exercise explaining the significance of reserves in our monetary and banking system was to help you understand the words of Jacques Rueff who first warned of the catastrophically dangerous flaw embedded in this new system—a flaw which continues today—way back in 1931. The term "exorbitant privilege" would not be used until 30 years later under a new system, but I hope to help you see, as I do, the common thread that ties all three systems together, the gold-exchange standard, Bretton Woods and the present dollar standard.

As we walk through this timeline together, you'll read three warnings at times of great peril to the system. The first was delivered by Rueff to the French Finance Minister in preparation for the French Prime Minister's meeting with President Hoover in Washington DC in 1931. The second was delivered to the U.S. Congress by a former Fed and IMF economist named Robert Triffin in 1960. And the third will be delivered later in this post.

To put it all in perspective, I drew this rough timeline to help you visualize my thought process while writing this post:

Those of you who have been reading my blog for a while should be aware that the U.S. has run a trade deficit every year since 1975. You should also know that, since 1971, the U.S. government has run its national debt up from $400B to $15,500B, and that foreign Central Banks buying this debt have been the primary support for both the relatively stable value of the dollar and the perpetual nature of the U.S. trade deficit.

But it wasn't always this way. Before 1971 the U.S. was running a trade surplus and the national debt level was relatively steady during both the gold-exchange standard and the Bretton Woods era. During the gold-exchange standard the national debt ranged from about $16B up to $43B. It increased a lot during WWII to about $250B, but then it remained below its $400B ceiling until 1971.

Another big difference during this timeline which I have already mentioned is the flow of gold. The U.S. experienced an uncontrolled inflow of gold from the beginning of the gold-exchange standard until 1952, and then a stunted outflow ensued until it was stopped altogether in 1971.

The point is that with such a wide array of vastly disparate circumstances, it is a bit tricky for me to explain the common thread that binds this timeline together. Very generally, let's call this common thread the monetary privilege that comes from the rest of the world voluntarily using that which comes only from your printing press as its monetary reserves. It started as a privilege, grew into an exorbitant privilege 35 years later, and then peaked 45 years later at something for which, perhaps, there is not an appropriately strong enough adjective.

Robert Triffin thought it had gone far enough to warrant warning Congress in 1960, but just wait till you see how much farther it went over the next four and a half decades. But first, let's go back to 1931.

First Warning

In his 1972 book [6], Jacques Rueff writes:

Between 1930 and 1934 I was Financial Attache in the French Embassy in London. In that capacity, I had noted day after day the dramatic sequence of events that turned the 1929 cyclical downturn into the Great Depression of 1931-1934. I knew that this tragedy was due to disruption of the international monetary system as a result of requests for reimbursement in gold of the dollar and sterling balances that had been so inconsiderately accumulated.

On 1 October 1931 I wrote a note to the Finance Minister, in preparation for talks that were to take place between the French Prime Minister, whom I was to accompany to Washington, and the President of the United States. In it I called the Government's attention to the role played by the gold-exchange standard in the Great Depression, which was already causing havoc among Western nations, in the following terms:

"There is one innovation which has materially contributed to the difficulties that are besetting the world. That is the introduction by a great many European states, under the auspices of the Financial Committee of the League of Nations, of a monetary system called the gold-exchange standard. Under this system, central banks are authorized to include in their reserves not only gold and claims denominated in the national currency, but also foreign exchange. The latter, although entered as assets of the central bank which owns it, naturally remains deposited in the country of origin.

The use of such a mechanism has the considerable drawback of damping the effects of international capital movements in the financial markets that they affect. For example, funds flowing out of the United States into a country that applies the gold-exchange standard increase by a corresponding amount the money supply in the receiving market, without reducing in any way the money supply in their market of origin. The bank of issue to which they accrue, and which enters them in its reserves, leaves them on deposit in the New York market. There they can, as previously, provide backing for the granting of credit.

Thus the gold-exchange standard considerably reduces the sensitivity of spontaneous reactions that tend to limit or correct gold movements. For this reason, in the past the gold-exchange standard has been a source of serious monetary disturbances. It was probably one cause for the long duration of the substantial credit inflation that preceded the 1929 crisis in the United States."
Then in 1932 he gave further warning in the speech at the School of Political Sciences in Paris which I wrote about in Once Upon a Time:

The gold-exchange standard is characterized by the fact that it enables the bank of issue to enter in its monetary reserves not only gold and paper in the national currency, but also claims denominated in foreign currencies, payable in gold and deposited in the country of origin. In other words, the central bank of a country that applies the gold-exchange standard can issue currency not only against gold and claims denominated in the national currency, but also against claims in dollars or sterling.


The application of the gold-exchange standard had the considerable advantage for Britain of masking its real position for many years. During the entire postwar period, Britain was able to loan to Central European countries funds that kept flowing back to Britain, since the moment they had entered the economy of the borrowing countries, they were deposited again in London. Thus, like soldiers marching across the stage in a musical comedy, they could reemerge indefinitely and enable their owners to continue making loans abroad, while in fact the inflow of foreign exchange which in the past had made such loans possible had dried up.


Funds flowing out of the United States into a gold-exchange-standard country, for instance, increase by a corresponding amount the money supply in the recipient market, while the money supply in the American market is not reduced. The bank of issue that receives the funds, while entering them directly or indirectly in its reserves, leaves them on deposit in the New York market. There they contribute, as before being transferred, to the credit base.


By the same token, the gold-exchange standard was a formidable inflation factor. Funds that flowed back to Europe remained available in the United States. They were purely and simply increased twofold, enabling the American market to buy in Europe without ceasing to do so in the United States. As a result, the gold-exchange standard was one of the major causes of the wave of speculation that culminated in the September 1929 crisis. It delayed the moment when the braking effect that would otherwise have been the result of the gold standard's coming into play would have been felt.
Are you starting to get a sense of the key issue yet? Reserves move from one bank to another to settle a transaction. When our depositor at COMMBANK5 spent his deposit and it was thereby transferred to COMMBANK4, the cash (C) reserve was also moved to COMMBANK4 to settle (or clear) the transaction. This put a certain strain on COMMBANK5 since it had also lost another reserve to redemption which forced COMMBANK5 into the action of seeking reserves.

Or when a Central Bank expends its reserves trying to remove a glut of its currency abroad so that the marketplace won't devalue (or collapse) it, that CB is generally limited to a finite amount of reserves which, once spent, are gone. So the movement of reserves serves two purposes. It is not only attained by the receiver but it is also forfeited by the giver. Both are vital to a properly functioning monetary system.

But with the system that began around 1926 and still exists today, we end up with a situation in which one currency's reserves are actually deposits in another currency zone:

Notice that I am avoiding the use of gold in my illustration. The warnings given in 1931 and 1960 were presented in the context of a gold exchange standard of one form or another, and therefore they (of course!) heavily reference the problems as they related to ongoing gold redemption. But the real problem, as I have said, transcends the specific issues with gold at that time.

The real problem was and is the common thread I mentioned earilier: the monetary privilege that comes from the rest of the world voluntarily using that which comes only from your printing press as its monetary reserves. It was and is, as Jacques Rueff put it, "the outcome of an unbelievable collective mistake which, when people become aware of it, will be viewed by history as an object of astonishment and scandal."

Another angle which was apparent from the very beginning—because Rueff mentioned it in 1932 (as quoted above)—was that of international lending. It basically worked in the same way as the three steps above except that the net international (trade) payment was an international loan. Remember that the U.S. was the prime creditor to the world following both wars. This may partly explain the inflow of gold payments that brought the U.S. stockpile up from 3,679 tonnes in 1920 to 20,663 tonnes in 1952. A dollar loan was the same as a gold loan and was payable in dollars or gold. But as Rueff pointed out above, the lent dollars came immediately back to New York just as the pounds came back to London:

"During the entire postwar period, Britain was able to loan to Central European countries funds that kept flowing back to Britain, since the moment they had entered the economy of the borrowing countries, they were deposited again in London. Thus, like soldiers marching across the stage in a musical comedy, they could reemerge indefinitely and enable their owners to continue making loans abroad."
Now think about that for a moment. The same reserves (base money) getting lent out over and over again like a revolving door. And let's jump forward to the present for a moment to see if we can start connecting some dots between 1932 and 2012. Here's a recent comment I wrote about the revolving door of dollars today:

Hello Victor,

The point of JR's excerpts is that the real threat to the dollar lies in the physical plane (real price inflation) rather than the monetary plane (foreign exchange market). The source of the price inflation will be from abroad and it will be reflected in the exchange rate, but the price inflation, not the FX market, is the real threat.

Imagine a toy model where the entire United States (govt. + private sector) imports $100,000 worth of stuff during a period of time (T). T repeats perpetually and, just to keep it real, let's say that t = 1 second, which is pretty close to reality. So the US imports the real stuff and exports the paper dollars. But the US also exports $79,000 worth of real stuff each second. So 79,000 of those dollars come right back into the US economy in exchange for the US stuff exports.

Now, in our toy model, let's say that the US private sector is no longer expanding its aggregate level of debt. And so let's say, just for the sake of simplicity, that $79,000 worth of international trade over time period T represents the US private sector trading our stuff for their stuff. And let's say that the other $21,000 worth of imports each second is all going to the USG consumption monster.

So the USG is borrowing $21,000 **from some entity** each second and spending it on stuff from abroad. This doesn't cover the entire per-second appetite of the USG consumption monster, only the stuff from abroad. The USG also consumes another $114,000 in domestic production each second, which is all the domestic economy can handle right now without imploding, but we aren't concerned with that part yet.

Now, if the **from some entity** is our trading partner abroad, then there is no fear of real price inflation. The USG is essentially borrowing $21,000 this second -- that our trading partner received last second -- and the USG will spend it again on more foreign stuff a second from now and then borrow it again. See? No inflation! The same dollars circulate in perpetuity, the real stuff piles up in DC, and the USG debt piles up in Beijing.

But what if that **from some entity** is mostly the Fed, and has been for two years now (and they are calling it QE only to make it sound like its purpose is to assist the US private sector)? If that's the case, then the fear of real price inflation is now a clear and present danger to "national security" (aka the USG consumption monster). Not so much for the private sector which is now trading our stuff for their stuff, but mostly for the public sector which trades only $21,000 in paper nothings, per second, for their stuff.

Under this latter situation, you now have $21,000 per second piling up outside of US borders and it's not being lent back to either the USG or the US private sector (which has stopped expanding its debt). It's either going to bid for stuff outside or inside of US boundaries.

The USG budget approved by Congress does account for this $21,000 per second borrowing, but it also assumes reasonably stable prices. If the general price level starts to rise faster than Congress approves new budgets, this creates a problem for the USG. It's not as big of a problem for the US private sector, since we are trading mostly stuff for stuff. If the cost of a banana rises to $1T, it will still only cost half an apple. But if you're relying only on paper currency to pay for your monstrous needs, real price inflation is an imminent threat!

FX volatility has more to do with the changing preferences of the financial markets. It is a monetary plane phenomenon on most normal days. But it will also show up when the price of a banana starts to rise.

When the USG cuts a check, it is drafted on a Treasury account at the Fed. Sometimes those funds are all ready to go in the account. Sometimes they are pulled (momentarily) from a commercial bank into the Fed account for clearing purposes. And sometimes the Fed simply creates them, adding a Treasury IOU to its balance sheet.

This latest Executive Order paves the way for the Fed to start stacking not only Treasury IOUs, but also Commerce Dept. IOUs, Homeland Security IOUs, State Dept., Interior, Agriculture, Labor, Transportation, Energy, Housing and Urban Development, Health and Human Services, etc… IOUs. Whatever it takes to keep the real stuff flowing in! If you think the Fed's balance sheet looks like a gay rainbow now, just wait!

But from a financial perspective, if you are stuck in dollar assets when real price inflation takes hold, you are going to want out. And the quickest way out is through the currency itself. So we could see a spike (outside of the US) in the price of Realdollars even as the dollar is collapsing against the physical plane and the USG is printing like crazy to defend its own largess! How confusing will that be to all the hot "experts" on CNBC?

The financial markets can cause dramatic volatility in the FX market, and vice versa. But that's all monetary plane nonsense. A small change in the physical plane might not even register at first in the FX market, especially if a financial panic is overpowering it in the opposite direction. But even if the dollar doubles in financial product purchasing power terms (USDX to 150+), that's not going to lower the price of a banana in the physical plane while the USG is defending its consumption status quo with the printing press.

I highlighted the part relevant to our revolving door discussion, but the whole comment is relevant to the whole of this post because I had this post in mind when I wrote the comment. Anyway, can you see any similarity between what Jacques Rueff wrote about the sterling in 1932 and what I wrote last week?

How about a difference? That's right, the U.S. is now the world's premier debtor while it was the world's creditor back in the 30s. But in both cases the dollar currency is being continuously recycled while notations recording its passage pile up as reserves on which foreign bank money is expanded while the U.S. counterpart of reserves and bank money is not reduced as a consequence of the transfer.

If you print the currency that the rest of the world uses as a reserve behind its currency, that alone enables you to run a trade deficit without ever reducing your ability to run a future trade deficit. Deficit without tears it was called. For the rest of the world, running a trade deficit has the finite limitation of the amount of reserves stored previously and/or the amount of international liquidity (reserves) your trading partner is willing to lend you.

Another thing that happens is that, as the printer of the reserve, the rest of the world actually requires you to run a balance of payments deficit or else its (the rest of the world's) reserves will have to shrink, and its currency, credit and economy consequently contract. So to avoid monetary and economic contraction, the world not only puts up with, but supports your deficit without tears. Here's a little more from Jacques Rueff:

The Secret of a Deficit Without Tears [6]

To verify that the same situation exists in 1960, mutatis mutandis, one has only to read President Kennedy's message of 6 February 1961 on the stability of the dollar.

He indicates with admirable objectivity that from 1 January 1951 to 31 December 1960, the deficit of the balance of payments of the United States had attained a total of $18.1 billion.

One could have expected that during this period the gold reserve would have declined by the same amount. Amounting to $22.8 billion on 31 December 1950, it was, against all expectations, $17.5 billion on 31 December 1960.

The reason for this was simple. During this period the banks of issue of the creditor countries, while creating, as a counterpart to the dollars they acquired through the settlement of the American deficits, the national currency they remitted to the holders of claims on the United States, had reinvested about two-thirds of these same dollars in the American market. In doing so between 1951 and 1961 the banks of issue had increased by about $13 billion their foreign holdings in dollars.

Thus, the United States did not have to settle that part of their balance-of-payments deficit with other countries. Everything took place on the monetary plane just as if the deficit had not existed.

In this way, the gold-exchange standard brought about an immense revolution and produced the secret of a deficit without tears. It allowed the countries in possession of a currency benefiting from international prestige to give without taking, to lend without borrowing, and to acquire without paying.

The discovery of this secret profoundly modified the psychology of nations. It allowed countries lucky enough to have a boomerang currency to disregard the internal consequences that would have resulted from a balance-of-payments deficit under the gold standard.

Second Warning

By the early 1960s, Jacques Rueff was not alone in speaking out against the American privilege embedded in the monetary system. Another Frenchman named Valéry Giscard d'Estaing, who was the French Finance Minister under Charles de Gaulle and would later become President himself, coined the term "exorbitant privilege". [7] Even Charles de Gaulle spoke out in 1965 and you can see a short video of that speech in my post The Long Road to Freegold.

But perhaps more significant than the obvious French disdain for the system was Robert Triffin, who stood before the U.S. Congress in 1960 and warned:

"A fundamental reform of the international monetary system has long been overdue. Its necessity and urgency are further highlighted today by the imminent threat to the once mighty U.S. dollar."
To put Triffin in the context of our previous discussion, here's what Jacques Rueff had to say about him:

"Some will no doubt be surprised that in 1961, practically alone in the world, I had the audacity to call attention to the dangers inherent in the international monetary system as it existed then.

I must, however, pay a tribute here to my friend Professor Robert Triffin of Yale University, who also diagnosed the threat of the gold-exchange standard to the stability of the Western world. But while we agreed on the diagnosis, we differed widely as to the remedy to be applied. On the other hand, the late Professor Michael Heilperin, of the Graduate Institute of International Studies in Geneva, held a position in every respect close to mine."
And here is what Wikipedia says about Robert Triffin's Congressional testimony:

"In 1960 Triffin testified before the United States Congress warning of serious flaws in the Bretton Woods system. His theory was based on observing the dollar glut, or the accumulation of the United States dollar outside of the US. Under the Bretton Woods agreement the US had pledged to convert dollars into gold, but by the early 1960s the glut had caused more dollars to be available outside the US than gold was in its Treasury. As a result the US had to run deficits on the current account of the balance of payments to supply the world with dollar reserves that kept liquidity for their increased wealth. However, running the deficit on the current account of the balance of payments in the long term would erode confidence in the dollar. He predicted the result that the system would not maintain both liquidity and confidence, a theory later to be known as the Triffin dilemma. It was largely ignored until 1971, when his hypothesis became reality, forcing US President Richard Nixon to halt convertibility of the United States dollar into gold, an event with consequences known as the Nixon Shock. It effectively ended the Bretton Woods System." [8]
(For more on the Triffin dilemma, please see my posts Dilemma and Dilemma 2 – Homeless Dollars. And for a glimpse at what I view as an even more fundamental dilemma, you'll find "FOFOA's dilemma" in my post The Return to Honest Money.)

As noted above, Triffin's prescription in the 1960s was at odds with Rueff and the French contingent. In fact, even today, the IMF refers to "Triffin's solution" as a sort of advertisement for its own product, the almighty SDR. [9] From the IMF website:

Triffin's Solution

Triffin proposed the creation of new reserve units. These units would not depend on gold or currencies, but would add to the world's total liquidity. Creating such a new reserve would allow the United States to reduce its balance of payments deficits, while still allowing for global economic expansion.

But even though Triffin proposed something like the SDR (a proposal the IMF loves on to this day), I think that actions speak louder than words.

Robert Triffin was a Belgian economist who became a U.S. citizen in 1942 after receiving his PhD from Harvard. He worked for the Federal Reserve from 1942 to 1946, the IMF from 1946 to 1948 and the precursor to the OECD from 1948 until 1951. He also taught economics at both Harvard and Yale. But in 1977 he reclaimed his Belgian citizenship, moved back to Europe, and helped develop the European Monetary System and the concept of a central bank for all of Europe which ultimately became the ECB five years after his death in 1993.

Final Warning

With the end of the Bretton Woods monetary system in 1971, three things (besides the obvious closing of the gold window) really took hold. The first was that the U.S. began running (and expanding) a blatant trade deficit. It went back and forth a couple of times before it really took hold, but starting in 1976 we have run a deficit every year since. [10]

The second thing that took hold was something FOA called "credibility inflation". You can read more about it in my aptly-titled post, Credibility Inflation. This phenomenon, at least in part, helped grow the overall level of trade between the U.S. and the rest of the world in both nominal and real terms. In inflation adjusted terms, U.S. trade with the rest of the world is up almost eightfold since 1971. [11]

The third thing was that the U.S. federal government began expanding itself in both nominal and real terms by raising the federal debt ceiling and relying more heavily on U.S. Treasury debt sales. From Credibility Inflation (quoting Bill Buckler):

Way back in March 1971, four months before Nixon closed the Gold window, the "permanent" U.S. debt ceiling had been frozen at $400 Billion. By late 1982, U.S. funded debt had tripled to about $1.25 TRILLION. But the "permanent" debt ceiling still stood at $400 Billion. All the debt ceiling rises since 1971 had been officially designated as "temporary!" In late 1982, realizing that this charade could not be continued, The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling. The way was cleared for the subsequent explosion in U.S. debt. With the U.S. being the world's "reserve currency," the way was in fact cleared for a debt explosion right around the world.
Here are the debt ceilings through 2010 as found on Wikipedia:

That's all well and good, but to really see the U.S. exorbitant (is there a stronger word?) privilege of the last 40 years in stark relief, we must think about those empty containers we export from the picture at the top. Those containers come in full and leave empty, just to be refilled again overseas and brought back in. Those empty containers represent the real trade deficit, the portion of our imports that we do not pay for with exports. Those empty containers represent the portion of our imports that we pay for with nothing but book entries which are little more than lines in the sand. [12]

Here's my thesis: that the U.S. privilege which began in Genoa in 1922, and was so complicated that only one in a million could even fathom it in 1931 and 1960, became as clear as day for anyone with eyes to see after 1971. And so, to see it in real (not nominal) terms, we can very simply look at the percentage of our imports that is not paid for with exports. So simple, which might be why the government doesn't publish that number and the media doesn't talk about it. All you have to do is compare the goods and services balance (which is a negative number or a deficit every year since 1975) with the total for all goods and service imports.

That's comparing apples with apples. For example, in 1971 total imports were $60,979,000,000 and total exports were $59,677,000,000 leaving us with a trade deficit of $1,302,000,000. It doesn't matter what the price of an apple was in 1971, because whatever it was, we still imported 2.14% more stuff than we exported. 1,302 ÷ 60,979 = 2.14%.

A trade discrepancy of 2.14% in any given year would be normal under normal circumstances. You'd expect to see it alternate back and forth from deficit to surplus and back again as it actually did from 1970 through 1976. But it becomes something else entirely when you go year after year (for 36 years straight) importing more than you export. And that's why I showed that little dip in the above timeline visualization of the U.S. exorbitant privilege at 1971.

And now here's what it looks like charted out from 1970 through 2011:

Here's the data from the chart:

1970 -4.14%
1975 -10.32%



As you can see, the U.S. exorbitant privilege (essentially free imports) peaked in 2005 at an astounding 35.5%, or more than a third of all imports! Stop and think about that for a second. For every three containers coming in full, only two went out full. So how do we reconcile that number (35.5%) with the report at the top of this post that said 45% of containers are exported empty?

The answer is simple. The trade deficit includes both goods and services. But services are not imported in containers. In fact, the U.S. has been running a trade surplus on services every year since 1971. Imagine that! So if we look only at the portion of goods coming and going, we get an even higher percentage. So let's look at 2005 in particular.

In 2005 we imported $1.692T in goods but we exported only $911B for a goods balance of payments of negative $781B. That equates to 46% of all containers being exported empty in 2005. That goods deficit has since dropped down to around 33% for the last three years, so perhaps 45% empty containers in 2010 can be explained by the location of the Port Elizabeth facility being only 200 miles from Washington DC, consumption capital of the world.

But all of this is kind of beside the point. The point is that the U.S. exorbitant privilege peaked in 2005, for the last time, at its all-time high of a third of all imports, and soon it will go negative, where it hasn't been in a really long time.

I can say this with absolute confidence because the signs are everywhere, even if nobody is talking about them in precisely these terms. Here's one bloodhound who's at least onto the right scent (from Barrons):

But more recent Treasury data show China has been selling Treasuries outright. And while the markets have been complacent to the point of snarkiness, MacroMavens' Stephanie Pomboy thinks that's wrong. Unlike other Cassandras, she's been right in her warnings -- notably in the middle of the last decade that the U.S. financial system was dangerously exposed to a bubble in U.S. real estate. Hers was a lonely voice then because everybody knew, of course, house prices always rose.

As for the present conundrum, there's an $800 billion gap between the $1.1 trillion the Treasury is borrowing to cover the budget gap and the roughly $300 billion overseas investors are buying, Pomboy calculates.


But Pomboy has little doubt that the Fed will step in to fill the gap left by others. In other words, debt monetization, a fancy term for printing money to cover the government's debts, which in polite circles these days is called "quantitative easing."

"Having pushed interest rates to zero, launched QE1 and QE2, there's no reason to believe that the Fed is going to allow free-market forces to destroy the fragile recovery it has worked so hard to coax forth now. And make no mistake, at $800 billion, allowing the markets to resolve the shortfall in demand would send rates to levels that would absolutely quash this recovery…if not send the economy in a real depression."

But her real concern is a bigger one. "The Fed's 'need' to take on an even more active role as foreigners further slow the purchases of our paper is to put the pedal to the metal on the currency debasement race now being run in the developed world -- a race which is speeding us all toward the end of the present currency regime." That is, the dollar-centric, floating exchange-rate system of the past four decades since the end of Bretton Woods system, when the dollar's convertibility into gold was terminated.


That would leave the Federal Reserve as lender of last resort to the U.S. government to fill the gap left by its biggest creditor. Think this Zimbabwe style of central-bank monetization of an unsustainable government debt can't happen in one of the world's major industrialized democracies?
That was from March 2nd. Here's another one from the same writer at Barrons just a few days ago:

Our friend, Stephanie Pomboy, who heads the MacroMavens advisory, offers some other inconvenient facts about the Treasury market: Uncle Sam is borrowing some $1.1 trillion a year, while our foreign creditors have been buying just $286 billion.

"I'm no mathematician, but that seems to leave $800 billion of 'slack' (of which the Fed graciously absorbed $650 billion last year.) Barring a desire to pay the government 1% after inflation, there is NO profit-oriented or even preservation-of-capital-oriented buyer for Treasuries," she writes in an email.

"For the life of me, I can't understand why NOBODY is talking about this???!!!"

Having known Stephanie for a few years, I can't recall her being this agitated since 2006, when she insisted the financial system's hugely leveraged exposure to residential real estate posed grave risks. She was called a Cassandra then, but both ladies' prophesies turned out to be right.

The U.S. fiscal situation hasn't mattered as long as the Treasury could readily finance its deficits at record-low interest rates. Even after the loss of America's triple-A credit rating from S&P, Treasuries rallied and yields slumped to record lows.

That's no longer happening. For what ever reason, assurances by the Fed Chairman aren't impressing the bond market. Neither is weakness in the commodity markets. Maybe Stephanie is on to something.
Of course they are looking only at the monetary plane, the silly market for U.S. Treasury debt which the Fed can dominate with infinite demand. As I keep saying, the real threat to the dollar is in the physical plane: the price of all those containers being unloaded and then exported empty.

The U.S. government has grown addicted to its exorbitant privilege over the years. It is a privilege that has been supported by foreign Central Banks buying U.S. debt for the better part of the last 30 years. But as I wrote in Moneyness, and as Ms. Pomboy has noticed above, that ended a few years ago. From Moneyness, the blue that I circled below shows the Fed defending our exports **of empty containers** with nothing more than the printing press and calling it QE:

I would like you all to give this some serious thought:

1. The U.S. exorbitant privilege peaked in 2005 (before the financial crisis) and is now on the decline, meaning it is no longer supported abroad.
2. The U.S. government (with the obvious assistance of the Fed) is now in defensive mode, defending that inflow of free stuff with the printing press.
3. The U.S. federal government budget deficit (DC's "needs" minus its normal revenue) **eclipses** the trade deficit by more than a 2 to 1 margin.

So what could possibly go wrong? The recession has already contracted the U.S. economy, all except the part that resides in Washington, DC. And just to maintain its own status quo (when has it ever been happy doing only that?) our federal government needs to insure our national business of exporting empty containers at its present level.

What could go wrong? Prices! If the price of an apple doubles, what do you think happens to the price of a full container? Those of you who think we are due for some more price deflation in the stuff that the USG needs to maintain its status quo should really have your heads examined. Even Obama is winding up to pitch the whole ball of twine at the problem. He just delegated his executive power to print until the cows come home to each of his department heads. I quote from Executive Order -- National Defense Resources Preparedness:

"To ensure the supply… from high cost sources… in light of a temporary increase in transportation cost… the head of each agency… is delegated the authority… to make subsidy payments"

In case you're having difficulty connecting the dots I've laid out (not) so subtly, I'm talking about a near-term dollar super-hyperinflation that will make your hair curl and make Weimar and Zimbabwe seem like child's play in the rearview mirror. If you're new to this blog, you should know that the rate of hyperinflation does not follow the printing. An apple does not end up costing a trillion dollars because they printed enough dollars to price all apples that way. Hyperinflation comes from the margin, from the government defending its own needs, and there's never enough "money" for us mere mortals to pay the prices which are running away from everyone during hyperinflation.

Also, hyperinflation turns physical (as in physical cash) very quickly once it takes hold. So if you're expecting some sort of electronic currency hyperinflation, fuggedaboutit. If you think we're more technologically advanced than bass-ackward Zimbabwe or ancient Weimar, you are not understanding what really happens during currency hyperinflation. It cannot play out electronically all the way to the bitter end because, when prices are rising that fast, physical cash always brings a premium over electronic deposit transfers which require some amount of time (and thereby devaluation) to clear.

Here are a few of my recent posts in which I explore what little we can do to prepare for what is inevitably coming our way:

Deflation or Hyperinflation?
Big Gap in Understanding Weakens Deflationist Argument
Just Another Hyperinflation Post - Part 1
Just Another Hyperinflation Post - Part 2
Just Another Hyperinflation Post - Part 3

That's right, I saved the "crazy super-hyperinflation talk" for the tail end of a really long post. Because A) people who think they have it all figured out already tend to abandon a post once they read the word "hyperinflation", and B) the stuff in this post really happened and is still happening so it's only fair to you, the reader, to give its inevitable denouement the appropriate weight of a bold conclusion. If I didn't do that, I would not have done my job, now would I? ;)

And in case you didn't figure it out yet, this third and final warning was only for the savers who are still saving in dollars. It's way too late to fix the $IMFS.


PS. Thanks to reader FreegoldTube for the custom video below! He just happened to send me the link while I was considering songs for this post. The band is Muse and the song is Uprising from their album titled The Resistance.

[1] http://mauricio.econ.ubc.ca/pdfs/kirsten.pdf
[2] The Age of Inflation –Jacques Rueff
[3] http://mises.org/money/4s3.asp
[4] http://www.gold.org/download/pub_archive/pdf/Rs23.pdf
[5] research.stlouisfed.org/publications/review/03/09/0309ra.xls
[6] http://mises.org/books/monetarysin.pdf
[7] http://en.wikipedia.org/wiki/Exorbitant_privilege
[8] http://en.wikipedia.org/wiki/Robert_Triffin
[9] www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm
[10] www.census.gov/foreign-trade/statistics/historical/gands.txt
[11] Using data from [10] and the BLS inflation calculator at http://www.bls.gov/data/inflation_calculator.htm
[12] Lines in the sand is a reference to my Ben and Chen island analogy in Focal Point: Gold
[13] http://online.barrons.com/article/SB...5246.html
[14] http://online.barrons.com/article/SB...6544.html


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M said...

From post...

"if you are stuck in dollar assets when real price inflation takes hold, you are going to want out. And the quickest way out is through the currency itself."

Im not sure that the transfer to dollars momentarily will produce a rally. Its just transaction at that point.

Michael dV said...

an interesting explanation of the situation the Eurozone is in

RJPadavona said...

Hello JR,

I was reading through some of what you posted earlier about T-bills and Treasury bonds. I have a question: In a post-RPG world, do you think they'll even be such a thing as a Treasury bond?

This may have been covered here before, but my thought would be that anyone saving for the long term would do so in physical gold. So where would the demand come from for bonds? I can still see the need for bills and notes (up to a certain maturity date) as a place to park large amounts of cash, but I don't see where a demand for long term government debt would come from.

I suppose there may eventually be some sovereigns who would buy bonds, but it seems to me that the same psychological effect that will keep the ROW from ever trusting the USG to go back on a classical gold standard will also apply to the trust involved in accepting a world in which long term US Treasury debt exists. I know it's a little different because in '71 the USG actually defaulted on their obligation to redeem dollars for gold. But this time around, even though the Treasury debt obligations will be met nominally, they won't be met in real terms. So it seems the same psychological effect would still apply.

Any thoughts you (or anyone else) have on this would be appreciated.


And thanks for posting that link earlier on Counter-Establishment economics. Interesting read.

We watch these tribes
Like Lord of the Flies
Together, yes?



Wendy said...

Thank you costata,

I am enjoying the sunshine. Vegas is a very weird place, nothing and nobody is real in vacation-land, yet if you look into the eyes of the people posing for pics etc it exemplifies the US and it's struggle. Kinda like a ground zero in my opinion.

I'm neither a partier or gambler, but I'm enjoying myself none the less :D

And although vegas is just waking up, it's past my bedtime ;)

Anonymous said...


nice description of where all the T-bonds might be hiding. I am a bit unhappy about the data I have on this issue. What I noticed is that the selling of treasury debt by China since summer 2011 has been compensated pretty exactly by buying from Japan (I guess BoJ) and from the UK (perhaps banks and hedge funds? - but theoretically even a government that doesn't want to be seen).

Concerning the goodbye to the long bond, I think the trend is there, but it is rather slow. Somehow the Fed guessed the required volume quite accurately when they started their Operation Twist 2. And, by the way, Jim Rickards got it right again when he said, OT2 until June, and this also means there won't be any further QE before June.


Anonymous said...


it would be interesting to know what percentage of the northern European surplus was invested in gold. If you believe in the usual freegold price estimates, then it would be enough if about 2% to 5% of the surplus was put in gold.

According to Wikipedia, Germany had about € 133bn in trade surplus in 2011. If they bought gold for 3% of this, say about € 4bn, that would make it about 100 tons. That should be enough to preserve the surplus through the transition. Sure, the 97% in PIIGS debt was a waste, but the gold revaluation would compensate for this.

Purchasing gold for € 4bn per year is just € 50 per capita. I bet they have been buying substantially more.

I wonder whether the Bundesbank are doing the same back-of-the-napkin calculation. Perhaps there is a good reason not to rush anything.


AdvocatusDiaboli said...

nice theory, I hope your right about the Bundesbank. At least what underpins your thesis is, that the Bundesbank encourages people to buy gold. Not in the media, but in all their publications.
Just one example, they state:
(page 20)
Greets, AD

Anonymous said...

I read a little bit German, and page 19 seems even better. Isn't that FOFOA, saying the US$ can fall, but gold doesn't care?

Even the Greenspan quote on p. 20 is surprisingly freegoldish.

Wow, that's way more pro-gold than you have admitted so far, isn't it?


costata said...

Some more data points on the US as a place to do business. Dire findings.


A Harvard Business School study that Niall Ferguson pointed us to today shows the U.S. has fallen severely behind in terms of international competitiveness.

The study, from January, found that for Harvard alums personally involved in a company relocation decision, 57 percent said the decision "involved the possibility of moving existing activities out of the U.S."

Meanwhile, only 9 percent considered moving existing activities from another country into the U.S.

And this:


JR said...


In a post-RPG world, do you think they'll even be such a thing as a Treasury bond?

I have two sorta overlapping thoughts that initially came to mind, although they are not directly on point. I don't think they are complete or exhaustive but I think they might help start some discussion. Basically, I agree wrt to Treasury debt, and I agree wrt the idea long term debt will be disfavored and shorter maturities preferred.

First, FOA's idea of a second currency - basically the idea that the $IMFS bloc countries will suffer during the initial phase after the freegold transition, and thus these countries will demand Euros as second money. There will be demand for Euro debt related to this, although as you note it probably won't be for super long maturities.

Does Fiat Produce an Endless Sea of Wars?

We must not confuse a currency's "total demise" or "falling out of use" with a "loss of identity". In our time there have been few major moneys that went away. Today, we have a whole world of national fiats "in use" and "not demised" that still carry their nations identity. They lose value at an incredible rate, are mismanaged to the highest degree, are laughed at and despised. But, still they are "in use" as they function for their governments and economies. Usually, they function along side whatever major reserve currency is in vogue. Today, the dollar, tomorrow the Euro. Make no mistake, the entire internal US sector can and will function as it's currency runs a price inflation just like these third world countries. We will adapt as they have by dropping our living standard accordingly and adopting the Euro as our second money.


Won't happen! Plan on Americans using inflating dollars as their local transactional currency and Euros as their second currency.

Second is the related idea that the Euro will be the world oil currency and a global network good come to be used to conduct a big part of world trade - Dilemma. In the follow-up post Dilemma 2 – Homeless Dollars, FOFOA quoted this from the archive:

I thought that if oil was paid for in Euros, say, instead of dollars, then that would encourage most countries to divest themselves of an appropriate number of "dollar asset reserves" in favour of "Euro asset reserves", thereby reducing the demand for dollars and lowering its "value", and increasing the demand for the Euro and raising its value.

JR said...

But yeah, what is ocuring is in essence a reaction to the fundamental recognition that when you deploy your savings in the system (the $IMFS' debt) you enable systemic malinvestment. But when you withdraw savings, you don't :) So I would expect most savings won't be held in debt, and it will be shorter maturities:

A Winner Takes the Gold


Once Upon a Time

Our money is credit. “The people’s” money has always been credit. Credit expands and contracts based on the availability of actual money, the monetary base. 1922 was the first time they included a form of credit as the base itself. A Pandora’s box if ever there was one!

But don't assume there is coercion involved when I say credit is our money. It is the best possible money for a vibrant economy. It is how the pure concept of money emerged in the very beginning. When gold first became money, it was as the mental unit of account. I'll give you five ounces of gold worth of cattle and you'll owe me five ounces worth of milk and other goods and services. When we participate in a vibrant economy, we deal in credit denominated in money. When we withdraw from a mismanaged economy, we withdraw into the monetary base, we hoard the reserves. Holding credit is our vote for vibrancy. Hoarding reserves is our vote against the current economy.

Gold is in the process of changing functions in the global economy. And in this transition, "the most visible transformation since it was first used as money," it will plateau at a new, mind-blowing level before it resumes its proper function. This is happening. It must happen, because bullion bank paper promises cannot function like gold.

those who net-produce and then funnel their savings into those antiquated financial instruments have and will always make somewhere between a much lesser and a massively negative contribution to society than the gold hoarders. I say massively negative because it is they, Dagen and Munger, that enable systemic malinvestment and incentivize the kind of lowering of prudent lending standards that almost brought the system down in 2008. By contrast, gold savers force banks to use their own capital when funding the debt-based consumption of the widgets left on the table. Paper investments pinched off by the sphincter that is Wall Street only encourage and enable banks to make too many loans, far beyond the weight (and prudence) of their capital.

So Munger and the Dingbat are wrong wrong wrong! You're a jerk if you save in paper, enabling the destruction of Western Civilization. Rational people everywhere have a moral obligation to buy ONLY physical gold with their savings. If you're capable of understanding the REAL world, you have a moral obligation to become rational.

JR said...

Glimpsing the Hereafter

Of course, what I have described above is a simple model. The reality will be a bit more complex. For instance, gold will have some competition although it will be tiny in comparison to today. Some government debt will likely compete for your savings. But the US government, for example, will have to compete just like the Greeks do today. And we will still have a much more limited menu of investments and trading opportunities to lure you into putting your hard-earned savings at risk.

JR said...

Hi M,

Im not sure that the transfer to dollars momentarily will produce a rally. Its just transaction at that point.

When demand increases and supply stays the same, price goes up. What will the FED do with the supply?

Money Talk Continued

"15) The USDX is a measure of dollar exchanges with other currencies that happen on the open market. The Fed can counteract a rise in open market dollar demand by providing a supply of dollars directly to banks within its own sub-system, or indirectly to foreign banks through swaps with other CB's. Last year the Fed had a lot of practice doing this fast. I am sure the contractual transaction with the foreign CB's took several hours and included recording video teleconferences in which the agreements were legally bound. But now that they have experience doing this in a crisis, next time it will probably be almost instantaneous.


The next crisis, if it is mainly in the US financial system, will likely not spike the dollar because the Fed has total control and flexibility within its own system. If it is spread throughout the world it may spike as foreign banks bid up dollars on the exchange, but the Fed is now more experienced than it was a year ago and will likely put a lid on it very quickly.

But this next dollar shock will probably be irreversible, unlike the last. And in such, it will increase the global supply of dollar monetary base by a large percent. Perhaps by 100% or more. This alone will devalue the dollar and be the cause of the next shock which will require a similar response by the Fed, perhaps increasing the base by another 50% as China and others dump the last of their bonds onto the open market in a highly one-sided transaction sending the value of the bonds to zero, US interest rates to something so high they are non-existent, and the purchasing power of the dollar down into the stinky, Zimbabwe dirt.

So in short, I guess I agree with David Bloom. Of course it COULD rally, but I don't think the Fed will let it (unless it happens to have some T-bonds to sell that week!). Letting it rally too high would crush the financial system (by driving asset values into the dirt) which the Fed wants to save at any cost. Even though the cost will be the crushing of the system. The ol' Catch-22.

Sorry if this seemed a bit simplistic or a little elementary. Of course there are more complicated issues involved, like the $ carry trade and cross-currency investments. Derived foreign exchange activities become very complicated very fast! Too complicated for the banks, obviously! But I hope I at least covered the basics of the problem, enough to explain my answer. You all will be sure to let me know if I got something wrong... I am sure of that! ;)"

JR said...

Big Gap in Understanding Weakens Deflationist Argument

"The value of money, like everything else in life, derives from supply and demand. There are two distinct entities that each control one side of the equation, kind of like a tug-of-war. The printer controls supply and the marketplace controls demand. A tug-of-war is actually an apt analogy. When demand for a currency spikes its price, the printer just eases his grip on the rope, releases more rope and the whole demand side just falls on its butt.

We saw this with the yen after the earthquake and with the dollar a little over a year ago. With a fiat currency, this is the way it works. No matter how hard demand pulls, if the printer doesn't want the price of the currency to spike all he has to do is release more rope. It's his ace in the hole. He can always send the marketplace to its butt. The printer is firmly in control of the supply side.


When the economy is struggling, unemployment high, home prices falling, people are afraid to spend their money. This drives up the demand for money, slows the velocity of money, raises the value of money and lowers the prices of things and assets. Likewise, when the financial markets are crashing, the demand for cash skyrockets while plunging assets bid frantically for dollars. Both of these demand-driven events act just like a large deflation in the money supply as they drive up the value of money and lower the prices of other things.

When this happens, the money printer tries to counter demand by increasing supply.


A spiking demand for currency because of instability in some markets and the economy, as well as earthquakes and unrest in the Middle East, jacks up the price on the currency exchange and drops the price of other assets which is instantly met with quantitative printing (supply increases) to ease the pain, raise the price of assets, and recklessly counter that which is actually in the driver's seat today, demand.


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."

JR said...

Opps, the A Winner Takes the Gold quote is below, I made it look like part of Once Upon a Time Above.

those who net-produce and then funnel their savings into those antiquated financial instruments have and will always make somewhere between a much lesser and a massively negative contribution to society than the gold hoarders. I say massively negative because it is they, Dagen and Munger, that enable systemic malinvestment and incentivize the kind of lowering of prudent lending standards that almost brought the system down in 2008. By contrast, gold savers force banks to use their own capital when funding the debt-based consumption of the widgets left on the table. Paper investments pinched off by the sphincter that is Wall Street only encourage and enable banks to make too many loans, far beyond the weight (and prudence) of their capital.

So Munger and the Dingbat are wrong wrong wrong! You're a jerk if you save in paper, enabling the destruction of Western Civilization. Rational people everywhere have a moral obligation to buy ONLY physical gold with their savings. If you're capable of understanding the REAL world, you have a moral obligation to become rational.

Aquilus said...

JR, nice, and to the point.

2 rusty cents from me on future bonds:

Speaking for myself, regardless of pre or post any transition, I always look at 2 things:

1. real interest rate for the duration I will defer consumption.
2. real purchasing power of currency I obtain (including interest) at the end of the period.

Now those 2 things are highly subjective from person to person, and honestly they differ for myself from day to day depending on external inputs.

I will do no different under freegold. I will check my expectations and buy bonds or gold with my savings depending on what benefits me most at that time. But understand that the bond market will have to compete hard to get my savings, and for that they can't play devaluation games like today's USG.


Re: treasuries market and ways to uphold it.

I have no access to that private data either. Quite honestly I'm more interested about flow from producer countries into real assets where I can find that info, as well as demand for near cash bills. Like I said, the Fed can manage the rest quite nicely in so many ways.

Woland said...

JR: re: the dollar doesn't bid for gold, gold bids for the dollar.

I understand and accept the concept. I do think that the phrasing,
in spite of its' unimpeachable source, could be made clearer to the
neophyte. Let me explain: To the shrimp, whether he be buyer or
seller, he looks up the market price, "determined" by the "tug of war"
on the futures market, and does the transaction. If he needs dollars,
he takes the price offered. Yes, he is the "weak hand" who does not
know why he held gold. As a buyer, he does the same. To Him,
his dollars are bidding for gold.
The GIANT, or CB, is the gold holder who "bids for dollars". An
easier concept to understand (for me, anyway) is, Gold "chooses to
accept, or not" any offer of currency, dollar or otherwise.
Gold is like FOFOA's Renoir, hanging on his wall, when his friends
come to visit. If he chooses to sell it, it will not go to the flea
market. It will go to Sothebys, but NOT to be sold for whatever
it may bring. It will be sold with a RESERVE price, or not at all.
No doubt, for all the longstanding readers of this blog, this simple
distinction is already understood. For the neophyte, I think the
alternative may prove helpful. (an afterthought: for the GIANTS,
the BIS is "their" Sothebys)

Mike said...


that demand that was lost in india will now be made up.
silver on the other hand, probably not.


AdvocatusDiaboli said...

One final attempt from my side:
Since my appearance here at FOFOA I guess I p!ssed off quite a lot of FG believers. By now you also noticed what my main problem is about FG, it's not FG in itself, it's that lalala-Another-said-15yrs-ago-Eurogold BS stuff.
Lots of those self entitled FG experts call me lots of names by now, you dont like me? Okay, here's the deal:
Name me one Pro-EU(RO) person in charge of the EU(RO) who is not a collectivist/socialist/statist/GoldmanSachsCrook (or just a simple jerk). Just ONE FEAKING SINGLE PERSON, and I will shut my mouth forever and will continue to admire the great outlook of ANOTHER. JUST ONE!!!
Just to chancel your favorit names in advance:
Schäuble - statist
Merkel - statist/socialist
Barosso - communist/socialist
Junker - statist
Asmussen - socialist
Rehn - statist/collectivist
Trichet - statist
Duisenberg - maybe, but long time passed away
Weidman - no power in the ECB
(I am not even going to start with the GS crooks crew)

I just like to know, what you are all aware of, and what I am missing.
Greets, AD

Anonymous said...


I wouldn'dismiss the above. My impression is not different from yours, but Another had a concept which maybe might not get completely fulfilled re the euro, but the way for RPG/FG is designed in that direction. Have you seen the gold bars of o.o5 sold for ca. 5 euro? You know that the Germ MSM is not writing anything it should, the G. Grass situation tells a lot - and even so, in Handelsblatt there is an exact analysis how much one could have saved in gold instead of paper...
More is not allowed.Not yet. We are not the 1%!

Think Geldmuseum Ffm/M!!! Excellent link, I enjoyed it a lot. And btw we are in the middle of the storm,
our view can sometimes deceive us.

AdvocatusDiaboli said...

yes I perfectly agree with your analysis, it's strange, really really strange things going on: German "MSM" gold hater tell you: yellow stone are sucks, so only hold 5% of your savings in it, but 5% is obligatory, but just maximum!!!
And what you mentioned about the G.Grass thing, yes, drives me also crazy. What is their freaking problem about somebody unimportant just stating things simply what it is?
Greets, AD

What do you mean by:
"We are not the 1%!", I would consider myself the 0.05% ;)

Anonymous said...


concerning GG, he is not that unimportant as we might believe and I suspect changes are to come there to. Rememberthe Spiegel paper from the Bundeswehr a few years ago about the East directions of the Ger. policy and the unsustainability of rhe actual policy inME re. that country we do so much for?
Secondly the 1% di have their information...They are the big and the small giants together.

Tommy2Tone said...
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M said...

@ Gary

"Yes, historically, if you look at other countries' HI, you do get a bout of currency appreciation/deflation before HI (see Argentina)"

Can you show a graph that shows this ripping deflation before the HI ? From what I can see, there was no major currency appreciation before HI.

M said...


Does anyone have any thoughts on timing at this point ?

Considering this is a recession year ? (pre-2008)

Ryan said...


This might be what you're looking for...


The graph applies to Argentina in the last decade.

M said...

@ Ryan

That is the same chart I am looking at. That sure as hell is not the equivalent to the dollar spiking to 150. Not even close.

Anonymous said...

No, jojo, nothing surprises me anymore after seeing the contradictions I notice. Not even when I hear on state radio gold ads from bullion sellers, not such as cash4gold! In the meantime I also notice more simple people worried about their financial future and interested in gold. Nice evolution!

Michael dV said...

with regards to euro North/South wealth
I doubt things are much different there than here, there are many theories about gold under which rationale people might operate. I'm sure many are trying to preserve wealth using gold but I doubt a system wide effort is under way. Probably a few are 'all in' but most save paper just like here in the USA.

costata said...

Uncle costata here again doing his dictum thing again. It's time for number three:

- People can rationalise anything.

To recap, the first two I shared with you are:

1. Those who can be screwed will be screwed.
2. The too hard basket is never full.

Some re-ordering is required methinks:

1. Those who can be screwed will be screwed.
2. People can rationalise anything.

And let's not forget:
- The too hard basket is never full.

Tommy2Tone said...
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Aquilus said...


their logical error is very simple: frame an environment that is a microcosm of the ideas presented here (in this case the political environment, but it moved from type of store of value, need for one, saying that it can never happen because it has not happened before, confirmation bias, you name it... )

Once that frame is setup, the straw man can really be beaten to a pulp (why doesn't any politician openly disclose knowledge - huh???) or talking on both sides of the issue, which is what got me going the other day.

It's an open board though, and given that we're talking about the superorganism here, they are part of it, the superorganism always questioning, questioning. Even trolling has its (small) uses.


you are the "Confucius says" of the forum. Can't argue with what Confucius says though :-)

JR said...

Costata's avuncular manner and the bucolic pleasantness of Wendy's "fresh air" are two of my favorite aspects of FOFOA blog.

Anonymous said...


you didn't quite unerstand my position. I do not inquire why the Au is not advertised for. IT IS NOT POSSIBLE, we would have panic and blood on the street. That's why the recommend 5-10%!
Today I have convinced someone to liquidate all paper possessed! I've used the link from AD which is more than any PR! I speak with very many people and I see more and more of them intersted in preparing. I've convinced even very young people to start working on this subject and I am very proud of that. That youngster bought already 25g in small bars!
The only thing making me sad is the misery some people have to live with, the big price we all pay for the euro, some individuals never being able to come into motion to save their lives or those their children. I wish I were in India where it is no need to explain anything as they already know all they need.
If one day the euro were to break down, come whatever afterwards, I would rejoice. As a matter of fact Au existed before the euro it it will exist after it, regardless what TPTB want. I call that productive chaos, maybe we need it.
I would like to know why nobody aver thought of a plan B for the case the euro dies. Why shouldn't the superorganist take a short cut to come to the same result? I do not really see why. Just because anarchy and chaos would be worse? I prefer anarchy over subjugation.

AdvocatusDiaboli said...

I almost never try to convince people to buy gold (you have to understand money, before you understand gold, and most sheeple are just too stupid to gasp what is money and I dont want to make a fool out of myself, trying to explain things that people dont want to hear anyway). I only convinced my wife to liquidate major holdings in PIIGFS institutions, thats all.
I just try to tell people not to take todays supermarket for granted to be always there.
If somebody owns, lets say $/€10000 in currency, I thing it is more usefull get out of debt and to stack up real stuff you need anyway. YOU CAN NOT EAT GOLD.
And guess what: When there will not be water, food or fuel available, I will not sell mine for no matter how much gold.
Greets, AD

AdvocatusDiaboli said...

and if people might consider me to negative, you might consider the following experiment:
Once in a while I ask people the following question:

"Image no matter what kind of occupation you take, you will not be paid. Under this assumption would you continue your current occupation, or would you do something different (if at all)?"

- until now, under this assumption, I have not found anybody who would continue his work the same way. Think for yourself what that means when TSHTF.
Greets, AD

Nickelsaver said...

In the Big Picture, what the Euro does now is irrelevant. You can't change reality so get over it.

She's got everything I need
And more to live my life
Ever thought to think of never survive
The circle has been broken
It's always been this way
The funny farm, our work
We're on our way

The Big Picture
I wanna see
I know you're listening
So let it be

AdvocatusDiaboli said...

and if you liked the Bundesbank link, you might also like this one:
Instead of criminalizing preppers (like in the US), the german government tells you to hoard. (Amazingly almost uncovered from media).
Greets, AD

Edwardo said...


Correct me if I'm wrong, but my sense has been that heretofore, China has been more interested in acquiring refined gold than gold in the ground.

M said...

@ AD


haha really ? Say someone worth 5 million of todays dollars bought a million bucks worth of quality food and goods. What does he do with the 4 million left over ? Say someone worth 50 million bought a million.... Say someone worth 500 million bought 5 million worth of quality goods... What does AD say he does with the rest of the 495 million ?

AdvocatusDiaboli said...

your absolutely right, thats why I bought gold AFTER the food and AFTER the farmland.
Greets, AD
Does somebody have reliable source on how long you can store what types of fuel (with what additives, because there are really different storries about that out there)?

JR said...

FYI you can eat it (drink it too)

Hollywood is not known for its displays of modesty, and the world certainly does not look to film stars for lessons in financial restraint. But the opulent, gold-garnished menu concocted for guests at the Golden Globes awards ceremony in Beverly Hills has already prompted some observers to choke.


The pudding, decorated with real gold, is described as "a chocolate delice, almond crunch terrine, garnished with acacia honey, caramel and fresh berries" and sprinkled with edible gold flakes at $135 a gram. The dish was devised over six months by pastry chef Thomas Henzi at the Beverly Hilton hotel and is being prepared by 40 chefs and 110 kitchen staff.

"There is gold dust on there for the Golden Globes," Henzi has explained, adding it would pair ideally with the Moët & Chandon Grand Vintage 2002 magnums created for the night. The meal will be served to 1,300 guests, including awards presenters Nicole Kidman, Natalie Portman and Frieda Pinto.


While the team staging the Globes have a thematic excuse for using gold in their dishes, the choice also reflects a growing appetite for incorporating gold leaf and gold dust in recipes, flying in the face of the harsh economic climate.

Last month Britain produced one of the most expensive cheeses on the festive market by mixing premium white stilton with real edible gold leaf and gold liqueur. The cheese, made by Clawson, sold at £608 a kilo. Harrods Food Hall also took stock of Swarovkski-crystal decorated boxes of 15 handmade, 24-carat gold-flecked chocolate truffles with a price tag of £190.A pudding served this Christmas at a country-house hotel in Cumbria took the gold-encrusted biscuit, however. Costing £22,000 and shaped like a Fabergé egg glazed with edible gold leaf, it was also decorated with a two-carat diamond and infused with five grams of edible 23-carat gold. It took the record as the world's most expensive dessert from the previous holder, New York's Serendipity Restaurant, where the bill for the contending pudding was only £12,000.

"The idea of gold in food as a display of wealth goes back to the Romans. Caesar used to crush pearls into food to make it more valuable and hide jewellery inside it too," said restaurateur and cookery expert Prue Leith.

JR said...

;) This would be more fun on twitter!

Gary Morgan said...

Hello Costata,

I get the other two, but can you explain what this one is all about please:

'The too hard basket is never full.'


AdvocatusDiaboli said...

german delicatess:
Whats really cool:
"Goldwasser is used to flavour a traditional Soufflé Rothschild."
But trust me, tastes horrible anyway....

Anonymous said...

Are there any posts on what will happen to the CAD or other currencies if the USD hyper-inflates?


mr pinnion said...

@none available

This just about covers most

Regards ozzy

M said...

@ AD

"thats why I bought gold AFTER the food and AFTER the farmland."

So even me and you have enough surplus wealth that bringing up basic survival is rather foolhardy. "You cant eat gold" is the most infamous paper bug quote out there. Farmland BTW, is over-priced. Farmers have been just as drunk on credit as everyone else. Funny how the city slickers don't realize that.

costata said...


The too hard basket




Michael dV said...

keer with vark
keer is an Indian milk pudding and vark is silver powder. It is tasteless as there is so little of the metal but it comes in sheets and completely covers the treat (if you are careful and don't sneeze
I have no experience with gold in cooking but it is probably similar. The amounts of metal are extremely small....and not very expensive...

costata said...

Ally Financial

After reading this I don't know whether to laugh or cry.


Aquilus said...

You can laugh. As an American, I should cry.

Michael H said...

Phat Expat,

A gold for silver trade is explicitly not a 'like kind exchange' under IRS rules.


The launch of the Euro seems to fall under the 'too hard basket'. How did it ever get off the ground?

holdinmyown said...

Hello None Available. "Are there any posts on what will happen to the CAD ..."

I have been thinking of this for sometime myself. I have identified 2 possibilities:

1. "We're toast" (as Mr. Pinnion alluded to above). The BoC does not hold any significant amount of gold reserves (other than inventory for its gold coin program). Most of the reserves held are in USD as you would expect since this is the world's reserve currency and the US is by far our largest trading partner. If the USD goes into HI then our reserves melt away leaving only Canadian Govt debt as our monetary base (as FOFOA has previously explained these would NOT be considered reserves). If the CAD survived USD HI we would need to rebuild our reserves in gold and Euro. Would there be time to do so?

2. Canada's government debt (including social security and guaranties) and financial debt seem manageable (at least compared to any other G7 country). But the problem could be in the private sector, especially if we experience a housing crisis. If the US starts to experience "a little bit of inflation" (per FOFOA) then Canada would have to decide whether or not to follow the US lead. (Canadian trade accounts have largely been in balance over several decades.) If we refrain from following a mercantilist policy (printing CAD and buying UST to avoid killing our non-energy exports) then we might avoid following the USD into HI.

My gut feeling is that either way "we're toast".

holdinmyown said...

Also if/when the USD fails they will have to replace it with a new currency (or lob off a bunch of zeros from the old one). My guess is that they (USG) already have a plan in place to launch the Amero (Canada, US and Mexico) that would be pattered on the Euro (severed from both gold and the nation state). Never waste a good crisis and always have a fallback Plan B.

costata said...


It's the sheer folly that still amazes me at times. I'm certainly not laughing at the plight of Americans.

Michael H,

Regardless of how the Euro got off the ground - it did. I think going back is in the "too hard basket" now.

FWIW I think regression theory may explain why it could be launched. I think the Euro absorbed the long term acceptance by citizens of their various national currencies. The well spring of the political will to launch it has been discussed exhaustively.

I think that if the Euro had a weak point it was the failure to completely sever the link between the Euro and the nation state by bringing the regulation of the banks in the EMU under the supervsion of the ECB and the EBA. This may be in progress now on the back of this ongoing crisis.

I also think it is instructive that Greece did default. A precedent (albeit half-baked) has been set.

Here's a little homework for our German readers if they care to take up the challenge. Can you suggest some English language papers and/or books which discuss the Bundesbank's regulatory tools over German banks during the post-WW2 era of the Mark? In other words: How did the Bundesbank influence the bank credit money issuers of the Mark?

costata said...


It's interesting see discussion among other countries contemplating, or moving toward, trade and currency unions citing the Eurosystem as a template.

What do they see that the critics of the Euro do not?

costata said...

Those Naughty Gold Miners

James Steel, HSBC’s gold guru.

Mr Steel said the “marginal cost” for mining gold is around $1450. That is when miners leave low-grade ore in the ground and weaker producers shut down.

One thousand, four hundred and fifty dollars per ounce, forsooth. It appears these diggers may be naughty fibbers. If true, no wonder gold mining stocks are in the toilet.


Anonymous said...


How did the Bundesbank influence the bank credit money issuers of the Mark?

Some of it is in Richard Werner's books and papers - he is German.

They have a large number of local savings banks that have a huge market share and (until the 1990s? - AD might answer this) were limited in their activities to extending loans to local businesses and to local home builders. They gold told top down quite precisely how much credit to create. Similarly in post-war Japan.

Back to the future?


Victor The Cleaner said...

funny typo: They got told top down

costata said...

Thanks VTC,

I have a read a few of Werner's papers. Can you suggest one that deals with this topic specifically?

Back to the future?

That's my suspicion. The ECB/EBA will try to recreate the controls over banks that the Bundesbank had (or at least the controls that are still relevant). Alternatively they may push for changes in the European banking system to make it resemble the German model more closely.


costata said...


If, at some point, you want to discuss what went wrong with the system in Japan let me know.


Phat Repat said...

@Michael H
Do you have a post 1991 ruling that this exchange is explicitly NOT permitted?
Here's what I am referring to:

Once again, and I'm shocked, nein wirklich; you know not what you speak of.

Winters said...

I found this an interesting remark in a totally off topic bio/article on behavior economics/psychologist Dan Ariely:

In the United States I work mostly with the Department of Energy. On Friday I was at Berkeley for a conference of the Defense Department, as it happened, and they talked about how to try to persuade Americans to use less fuel.”

They can try the Israeli model – the tax on fuel is so high that people have to choose between gas and food.

“Ah, yes? They aren’t quite ready to do that here at the moment, but the truth is that it’s definitely a possibility.

Somewhat off topic but Ariely's TED talks are well worth the watch.

Winters said...

sorry - link to source article here

Victor The Cleaner said...


Re Werner, is must be the book "New Paradigm", the one with the data analysis about Japan post-bubble.

If, at some point, you want to discuss what went wrong with the system in Japan let me know.

Ironic? Well, I guess, the answer is that they sent too many of their economists to US schools. I vaguely remember that Werner wrote about Japan that they were controlling credit volume until the 1970s (?), but then, following globalization, they adapted the American system.


meo fio said...

ANyone read this book "Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System" by Barry Eichengreen?

JR said...

Mr Eichengreen does not think the dollar is about to be vanquished as sterling was. Rather, he foresees a “multipolar” system of international currencies. Reunification shifted Germany’s priorities from supporting America to binding itself more closely to Europe, resulting in the creation of the first significant competitor to the dollar, the euro. Mr Eichengreen could have devoted more attention to the strains that Europe’s sovereign-debt crisis have placed on the euro. His book is optimistic, noting that political rather than economic imperatives have always driven the euro.
The rise and fall of the dollar

AdvocatusDiaboli said...

yes, sure you got ready.gov. On the other hand it says "3days of food" which is a joke, when supply chains would break in a land like the US: You want to be with your 3days supply in a mega city, or rather in the middle of nowhere?
Also you might want to read this:
e.g. if the FBI wants shop owners to call them, if somebody insist to pay in cash or makes "bulk purchases of ready-to-eat meals"... well, what can I say, it's not "criminalizing" in legal terms, but from my point of view, it tells you where the train is headed.
Greets, AD

AdvocatusDiaboli said...

the thought of "How did the Bundesbank manage it differently" is useless in a certain sense.
Yes, lots of things were different.

As mentioned the credit business was mostly run by local trade union banks (Sparkassen=owned by the local regional governements and Volksbanken=owned by the local people, both must not make profit, only paying guaranteed 6% profit on the net equity holders, which is also ruled&limited).

The regulation of the banking sector was completly different. But to get to the IMHO important point: I am not sure, if only the control of a central bank makes the difference. As FOFOA stated: Money is a social contract. And each contract is only as good as it is carried out and acted upon.
So being in a credit moneytary system, the money is only as good as the superorganism has the intention to pay back. From my view this is the essential point that changed: In earlier Germany this was the basic idea agreed upon, by the bank and by the debtor (and just guided by certain regulations). This has changed: Ninja credits all over Germany just as probably in other countries. So credit(money) is in a certain way a "state of mind", and I have serious doubts, that a central bank can turn this clock back.
Greets, AD

Unknown said...

My mind has been on “slow cook” for a little while now, thinking about the two types of transactions (free exchange and forced exchange) and trying to figure out how TPTB, who clearly take advantage of the forced exchange model, would make sure not to lose advantage in the free exchange model.

I think I found the crux of the problem in Costata’s Dictum #1 (“Those who can be screwed, will be screwed”). It goes like this:

Consider free exchange and all the utopian benefits this egalitarian system offers, then consider: the bell-curve distribution of relevant distorting factors between market participants (such as native intelligence, social connections, experience, access to information, etc.) means that one or the other participant in an exchange will always have an advantage.

People can be socialized not to utilize that advantage (and not hurt the “little guy”), but as roughly one-in-twenty of us humans is a full-blown sociopath (and quite a number are intelligent enough to hide the fact) it is more or less inevitable that even with a more-fair relationship between participants in a free exchange system (facilitated by a store of wealth outside of the means of exchange), AS INDIVIDUALS players can, and will, be “screwed.”

I don’t know how much this helps anyone else, but for me it helped resolve conflict between the “utopian” aspect of the evolution of a Freegold monetary system, and the nagging belief that, as a shrimp, I am still subject to Costata’s Dictum #1. Anyone left with some nagging feelings that Freegold might be too good to be true because it conflicts with the interests of TPTB, may, like me, find some perverse comfort in this reconciliation.

Tommy2Tone said...
This comment has been removed by the author.
costata said...



Not at all.

Thom Ketring said...

I spend a lot of time doing that same mental exercise- what evidence is there that would point to NOT eventually moving to FG? The most likely reason that FG wouldn't happen would (IMHO) be if an entity or entities with considerable power didn't want it to happen. Since giants already have gold in size, they would be off this list.

WHat about an organic, bottom up movement of really pissed off people worldwide that don't happen to hold any physical gold, and find themselves suddenly at the bottom of the economic heap? Throw into the mix self-serving populist politicians who demagogue the issue to gain/hold power, and some grand plan for a more "fair" system? Could chaos and social upheaval delay or derail FG?


Unknown said...

I'm not sure I'm in the best position to elucidate the "strongest arguments" for anything, but I was raised with the general mental framework that "If something seems too good to be true, it probably is." Based on that, my second thought (after "Hurray!") about the promise of Freegold (a stable store of value for saving) was "What's the catch?"

I will admit I am now a little bit "stuck" on what force would act to break the two-tier system for gold valuation. If, as is posited, the central banks ALREADY value gold at a multiple of its lower-tier "paper gold" price (in fiat), and the market-moving Giants can keep obtaining deals that they find satisfactory (whatever those are) using the two-tiered system, why ever would Freegold arrive for the shrimps?

I don't see the leverage that creates the need to come out in public. I realize that the structure of the Euro (oh noes now I've done it and AD will have to say something nasty because I mentioned the Euro!) is structure do VERY PUBLICLY take advantage of any increase in the announced "paper gold" price on its balance sheet, but I don't see that advantage as sufficiently motivating to ITSELF cause the ECB to "go public" and move to an single-price structure.

I have yet to be "put straight" on who gets advantage in breaking the two-tier system. Maybe we can analyze the players on the stage and try and guess, but the presumption is that eventually SOMEONE WILL.

I just don't know where the assumption comes from.


I'm actually not that worried about "bottom-up" movements. Crowds are notoriously easy to manipulate, and have been for 100% of written history. It might be fair to consider how much damage a motivated would-be-despotic (forced exchange) force could do in trying to prevent the movement to a (global) fair exchange system, but that's what the Euro (I said it again) was designed for -- as a means of exchange to facilitate transition away from hegemony "without war."

Michael H said...


I'm not sure I'm in the best position to elucidate the "strongest arguments" for anything, but I was raised with the general mental framework that "If something seems too good to be true, it probably is." Based on that, my second thought (after "Hurray!") about the promise of Freegold (a stable store of value for saving) was "What's the catch?"

To my view, a freegold world would not be 'utopian'. Rather, it would shift control from those that manipulate financial symbols to those that manage production of actual goods and services.

And note that I say 'manage production', since the benefits are likely to accrue to the owners and controllers of the enterprise, and not necessariy to the 'shrimps' who do the actual production.

Tommy2Tone said...
This comment has been removed by the author.
JR said...

Hi Zenscreamer,

I don't see it as you do, but i dislike marxain exploitation theory so I suppose we are, at base level, approaching the world form very different perspectives. Mises:

What alone enables mankind to advance and distinguishes man from the animals is social cooperation. It is labor alone that is productive: it creates wealth and therewith lays the outward foundations for the inward flowering of man.

We want people to use their advantagea - its the beauty of being human - we are all different and unique - gogo law of comparative advantage:

The law of association makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation. We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature. We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants. In order to comprehend why man did not remain solitary, searching like the animals for food and shelter for himself only and at most also for his consort and his helpless infants, we do not need to have recourse to a miraculous interference of the Deity or to the empty hypostasis of an innate urge toward association. Neither are we forced to assume that the isolated individuals or primitive hordes one day pledged themselves by a contract to establish social bonds. The factor that brought about primitive society and daily works toward its progressive intensification is human action that is animated by the insight into the higher productivity of labor achieved under the division of labor.
Human Action

Jeff said...


The leverage I see being applied is in the paper gold market, suppressing the price of physical. So don't look for leverage to be applied in the opposite direction; look for the leverage being applied to finally break the market.

Speaking of leverage, why is a JPM trader taking such a large position in the CDS market?


Tommy2Tone said...
This comment has been removed by the author.
JR said...


If, as is posited, the central banks ALREADY value gold at a multiple of its lower-tier "paper gold" price (in fiat), and the market-moving Giants can keep obtaining deals that they find satisfactory (whatever those are) using the two-tiered system, why ever would Freegold arrive for the shrimps?

Because the won't be able to keep obtaining deals they find satisfactory at non Freegold prices.

Because the banks knew all along that it will ultimately be a "giant" that sounds the alarm. The overriding goal has always been to delay the inevitable, not to avoid it, for the last decade at least in my opinion.

And that is how the banks are using this "vaulted cash" to delay the revelation that a bank run is already fully underway. They are slowly buying back those "special accounts" in order to move that cash, a little at a time, into safety deposit boxes for the big customers that are actually "running on the bank." As long as no one runs out of the bank's front door yelling "the bank is out of cash," then the run hasn't reached the panic stage yet. But that doesn't mean it isn't happening.

The View: A Classic Bank Run

Ergo, the explosion of price to the level of value is more likely to be brought about by the existing stock holders exploding the stock to flow ratio toward infinity for a period of time than by a stampede of panicked savers driving the price higher and higher.


"physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold" … "stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

This is when the stock to flow ratio explodes to infinity and physical gold goes into hiding, when the price (the $PoG aka today's "gold") gets too low to support parity between it and "gold the wealth reserve, which means physical gold only.

Today's (quote-unquote) "Gold"

JR said...

comment to Who is Draining GLD?

Why is the price of gold rising? Who is ANOTHER? From "Dilemma":

And let's take a quick look at the results thus far:

Tuesday, January 1, 2002 - ***"E-Day" Launch of euro notes***
(with reserves of about 12,500 tonnes of gold)
Friday, February 8, 2002 - *** GOLD ABOVE $300 ***
Monday, December 1, 2003 - *** GOLD ABOVE $400 ***
Thursday December 1, 2005 - *** GOLD ABOVE $500 ***
Monday, April 17, 2006 - *** GOLD ABOVE $600 ***
Tuesday, May 9, 2006 - *** GOLD ABOVE $700 ***
Friday, November 2, 2007 - *** GOLD ABOVE $800 ***
Monday, January 14, 2008 - *** GOLD ABOVE $900 ***
Monday, March 17, 2008 - *** GOLD ABOVE $1000 ***
Monday, November 9, 2009 - *** GOLD ABOVE $1100 ***
Tuesday, December 1, 2009 - *** GOLD ABOVE $1200 ***
Tuesday, September 28, 2010 - *** GOLD ABOVE $1300 ***
Thursday, October 14, 2010 - *** GOLD ABOVE $1375 ***

The physical portion of the paper gold market is cornered, plain and simple. Too many dollars out there in the world, not enough physical at these prices.


The physical portion of the global paper gold market is cornered by the number of dollars and the desire for physical by the world's producers in Asia and the ME versus the amount of physical available at this price. The gold that went into the Trust came from the Bullion Banks' unallocated reserves when they lost the carry trade and leasing operation incomes. It was the spare (excess) reserves at the time, perhaps no longer spare. It did not have to be bought on the open market like Sprott's gold. These are the Bullion Banks. They had more than 15,000 tonnes on deposit at the time, floating around unallocated, with a lost purpose thanks to the CBGA and the rising price of gold.

"The oil states had already (almost inadvertently) cornered the gold market."

"What of the LBMA mess? Gold is cornered. Plain and simple. No complicated theories, no options problems."

"Gold bullion is being accumulated and cornered on a worldwide scale not seen before! UNDERSTAND THIS: The people who are buying do not expect the price to rise until the CBs slow their selling." [Ahh, see: the CBGA and the timeline above]

"No Central Bank will sell its 50, 100, 200 million ozs gold when 600 million is needed! I ask you, how can currency price gold? Indeed, no price will work! You think any form of "paper gold" will stand this fire? Can we do battle with lions?"

Tommy2Tone said...

regarding gold going into hiding (would TPTB frame this on the media as the gold bubble crash??)- How would we see this (IF at all)?

Aquilus said...

I posted this on Twitter last night, but looks like it's relevant to the discussion today in the sense that a COMPLETE separation of the lending medium and store of value eliminates "evil and devious" POLITICAL incentives:

Must read(link at the end, h/t JR): FOFOA's trail quotes on how lending non-monetary assets is politically different than lending the state's money.

When you're done, read it again, and then one more time at least, until it really, really sinks in.

Because it's not about the gold (that just happens to be the focal point).

It's about allowing the "evil state" to stay "evil" while preserving the purchasing power of one's savings.

That's how the real world works, not by trying to legislate morality.

NeuralNetWriter Blog Link

By "evil" I simply mean "allow human nature to take it's preferred course"

By not being about gold I simply mean that gold is only the historical acceptable, focal point as the one asset (not currency) that the majority of the world recognizes as valuable, and just as important, central banks and wealthy individuals hoard. Through historical selection gold got to that pinnacle of value recognition, and by focal point I mean that there need be no conference, no panel of experts and no legal tender law around the world to make people want to accept to trade gold for local currency - they do it gladly if the price is right.

But if that's to much for you to believe, if you get stuck on why gold versus your other favorite, fine: for right now I would be happy if instead of gold you substitute your favorite non-monetary asset when reading FOA's quotes.

Use silver, diamonds, fox pelts, whatever gives the visual that it's a valuable asset COMPLETELY OUTSIDE OF THE REGULAR MONEY, but one that's liquid and easily exchanged for currency

Tommy2Tone said...
This comment has been removed by the author.
Aquilus said...

Here is the most relevant part of the linked post, but PLEASE read the whole discussion, not just this morcel:

Trail Guide (05/11/01; 14:32:34MT - usagold.com msg#: 53425)
Of ORO's World

I borrow 100oz of money gold from ten people so as to spend that gold doing commerce
business. The hard money theory has us thinking that if I fail and cannot pay back the gold,
this little portion of the money supply contracts.
Thereby the gold system is perfect, as it slows
the economic excess.

This is a minor example of gold banking. On a tiny scale. It works, as long as we don't act out
our motions in a political way.

Conversely, if gold was not part of a banking,,,,, credit,,,,, lending system,,,, rather it is just a
tradable, non-lendable non-official money asset,,,,, then those ten people would have given
me their gold and became part owners in my (ours now) enterprise.

When it fails, our gold money is gone and no credit contract is lost in the process. Society at
large will not come to our collective defense, no matter the scale of the loss. You see, we lost
our assets, not society's official money!

The difference:
When gold is lent,,,,, when it's part of the banking system,,,,, when it becomes the object of a
credit contract,,,,,, this whole hard money system falls into political RISK! No matter how
perfect the "schools of economics" have show this to work, in real life, political risk degrades our perfect
credit money. This is the gray area that's not ironed out because we cannot iron out society's
emotions. Let's see:

In the above, the ten people I borrowed gold from would be holding my IOUs for that 100
ounces. Be they private citizens, banks or corporations they have effectively lost their gold
money. The very money of the nation state!

Rather than see their losses made final, and cause harm, they petition the government to
intervene by recognizing those money (gold) loans as good on the books. Further, the
government is asked to lend some of its gold (collected through taxes) to me to extend my
business life. I continue to function in a small way as I pay on those gold (money) loans.

Further, those loans (held by ten lenders) become marketable as they become seasoned. Then,
at a discount to their face value, they can be sold or kept as collateral assets. Over time, this is
the political risk that seeps into any hard money system. Over time, even a gold credit system
is expanded,,,,,, inflated,,,,,, until outright fiat must come into play.

It never starts out as "big corrupt government and their awful bankers" controlling the "good
honest people",,,,,, rather,,,,, it's when a large enough segment of the "good honest people"
are threatened with losing enough (gold) money that it could take down the economy,,,,,, they
demand (elect into office) that their government and therefore bankers, expand the (gold)
credit enough so as to slow the fall..

JR said...

Freegold transition does not require small sizes. They will likely be an after effect. The vast majority of currency is traded for life's necessities and debt service rather than the timeless wealth asset of Kings. Following in the footsteps of giants requires more than pocket change.

The transition to Freegold is all about the big players.

comment to Go Go South Korea

JR said...

What I mean is, would we see this on any chart or tv screen and be able to say "Aha!"

It might look like this from The Shoeshine Boy. It will also be occurring concurrently with this, so it shouldn't be hard to notice.

I cannot see a dollar collapse without a simultaneous revaluation of something else. It's a seesaw. The dollar isn't collapsing against gold. It is collapsing against the physical plane of goods and services. That's the fulcrum, not gold. Dollar collapse is the force, goods and services the fulcrum, and gold the load. So gold is revaluing against goods and services. The gold revaluation is against the physical plane so as to fill the reserve void left by the dollar's collapse.
comment to Moneyness

"You’ve said hyperinflation and freegold are separate events. I can only imagine them all rolled up in one messy ball. Would love to know how you see the separate events relate to each other as they unfold separately, if you haven’t already covered it."

I replied:

"They will most likely be rolled up in one messy ball. But thinking about it in that way makes people miss that they are distinct, discrete events that will be happening at the same time. For example, if hyperinflation takes the price of everything up 1,000,000%, gold will go up 40,000,000%. But only gold. Everything else, silver, cans of peas, etc... goes up 1,000,000%. So gold's FREEGOLD rise (that extra 40x rise) is in REAL TERMS because it is relative to everything else REAL. While everything else only rises in NOMINAL terms. Can you see the difference?"

From the Treasure Chest

Tommy2Tone said...

JR, you are invaluable.

In a world of FreeJR, his worth would be limitless, no?

Anonymous said...

Costata and Victor,

Question on Japan:

One thesis is that QE is ineffective to stimulate the economy, because it essentially makes profit-making in the bond market risk-free (because the CB is on the bid side with an infinite capacity).

Is this the reason why QE essentially fuels more deflation (because profits chase the bond market and lower any available yield) as opposed to the actual intent of stimulating productive lending?

Anonymous said...

meo fio,

ANyone read this book "Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System" by Barry Eichengreen?

You mean this one? http://is.gd/ghAzc5

Yes. As far as the description of the history is concerned, some parts are quite entertaining to read. In terms of the actual monetary policy, it contains only cheerful pro-dollar agitation, but no further substance. It could have been published straight by the Treasury Department.


Michael H said...

Phat Expat,

From the site you linked:

A description of the 1982 ruling that disallowed a gold-silver bullion like-kind exchange:

Revenue Ruling 82-166 is the most troubling of all. The exchange of gold bullion for silver bullion did not, in the opinion of a government lawyer, qualify as an exchange of like kind property. Though he agreed the value of silver bullion and gold bullion are determined solely on the basis of their metal content, (the legal basis of other rulings) the author stated that silver and gold were intrinsically different metals and primarily are used in different ways. Silver is essentially an industrial commodity. Gold is primarily utilized as an investment in itself.”

With the author’s rebuttal:

“First, the ruling erroneously incorporates, as a matter of law, a factual conclusion that silver and gold are intrinsically different metals, primarily used in different ways. Silver is an industrial commodity and Gold is primarily utilized as an investment. Second, the ruling does not incorporate the central test of Section 1031, that the character and nature of the properties must be compared to determine if they are like kind. Third, where it can be demonstrated that gold and silver are essentially similar metals, both physically and chemically, and/or they are used primarily in the same ways, they should succeed in being exchanged.”

From elsewhere on the site:

"Exchanges between Gold and Silver. While there is a 1982 Revenue Ruling which disapproves of this type of exchange, we believe that the similar nature and character test in 1991 tax regulations support this type of exchange and supercede the 1982 ruling. Gold and silver share similar physical and chemical properties as well as their primary use is the same. Our Company provides a tax opinion which will provide protection against penalties or interest from an IRS challenge."

MH: The key is ” Our Company provides a tax opinion which will provide protection against penalties or interest from an IRS challenge. So if you go this route and treat a gold-silver trade as a like-kind exchange, you would be betting that this company’s ‘tax opinion’ is a sufficient paper shield vs. the black-and-white ruling from 1982.

Though, if you are truly expat, then you likely don’t care.

Michael H said...


I agree that breaking up the Euro is now in the 'too hard basket'. I find it interesting that developing an alternative to the dollar was important enough that the 'too hard' limitation was overcome over decades to get the Euro launch.

AdvocatusDiaboli said...

"I spend a lot of time doing that same mental exercise- what evidence is there that would point to NOT eventually moving to FG? The most likely reason that FG wouldn't happen would (IMHO) be if an entity or entities with considerable power didn't want it to happen."

jep, how about that entity with the exorbitant privilege to screw the rest of the world with funny money at will?
How many western nations with their corrupt politicians do they have in their pocket?
And if somebody thinks they would not start WWIII over some false flag attack (weapons of mass destruction 9/11 BS) in order to defend that privilege, you might as well still believe in the tooth fairy.

Or lets put it the other way around: Who has actually interest in order to launch FG?
The ECB? LOL, grow up, and live at least a couple of years in europe with knowing how things are handled here, before telling such a BS.
The ME? Why should they? A bunch of corrupt bloddy dictators, as long as they are doing fine themself personally why should they mess around? To follow Gadaffi's destiny?
China? They dont need FG. They have their own internal cultural changes to get along with. Maybe in 20yrs, but definitely not right around the corner.
Greets, AD

Motley Fool said...


You suggest it is to the benefit of superproducers to accept worthless promises for real goods indefinitely?


Nickelsaver said...

Of Currency Wars

Yes, the name Freegold refers to an emergent system. But its ultra-high valuation of gold is also an anticipated prize. A prize that has been paid for through the support necessary to keep the dollar system alive for decades beyond its natural timeline, and to keep the price of gold metal low while it found its way to where it was wanted. With the tight supply of physical today we can assume that most of the metal has now found its home. And that those entities that have been waiting patiently for the prize and faithfully supporting a system at end of its life can now be expected to withdraw their support. "To pull the plug" so to speak.

This is what we are seeing today. From the central banks' gradual shift from sellers into buyers, through the Central Bank Gold Agreement, five years at a time, to India, China and Russia now showing an open interest in physical gold, the signs are everywhere. In the past, large entities like central banks would never openly express a desire for physical gold because it would move the markets. The last time we saw such a move Charles de Gaulle demanded official gold at its fixed price of $35/ounce, and such was all it took to end the entire global gold standard. Talk about moving markets! So it is no small thing for central banks to openly want gold.

But don't be too upset. This whole gradual shift bought us much time to prepare. And the "prize" is available to ANYONE! Yes, even you! This was ANOTHER and FOA's whole purpose through four years of postings. To get the word out that gold would be revalued by the Giants once the dollar reached its inevitable dead end.

So the dollar now has to reach its end. But can the dollar prevent its own end?

The answer to that is in this post.

AdvocatusDiaboli said...

no, everybody should do with his money the way that he thinks to be paid the best way. Either by following OGWarrenB or Valhalla-FG-Indians. I personally like both, as long it is not socialist-euros ;)
But still after following FOFOA now for almost 2years, I just dont found enough indications that there is any "orchestration on FG", like it is claimed by FO(FO(A)).
Greets, AD

Gary Morgan said...

'But still after following FOFOA now for almost 2years, I just dont found enough indications that there is any "orchestration on FG", like it is claimed by FO(FO(A)).'

Further evidence, if any were needed, that some people are really really stupid. Orchestration? My oh my.

Meanwhile in the real world, anyone fancy some fancy paper? It's really good stuff mind (no trashy bills, this is quality 2 year debt. So, it'll cost you 0.2%pa to get some. yes, negative yields appear to arrived:


Also in the real world, the 'real' price of gold rose nicely today, with commodities down, whilst the gold price rose. The foundations are being laid every day for the next rounds of QE, and the gold price to soar above $2,000.

Gold: it's yellow and shiny money!

AdvocatusDiaboli said...

yes, paper gold rose today, you're pretty proud on that, right?
Looks like you have understand sh!t about FO(FO(A))s predictions....
Greets, AD

Tommy2Tone said...
This comment has been removed by the author.
AdvocatusDiaboli said...

oh Gary, one thing left:
"Gold: it's yellow and shiny money!"

How about that:
Gold: useless yellow stones, stupidly digged out at one place on earth to be burried somewhere else.

Tell me Gary, be seriuous to yourself, are you mad about that expression? If yes, I think, you should not hold gold. Think of it!
Greets, AD

Aquilus said...


I can't resist following up on your comment:

Pardon my Latin, but our dear "Irrumator Diaboli" sets up the classic trolling behaviour for anyone trying to follow: the schizofrenic whiplash.

He treasures and derides the same item, values and mocks the same commentators, in summary, he is the Schrödinger's troll of this forum.

Still, part of that SuperOrganism, questioning, questioning, event annoyingly so, questioning everything.

Vale, Advovatus Diaboli!

@All: pardon the interruption and language

Anonymous said...


Is this the reason why QE essentially fuels more deflation (because profits chase the bond market and lower any available yield) as opposed to the actual intent of stimulating productive lending?

I don't agree with the claim that this was the intention of QE in the first place, at least not the primary intention.

Yes, if there is the danger of widespread bank failures and you want to avoid such a chain reaction (which would wipe out innocent third parties as well, causing more damage to the economy), then yes, you can QE. This probably covers a part of QE1 in the U.S.

But what you cannot do is make businesses take out additional loans in order to expand their production unless they think it is promising. And you cannot make consumers take on additional debt either. So here, the system is in a saturation. No QE will change this.

Another aspect of QE1 must have been to give some foreigners a chance of getting out of agency bonds (Fannie and Freddie) without upsetting the market. I suppose, something similar is true for OT2, i.e. some foreigners want to sell long bonds while the scared public is buying short bonds, but this is difficult to quantify.


Tommy2Tone said...


I won't lie, I had to look em up. It was upon doing so that I started laughing out loud:)
Thanks Aquilas!

Edwardo said...

Yes, Gary, it is eminently sensible to suggest that today (paper) gold was acting as if it "knows" the next round of QE, or whatever the authorities, choose to call it, is just around the corner. After all, they can't have share market dependent pensioners lose ground nominally.

Anonymous said...


I don't agree with the claim that this was the intention of QE in the first place, at least not the primary intention.

I agree. Would you say then the primary intent is to ensure banks are adequately capitalized through the deleveraging process?

If the Central bank increases the base money supply through QE (purchasing government securities in the open market would do just that), and the banks won't lend because of the fear of more impending defaults on their books (they don't mark assets to market, but at least they'll know what will happen to their balance sheet if they did), then this new money is essentially staving off bank runs.

For instance, the Fed purchased a lot of MBS during their QE1. This would essentially hold the mortgage market in a sort of a stasis condition, avoiding a catastrophic scenario.

The other intent behind QE would be to basically fund government spending through check kiting.


enough said...

If I am not mistaken, according to Mr. Organ, we had a GLD puke today of 1.08822%

RJPadavona said...

You're a slave to the power of death
If you save in the power of debt.

When the Life Giver dies
All around is laid to waste

Anonymous said...


concerning GLD, here is the table:


and so GLD lost less than 0.1% today.


Thom Ketring said...

***Shrimp Sidebar (WARNING:May be lame) ***

For my shrimp brain, it's helpful to step wayyy back and look at some simple truths. For instance...

There's essentially a fixed amount of physical gold on our planet. Yes, a little is brought out of the ground each year, and a little is lost into landfills and such as well. But in the big picture, the total physical gold isn't going to lurch higher or lower.

This gold is either lying very still, flowing into the market, or flowing out. We know that somewhere north of 80% is lying still (and wants to stay that way). What of the remaining 20%? As I watch, I see increasing awareness in the general population of the need to hedge with gold, and conversely, weak hands relentlessly courted by gold-buying merchants.

Given the above observable truths, it is only reasonable to deduce that the trend is one of physical gold moving from weak hands and into determined hands where it will lie still until the economic conditions don't look so shaky. It's also reasonable to deduce that measurable improvement in global economic outlook is not likely before there is a severe dislocation...it just doesn't look good out there.

So that's the trend. Gold that is in play is flowing out of the market faster than it is flowing in. The demand for gold is rising, and the supply is (to whatever degree) waning. Moreover, this trend seems to be only increasing in velocity.

Sooo, the inevitable conclusion is more dollars (or whatever) bidding for less gold, in a feedback loop that will only intensify.

It may very well end in FG (I think so), but at the very least, gold is(by my deduction) a very, very stable place to put wealth for deep storage.

And so I soldier on, stacking the gold.

If any of you can poke a hole in my logic, please do. Thanks. Shrimps Rock!


Nickelsaver said...


"So that's the trend. Gold that is in play is flowing out of the market faster than it is flowing in. The demand for gold is rising, and the supply is (to whatever degree) waning.

I sure would like to believe that is true. Unfortunately there is no way to verify. The volume that is traded on the paper market masks the reality of the physical. I have not heard of any shortages from the dealers. Maybe Bron can make an appearance and set us straight on that one. But I am thinking that if there was a supply problem, it would show in price and availability, which I do not currently see.

That all changes when the crowd rushes into gold during the last mania phase though. I hope to be in the right place at the right time to swoop up some really cheap gold from some weak hands when that paper bubble burst, but I ain't counting on it.

JR said...

Unfortunately there is no way to verify....But I am thinking that if there was a supply problem, it would show in price and availability, which I do not currently see.

I see a trend :)

What we learned from ANOTHER thirty years later was:

1. The purpose of the euro was to provide an international transactional alternative to the dollar.
2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."

Quote - Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600
Monday, August 8, 2011 - GOLD ABOVE $1700
Thursday, August 18, 2011 - GOLD ABOVE $1800

What I can tell you with full confidence is that this is only the very beginning of gold's functional transformation.

Once Upon a Time

M said...

@ JR

you said"When demand increases and supply stays the same, price goes up. What will the FED do with the supply?"

The demand will only be for nano seconds as treasuries are dumped for dollars and the dollars are instantly dumped for gold and real things.

M said...

@ Costata

"Mr Steel said the “marginal cost” for mining gold is around $1450. That is when miners leave low-grade ore in the ground and weaker producers shut down."

Industry average is around 4 to 700. Newmont has a PE of 8 right now. Usually PE's are low when interest rates are high. Interest rates have never been lower but one of the biggest gold miners in the world has a PE of 8. Never happened in history before. Goldcorp has no debt at all and that stock hasnt moved in years.

Mining stocks are just not hip right now. Its that simple. Tech is hip. Apples market cap is more then double the size of all the gold producers in the world combined. DOUBLE. Instagram doesnt have a penny of cashflow yet it was bought for a billion dollars.

costata said...

Rigged Markets

I should have inserted the words "In a rigged market" into my No.1 dictum above. For the record I don't think this notion of the weaker parties being automatically done over applies outside markets or inside free and fair markets.

I want to share a definition of a rigged market and see what the folks here think of it. Here goes:

In a rigged (or failed) market price discovery is not impartial.

Conversely in a free and fair market price discovery is impartial.

Here's a definition for the word impartial:

im·par·tial (m-pärshl)
adj. Not partial or biased; unprejudiced.


In my mind in an "impartial" market the regulators would be neutral. There would be no coercion or threat. Trade would be voluntary, offers transparent and acceptance explicit. Skills and ability could be unequal without invalidating the impartiality and fairness of the market.


DASK said...

Nickel & Thom:

Trying to see it through FOFOA's perspective, my shrimp brain sees about 3800 tons gross physical inflow into gold, about one third of which comes from scrap (net inflow is thus the 2500 tons mined). There is also a seperate loop where would-be gold holders purchase off existing holders. I do not know the net scale/velocity of these transactions; it appears to be large scale and high velocity compared to physical inflow but that is paper and the net shift in ownership is opaque. It is likely though that this net shift in existing stock is the same size or bigger than the new inflows. Apparent supply is thus mining+scrap+paper change in ownership.

The scrap flow has been diminishing in absolute terms for a decade, and in terms of the existing stock (velocity), for about two. There will be a tipping point: Price has been rising but scrap supply diminishing (funny how that is reminiscent of some quotes on here); if price were to suddenly rise quickly, then scrap flow would presumably drop: the transition would play out thus:

Gross physical inflow is reduced by approximately 1/3, and at the same time, the velocity in the existing stock plummets. Those who thought they had a ticket for existing stock find out they don't and are largely forced to bid for the physical inflow that is available for bidding. Apparent supply is thus some fraction of the mine output instead of mine+scrap+paper. The bulk of this change comes from credible sellers in the paper system withdrawing their offers. And thus (with the assumption that net change in existing ownership is about the same as physical inflow), physical supply could drop by a factor of two thirds (more if not all mined output is for sale or if the net change in physical ownership from paper transactions is higher) more or less instantly while being confronted with the same (or higher) quantity of currency bids. Perhaps avoiding this scenario and thus keeping up the scrap flow and the net flow from paper markets as supply components for as long as possible is the purpose behing that nice steady rise in the price?

KindofBlue said...

VTC & e_r, et al,

QE is just debt default by another name... a sly admission that the debts cannot be paid. A consequence of our unsustainable, privately held, fractional reserve debt-based money system -- now there's an 'exorbitant privilege'!

DP said...

I wish there was an ignore feature on here.

There is! Set finger to 'scroll'! :)

But, like Aquilus, I do and will continue to read AD's comments. Because the trolling aspects just make me smile and I don't rise to them, and not everything (s)he says is nonsense. Case in point from just last night:

yes, paper gold rose today, you're pretty proud on that, right?
Looks like you have understand sh!t about FO(FO(A))s predictions....

Anand Srivastava said...

KindofBlue: Default is different from QE in who pays for it. In Default banks pay for it, in QE people pay for it. So obviously banks and even traders will prefer QE. The only people who shouldn't like QE are the masses that have saved in the banks. But if they really were knowledgeable to know that it is not good for them, they wouldn't have saved in the banks.

Hopefully after this crisis people will understand that they should not SAVE in the banks.

I was like that a few months back before hitting on this blog. Now I do not have anything in paper, except some living expenses.

I am also convinced of that gold is highly undervalued and am trying to convert my property into gold.

The crisis doesn't look very far in the future.

DP said...

QE is just debt default by another name... a sly admission that the debts cannot be paid.

Debts of whom, to whom?

The debtor to the bank defaults. This would be politically acceptable to the voting masses. (But less so to the bank lobby!)

The default of the borrowers to the bankers ought to result in the banks defaulting on their obligations to their depositors; the bankers borrowed the money from them after all. This is the part that is politically unacceptable to the voting masses. And why (IMO) QE∞ (and ultimately Freegold) is inevitable in an economic environment as stagnant as The West today.

DP said...

Default is different from QE in who pays for it. In Default banks pay for it, in QE people pay for it.


When the bankers don't have your money any more, and the CB doesn't QE some more into existence to paper over the gaps so we have a deflationary collapse, who ultimately eats the loss of your savings? [hint in bold]

Your choices are: lose all your paper purchasing power as you are taken down with the bank; everyone loses a little of their paper purchasing power. (Or, since you are lucky enough to have found this blog, you realise you have a third choice, to not save in paper - but "most people" do not realise they have this choice today, or why they should choose it.)

Push comes to shove, I think I know the voting intentions of "most people" from this menu of two options in front of them. Hence the inevitability of QE∞ (and Freegold) ... so thank heaven for hybrids!

Gary Morgan said...

Looks like I hooked a big one..shall I throw him back, or yank him around for a bit?

DP, looks like you got hooked too, hope he throws you back.

Irony: it's funny and Germans will never get it!

AdvocatusDiaboli said...

"Stable physical-only supply"

How will that ever happen? I dont see any interest from anybody (okay forget the ultra paranoid goldbugs like us ;).
When I got the printing press and got used to printing anyway, I can set the paper price of gold wherever I want to anyway and cook my books however I want to (remember: Gold is equivalent to Gold claims).
I know, I know, dont gimme that "Gold Bankrun" post, completely unrealistic:
1.) Politians/Banker/CB will stop it immidiately.
2.) People buying paper, buy it to sell paper.
Greets, AD

DP said...

Who's hookin who here? ;D

DP said...

No hooks on me! I'm dryzabone. But thanks for your concern, Gaz - appreciated! ;)

AdvocatusDiaboli said...

much more sense to me makes, when FOFOA calls it: "One side wants it to rise, the other side needs it to rise".
With ~19%/yr over the next ~25yrs (right on spot when most gold mines are exhausted), whenever possible shake out as many speculators as possible, and you end up at the same result, without any damages for anybody.
Maybe some new taxes, voila, you got all you need. (If somebody things "no no no they will never tax me, because lalala I am such a smart gold bug": Wake up and take a look at the international tax treaties on private entities.)
Just my 2cents according to occams razor.
Greets, AD

DP said...

Be nice if they could pull that off. So, all we need is 25 more years of people finding sufficient of their grannies' jewellery down the back of the sofa then dutifully handing it over to Cash4Gold, and we'll be golden. What could possibly go wrong?

2012 $1,650.00
2013 $1,963.50
2014 $2,336.57
2015 $2,780.51
2016 $3,308.81
2017 $3,937.48
2018 $4,685.61
2019 $5,575.87
2020 $6,635.29
2021 $7,895.99
2022 $9,396.23
2023 $11,181.51
2024 $13,306.00
2025 $15,834.14
2026 $18,842.62
2027 $22,422.72
2028 $26,683.04
2029 $31,752.82
2030 $37,785.85
2031 $44,965.17
2032 $53,508.55
2033 $63,675.17
2034 $75,773.46
2035 $90,170.41
2036 $107,302.79
2037 $127,690.32

Actually, what could possibly go wrong is that for this to resolve the problem in 25 years time, they would need to deflate all the paper gold activity to zero and arrive at a physical-only market. But the paper market activity drawfs the physical. OK, this is taken care of with that steady rise in price as you indicate. But since it's been steadily rising for a few years already now, isn't it possible that a few more people will wake up to steady 19%/year gains and further add to the demand side before 25 more years? Meaning 19%/year will no longer be enough. Plus the heirlooms might cease flowing into Cash4Gold at a time earlier than all the paper is mopped up, if people finally come to realise maybe it's worth more to them next year.

DP said...

I've only popped in for a quick swim, Gaz. No need to reach for the life ring just yet buddy. ;-)

The water's lovely.

AdvocatusDiaboli said...

sure, on the other hand each year you will have the same talking heads: BUT THIS YEAR THE BUBBLE WILL REALLY FINALLY DEFINITELY ULTIMATELY BURST.
Sure Cash4Gold might run slower on scrap (but look at the numbers how much still goes in jewery today and will be less when prices rise). On the other hand you got probably gold bugs that want or have to cash out in the meantime and also some additional mining will become profitable in small extends.
But who knows what will be in 25yrs anyway, lots of other developments (social, political, military, technically) possible.
I am not saying that this is the ultimate answer, it maybe just a possible path we might be on for now (but maybe not;).
Greets, AD

Edwardo said...


Where, in your view, do thoroughly impartial markets exist presently?

Has their ever been a time when impartial markets were a mainstay in the world of markets?

Warren James said...

@DP, yep - also got an entire spectrum of dutiful 'investors' who say to themselves 'oh i see my investment has doubled' and promptly sell half.

Throw in a bit of social engineering and the straight line is what allows the folk at the banks to keep the supply of physical gold at the goldilocks temperature.

A 25-year journey may cause the least amount of social disrumption - same destination. Just my two cents anyway. My household is not ready just yet for massive social upheaval - at least not the way AD is expecting.

DP said...

I am not saying that this is the ultimate answer, it maybe just a possible path we might be on for now (but maybe not;).

IMO it's the path we are on for now (until it's not;). (FYP?)

So, let's see.


Jeff said...

Easy credit is back.

Annette Alejandro just emerged from bankruptcy and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail. “Even I wouldn’t make a loan to me at this point,” Ms. Alejandro said.


FOFOA: "So in the early stage we have a feedback loop of credibility inflation. Debt creation inflates the amount of "stored wealth" and this "stored wealth" (stored as someone else's debt) enables more and easier debt creation. Subprime loans and MBS's are a perfect example of this kind of a feedback loop. The invention of Subprime fed the MBS phenomenon, and the MBS phenomenon enabled (and demanded) the invention of Subprime. And today's credit contraction is a sure sign that the feedback loop is no longer functioning. Banks don't like to extend credit unless they can immediately sell the resulting hot potato of "stored wealth" to a pension fund or some other sucker."

Jeff again; it seems clear that no foreigners are suckers enough to scoop up subprime securities today. So who is the buyer of last resort? Who would buy this worthless debt at par to keep the game going? This doesn't seem like credibility inflation, if the issuer has to buy all their own paper instead of dumping it on stupid bagholders. It just seems like inflation.

Thom Ketring said...


"I've thought of this too but IMO, you are talking about the little people, aka. shrimps- aka me and you.
Doesn't the little guy always get screwed?"

What is interesting (and frightening) to me is the potential juxtaposition of winners vs losers in a sudden revaluation scenario. We all have seen lottery winners and felt a slight tinge of jealousy. Most of us have suffered loss and felt anger over the situation. But has there ever been an event where so many who currently have things good get the rug pulled out from under them violently, at the same time that others all around them find sudden precipitous wealth?

If the change comes quickly, the big winners and the big losers will be neighbors, co-workers, and family. And everyone will know who is who (can't hide your status forever).

In today's society, where so many are so profoundly self absorbed and have a distorted view of their own entitlement, the shockwave of a fast transition would be devastating.

For that reason, I hope the long, slow climb in gold is the way this plays out.

Nickelsaver said...


I think we have been on the long slow climb. Problem is, we are dealing with an addiction no? And with addictions, gradual cessation really is not an option.

In drug addictions, the further one progresses into it, the more of the drug it takes to get the same affect. Now try reversing that the other way, millions of addicts all enduring a state of prolonged angst? In a world of instant gratification?

A lot of discomfort for a short period of time -vs- general discomfort for a long period of time; I choose the former, and so will the world.

JR said...

Hi M,

From the above post - MMMkay?

The USG is essentially borrowing $21,000 this second -- that our trading partner received last second -- and the USG will spend it again on more foreign stuff a second from now and then borrow it again. See? No inflation! The same dollars circulate in perpetuity, the real stuff piles up in DC, and the USG debt piles up in Beijing.

But what if that **from some entity** is mostly the Fed, and has been for two years now (and they are calling it QE only to make it sound like its purpose is to assist the US private sector)

From abroad:

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


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

During hyperinflation the entire money supply becomes "Realdollars" rather than bank credit backed by debt assets.


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

JR said...

oops, link to "abroad" is here

Nickelsaver said...

I should have thought to post this with my last comment.

Freegold 12 Steps

JR said...

Hi Gary,

I too expect paper gold to rise more before it goes kaput.

yes, paper gold rose today, you're pretty proud on that, right?
Looks like you have understand sh!t about FO(FO(A))s predictions....

FOFOA prediction

So what I don't foresee is a stampede by those homeless savers into today's "gold". There may well be another mini-stampede like we had in August, but it will display many characteristics of a bubble, including the volatility and the downside, which savers don't like.


So now I'm looking only at physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold (i.e., not for paper profits). And I'm wondering when physical gold will stop moving through paper currencies, at least at parity with today's "gold", the $PoG. And I think that will probably happen when the $PoG goes too low. OBA has a neat theory about that.

Look at Buffet's piece above. He's shunning bonds but keeping his cash in bills. That's what the savers are doing while they decide where to deploy that cash. All the financial advisors across the land are advising savers to hold some cash, because they just know there will be some deals soon. And for the really big money, that means T-bills, just like the $20B Berkshire is holding. And when a trade gets that crowded it chases the yield right away, which is why the T-bills are heading to sub-zero yields.

This is the rush out of future-dated debt into Here&Now cash (T-bills for the really big $$$). It's the bank run shoebox under-mattress effect en masse. This makes the dollar look (temporarily) strong and today's "gold" (the $PoG) look weak by comparison, gold bug protestations notwithstanding. So just imagine another quick run-up like July/Aug. to, say, $2,333 correlating with a big spike in the USDX/$IRX (price) and then a crash in the $PoG down to ~$1,000 or lower. How hated would today's "gold" be by the homeless savers then? That's some serious beta!

So that's why I said in the post, "ALL TRADERS dump ALL gold, paper, physical, whatever, in my scenario. It has nothing to do with insiders. It has to do with traders and weak hands." And at the same time… because the return is surprisingly shitty all of a sudden… "physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold" … "stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

This is when the stock to flow ratio explodes to infinity and physical gold goes into hiding, when the price (the $PoG aka today's "gold") gets too low to support parity between it and "gold the wealth reserve, which means physical gold only."

A key idea:

So just imagine another quick run-up like July/Aug. to, say, $2,333 correlating with a big spike in the USDX/$IRX (price) and then a crash in the $PoG down to ~$1,000 or lower. How hated would today's "gold" be by the homeless savers then? That's some serious beta!


"ALL TRADERS dump ALL gold, paper, physical, whatever, in my scenario. It has nothing to do with insiders. It has to do with traders and weak hands."

KindofBlue said...

Anand Srivastava:

"Default is different from QE in who pays for it."

I said a 'sly' admission. It's a default regardless of who gets stuck with the bill.

Note: I've been reading this blog since there were hardly 30 of us doing so regularly, and a market participant since '03.


"Debts of whom, to whom?"

Window dressing. Better to say: debts that matter and that will not be repaid at full value.

"The default of the borrowers to the bankers ought to result...."

Note that FOFOA avoids the word 'ought' as if it were the plague, and for his reasons. The only thing I know of that FOFOA thinks we 'ought' to do is to save in gold ("Gold, get you some." -- Ari)

Nickelsaver said...


I have to laugh...FOFOA's comments abroad long and detailed enough to serve as a post.

So going from credit money to base money, that makes me think of this.

AdvocatusDiaboli said...

the longer I think about it, the more I come to the conclusion that the more the unwashed masses sell their gold for cash, the higher the final (Free?)gold price will rise.

Sounds logical? So please NS, JR and your unwashed friends stop promoting gold :P
Greets, AD

Edwardo said...

JR posted the following from FOFOA,

"physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold" … "stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

One must infer from this that presently, physical gold **IN SIZE** is bidding for dollars. Is that the case?

DP said...

Hi KindOfBlue,

"The default of the borrowers to the bankers ought (as far the deflationists are concerned) to result...."


Nickelsaver said...


I think perhaps you need to allow yourself to reach stage five in the process.

DP said...

the longer I think about it, the more I come to the conclusion that the more the unwashed masses sell their gold for cash, the higher the final (Free?)gold price will rise.

Sounds logical?

Yes. The more the Giants have locked up the flow into stock, the less there is to flow from the weak hands of the unwashed masses. So the natural Freegold price will therefore need to be higher, if demand will still be the same but supply will be smaller.

Or, the sooner they stop selling it the sooner the paper suppression game stops and gold is Freed? So please NS, JR and your unwashed friends keep promoting [physical] gold :P

Because we unwashed masses would prefer the Giants to not benefit quite so much from a Freegold revaluation at our expense, and because we will be able to buy slightly more post-transition when we wake up to the whole idea of buying it as our preferred SoV.

AdvocatusDiaboli said...

What you mentioned:
"The more the Giants have locked up the flow into stock, the less there is to flow from the weak hands of the unwashed masses. So the natural Freegold price will therefore need to be higher, if demand will still be the same but supply will be smaller."

Jep, that's the final end game, but I am also thinking about the way up there, what we discussed earlier. These very magical gold_CLAIMS_.

Does anybody believe that the BB and CB have any interest to have these CLAIMS uncovered, caught with their pants down? No, of cause not. Never ever will that happen. Of cause paper bugs can be cashed out, but cashing out the hard way in terms of market defaults, I absolutely dont see in the cards and it would be the most painfull way, not something somebody wants to experience.
So please dear proletarians let them cover those CLAIMS with your PHYSICAL gold, because that's the only way that FREEgold can be set free. Before it will never ever be allowed to do so. You will not break the BB system, so dont make it so hard on yourself and turn in that shinny yellow.
Thanks&Greets, AD

Sounds funny, but I feel dead serious about it and looking at what's happening the puzzle parts fit better and better, no?

DP said...

Does anybody believe that the BB and CB have any interest to have these CLAIMS uncovered, caught with their pants down?

Which CB are we talking about here? BoE? Fed? ECB?

I ask because my understanding is the ECB can and will cover all claims they have sold (witness the steady draw-down on the ECB gold reserve assets by weight rather than value). Whereas the BoE and Fed don't have any physical gold to use in covering claims they have sold. That would be a Treasury matter, if the other market participants pull back any time.

This is also why, IMO, the €gold physical market that steps in to fill the trading void will have credibility if/when the $gold paper markets fall into disrepute. In Europe, if all else fails, gold will be paid.

AdvocatusDiaboli said...

good question, but let's think of it this way:
Almost each and every CB on the planet never ever wants to admit details or distinguish on the gold vs. gold CLAIMs or their real actual allocated physical storage.
All answers around that are just nonsense: "lalala it's there for security lalala transportation is too expensive lalala market stabilization lalala audits cost too much lalalala claims are the same as the original lalalala"
Didnt FOFOA wrote something like "to avoid advertisement for gold"(?), but that does not really sound that satisfactory to me at all.
Greets, AD

KindofBlue said...

Hey DP

If by 'FMP' you mean Financial Management Professional, then no.

I started intuitively from limited experience. Reading FOFOA and others has helped me to understand what money is and why the current system will fail.

Look out kid
You’re gonna get hit
But users, cheaters
Six-time losers
Hang around the theaters
Girl by the whirlpool
Lookin’ for a new fool
Don’t follow leaders
Watch the parkin’ meters

-- Dylan

DP said...

:) Apologies - "Fixed My Post?"

KindofBlue said...


Once you've conquered the English language it would be interesting to get your take on money....

KindofBlue said...


Oh. Right.

DP said...

I see, AD. We are talking at crossed purposes it would seem. You appear to be concerned about allocated CB gold held in custody outside of their own vaults. Whereas I don't personally feel this is that big of a deal. If it is unambiguously owned, it doesn't matter where it physically is just as long as it's somewhere reputable. IMO. If the BoE, Fed or SNB start telling the BIS other countries allocated gold they were looking after was lost in an unfortunate boating accident, then there is going to be a whole world of problems anyway. It doesn't even bear thinking about as possible, for me.

I am, however, more interested in the distinction between gold and "gold receivables".

AdvocatusDiaboli said...

"You appear to be concerned about allocated CB gold held in custody outside of their own vaults."

no, absolutely not necessarily only.

For the principle: let's say, I lease out gold to my best buddy, but keep it in my basement. How much gold I still do have unambiguously?

Okay, my buddy wants to sell that now unallocated (why else should he lease it) and ...surprise surprise, I was just about to buy some more, why not from my best buddy?...that sounds like an awesome deal, I just doubled my gold reserves and my buddy still has a clean balance sheet.

So what you meant with "gold receivables" does not really matter where it is actually stored. Everything is still fine so far, except this setup is not really helpful for a real freegold environment when you want to be able to mobilize that stuff.
Greets, AD

Gary Morgan said...

Anyone know if replacement mouse scroll wheels can be bought anywhere please?

Anonymous said...


Your definition of rigged market is precise, but I am with Edwardo. Has there ever been an impartial market?


QE is not just a sly admission of debt default, it is also financing future debt obligations, which is what's even more scary.


I think yes is the answer to your question as to whether physical gold in size is bidding for dollars. I'd expect these bids to be withdrawn when the future outlook is completely bleak, but I don't think the mass consciousness is there yet.


One question concerning the trade deficit threat to the dollar: Did you consider the fact that politicians can raise taxes on the wealthy easy money camp (examples include Buffet, Bank CEOs etc.), and therefore fund their spending through increased revenue as opposed to just funding their consumption binge with just more debt?

Setting aside the question of morality with respect to increased taxation on the wealthy easy money camp, I think you'd probably see that as delaying the inevitable HI. But it would be helpful if you can elaborate on this point.

Nickelsaver said...

la lala lalala

Anonymous said...

My comment related to increased taxes on the wealthy easy money camp looks timely.

Here's a recent speech by the POTUS:

Associated Press Luncheon

At a time when the share of national income flowing to the top 1 percent of people in this country has climbed to levels last seen in the 1920s, those same folks are paying taxes at one of the lowest rates in 50 years. As both I and Warren Buffett have pointed out many times now, he’s paying a lower tax rate than his secretary. That is not fair. It is not right.

Here's a WSJ article related to easy money wealth inequality.

So at least politically, the climate is currently being setup by the incumbent for the increased taxes.

Michael H said...


Call me skeptical, but I don't believe that those tax increases will materialise.

DP said...

Someone had better send one or the other (both? :) ) of us meds I think...

I just doubled my gold reserves

[scratch bodypart='head'] Que? [/scratch]

Didn't you simply change some of your gold in the accounts from the "receivables" line back to the main entry? From "some day these people will 'return' my leased gold" to "it is mine and once again unencumbered"? How has this doubled your gold? I must be missing your point here.

JR said...

Hi KindofBlue,

The wintertime's a coming, but to whom can I get across? Pardon the nontraditional interpretation and welcome, there's always room for more!

Well, I ride on a mailtrain, baby,
Can't buy a thrill.
Well, I've been up all night, baby,
Leanin' on the window sill.
Well, if I die
On top of the hill
And if I don't make it,
You know my baby will.

Don't the moon look good, mama,
Shinin' through the trees?
Don't the brakeman look good, mama,
Flagging down the "Double E"?
Don't the sun look good
Goin' down over the sea?
Don't my gal look fine
When she's comin' after me?

Now the wintertime is coming,
The windows are filled with frost.
I went to tell everybody,
But I could not get across.
Well, I wanna be your lover, baby,
I don't wanna be your boss.
Don't say I never warned you
When your train gets lost.

DASK said...

DP.. the gold is both his and a receivable. His friend has some cash and an obligation to deliver.

db said...

"Anyone know if replacement mouse scroll wheels can be bought anywhere please?"

Hi Gary, if instead of complaining like a 5 yr old kid you tried to understand AD's comments we'd all be better off.

If you don't want to read what he has to say it's fine, I don't care what you think about him (and I don't think anybody does either)  I'm sure we all find some comments to be superfluous, but I'm not who to decide which ones are so for the rest of us, therefore I try to ignore the noise when I consider a comment to be so (and I'm sure other people will find those amazingly valuable) but  it's just you again and again who posts about trolls, so my kind advice is: if you want to ignore AD I'm happy about your decission, but make us a favour and don't tell us every time he writes, we don't care.

Having said that, I have to admit that sometimes AD's comments might sound annoying, but not because he is trolling but because IMVHO he's got a touch of reality many otherFreegolders lack, I guess he must be older than most of the idealist guys here and therefore he must have dealt before with "what should have been/what is fair vs reality/politicians", that's why I consider his "lalala" not to be irrespetuous but a rude way of saying "I don't believe it", Euroland is not the Promised Land some US guys think it is, though it's not either the sh*t AD speaks about.

I do find his comments to ve valuable, and in every discussion different points of view are always helpful for the group to learn.

AD, pls keep on posting (though I have the feeling you don't need me to tell you so)



DP said...

Thank you for delivering my meds, DASK. :-)

You mean like this.

Tommy2Tone said...
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AdvocatusDiaboli said...

thanks for your explanation, so I guess you are from the Euro-MTM and GIANT conspiracy camp?
Greets, AD

Gary Morgan said...

DB, must have been a slog to get through my one-liner re mouse wheels, far easier to cope with some of the epic blather we see from other posters I am sure.

This statement of yours is factually incorrect by the way:

'it's just you again and again who posts about trolls'

I just have more stamina. And stop complaining like a 5 year-old.


'if you don't want to read what he has to say it's fine, I don't care what you think about him'

Perhaps consider applying that logic to any of my comments that you find onerous, and then consider the very comment you just made: the purest example of hypocrisy.

And finally, perhaps you might like to try a little harder with this endeavour:

'therefore I try to ignore the noise when I consider a comment to be so'

Because you failed miserably this time.

Tommy2Tone said...
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Tommy2Tone said...
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Tommy2Tone said...
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AdvocatusDiaboli said...

does anybody else at least get my thesis and/or is willing to explain it to jojo, since he complains that my english is too bad?
Thanks&Greets, AD

JR said...

"I am stupid and type stuff that makes no sense but thankfully I'm also a huge narcissist so I 1) have no shame and 2) don't care what other people have to say on an issue because, LDO, I'm right :)"

db said...

Gary, you are a true adult .... Just count how many times you wrote against AD and how many times I've written about you ... It's just that in time one gets fed up of such an absurd bullying.

The reason I posted today is because I find AD's comments valuable despite what you, jojo and others may think, and I wanted to demonstrate so, otherwise He might stop posting and I wouldn't like it.

Please don't take it personnal, and truly apologize if you took it as offensive.

Jojo, are AD's post contradictory? Sure, same as those from many others, unfortunately I don't have JR's capacity to post 34366 examples, but it's something that's inherent to the learning process; I don't know if it's your case, but if you remember MF's first posts he also held contradictions and he's evolved to become one of the most clever guys around.



KindofBlue said...


"QE is not just a sly admission of debt default, it is also financing future debt obligations, which is what's even more scary."

Yes. As in "How 'bout instead I owe you $10,000 -- which I can't pay you just now -- I owe you $100,000!"

AdvocatusDiaboli said...

thanks for the flowers :)
But just because of jojo, gary, matrixsentry, JR (am I missing somebody else, hands up), I am sure not going to stop :P
Amazingly these are the very people who do not really contribute any own original thoughts, conclusions or experience, just C&P or OT links...
To me, those appear just invisible, just ghosts or blind cult followers, the CNBC talking heads of Freegold. Worse: most of the time they are not even funny (never mind jojo, but okay that "leased scrollwheel" got me almost to wet my pants).

Completely the opposite of VtC, costata, MF, desperado... these are persons that have their own thoughts, spirit and character.
Greets, AD

Anonymous said...

Michael H,

Note that they don't necessarily have to increase the marginal income tax rate, they can simply eliminate loopholes through which the wealthy easy money camp can bring their tax rate to a minor fraction of what most people pay.

I understand the political ramifications of why a plain income tax rate increase cannot manifest, but there are other ways they can get around this issue.

db said...

I also do like and appeciate JR's posts ... He makes me not loose the trail with his great and appropiate quotes, kudos to JR

Motley Fool said...


It must be hard to be so confused and uncertain that one has to constantly blather just to maintain the illusion of one's one convictions.

I pity you, that you are unable to quietly reflect upon your position, lest is shatter your fragile world view.

Personally I find value in your jumbled confusion, simply because I have the clarity to see through it.

Sadly for most here you confuse a very complex matter, far beyond the need for it.

I understand it is a matter of defending the perceptions you hold dear, I just find the result sad.

I know you will read this to be an attack, though that is not the intent. I simply grow weary.

I would ask a favour. Answer yourself this. Why do you cling so desperately to your viewpoint?


Jeff said...

AD ignores answers he doesn't like, and repeats the same questions over and over. It may not be trolling, but is a bit dull.

On 'conspiracy'. Feel free to ignore this, and repeat the question later, AD.

Date: Mon Feb 16 1998 14:40

The BIS and other various governments that developed this trade (notice I didn't use conspiracy as it was good business, as the world gained a lot), thought that the paper gold forward market would have allowed the gold industry to expand production some five times over! Don't ask where they got this, as they are the same people that bring us government finance and such.

Date: Sun Oct 05 1997 21:29

Westerners should not be too upset with the CBs actions, they are buying you time!


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

For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained; with its IMF agenda intact, gold polices followed and foreign central bank support all being part of that structure. Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.

and on physical supply:

FOFOA: New liquidity can only be created through gold as long as real physical gold is willing to bid for dollars somewhere in the world. This is why the dollar must depreciate against gold, to coax fresh gold "stock" into bidding for dollars! (ANOTHER taught us that gold prices dollars, and then dollars price everything else.)

somanyroadsinvesting said...

Anyone read this book by Richard Duncan: The New Depression. I just listened to a Financial Sense podcast of him. He seems to lay out whole credit expansion cycle of last 50 yrs pretty well. Basically says we prob have between 2015-2020 before some super crisis hits. Says we prob have another 5-10 yrs until our debt/gdp ratios get really high then we become another greece.

His solution seems bizarre though; we should continue to borrow as much as we can at these low rates and use all that money have the govt help develop new technology industries for the future. Like the govt has a great track record of picking winners?

Gary Morgan said...

DB, no need to apologise, as in no way can likening someone to a 5 year-old ever be intended to be offensive (please stop the hypocrisy at least).

The discussions here have deteriorated of late for one reason, which is a shame. Most are here to further their knowledge of FG, some are not. Some are just here to have some fun at our expense. Some of us will point out these time-wasters, and their ridiculous comments, whilst never engaging with them.

Others (oddly) will goad these fools into more and more posts, with debates that go nowhere and cute video links, or (see above) will ask questions to actually begin pointless debates with them, surely a foolish endeavour if ever there was one.

I ran a little blog a while back, and one poor soul used to come by to abuse me and others. I put up with it for a while, then I just deleted every post of his. He stopped posting immediately. Just sayin'.

Now, back to watching Star Trek First Contact for me: I am Freegold, resistance is futile.

Jeff said...

I hope uncle Costata won't mind me reposting his words of wisdom for anyone who says: 'Amazingly these are the very people who do not really contribute any own original thoughts, conclusions or experience, just C&P or OT links...
To me, those appear just invisible, just ghosts or blind cult followers, the CNBC talking heads of Freegold"

Welcome to the FOFOA blog. In case you missed it the heading reads:

A Tribute to the Thoughts of Another and his Friend.

Clearly you haven't found the time to read any of the archived material available in the links on the right hand side of the home page.

As a favour to you I have extracted Another and FOA's predictions from 1997 and 1998 about taxes on gold under Freegold.

As an additional favour I will break it down for you.

1. The gold miners will be the targets for high taxes. For political and practical reasons they are the soft option.

2. Anyone holding paper gold when the transition to Freegold comes will be burned.

3. Personal holdings of physical gold will be encouraged by EU Governments and their allies.

4. No-one knows what the specific tax regimes will be on the sale of gold in other jurisdictions. At present it ranges from Zero to the equivalent of the taxpayers' marginal income tax rate.

If you cannot be bothered to read FOFOA's archive (BTW did I mention that this is his blog) you will bore the s#@t out of most people with your half-baked theories and predictions.

Motley Fool said...


Lucky for me I am a fool, which allows me the liberty of engaging in foolish endeavors. This time though I will disavow the accusation. I did not ask a question seeking answers. Au contraire... :)


Ps. And I really do hope I don't get one fwiw. -.-'

Gary Morgan said...

MF, you are a cunning fool I now see!! (and a huge risk-taker too IMO).

Good luck.

Lots of interesting stuff in this article:


Of most note is the comment:

'The correlation between gold and the euro/dollar exchange
rate strengthened on Wednesday to its most positive since early
January, above 65 percent. That means the gold price is more
likely to move in tandem with the single European currency than
it was just six weeks ago.'

Hmm, only another 35% to go and the Euro is as good as gold.

The article also noted that China are still hoovering up more and more gold from Hong Kong, in my view the Chinese and Russians are buying with vigour, in an effort to end the $IMFS as soon as possible.

tintin said...

Things are going the way Fofoa predicted.

1. a little bit of inflation: http://www.zerohedge.com/news/import-prices-surge-most-april-2011
2. USG can't crash lifestyle, biggest March deficit: http://www.zerohedge.com/news/us-posts-biggest-march-budget-deficit-history-or-how-chart-became-chart
3. Gold flow: China bought 40 tons from HK in FEB. (Reuters news).

AdvocatusDiaboli said...

no no dont worry, now I finally got it and be fine: Because another said so.
Too bad that basically EVERY prediction made by another turned out to be wrong, at least the ones possible to verify, but anyway funny to read.

Like some random examples to laugh?

ANOTHER: Zama, I think Norway is a fine country and strong people, but do they not also use the US$ as a reserve currency? In the future, if they sell "black gold" for "real gold" or the Euro, all will be well, except their banking system will fail from dollar holdings!

Date: Sat Mar 07 1998 19:57
However, it is now my view that the CBs have lost control! I expect a break above $360 to create an allout run to infinity, before year end.

Date: Sat Apr 18 1998 19:18
Gold is now being managed back to the $320 - $360 range. But, this few dollars of value is of little use, as forces are at work that will break $360! The CBs are loosing control.

Date: Tue Apr 28 1998 20:41
I hope to return before the changes , as a move above $360 will show the world that oil has moved for the Euro currency. We will know soon!

So Long, and Thanks for All the Fish,
have fun with your church services, AD

Anonymous said...

"So Long, and Thanks for All the Fish,
have fun with your church services, AD"

Maybe we can hope this ass has finally become bored enough to go elsewhere.

Nickelsaver said...

AD isn't that bad. He is very entertaining. And even though he seems to be unconvertable, he does add that certain something to the mix (contrast).

Gary - sorry you don't like cute little video's. Maybe you should just scroll right past my comments...I am rather fond of posting them.

JMan1959 said...

I will also miss AD, Nicklesaver, not only for his Norm Crosby-like use of the English language (which literally makes me laugh out loud at times, especially his "lalala") but also for the entertainment value of the responses to his cryptic posts.

Tommy2Tone said...
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costata said...

Edwardo and e_r,

I can point to some examples of impartial markets but not readily to global ones. I think ebay may be a candidate. Locally we have produce markets that are impartial.

Having slept on this definition I would add the word "honest" to impartial. Then I would add a note that I'm talking about honesty in the same way that a game of poker can be honest. Or a game of bridge can be honest even though players are co-operating.

I think we may have to add another couple of words to this definition as well. The word "competitive" may need to join honest and impartial along with "open". As in open to entry - open to participation.

This definition feels increasingly robust (defensible) to me. Thoughts?

costata said...


In the period when Another began writing he thought that the collapse of the $IMFS was imminent. The Euro wasn't ready to fill the void that a collapse in the US$ would have left. He asserted that the ME oil producers, led by Saudi Arabia, would demand gold in full or part payment for oil.

I wasn't interested in gold in those days and I had not read his posts back then. I don't know if the Asian financial crisis of the late 90s affected you but I can tell you that for those of us who were directly affected it wasn't hard to imagine a total collapse scenario. It would have saved a lot of people I knew back then a s#@tload of money if they had known where to take shelter ie. gold instead of, say, the stock market.

Obviously, the PTB managed to get through that late 90s crisis period (and a few since then). The A/FOA archives helped us to develop some strong theories about how the PTB managed to do so.

So we view these archives as being valuable on several levels. Not least because they recast the relationship between gold, currency, oil and geopolitics. I personally feel that needlepoint and crochet are two glaring holes in their range but the topics they did discuss gave many here a lot of "homework" to do.

Guided study is thought to be superior to self-directed study by some educators. Few students have the brilliance and burning curiosity to blaze new trails based on their own inspired insights. This simpleton appreciates a little guidance. A few pointers or tips about the direction I should take in order to pick up the scent. From time to time I also like to compare notes with other people involved in the hunt.

I notice that Bob Dylan was mentioned earlier. As he once said "get out of the way if you can't lend a hand" because "the times they are a-changin". Let's take that injunction to heart.

Edwardo said...

Costata, I'm glad you mentioned produce markets, because, I think, if you examine the nature of food production in the U.S., specifically who controls it and how, you will encounter something that fails to meet your criteria.

Now I realize that, strictly speaking, the food production industry does not equate to produce markets, and, yet, the two are inextricable.

Anonymous said...


Where can I procure physical gold? us mint or are there better places to get delivery?

Nickelsaver said...


I will assume you are in the USA. If you click on my blogger profile and send me an email, I will give you my perspective on where to buy.


I was hoping to talk you as well. Give me a buzz via email if you get the chance. Thanks

costata said...


I take your point. I could have pointed to XYZ or ABC produce market in Australia as examples but it would have no meaning for people who are not familiar with those markets.

Perhaps the solution would be to ask everyone to think of a market they know which best meets the criteria eg. the flea market example from Woland in an earlier comment (here):


costata said...

A big Hello to Oldinvestor,

Recalling that report I posted a link to earlier in this thread quoting a HSBC "gold guru" as saying that the "marginal cost" of gold production is $1,450. I would like to add this: Trader Dan Norcini talking to KWN. (h/t JSmineset)

“Earlier in the trading session when gold stabilized near the $1,635 level and pushed back through $1,640, somebody came in, out of nowhere, with huge size on the bids and there was a massive surge in volume. This took the price from $1,640, all the way up to $1,660.

So gold moved $20 very quickly, in roughly 30 minutes. It was a sharp rise in gold. There was a little bit of hesitation there and then another surge came in and took gold to $1,665.

From a technical perspective, they pushed out a bunch of brand new, fresh short positions....

Tis a brave soul who attempts to push the price of gold below the cost of production or chases the paper gold price if it pushes down toward that level. As Another informed us that stunt has been pulled before and the LBMA chaps responsible were treated to a near death experience for their pains.

Cease and desist you imps, you scallywags! Don't press your advantage too hard, Gordon Brown has left the building.


They say "Don't fight the Fed". Your Uncle costata says "Don't fight the BIS" In either direction BTW. I don't think the time for transition is upon us just yet FWIW. So if the game is still to balance supply and demand for physical gold in an uptrending market then don't crack the champagne just because the price of gold goes for a sprint to the upside in the next little while. Price = Supply.

IMHO you have to take note of demand by region and the cost of gold in those regional currencies as well as US dollars in order to see the true supply picture. Sadly we cannot know the actual demand picture at any given time if the LBMA members and the Chinese are "working over" the physical gold market with brass knuckles and a crow bar. But I think we can look at any weakness in demand from India as an open invitation to these folks. (That's just my two cents worth of course.)


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