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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Edwardo said...

Speaking of manipulation and impartial markets.


I can't speak to all the various claims made in the clip (warning: it's Max Keiser who I know some of you revile) but I think the simple fact that JPM trotted out The Wicked Witch does, perhaps, evidence, a sea change of sorts. As Otto Von Bismarck said, "Never believe a rumor until it's officially denied."

Motley Fool said...


I would like to apologize for my comment yesterday. I broke a personal rule, being not to meddle with the deeper level perspectives people hold.

I was frustrated that surface commentary was simply bouncing off your practiced facade.

Even so, it is destructive, in my experience, to show people the eyes they view the world with, so I should not have touched upon it. Sorry.

I hope you have the strength of character to examine the barriers of your cage at your own pace.



Michael H said...

costata, Edwardo,

In case you are interested, a good book that discusses the food system is "Stuffed and Starved: Markets, Power and the Hidden Battle for the World’s Food System" by Raj Patel.

The cliffnotes:

The power in the food system rests in what Patel calls the narrow 'waistline': thousands of farmers sell their products to a handful of corporations, who then process/package/market/distribute/sell to millions of consumers. These few at the waistline are who exert control over food policy and markets.

US farm subsidy policies, where US farmers are paid subsidies based on the amount of crops they grow, do not benefit the farmers because it just lowers the cost at which they must sell their products. Rather, these subsidies benefit the waistline.

Further, these subsidies are a powerful foreign-policy tool. Cheap US food floods the world markets, driving third-world peasants off the land and into the sweatshops. It is most devastating when combined with 'free trade' policies, since these don't allow the third-world governments the option to erect trade barriers to protect their own farm production.

My further comments: the fact that US food policy is a critical part of foreign policy leads back to oil, since most commodity food production in the US is heavily dependent on diesel, nat-gas based fertilizers, and transportation. So a loss of access to cheap energy would affect the US's position in the world, not only through the military, but also through its effect on "food projection".

Woland said...


I hope you will not take this as an affront, but I think you should
consider changing your name to Nickelsaver #2. I believe the #1
position is currently occupied by Kyle Bass, who ordered 20 million
nickels from his bank a few months ago. They had to go to treasury,
who asked, "What does he want all those nickels for?" The question
was passed on to Bass, who replied "I just like nickels." Perhaps
the fact they they are worth more than 6 cents might have something
to do with it? I think the video is on you tube. Cheers

costata said...

Michael H,

Thanks for for the suggestion.


Woland said...

Michael H:

I agree with some of the observations you make, but I would
point out a few counter arguments, if I may. "Cheap US food
floods the markets, driving ... peasants off the land." Yes, that
is what happened in Mexico with corn. But it was not food
subsidies, but rather export subsidies. The price of corn has
nearly tripled since the absurd "corn to ethanol" policy was
instituted, which is "total energy negative" in its' effects. We
consume more energy than we get back from the ethanol, just
less than we get from the diesel portion. It was sold as an
"energy security / independence" measure. Unfortunately,
it is also a primary feedstock for beef, pork and chicken. Oops.

Today's industrial agriculture is truly a mining operation, from
deep aquifer water, to potash and phosphorus, to the natural
gas feedstocks for synthesized ammonia. I agree that it is much
more a political than an economic policy which governs. We are
a farmland superpower, an ammonia superpower, a potash
ordinary power and a phosphorus weakling. About water, well
stay tuned!

Michael H said...


"I agree with some of the observations you make, but I would point out a few counter arguments, if I may. "Cheap US food floods the markets, driving ... peasants off the land." Yes, that is what happened in Mexico with corn. But it was not food subsidies, but rather export subsidies."

Can you clarify for me what the counter argument is? Specifically the distinction between food subsidies and export subsidies.

You seem to be agreeing with me, which means I am probably not understanding your comment.

jonny49 said...

Firstly, NS, I wasn't referring to you with the video comment but to someone else who knows who he is. I generally like all amusing vids, and new music.

MF, I doubt he would even understand what you were getting it! (Even I'm not sure if you were having a subtle pop at him).

So, it looks like it's goodbye to bad rubbish as regards our lalalala pal.

Everyone should note his parting comment, clearly confirming he was here to mess with those were open for some messing. Some bit, some didn't.

I only point this out in case he returns and attempts to hook some fish again. I hope we never see him again.

And a random but relevant amateur video for fun, which made me chuckle, especially some of the viewers' comments, which show what a bastion of good manners FOFOA's blog is, even when provoked by mad men:


Happy golden days lie ahead my friends!

Nickelsaver said...


"Nickelsaver" is a moniker born out of my previous HMS mindset. It shall always serve as a reminder of where I have been.

My calculator indicates that nickels are basically a wash at this point.

Although, they are a loosing proposition for the US mint, as it costs more to produce a nickel than they are "worth". I'm guessing that a metallurgic reformulation is due any year now. I'll keep a token amount on hand just in case.

For that matter, even zinc may very well find its way into the Gresham zone, its all relative.


Its all good. I had my ups and downs with regard to AD. I had finally concluded that his/her presence was a net good, simply because he/she evoked thought about why I believe what I believe. And that can never be a bad thing.

I for one, hope that the comment section would resemble a microcosm of the superorganism (within reason).

That being said, there is really only one issue I would take with anyone who repeatedly litters the comments...at least have the courtesy to DONATE...especially if you're going to brag about how much you're worth!

Now, having met my April 15th obligation to my Dear Uncle, and feeling very relieved at the moment, I shall follow my own advice.


Woland said...

Michael H:

My point was only that, If "food subsidies" were the purpose, then
consumers INSIDE and OUTSIDE the US would benefit. I indicated
in the end of paragraph 1 (OOPS!) that US consumers SUFFERED from
the corn ethanol mess, via HIGHER prices for animal protein, resulting
from higher grain prices, and the effects of substitution arising out
of the EXCESS DEMAND for corn. I understand the Mexican peasant
could not compete with the industrialized "efficiency" of corporate US agriculture. They were a big victim of NAFTA.

Aaron said...

Hi Costata et. al.

About the big price move yesterday, I wonder if GM and Sheik Ahmed had anything to do with it.

Check out Warren's 4/8 post at Screwtape. ;-)


mr pinnion said...

Seems to me , you wrote as much about AD as anyone here, thus feeding him as well.I agree with NS regarding AD.

"Firstly, NS, I wasn't referring to you with the video comment but to someone else who knows who he is. I generally like all amusing vids, and new music."

Does that mean u sometimes dont like amusing vids?


jonny49 said...

Ozzy, I never fed him, just attempted to drive him away by pointing out he was a troll. Seems I was succesful?

I'll confess to finding it odd that anyone can find use in a self-confessed troll, who delighted in catching some 'fish' here.

I suspect some 'fish' are now attempting to justify their entrapment by someone who very clearly just trash-talked pretty much everything Another/FOA/FOFOA ever wrote. Oh, how he must have chuckled at his keyboard.

Also, some of the comments today on this issue (NS) I know to be hypocritical (polite word for utter bollocks), but I won't share the email you sent me. Did you forget that email?

I am proud I called him out countless times,saw right through him, and that with the help of some others, appear to have driven him away, hopefully for good. And with that, I will have nothing further to say on the matter, cos job done.

costata said...


I'll try to visit Screwtape but I just googled the hotels that Mrs costata and her party are staying in during her sojourn in Europe. I couldn't help noticing how close those hotels are to some of the most expensive shops in the universe. It's damned hard to type when you are curled up in the foetal position.

ampmfix said...

That was very funny Costata, good luck with the ladies shopping spree...!

Edwardo said...

Thanks, Michael. Mr. Patel sounds like he's on the right track.

Nickelsaver said...

Really Gary?

You calling me a hypocrite? And by referencing a private conversation in open forum to boot.

And such a long conversation it was:


LOL. I don't want to feed that troll...but I can't resist. It has now become a sport.


I mostly ignore his comments (for obvious reasons), but for some reason this time I read them and well, you saw the result.

Free world, so feed away.


LOL. Who was the hypocrite in that conversation? Not I.

You see, I still think he is a troll, but he is OUR troll.


Edwardo said...

I think OBA (and some folks around here might find this of interest, pun not intended.


jonny49 said...

NS, you had fun and sport with him, he had fun fishing for you, you made a lovely couple, and clearly you miss him already.

None of it was worth viewing on a class blog though, akin to monkeys mating on stage during a Shakespeare play.

jonny49 said...

The IMF discusses Exter's inverse pyramid (with somewhat surprising frankness):


Aaron said...

Good luck with that, Costata. While visiting family in Holland last year I tossed the credit card in the trash mid-trip in an attempt to ease my blood pressure. Little did I know the Mrs. had the other card in her purse -- and she likes to rent private boats to cruise the canals!! *sigh*

Here's the relevent part from Screwtape.

Many kind readers have inquired as to my whereabouts over the past several weeks. Unfortunately, I can't divulge too much sensitive information therein. Suffice it to say, however, that James Turk has called my recent activity "super bullish for gold."

I will proffer one clue. Perhaps some of you have read Jim Sinclair's recent post, entitled "Golden Idea," wherein he offers the following challenge:

What we need is the second coming of a determined trader so convinced of his/her opinion and feel for the market that taking on the gold banks would seem like a divine calling … Is [there] no-one with cojones that are big and well-financed enough to say enough and take them on for mega profits[?]

Well, let's just say that my cojones are some of the best-financed in the entire precious metals space, and I'll let you connect the dots. So, I hope you can understand my blogging endeavours must continue to be sporadic for the next few months. But, seeing as there are delays here at Terminal 3 in Dubai, and that Sheik Ahmed has just gone off to smoke a cigarette laced with hash, I'm happy to say I'll have an hour or so to give you my impression of where these markets are headed.

JR said...

Infinite Monkey Theorem wine - its not that good. :(

RJPadavona said...

Hello Friends,

I don't have much to say about the departure of AD, but I have noticed it's a little quiet around here.

Maybe we need some music?


Thom Ketring said...


"None of it was worth viewing on a class blog though, akin to monkeys mating on stage during a Shakespeare play."

Now that's class blog material...

Edwardo said...

For the purposes of this blog, with respect to the link, there are two takeaways:

1.) Physical gold's prospects are substantially bolstered once the seeds from this grand legislative travesty sprout their toxic fruit.

2.)The political class have no ideas (save for supremely awful ones that they are spoon fed by vested interests) to deal with our nation's financial and economic predicament. Plan accordingly.


Thom Ketring said...

Let's talk about gold.

When I was in college (a long time ago), a dorm mate took me to an Amway meeting. We sat in someone's living room, drinking coffee and watching the "successful" one draw little circles on a big presentation pad.

If we just converted 10 people to use Amway and evangelize the organization, then those 10 did the same to 10 new folks each, and on, and on, immense wealth was virtually a lock! The imminent windfall and the coffee made me dizzy with excitement!

The sober truth sank in later. If one converts 10, then those 10 convert a new 10 each, and so forth, after only 10 iterations, every human on the planet is stacking concentrated soap. The model doesn't stand against the scrutiny of logic.

So, okay, gold. We, at this blog, are all pretty convinced of the inevitability and the moonshot payoff of a freegold transition. Yay gold!

But, when will it happen, that's the grand question. In this year? In our lifetime? Nobody seems to have a clear vision to produce an answer.

Soo, the real issue is, do we wait like penguins on an ice bank for something to happen, or do we evangelize? Remember, 10 levels in, we cover the globe.

Yes, it's an over simplification, and yes, I understand that lots of folks are out of reach. But some concentrated coffee talks could create a lot of motion.

My one real question is, is it better to wait, or to push?



JR said...

It doesn't matter - share knowledge with those you care about, or better yet with other people. Go Go humanity.

No, 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

Robert LeRoy Parker said...

Hi Thom,

The term evangelize is going to be a huge turn off for a large portion of people. And if your intention is to initiate freegold, it would likely be an exercise in futility unless you are in tight with a good chunk of the .01% that can actually influence market movements.

Nevertheless, I'm of the opinion that when you are in a discussion of markets, investing, and saving, it doesn't hurt to explore the merits of physical gold. I generally do this with leading questions like "What do you think about gold?," and "How do you determine fair value for gold?," and "Why do you think central banks still hold gold?"

I can usually gauge a person's level of interest from simple questions like that, and then determine if more meaningful discussion is warranted. One thing I would definitely not do is start pushing physical gold en masse like the current pushers of paper gold and mining stocks do. Most people have very little meaningful savings that isn't offset by debt, and those people shouldn't misallocate their resources to physical gold which they won't be able to hold through a crisis.

Imo it's better to wait, which for me gets easier all the time. But like JR says, share your knowledge with interested people you trust.

Some hip hop for the forum:

Aesop Rock


Zion I

Wiz Khalifa - what i'll do during freegold

Thom Ketring said...

1 x 10
100.00 X 10
1000.00 X 10
10,000.00 X 10
100,000.00 X 10
1,000,000.00 X 10
10,000,000.00 X 10
100,000,000.00 x 10
1,000,000,000.00 x 10
10,000,000,000.00 = everyone on planet

Small sizes might matter. No?

Thom Ketring said...


Yup. I don't mean to sound like I advocate a full-scale assault on the public with a freegold message. And I haven't formed a position on the issue of evangelism. I'm trying to spark a discussion I haven't seen yet here.

However, it's a fact that there are a hell of a lot more people out there than the 1%. If they suddenly, Viscerally want us all to wear tutus, guess what we'd be wearing?

Sorry, I'm off track. I accept your comment about folks who don't have the resources to hold gold through a tough transition (I might be one of those), but would it not be more noble to give them the chance to try?

The looming question remains, if we could make the transition happen in the near term, would we want to do that?

Beer Holiday said...

has A Vicious Bald Toad left the comments for good ?

Here is some Bad Vocalist Audio to think it over.

Hope this is taken in the humorous way that it was intended.

Aiionwatha's Nation said...

I've been away for some time thinking the impossible were true, but alas its time to get down to business. It's not going to be a transition, but more like a realization. world wide. like FOFOA said imagine you were the Chinese and realized the window was closed....

Michael dV said...

I have not seen it mentioned so I will..."so long and thanks for the fishes" is a quote from Douglas Adam's Hitchhikers Guide to the Galaxy. It is I believe the final sentence spoken by the dolphins as they fly off into space.
I assume it was a final tease.
I have ne er experienced a troll before as I do not regularly frequent very many blogs but I have to say it was annoying. Most here are good folks who would give a newbie a courtesy reach around (at the very least) but to see trust abused and to see one take delight in abusing trust was unpleasant...AMF

Michael dV said...

RLP et al
when discussing a collapse with those who are also concerned about such an event I always ask about debt. Once folks realize the difference between a hyperinflationary end and a deflationary end and the benefit vs hindrance of debt they can begin to see the value of gold. 90% of those I talk to about the economy believe gold will be good but also believe debt is bad. To hear the contrary is a wake up call for them. After they 'wake' convincing them to get physical is a lot easier....plus they know you understand the underlying problem if you take the time to prove your points.

Anonymous said...

Tutu? No thanks. I might consider a dress like this dude, though... If top 40 suddenly, viscerally died or started to rock it properly;)

On track now... I share what I've learned here and a few other places with those I care about and respect, and that's it. No evangelism and/or hand-holding.

Anonymous said...

Just for a change, here is a political question.

Imagine, FOFOA's interpretation of the recent executive order is correct, and the USG know they will get some sort of currency collapse during the next 12 months. What are they going to tell to their people?

"Sorry, ladies and gentlemen, we have abused our currency for decades in order to get some strategic advantages somewhere in the world. Unfortunately, this is coming to an end now. Hold tightly and, by the way, hope you find some potatoes."

Certainly not. So what are they going to tell to the people?

Something is missing, isn't it?


Robert LeRoy Parker said...

Hi Michael,

Like Fofoa said in this post: "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." In my experience, even people that don't presume to have it all figured out tend to abandon ship upon hyperinflation talk. It's a demoralizing subject.

And it is a long conversation to get from debt to hyperinflation without people simply tuning out. I like the inception approach better myself. In other words, if they don't want to hear it or won't pay attention, then try to plant a seed and move on to something else.



I don't have the philosophical wisdom to say what approach is the most noble. Many of the followers of this blog use their "understanding" or perhaps conviction in freegold to dictate their individual allocation to physical gold. Preparations for the fallout on the opposite side of the fulcrum should, imo, be done before any allocation to gold is considered.

if we could make the transition happen in the near term, would we want to do that?

To me that situation is an extreme hypothetical which I'll refrain from answering.

Beer Holiday said...


Maybe they'll blame the "hoarders" for hoarding all the cash and/or gold?

Mugabe et al blamed the US sanctions. Maybe the US will blame other countries somehow e.g for hoarding dollars or selling too many US bonds to quickly.

Robert LeRoy Parker said...

Hi Victor,

I bet that politicians will look for a scapegoat in a hyperinflationary situation. Anything to avoid taking any responsibility at all. Maybe they'll blame the Fed, or China, perhaps the Eurozone.

I'm not sure what Bernanke would say. Maybe he'd just disappear like Joe Cassano and a different patsy would take his place.

Anonymous said...

Here's an example of a UK analyst who has no idea what he's talking about:


Instead they recreated a version of the gold standard abandoned by their predecessors long ago. LOL

Beer Holiday,

IMO, there won't be a bond selling enmasse. As FOFOA alluded to in the Moneyness post, it is not the nominal debt servicing that is the threat to USD. It is the trade deficit.


I understand FOFOA alluded to the EO as HI prepardness, but a near-identical one was also signed by Clinton in 1994. Did they expect a HI then too? ;)

I agree with RLP that Politicians will shift the blame. After all, they are politicians.

Bernanke IMO is well-aware of HI (he may probably think of it as a tail risk). Which is why he keeps harping on the Congress to put together a credible fiscal policy (credibility is already inflated away though). Monetary policy can't fix unemployment and we are finding out through experimentation of Princeton PhD pet theories.

Anonymous said...

Jim Rickards talking about Currency Wars on CBC.


Salient points:

1. He attributes Euro strength to the weaker dollar and the yuan and he expects Euro to become stronger against the other two. Eurozone recession (as measured in nominal GDP) is more than likely in that case.

2. He puts a timeline of 2 years for SDR to be instantiated as the reserve currency. (he sounds like as if he's in the know, which he probably is).

3. He points out that US wants the dollar even weaker than where it is. He seems to clearly understand the big danger in little inflation.

As RJP rightly alluded in this comment, I should probably shut up now before I find myself on the business end of one of his buddies' sniper rifles ;) .

Michael dV said...

HI 'crazy talk' does unsettle people but I usually reply to the initial disbelief with a comment about the impossibility of American debt and obligations. All those who are not worried about HI cannot answer the basic question about how we get out of our 'situation' without HI (I then say)...yes the conversations are hard but humor ("I'm one of those 'doomer' 'end of the dollar' wackos") can allow an opening and a chance to plant a thought.
It is an exhausting process however and the person I'm willing to engage has to be someone of great significance to me.

Wandee said...

"Something is missing, isn't it?"
The Pentagon/CIA perhaps?
I do not think for a second they will close up shop.
It will be draconian social and financial controls and war, false flag and all.
Fear of the US military makes others tread very carefully with upsetting the dollar.
Why else has it even lasted this long?
I fear when there is no more gold flowing from the Comex etc. Is when we will face this day of reckoning.

Nickelsaver said...


”My one real question is, is it better to wait, or to push?

Like JR said, it doesn’t matter. If the ECB, who has the capability to ‘push’ simply by openly pursuing a 100% reserve position in gold isn’t doing so, what would a bunch of shrimps do?

But let’s say you wanted to try.

(BTW did you see The Studebaker Effect)

Anyway, as has been pointed out by others, you are going to get a lot of hiccups at the mention of HI.

But supposing you got someone’s attention, you’ve penetrated their normalcy bias, made the case for HI and a high gold price based on all of the standard arguments, the 10 year gold trend, the massive debt, the USG chasing its tail and all that. Now you’ve got them right about where most HMS are at.

The part about Freegold that is most difficult to grasp is the fact that the price of Gold is not going to rise to the plateau in a continuous stream via the $IMFS. The rocket is going to shoot up, but then we’re all going to loose sight of it right up until it explodes – like a firework on the 4th of July.

Now consider the inverted waterfall

I ask you now, is it a good thing to created a bunch of weak handed fools that will drop gold at precisely the wrong time. Or perhaps it is better just to wait to until pivotal moments to relay truth. Maybe the tact is to get people to simply understand what you believe is going to happen, then as they see you act on those convictions, you may win a few over to actually believing as well.

Nickelsaver said...


"So what are they going to tell to the people?

I think at this point, what they do will be more interesting than anything they say.

To me, if we are to believe that the EO is an anticipation of HI. Then that also means that they understand it as an opportunity for the ultimate governmental power grab. The two go hand in hand, don't you think?

What has the USG been slowly doing over the course of our lives? Growing the government. And not only growing it in size, but also in reach.

So how can a government that can see the writing on the wall as far as the dollar is concerned, also push a massive health care bill?

Unless maybe, what we are seeing is a realization that the Keynesian gamble didn't pay off, the position on health care is merely to save face for re-election, and this president is now prepared to ride the storm out with martial law in place. And maybe he plans to latch onto the Euro once the dust clears.

Anyone think he is that smart?

FOFOA said...

Hello Victor,

"Imagine, FOFOA's interpretation of the recent executive order is correct, and the USG know they will get some sort of currency collapse during the next 12 months. What are they going to tell to their people?"

Currency collapse is initiated by the market, not by the government. Any government would be insane to even hint that it expects its currency to collapse. But once a currency collapses, the government can then take it full hyper by printing. It was never in doubt that the USG can and will do this.

My interpretation is not that they know this is coming, or even that they believe it when advisors present warnings and recommend specific preparations. In fact, I think they probably believe dollar collapse to be unlikely. "Tail risk" as e_r called it. But their beliefs don't change reality. And I found it to be quite obvious (even before the latest EO) how they will react once they've got to outbid the private sector for "national defense" (aka the defense of the USG's appetite).

My point is that, in this case, in the dollar's case, price inflation is deadly. The government will have to respond to any price rises by expanding the dollar's base to outbid the private sector for what it needs. And the real danger in any monetary plane disruption is that is spills over into the price of foreign imports needed by the USG.

Normal price inflation is different from currency debasement price inflation. If the economy was expanding we'd have more credit dollars bidding for goods and financials. But today we have the opposite. So any price inflation we see today is the very very dangerous kind… a market reaction to government currency debasement. It is the dollar being devalued only against the vital stuff.

Imports will stop very quickly when it starts. Ships may be turned around or anchored in international waters while deals are renegotiated (reneged). New shipments will never leave port. The US government at all levels will find itself in direct competition with the private sector in the game of maintaining status quo. What can they really tell us, assuming anyone in government has even thought it through this far?

Today's government thinks of itself as our savior. "We've got to feed our peoples first so that we can have the strength to (slowly) distribute the leftovers to y'all" will be their thought process. So they will take what they can and they'll buy what they can't take with printed dollars. But this "draconian control" won't last long. Maybe a week. This is a very big country, and draconian controls don't scale up well to 7B or even 300M when your previous "control" was only due to external support. DC will have DC Metro (6M) under full control after a week, but not much else.

So what would they tell us if they had really thought this through? Nothing! Absolutely nothing, because there's nothing they can say to improve their chances. Anything they say diminishes their control. Their best hope is that their own stooges and, more importantly, the domestic private sector continue to overvalue dollars even while they are collapsing worse than Zimbabwe. So maybe they'd tell us something positive about the dollar and how US government is here to help us.

Perhaps a politician would say something like, "Here in America we look out for one another. Here in America we help each other get ahead. Here in America we have a sense of common purpose. Here in America we can meet any challenge. Here in America we can seize any moment." ;)


Phat Repat said...

Just who is this HI going to benefit!? Certainly not the 99%'ers. If that is the debt you are talking about. If at the gov level, okay, maybe. But not without a steep price. The more I reflect the more I see NS's point about this not being painless (and I was so hopeful).

And this thought of talking to your friends or family about this. No, I've tried, on a limited scale. Aside from putting yourself and your family at risk, since people are aware of your affinity for Gold, you also put your credibility at risk. On the other hand, suppose you do convince some to purchase a small amount. We all know they will view their purchase through the paper price of gold lens. So, should Prechter's 15 minutes of fame actually come to pass, well, you will certainly be burned in effigy and likely be labeled the village idiot. Thanks but no thanks. For those stuck on the MSM, too lazy or comfortable to see what is going on (MF Global, JPM/GS manipulations, The Fed, the state of persistent conflict, etc...) well, sorry, that's on you.

costata said...

Hard Money, Velocity and The Early Adopters

Part 1/3

I’ve been giving some thought to the issue of what makes a currency hard. Obviously the currency must be in demand. The MMT/Chartalist camp point to the demand created by government through legal tender laws, the requirement that taxes are paid in the currency they issue and so on. So there is a kind of gearing ratio (like a gear box) from government demand for revenue that might be in, say, a 2:1 ratio to the currency in circulation. This exerts demand pressure on the currency – hardness in the context I am using that word in this discussion.

Another source of demand for the currency comes from velocity. The rate of turnover of the money supply. This type of demand has two elements. Businesses who accept the legal tender in payment for goods and services exert a positive influence on demand. They are the key element of the “plumbing” in which the currency circulates. Low velocity makes the currency harder (people are willing to hoard currency and not spend it). High velocity weakens demand for the currency – people are not willing to hold it – they spend it quickly after receiving it.

But base money is only a small percentage of the money supply – probably less than 5 per cent in most countries. As we know the banks create the rest of the money supply. I call this bank credit money. By making loans banks not only create money they create demand for money through the repayments those loans require. This applies to both the base money and their own fungible (interchangeable) bank credit money.

The gearing ratio of demand exerted on the currency by the banking system is difficult to determine but it should be possible to calculate a ratio by looking at the available data. The key point that I want to make here is that in my opinion this “hardness” ratio is knowable to a reasonable degree of accuracy. For the purpose of this discussion the relevant issue is that the banks “hardness” or demand ratio would be multiples of the government demand ratio due to the high leverage they use and total system debt compared to the base money supply.

In other words the banks are a much more significant factor in the hardness of the currency. As a rule of thumb let’s assume the banks ratio is 20 times the government ratio we used above ie. 40:1.


costata said...


Part 2/3

There are a range of money aggregates that are used as a proxy for the total amount of base and bank credit money in the economy at any given time. The reality is that no one really knows precisely how much money is out there. For example: readers may recall a discussion on an earlier thread where it was pointed out that when a debt to a bank is defaulted it leaves a deposit somewhere else in the banking system that is now unbacked by a performing loan. But that deposit still counts as part of the “money supply”.

I intuit that a Central Bank or other entity who issues the base money could replace a low percentage of the unbacked bank credit money deposits in the system with base money without creating a serious systemic risk. It would need to be inserted into the system via several avenues rather than concentrated in one distribution channel. The FDIC takeovers of busted banks would be one obvious avenue to use for replacing bank credit money deposits with base money deposits.

Let’s think about what happens to the banking system and the hardness of the currency if the currency issuer injects too much base money into the banking system. Those “hardness” ratios begin to narrow. In other words a given amount of government generated demand and banking system generated demand confronts a rising level of base money in the system. The ratios that exert demand pressure on the currency within the system weaken. The currency is losing its hardness progressively.

Would this loss of hardness be evident to the man or woman in the street? I think it would be invisible to most people. How would it become visible? What would people do when it became visible? I think the answer to the second question is: hyper-inflation. Velocity would increase rapidly, an explosive increase, due to people seeking to offload the currency. My answer to the first question “how” is: intuition.

Now don’t jeer at your poor old Uncle costata. This isn’t a “cop out”. Think about this for a moment. There are always early adopters of technology, the mavens who pick up on a fashion trend before anyone else and first movers in other fields. The number of adopters grows progressively but the majority are always relatively late. This graphic attempts to give a representation of the phases of adoption.


costata said...


Part 3/3

If I’m right then we should identify the early adopters and watch them like hawks shouldn’t we? They will be the ones who can tip us off that velocity is about to explode and HI is upon us. Before I conclude this missive here’s a little background on this theory about the adoption of innovations. The term “early adopters” was popularized by Everett Rogers a Professor of rural sociology in his book Diffusion of Innovations (1962). The Wikipedia entry is here and here is a snippet (my emphasis):

In the book, Rogers synthesized research from over 508 diffusion studies and produced a theory for the adoption of innovations among individuals and organizations. The book proposed 4 main elements that influence the spread of a new idea: the innovation, communication channels, time, and a social system. That is, diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system.

Individuals progress through 5 stages: knowledge, persuasion, decision, implementation, and confirmation. If the innovation is adopted, it spreads via various communication channels. During communication, the idea is rarely evaluated from a scientific standpoint; rather, subjective perceptions of the innovation influence diffusion. The process occurs over time. Finally, social systems determine diffusion, norms on diffusion, roles of opinion leaders and change agents, types of innovation decisions, and innovation consequences.

Now here’s the problem that I believe you need to grapple with. I think that all of us here may be early adopters. There may be no one else to watch for reassurance that we have come to the correct conclusion (that the US dollar will hyper-inflate) and made the right decisions about how to prepare. The herd will come thundering in behind us as they reject the softening currency and look for escape from it. By the time the early majority and the late majority are on board hyper-inflation will be in full swing. It will be far too late in my very humble opinion.

costata said...


During communication, the idea is rarely evaluated from a scientific standpoint; rather, subjective perceptions of the innovation influence diffusion.



Thom Ketring said...

"Now here’s the problem that I believe you need to grapple with. I think that all of us here may be early adopters. There may be no one else to watch for reassurance that we have come to the correct conclusion (that the US dollar will hyper-inflate) and made the right decisions about how to prepare."

We are the ones we have been waiting for...

Woland said...

Has Jim Sinclair, over at KWN, been reading FOFOA. Surely, the
answer is no, but from the following comment, you wouldn't
know for sure.
"Once you start quantitative easing, such as we have..... how in
the world do you pull back from it? How do you stop without
having everything collapse behind you? Truth be known,
Bernanke didn't have a choice. If (he) diid not do QE, this place
would look like the day after the movie Mad Max.
I don't support QE as being RIGHT, but I do understand its'
NECESSITY. QE to infinity. If we've done over 17 trillion already,
do you think we wont do another 17 trillion? Of course we will,
denying it all the way, until the day, and when the day comes,
QE will follow. Makes you want to check out your front lawn.

costata said...


I wouldn't be at all surprised if people who have read this blog communicate with Jim Sinclair.


PS. From the foetal position if you lie on your side and turn a laptop on its side you can type without too much trouble.

Beer Holiday said...
This comment has been removed by the author.
Woland said...


Or you could just say to your phone: "Siri, I want you to write...."

By the way, no one has seen fit to pick up on Edwardo's comment
regarding the zero hedge piece on the Treasury Borrowing
Advisory Committee report on the issuance of "floaters", they
being notes or bonds with floating rates. This seems to me to
be another possible sign that the FED sees trouble ahead, and
is seeking to protect its' balance sheet from the risk of longer
dated paper tumbling in the event of a rate spike it could not
control. The title is "Is the treasury's imminent launch of
floaters the signal to get out of Dodge".

costata said...


The Fed moved it's balance sheet exposure to the Treasury a year ago. ZH reported that. Where's Marla?

Woland said...


Sorry, you are correct. The risk of loss is now on Treasury (as in us)
That doesn't answer the question of "why floaters, why now", though.
The loss occurs somewhere, in the event of a rate spike, on all long
dated bondholders. What would your interpretation be of the Fed's
considering such a change?

Aquilus said...


"Floaters" have one purpose: give CONFIDENCE to treasury investors that they can have their principal (the price of the bond) returned (minor range variation in the price - but stable price for all purposes).

The problem with today's treasuries is that the fixed rate makes the price of the bond go down on inflation expectations. So people parking big money choose the shortest term treasuries (even at ridiculous yields) in order to assure the return of principal.

If the interest rate is variable, then the principal would not vary much because the rate would rise with inflation, and as such big money would be very tempted to park themselves here and still THEORETICALLY get yield and conserve principal.

I say THEORETICALLY because one has to trust that the yield really reflects inflation expectations, but that's a whole different part of the confidence game.

Suffice it to say that fund managers would safely cover their asses legally by buying these things, guarantee the nominal return of principal, and show better yield when parking cash (nominal).

JMan1959 said...


While I do believe that Keynesians are in general blinded by the belief in their own BS, I still have a hard time believing that there is nobody (closet Austrians or more open minded Keynesians, perhaps) in the USG or FRB that views HI as anything more than a Black Swan event. There are some very smart (albeit misguided) people up there, and I simply cannot fathom that there isn't some analyst or professor that has studied HI/monetary theory and presented a risk scenario that favors it as a much higher probability, especially with their inability to stop QE in some form or fashion without crashing the system.

ampmfix said...

Costata, that foetal position does work indeed! Excellent comment, thanks. Yes I do think we would be some sort of early adopters. Intuition has helped me more than hard science, that is how I found and follow this blog, as probably many others.

costata said...


Nominal returns, that's the key to this line of thought. Both to the giver and receiver.

Woland said...


Agreed. I would add, each new measure undertaken to induce
CONFIDENCE is a tacit admission of the fear that it is at risk of
being lost. In that sense, is it not a signpost on the road to....

Aquilus said...


YES. Thank you for summarizing my rambling explanation


Yes, it shows that you have intelligent players at the Treasury and the Fed.

It is important not too underestimate their understanding and intelligence, and at the same not overestimate their powers of intervention in the long run.

ampmfix said...

An engineer friend tells me that voice recognition SW has finally achieved good results, so for whomever hates typing, try the Dragon speech soft. Can dictate from any position...

costata said...



Can dictate from any position...


Tommy2Tone said...

"Anyone think he is that smart?"

This presumes it's just him alone making the call. I don't believe he does things on his thoughts only.

Aaron said...

JMan1959 said...

There are some very smart (albeit misguided) people up there, and I simply cannot fathom that there isn't some analyst or professor that has studied HI/monetary theory

Keep in mind JMan1959 that conventional economic theory explains HI as a process through which debt is monetized to the moon. Grab any economist you can find and try to explain to him/her that HI is a velocity-driven event and you will have completely lost them in that one sentence.


Tommy2Tone said...

So, if we are the early adopters, we need a mirror in order to watch ourselves, or does that mean FOFOA needs to mirror his site and we watch that site? ;)

I'm feeling all Sienfeldian bizarro world right now.

DP said...

Shouldn't we be simply looking for a growing number of people here, and people elsewhere starting to increasingly say similar things.

Aquilus said...

Re: Costata's HI signs.

Just from having experienced the psychology of HI, here's how it goes for anyone not plugged into the monetary world, but just living their daily life:

1. Prices for necessities are rising, but my experience tells me that it's temporary and they will return to "normal" in a few months. Maybe a few percent higher, but no biggie.

2. So my plan is to just buy only what I need for now and save the rest. I will spend it when prices come back down. (Note: this usually causes a little price-deflation you usually see on charts before HI, as people stop buying non-essentials and their prices drop)

3. Prices for essentials just went up 10% last month. S..t, I'm getting nervous.. They better come back fast or else...

4. Prices for essentials just went up 20% since last month and they're accelerating. Time to go take my savings out and buy some real things before it gets too bad. What can I think of? Oh yeah, booze, cigarettes, jewelry. Check.

5. WTF, prices keep going up!! My neighbor is buying freaking refrigerators and s..t just to convert his money into something he can resell later. Not much left in the stores...

Also, if in this period the govt tries to "help" and impose price controls in order to "protect" the population from speculators, then shelves empty at a much faster rate since they do not get replenished.

Summary of the rambling above: psychologically it takes sustained inflation up usually to about 20%/month to break the normalcy bias.

costata said...


psychologically it takes sustained inflation up usually to about 20%/month to break the normalcy bias.

Then the new normal takes hold?

Aquilus said...


Haha. Yes, if by that it means scurrying to any open store with cash in hand (because credit is not accepted as the settlement delay causes losses), then yes.

KindofBlue said...

On the issue of informing the 'unwashed':

Keep it simple. While I fully expect a hyper-inflationary event, the advent of 'freegold' is less certain and is definitely a more complex argument (ballsy call, FOFOA). I do expect a much higher price.

I suggest simple analogies such as:

-- a pre '64 silver quarter bought a gallon of gas in its day AND IT STILL DOES AND MORE.

-- physical gold is FULL PAYMENT in hand, or would you rather I scribble out A PROMISE on a piece of paper?

-- WHY do you think CBs hold/acquire physical gold though they talk it down?

I think it is potentially dangerous to carry it any further than this -- don't advertise. One friend I worked with 'got it' and is pleased as punch that I shared my concern. Another friend -- intelligent govt accountant, though dogmatic -- just sees me as a paranoid nut-ball. I ended that friendship when he said 'if it gets that bad someone will just hit you on the head and take it' (as if crime in that context w/be justifiable, as in, if you 'win' I'll make sure you don't). People can be funny, that way.

If people aren't willing to invest some intellectual energy and understand then you've likely done them no favor; they will sell at exactly the wrong moment. Better to help them plant a fruit tree or start a garden for the SHTF scenario.

Times like this I really regret that boating accident when I lost it all....

Tommy2Tone said...

"Haha. Yes, if by that it means scurrying to any open store with cash in hand (because credit is not accepted as the settlement delay causes losses), then yes."

And so wouldn't that be about the time physical gold goes into hiding for a while?

Nickelsaver said...


I wouldn't start with pre-65 coinage. Do you really want to fight the silver -vs- gold argument when you get to that point in the process.

Best to stay in gold only I think. Then if the silver question comes up, deal with it from the reserve asset angle.

I only say this because I went thru silver to get to gold, and I don't even know why I was open to the argument because I was so convinced that gold and silver were both fruit of the same tree. But they are not of course.

Tommy2Tone said...

"(ballsy call, FOFOA)"

What is FOFOA's balsy call?

enough said...

Freegold "critical mass" ?

Just In: Now 7 quakes hit same area near Fukushima Daiichi — Includes M5.2 within the hour

Temperature doubles in a day at No. 4 Spent Fuel Pool

Radiation dose quadruples at one Tokyo monitoring station

Kyodo: Possible Leak at Unit No. 4 — Spent fuel pool cooling system halted after alarm sounds

Ex-Fukushima Daiichi engineer : Fuel rods still active and alive — Most worried about recriticality

Nuclear Expert: Fukushima spent fuel has 85 times more cesium than released at Chernobyl — “It would destroy the world environment and our civilization… an issue of human survival”

Former Japan Ambassador Warns Gov’t Committee: “A global catastrophe like we have never before experienced” if No. 4 collapses — Common Spent Fuel Pool with 6,375 fuel rods in jeopardy — “Would affect us all for centuries

Nobel Physics Prize Winner Caldicott: If Spent Fuel Pool No. 4 collapses I am evacuating my family from Boston

Adder's "here and now" may be just about to occur

Tommy2Tone said...

"I only say this because I went thru silver to get to gold, and I don't even know why I was open to the argument because I was so convinced that gold and silver were both fruit of the same tree. But they are not of course."

This is me to a T as well.

I ,frankly, think telling anyone is useless and I don't waste my time with it anymore. I understand the thought and desire to do so because I also went through that stage.
Here on FOFOA, you can form questions such as:
-- WHY do you think CBs hold/acquire physical gold though they talk it down?
and it makes sense, most everyone here can latch onto what that question means and implies but if you try to ask that to a regular joe- a civilian- you should look closer and you'll notice their eyes glazing over immediately.

As a former civilian myself, the regular joe's have practically ZERO understanding or desire to understand world finance or even their own countries finances.That's a big brush- let's say most.IMO.

I really like Costata's thoughts on early adopters and intuition.
You can lead a horse....

I would say intuition got me here....

I don't mean to suggest you never try converting people and hoard our info to ourselves. I think if a situation presents itself, then it's one's duty to engage and that is what I do.
In the couple years I stopped running around looking for converts, this approach has netted me one fish, but this one fish, listened and asked more than the 100 fishes before her. Eventually, the eye glaze came, but that's ok. She definitely listened and will not ever go to the cash for gold store again.

It's funny, but I still have daydreams of spreading the word though. I was just this morning daydreaming while driving to work and I was thinking of how I could go to a concert (or other venue with mucho people) and setup shop near the food vendors with a sign that simply said FOFOA.BLOGSPOT.COM and I'd have business cards- blank except for in the middle- fofoa.blogspot.com (I even have a logo in my head that involves a Yeti, a trail and mountain :))
I would hang around that sign, saying little to nothing unless engaged by the curious.... then the light changed to green :)

ampmfix said...

NS, I am following the same strategy as yours, but shifted in time. I WILL convert my silver into gold, but later. This is the gamble I am taking, I do not think Freegold is that close. My calculation is that silver will get at least up to the CPI adjusted value of 1980 say 100€, in maybe 18 months to 2 years. Then go all out to buy gold, maybe in the 3000€ ballpark.
I am convinced there will be a transition, but until then, silver has the potential of doing better. Why did you pull the plug already, do you think the transition is THAT close?

ampmfix said...

Au 35%, Ag 55%

Nickelsaver said...


When I said that I went thru silver to get to gold, I didn't mean that I have finished. I am still holding a significant qty of silver (and I am waiting for opportunity as well). But really I would get out today with a GSR of 45 or a $PoS of 38. I just hate taking a loss.

Am I nervous? A little. Only because I know I can sit on gold till hell freezes over. But silver just makes me feel cold-all-over now. I never got into silver to speculate, but that's where I find myself.

I could kill 2 birds if I could donate to FOFOA in silver. lol (FOFOA thinking...sure pass your losses onto me, thanks)

Anonymous said...


what you are saying about demand for currency and amount of base money in the system is what John Hussman describes in these two articles which I have recommended here several times:

Sixteen Cents: Pushing the Unstable Limits of Monetary Policy

Charles Plosser and the 50% Contraction in the Fed's Balance Sheet

costata and woland,

I am not sure the floaters are that important. If you want to get rid of the debt by inflating it away, you shouldn't have too many floaters - otherwise it won't work. The advantage of inflation is only available if the actual inflation is higher than expected, and then the effect is 'best' at the long end of the curve.

I would therefore expect some sort of QE3 in which they buy higher risk long term bonds (perhaps PIMCO is right, and it will be mortgage backed securities) and at the same time they 'sterilize' it by selling short-term safe paper, perhaps some bonds that the Fed creates for this very purpose.

When the inflation expectation finally goes up and the market interest rates rise, these mortgage backed securities will fall in value, but if the Fed holds them to maturity, what matters is only if they are paid back at face value. After a few years of high inflation, this should be no problem. So I don't see too much risk for the Fed in holding long term bonds (as long as they don't mark them to market).

The 'sterilization' with perhaps some 3-month bonds created by the Fed, would finally allow large investors to move closer to cash and prevent interest rates on 3-month T-bills from going negative too soon.

FOFOA and JMan1959,

I don't think a US$ collapse will come as a surprise to those who are in charge in the USG. Perhaps Obama is a muppet. But there are people behind him in the Treasury and in the Fed who know exactly what they are doing.

They have used their currency as a global political tool, and it is no surprise that this will end one day. In this sense, some form of inflation-because-of-debasement (if not HI) has long been the guaranteed outcome.

I would rather expect that they will try to control the timing and the process as much as they can. If your idea that the special deal with Saudi Arabia might be terminated, is right, then they have indeed been at the negotiating table as to the timing.


jonny49 said...

I have a view that HI will hit in Japan first, as they don't even have an 'exorbitant privilege' to keep them going. Their demographics are terrible, and following the nuclear issues they are now losing business, and the fiscal position is looking highly precarious. (and yes I agree with the poster earlier, the potential for a nuclear black swan fuel rod exposure is high given the frequency of earthquakes in that region).

The question if Japan sees a HI then becomes:

1. Will that trigger the collapse in collective confidence (hell, nice alliteration by accident there) around the globe. Will the Jap govts buying of USTs suddenly disappearing trigger a chain reaction in the US? Will the collapse of a major economy impact all other economies, causing so much QE to keep the debt load from collapsing, so that confidence vanishes?

2. Or, will Japan collapsing provide a perverse positive (damn, can't stop!) boost to the US, with the misplaced perception that the US is so much safer than Japan? Suddenly would the dollar rise to 'safe' levels for another few years?

And not just Japan, as I put the UK as slightly more likely than the US to see a currency collapse.

Re spreading the word re hyperinflation, I love asking two questions to get things started. (I think I've mentioned one here before).

1. A £20 note says 'I promise to pay the bearer on demand the sum of twenty pounds', signed by the chief cashier at the BoE. I ask people 'what would you receive if you presented the note at the BoE'? The generally say 'dunno', or 'twenty pounds'. I point out they already have twenty pounds!!

Then I explain they will get the following from the BoE: NOTHING! It is purely a medium of exchange, to enable easy transfer of one's earnings to real things. From there, it is easy to compare with a real thing, i.e. gold, as its value is not dependant on a bank promise, nor does it need transferring. Often a light goes on.

2. Which currency would you prefer your savings to be in, Sterling or the Euro. They always say Sterling. Wrong! Then I explain QE, inflation, maybe HI.

I felt obliged to share my knowledge with clients as well as friends, but I hold no physical at home. None of my clients think I have gone mad, and 15 of 90 have dipped their toes in a golden pond so far, with more to follow.

KindofBlue said...


We both agree that gold is the go to metal. I think people have to do some work and/or show real interest before they'll get the whole picture. I use the silver example as an opener -- their first minor 'ah-ha'.


The ballsy call is that gold will undergo a 30x +/- rise in value in addition to its rise in price.

ampmfix said...

Thanks NS, and understood, I am a bit nervous too, will keep you updated if I decide on something drastical soon. Cheers.

enough said...

Gary, will Japan HI before or after they evacuate?

worrying thing is that google news has this completely blacked out

yahoo news is carrying the links......

Title: Earthquake Information
Source: Japan Meteorological Agency

01:01 JST 14 Apr 2012 00:57 JST 14 Apr 2012 Fukushima-ken Oki M4.1 1
00:59 JST 14 Apr 2012 00:55 JST 14 Apr 2012 Sanriku Oki M4.8 1
00:30 JST 14 Apr 2012 00:26 JST 14 Apr 2012 Fukushima-ken Oki M4.4 2
00:01 JST 14 Apr 2012 23:56 JST 13 Apr 2012 Miyagi-ken Oki M3.3 1
23:58 JST 13 Apr 2012 23:53 JST 13 Apr 2012 Fukushima-ken Oki M4.2 2
21:56 JST 13 Apr 2012 21:52 JST 13 Apr 2012 Fukushima-ken Oki M3.6 1
21:33 JST 13 Apr 2012 21:30 JST 13 Apr 2012 Ibaraki-ken Oki M4.2 3
21:20 JST 13 Apr 2012 21:15 JST 13 Apr 2012 Fukushima-ken Oki M3.4 1
21:16 JST 13 Apr 2012 21:12 JST 13 Apr 2012 Fukushima-ken Oki M5.2 3
20:09 JST 13 Apr 2012 20:04 JST 13 Apr 2012 Fukushima-ken Oki M4.0 1
19:38 JST 13 Apr 2012 19:33 JST 13 Apr 2012 Fukushima-ken Oki M4.1 2
19:21 JST 13 Apr 2012 19:16 JST 13 Apr 2012 Fukushima-ken Oki M4.5 2
19:21 JST 13 Apr 2012 19:10 JST 13 Apr 2012 Fukushima-ken Oki M5.9 4

JR said...

I own silver to protect my gold. I'm not playing the GSR either. I own my silver because it has value - I live in the USA, and a few weeks/few months of Bartertown are coming.

Here's the thing. Hyperinflation is a currency event only. The price of three eggs may well rise to $100 billion as seen in this photo:

But those same eggs will still only cost one apple. This is an important enough concept that you should spend some time thinking about it. There will be shortages. Supply lines will be disrupted. And the relative value of stuff will change. But it won't change anywhere near the extent to which currency values will change. And if there's one thing the US has after 30 years of deficit spending, it's lots of real stuff! Tonnes of it!

I remember when my neighbor had his house foreclosed. He still had four cars, lots of very nice furniture and a quad-runner in the garage. Two of the cars were subsequently repossessed and when I saw him a few months later he was driving a much older car. But the point is, he was not only broke, he was in a negative net-worth hole of several hundred thousand dollars yet he still had all this stuff!

I have another friend who is equally broke yet he has all of the latest gadgets. He has the best digital camera, a nice iPhone, three computers, at least two iPads (he has to get the new one whenever it comes out) and much much more. There is lots of "stuff" here in the States. Lots and lots of it! And much of that stuff will become a secondary currency of sorts when the hunger sets in. That's how an impoverished, unemployed American will get his hand on the new US$1 billion note. He'll sell his iPad to a government stooge for a billion so he can buy a loaf of bread!

Think about it. That's all I ask.

Big Gap in Understanding Weakens Deflationist Argument


FOFOA owns some silver too:

Yes I still have some physical silver. But I am a seller today and have been for a year now. And I was only a buyer before I discovered the wonderful archives linked above. And for the record, I am not playing the GSR. And I won't sell ALL of my silver. I plan to keep a little bit of it. And if I didn't have any silver, I would probably buy an amount equal in weight to my gold position, as Desperado said in his comment. That means, if I had 100 ounces of gold, I'd also buy 100 ounces of silver. But that's just me (and Desperado).
Kicking the Hornets' Nest

Anonymous said...

I work with overly educated people considering my profession. I have found the more educated people are the more they are sure they know how it all is supposed to work. It has led to great frustration when I have attempted to start a "gold conversation", figuring it is something my intellectual counterparts should be able to grasp and even more importantly, appreciate. I end up being exposed to all kinds of fallacious reasoning and the worst kind of ridiculous naivety. So I no longer go there.

Occasionally I will either be approached because of reputation or will stumble into a conversation about the markets that eventually gets around to gold. You either get some interest or you get the glazed eye. More times than not it ends there.

When someone genuinely shows interest, I have found that giving a taste yields far better results than serving the entire banquet. It became apparent to me that since I come across so passionately in favor of gold, people were really getting intimidated by the idea that "going gold" meant allocating everything into gold, all in. It would immediately cause deployment of the "oh my God, he's another goldbug lunatic" deflector screens. I therefore start from the beginning and state that most financial advisers recommend a modest position in precious metals, perhaps 5-10% of the entire portfolio in allocation. I found that this often would put them at ease and assured them that I was not a wild eyed, anti-government, pro-Ted Nugent, off grid wannabe, and tinfoil hat wearing whacko. After all, nearly anyone could allocate 5-10% in gold right?

It is fairly easy to make the case for gold as superior store of value with the standard hard money rhetoric, especially now with such a well documented long term price trend in place. The tricky part is getting them to consider ways in which to accumulate physical gold. Many do not even know where to go to buy it. So I start real basic and tell them how easy it is to purchase and even to be delivered to the doorstep via UPS.

Then I start into the real specific information related retirement funds provided by our employer and their limitations. That leads me to discussion that illustrates the difference between paper gold and physical gold. I pass along a few tips that illustrate powerful ways available to enable allocation of retirement funds into allocated physical gold. Most are really intrigued at this point because these methods are largely unknown to most people I talk with.

Anonymous said...

...At that point I say that I can show them how this most certainly must happen in the future. If they either do not agree or cannot believe such a thing is possible, they still have their 5-10% allocation that will do quite well in the environment we have been in for the last 12 years and are likely to be in until something is changed to fix the problem. I suggest they can always build their gold position over time if it is insufficient in the event they believe Freegold is unlikely or impossible. "No harm no foul. Why not take a look for yourself. Here, check out this blog..."

I have snagged quite a few with this approach. The key is to start out in a non-threatening manner. Hard for me, but I am getting pretty good at it seems. The more I talk about Freegold with others, the more I fully understand it. It is mostly fun now to see people react, where in the past I would get frustrated. I always toss a few seeds over my shoulder on the way out and have been pleasantly surprised at the resulting fruit.

There is no way this stuff is going to be widely disseminated. But I do not think it needs to be. I don't think this ship can be steered. The superorganism will decide when the time is right and it will simply happen, as if the superorganism had planned it all along. I am content with that. But, I guess that is because I am content with my stack.

BTW, I sure am glad you know who is no longer the focus of attention. He or she is quite busy somwhere else doing what comes natural.

Biju said...


your thesis that imported inflation and USG printing to continue it's appetite, does not square with recent Govt proclamations that US will double exports by 2014. Unless Govt means in dollar value alone???

I prefer not to talk about Gold except very close relatives. too risky.

Costata imlying, we need to look at ourselves about US undergoing inflation is good point. I think I am prime example and a bit paranoid also. - since last 1 year , I am buying pasta, rice, cereals extra, bought some fuel hedge for 1 year supply in gallons. I am also more spend thrift now - buying biggest refrigerator, couches, biggest house, eating out more, buying best cut of beef, eating mutton more often. All this because I think prices will go up and they sure are increasing. Mutton(Goat) used to cost $3.99/lb in 2009, Now it is $7.99/lb - crazy.

Aquilus said...


Just a quick aside on doubling the exports:

It's gotta be based on debasing the dollar since otherwise I don't see how you can

a) convince other nations that they should now buy either new US goods or replace goods bought somewhere else with US ones without a price advantage

b) suddenly increase the base of the American private sector so much that it can double its export capacity. Unless they have a magic productivity wand.

Also, remember to take everything with a grain of salt in an election year.

JR said...

OMG government proclamations are at odds with what is suggested on FOFOA blog!!


FWIW people who say stuff like the US doesn't make stuff anymore miss two big ideas:

1) don't understand the US is still a world leader in the export of higher order capital intensive goods like computers, technology, industrial equipment and also industrial chemicals and

2) the US consumes a boat load. Its not like we don't make stuff, its that the US consume so much of what the US make it here. Yet on top of this we still expert lotsa super valuable stuff.

FOA on the US's tremendous resources, and how the issue is not its lack of resources, but that we consume too much of them.

"Besides, the issue beyond these items is our current lifestyle. We buy far more than we sell, a trade deficit. Collectively, net / net, using our own attributes and requiring the use of other nation's as well. Not unlike Black Blade's Kalifornians sucking up their neighbors energy supplies (smile). We cannot place [our tremendous resources] up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export!"

Biju said...


Agree with your assessment of US as super producer. USA is world leader in Medicines, Grains, Food, Entertainment(movies,music), mining(including Gold), Industrial & Medical equipments, services & Software, Hardware, Telecom.etc.

Also has one of the best water ways for efficient inland transportation.

All US has to do is cut some fat,upgrade rail transportation and once external debts are solved(or reneged), with a new currency USA will be off again.

Anonymous said...

I just realized part of my post didn't make it, here is the 2nd part in its entirety:

At some point they are sold that 5-10% in gold is prudent and physical gold ownership is actually not that difficult, certainly more safe in that it reduces counter-party exposure. Most of my colleagues are concerned with government attempts to confiscate. Then it is time to put out the Freegold hook and I say something like "well, you know you might think that 5% doesn't accomplish much, but you might actually be surprised how far that little bit of gold might go." Then I get the "oh really, what do you mean" look.

Then there is no more hiding it, you just have to come out and say it. A brief description of how the market price of gold is discovered followed by a few questions, "what if the demand for gold that currently exists had to be met with 100% physical supply, where all contracts had to be settled in delivery of real gold? For all intents a cash spot market? What would happen to the price?" Nearly everyone gets it right away and says the price would go much higher.

At that point I say that I can show them how this most certainly must happen in the future. If they either do not agree or cannot believe such a thing is possible, they still have their 5-10% allocation that will do quite well in the environment we have been in for the last 12 years and are likely to be in until something is changed to fix the problem. I suggest they can always build their gold position over time if it is insufficient in the event they believe Freegold is unlikely or impossible. "No harm no foul. Why not take a look for yourself. Here, check out this blog..."

I have snagged quite a few with this approach. The key is to start out in a non-threatening manner. Hard for me, but I am getting pretty good at it seems. The more I talk about Freegold with others, the more I fully understand it. It is mostly fun now to see people react, where in the past I would get frustrated. I always toss a few seeds over my shoulder on the way out and have been pleasantly surprised at the resulting fruit.

There is no way this stuff is going to be widely disseminated. But I do not think it needs to be. I don't think this ship can be steered. The superorganism will decide when the time is right and it will simply happen, as if the superorganism had planned it all along. I am content with that. But, I guess that is because I am content with my stack.

BTW, I sure am glad you know who is no longer the focus of attention. He or she is quite busy somwhere else doing what comes natural.

Michael dV said...

last Fall Kyle Bass stated at a conference that some 'high up officials' in the USG had told him that the plan was to just 'let the dollar go'.
He thought that there simply was no plan on the part of the USG to fight the debasement of the currency.
I too am sure that there is some little room in DC entirely devoted to hyperinflation planning. I believe that the majority of politicians simply do not believe that it could happen. They cannot answer the question: How does the USG pay off its debts, but they do not see the consequences of doing so with monetization. Most of these guys are smart in something, just very few in economics. Imagine how hard it would be to convince your in laws about HI, now picture some govt employee going up ending to a US Senator...sir I think I see HI coming....it would be career ending.

Michael dV said...

not 'up ending' but going up and telling a US Senator
I wish editing was possible before posting

Thom Ketring said...

So how do you suppose the financial mavens arrived at this 5% - 10% figure? Could it be that such a modest reserve of gold could be an adequate hedge in the event that all the rest of your nest egg implodes due to HI (and they accept that such an HI scenario is plausible)?

Or is the 5% - 10% recommendation just arbitrarily divined, and every one just got used to saying it?

Edwardo said...

enough wrote:

"Nobel Physics Prize Winner Caldicott: If Spent Fuel Pool No. 4 collapses I am evacuating my family from Boston."

Pardon my cluelessness, but is Boston somehow in the path of fallout that the rest of the planet isn't?

Aquilus said...


To answer you: read this whole thread. Twice.

It's that good.

Thom Ketring said...


Thank you. Spot on. *Sigh* Just when I think I understand the whole thing, there comes a wrinkle.

Tony said...


Here's one I've never felt comfortable answering...not even for myself. How many ounces of gold is enough? In other words, how many ounces can we assume one would need to be self-sufficient in a freegold environment?

Tony said...


And yes, I read Aquilus' link to FOFOA's percentage suggestion, but I'm hoping for some insights in actual number of ounces to perform the basic functions of buying a home, sustaining a living, etc. I apologize for such a juvenile question that can only be answered with speculation and hypotheticals. Just struggling to wrap my arms around the concept of what constitutes a reasonable goal for a common middle class citizen.

Aquilus said...


On the understanding part, the surface stuff is easy: if you're lucky your stash appreciates in purchasing power tremendously and you don't need to understand anything more.

For all else, this its not about "marketing freegold" - its about understanding the subtleties of the monetary system. Freegold will not need you and I to emerge, no little guys, regardless of how many, will bring this about, its about the huge, giant players.

We can only get a glimpse of that world, and you should start by assuming you understand nothing and if you feel you understand too fast, check your premises.

But again, your only action is your physical purchases. And lots of reading , thinking and talking about it. LOL

Aquilus said...


FOFOA has an estimate of 55k/oz. Take it from there with your favorite calculator Have fun!

Tony said...

Thanks Aquilus. I felt rather embarrassed posting a question like that. Nonetheless, that serves as a good starting point.

I have to assume that consumer goods and real estate prices could be vastly different in a freegold environment, assuming it coincides with a hyperinflationary event. I suspect food and consumables would skyrocket, and things like real estate and vehicles would plummet. Perhaps it all evens out in the wash and evaluating things with today's prices would still make a like comparison.

costata said...

VTC and Aquilus,

Thanks for pointing us back to those Hussman papers and that first hand description of the unfolding of HI from Aquilus.


FOFOA said...

Hi Victor,

"I don't think a US$ collapse will come as a surprise to those who are in charge in the USG. Perhaps Obama is a muppet. But there are people behind him in the Treasury and in the Fed who know exactly what they are doing."

Ha! Well you certainly have a higher regard for "those who are in charge in the USG" than I do!

Which reminds me of Why Are Governments So Stupid?


Phat Repat said...

And for a little 'light' music; for those unable to account for themselves, the excuse crowd:

And for the 1%'ers, and those of ill-gotten gains:

And it should be understood, the military is watching, with great interest... A return to the original intent is all but assured.

Aquilus said...


You're complicating things too much.

Look, regardless of when: now, during freegold time, before Ragnarok, the point is that most real things trade within a narrow range.

For example how many apples for an egg. Sure they vary according to demand, consumer preference, etc, but the ratio does not hyperinflate unless you can conjure up apples out of the blue to pay for eggs, which in the real world is impossible...

The point of this farm detour is that if you hold real stuff(unlike base or credit money that can be created at will) that someone else wants , its ratio to stuff you want will not degrade that much. So if you hold silver or copper or booze or ammo, you will still be able to exchange them for food at a decent ratio. And when the re-valued fiat currency is stable again, change back into that...

Gold, on the other hand does all that and more. The point of this blog is that as the only focal point that makes sense to be used as a store of value, it will not only keep pace with inflation like silver and copper will, but will have a one-time increase in valuation of an estimated 30-50 times current value.

One time, revaluation of physical only, elimination of paper gold, after which physical gold will continue as a store of value, but will not enrich anyone. It WILL however continue to keep your purchasing power intact!

Got the idea? Good.

Now before you drive yourself insane with all the self questioning you need a good base to build on. Read all these posts that MatrixSentry conveniently aggregated for us: JR’s Suggested RPG-Freegold Reading List Kindle Version .

When you're done, read them again, to make sure you get the things you inevitably will miss the first time.

By that time, you'll be able to figure the answers for yourself which is much better than taking anyone's advice.

Anonymous said...


No, I don't agree. When they terminated gold convertibility, they knew very well why they were doing it (rather than devaluing the US$ relative to gold which was the textbook knowledge at that time). Why did they do it? Not because it was the best for the country in the long run, but rather because it was the best for the government as an institution (in the not so long run), i.e. keeping the job, getting re-elected, becoming more influential, being able to spend more. The incentives for those who made the decisions explain a lot, and the concern for the country perhaps a little.

Then they used the unbacked dollar in order to raise the oil price. Why? Because this gave them a continuous cash flow from overseas (central banks accumulating US$ reserves) which they could spend on whatever they wanted. A second source of government funding that does not upset your voters because it comes from abroad and does not involve taxes. Big spending without high taxes. Pretty obvious where the incentives are, no? Again, they were not stupid. In fact switching from gold backing to oil backing was kind of ingenious, exploiting precisely their major strength and making their major weakness irrelevant - at least for a couple of decades.

Why would it be different this time? I expect that they are again far from stupid and that they indeed understand that the old oil-dollar arrangement is coming to an end as is the use of the US$ as the primary international trade currency.

Doesn't Jim Rickards give it away in his book?

Hyperinflation produces fairly predictable sets of winners and losers and prompts certain behaviours and therefore can be used politically to rearrange social and economic relations among debtors, creditors, labour and capital, while gold is kept available to clean up the wreckage if necessary.

Isn't Rickards precisely saying what the USG will do next?

I am not claiming the USG understands the situation and then wants to prevent HI because that would be the best for the country. No, they will use HI in order to clear the government debt from the system and then be free to act with the same government, just without the debt present. Sure, it won't be pretty. But given the past political use of the dollar, this is now inevitable. From this starting point, they will do what is best for the government as an institution, no?


Anonymous said...


I agree as far as the apples/eggs ratio is concerned. But I also think that the present financial system contains an absolutely unbelievable level of misallocation of capital, and this involves the mispricing of many goods and services relative to each other.

A few rather obvious ones are: Consultants and lawyers are overpaid compared to manual workers; the financial sector is too big relative to agriculture and resource extraction; long term capital investments are too scarce relative to present consumption, etc.

This should result in a tremendous change of the relative prices as well.


Aquilus said...

Touche Victor,

In order to not confuse Tony with too many variables, I stayed with a farm example, and went from there to describing the relatively stable exchange rate of real things for food.

You add the extra reality layers in that the world is much bigger and more complex, and that the miss-allocation of capital skewed so, so many areas and price ratios.


Phat Repat said...

Isn't it interesting who the director of the CIA is now? Hmmm...

Though Rickards is a little too close to the flag pole for my liking, the war gaming scenarios he described were quite revealing (and surprisingly candid; telegraphing...).

To think the Gov is full of idiots and that there is no coordinated effort would be a severe miscalculation. Perhaps that is 'by design' to allow for plausible deniability. Perhaps.

Wendy said...

I'm back and plugging away at almost a week of back posts.....I've made it to yesterday ;)

JR, I had to go to dictionary.com to look up that word you typed in referrence to me; I had never heard it before. I googled it, read it, and now I forgot the word and refuse to scroll through 4 days of posts to find it!

Now I will continue with yesterday in my effort to catch up.

BTW I was very happy to go to work on Wed. All the effects that are "happy" stimulating in Vegas when you arrive, become really annoying on day 4! Next trip I'm off the stupid strip!~!

Michael dV said...

'tail risk' is the term used by Bernacke when Ron Paul asked him why he thought so many people were buying gold. It has become almost a synonym for gold.

Anonymous said...


Ha! Well you certainly have a higher regard for "those who are in charge in the USG" than I do!

While there is a lot of stupidity in the Congress, I think the real control of critical USG actions come from the power Network.

Considered reading Confessions of an Economic Hitman ?


Agree completely with your comment on USG exploiting HI.


One guy who does know what he's talking about when mentioning Tail risks is Nassim Taleb. Please consider his The Black Swan of Cairo paper.

He also appeared recently on CNBC talking about why one shouldn't gamble with hyperinflation, since humans are not good at estimating tail risks.

Nickelsaver said...


Find myself scratching my head as to why Amway did not make that list of "most powerful/connected" companies. Maybe they moved into the 50 spot when Lehman got whacked. lol

Motley Fool said...


Yes, specifically Boston is in the Northern Hemisphere. That scientist said that if it happened they would move from Boston, to the southern hemisphere.

It's that bad.

Fwiw those quakes the last day or so don't look too bad. It looks like a 5.9 with aftershocks. From what I understand a 7 would be a problem. Of course the extra 6 doesn't help.


Nickelsaver said...


Unfortunately, fofoa island is located very precariously down wind of Japan.

Lets hope they get the situation secured.

costata said...

Did someone link this ZH post about Japan recently?


It looks like Japan could be first out of the gate for a currency devaluation. According to Andy Xie it needs around a 40 per cent deval to get to a level playing field with its main competitors. And it has to be sudden.

FOFOA said...

Hello Victor,

It is easy in hindsight to see someone's great success and to rationalize how it must have been ingeniously planned that way. As far as the decision to terminate convertibility rather than revaluing the gold to, say, $200/oz., I think that was a huge (and probably foolish) gamble.

As I have written before, I calculated (on the back of my envelope) that a revaluation to $200 could have easily bought them another 30 to 40 years (counterfactual estimation). As it happened, they got their 400% rise in oil (and everything else) and then it immediately overshot to almost twice that. The dollar was almost in freefall against foreign currencies and the European central bankers thought that the global financial system was on the verge of collapse.

That's when they confronted the brand new Fed Chairman, just appointed by a desperate Jimmy Carter to head the "deeply divided, inexperienced, soft and indecisive" Federal Reserve Board, ganged up on him during a trip to Europe, and told him what he had to do (which he then did). The rest, that "continuous cash flow" from 1980 to present, can be mostly attributed to foreign support, not ingenious USG planning. (Excepting maybe the last couple of years when they have been busily cobbling together and carelessly enacting the generous theories of a few economic and monetary luminaries.)

No, clearly we don't agree on this one "little" niggling detail. The "mastermind paradigm" will lead you down a spurious trail, I'm afraid. There's always a little bit of silly planning and a whole lotta luck involved when we evaluate the past winners honestly. Even the euro planners hoped it could be done in a single decade. I'd say they got pretty darn lucky when it all held together through the late 90s. I wonder if ANOTHER had anything to do with that.

You mentioned the "continuous cash flow from overseas" as if "those who are in charge in the USG" somehow masterminded that. Seriously? A/FOA explained that it was a conscious decision by the Euro CBs to support the dollar until they could launch the euro, an explanation which has led to this current discussion which you are apparently trying to revise so that it fits your preferred view of history. That CB meeting in Europe where they decided that they needed to support the dollar for a while in order to free themselves from it, did the USG masterminds engineer that secret overseas meeting while Carter was panicking, the Fed was a jellyfish and the dollar was collapsing?

My view is that the whole world, led by illustrious England, had a big oops in 1922. It will someday be known, as Jacques Rueff predicted in 1972, as "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." It took a while (half a century) for it to become obvious enough that more than one in a million economists could even fathom it. And by then, to fix the oops required the unthinkable: supporting the US$, and everything that goes with it, for as long as it took to build a replacement.

Then, at the turn of the century, just after the euro had launched, China nudged its way into the big game. Perhaps China supported the dollar for another 8 years simply to get in on the cheap gold. Let's see, it was in April of '09 when China suddenly announced it had secretly increased its official gold reserves from 600 tonnes (the number that had stood the same throughout the decade) to 1045 tonnes. What else began around that same time? Oh yeah, quantitative easing. Hmm…


Anonymous said...

Having been in VTC's camp, I will have to agree with FOFOA on this one. My thinking on a lot of things changed after reading Life in the Ant Farm (Apr 2010) a few times. I think it is very appealing to point to a person or a group and attribute responsibility for the world's woes to them. I think it is a natural reaction and tendency for all us ants.

The problem is that whenever I follow that path I end up running into logical absurdities that I must manage in order to achieve a comprehensive model of causality. To follow the twist in turns, and then attribute those complexities to a master plan, becomes a tedious and increasingly difficult proposition. One begins to doubt where one was once certain, am I becoming a conspiracy theorist?

All around us we see everyday examples of the failure of master planning. How could something so devilishly complex and convoluted as our present global monetary system have been planned? After reading Life in the Ant Farm I realized a far simpler and more elegant solution exists to explain it all, it just happened. It just happened as consequence of many individual actions and decisions made independently, but taken as whole in context of history they appear coordinated or at least as if the ants were working toward a common goal.

The superorganism came up with this $IMFS, as weird and unsatisfying as it sounds. People have been born and have lived their entire lives in this ant farm. It is only natural for the ants that find themselves living in this colony to fall in line and contribute to the construction of the colony itself. After all, it is what ants are designed to do. Somewhere along the way this colony took a turn for the worse and like ants who ultimately abandon their own colony, we are in the process of abandoning ours in favor of a new one that is under construction.

Our leaders are doing what they feel they have to do. I do not even think collectively they see that the colony is necessarily doomed. Perhaps they see a need for renovation :-) They certainly haven't agreed on a master design of the new colony IMO.

Have a great weekend everyone!

costata said...


It just happened as consequence of many individual actions and decisions made independently, but taken as whole in context of history they appear coordinated or at least as if the ants were working toward a common goal.

Spontaneous organisation - it's what humans (and many other critters) do.

enough said...

Hi Edwardo,

Motley is correct as circulation is Northern hemishere is generally separated from Southern.

The Dr. in question lives in Boston so that's why she will evacuate from Boston :-)

I believe that many are underestimating the gravity of Fukushima and it's possible effect on Adder's "here and now".

A collapse or even a breach of the spent fuel pool in reactor four COULD create recriticality and at minimum reactor fires and hydrogen explosions that COULD render much of Japan nuclear wasteland. At worst the rods heat up as they are no longer being cooled by water and you have an atomic explosion.

We've had more big quakes in the past two hours:

6 more quakes hit near Fukushima in 2 hours — Consecutive M4.5 and M4.6 in same location just offshore Daiichi....

19:56 JST 14 Apr 2012 19:51 JST 14 Apr 2012 Fukushima-ken Oki M4.6 2
19:52 JST 14 Apr 2012 19:48 JST 14 Apr 2012 Fukushima-ken Oki M4.5 2
19:01 JST 14 Apr 2012 18:57 JST 14 Apr 2012 Fukushima-ken Oki M3.9 1
18:30 JST 14 Apr 2012 18:25 JST 14 Apr 2012 Ibaraki-ken Oki M5.0 3
18:10 JST 14 Apr 2012 18:06 JST 14 Apr 2012 Ibaraki-ken Oki M3.9 1
17:50 JST 14 Apr 2012 17:46 JST 14 Apr 2012 Fukushima-ken Oki M4.3 3

Fukushima is out of control literally. Radiation is too high in reactor three for a human to go inside and even robots are failing within minutes.

Is it really so hard to imagine given the increase in frequency and magnitude of tremors at Di-Ichi that the situaton gets really out of control and causes the mad rush to "the here and now"?

It seems to me to be a quite likely catalyst....

Edwardo said...

Thanks for the clarification, enough. I did a bit of research on the good doctor and discovered what you just relayed. I don't want to hi-jack this blog discussing this sort of thing, (even if it can, in some way, be seen as a possible catalyst to a very different global monetary regime, and, let's face, it, a catalyst for a lot of monumental changes that very few would likely enjoy) but one would like to know how much time one would have to evacuate the east coast in the event of such an emergency.

Nickelsaver said...


I did a little research too. Boston is in no unique danger relative to any other place on earth.

The atmospheric jet streams are only half the equation. The oceanic jet streams are the other half.

If you combine the two and also consider the fact the Japan is on the edge of those systems, any event that would be big enough to effect Boston is going to contaminate the entire globe.

So you can run, but you cannot hide.

Or, figure that the folks in immediate harms way have enough self preservation instinct to keep a cap on it.

I for one am not worried about it.

enough said...

Hi again Edwardo....

After the hydrogen (or atomic, questions remain) blasts at the reactors a year ago, rainouts in Portland, OR. and Boulder, CO. occured mere days after the events. Those areas of the USA that just happen to have had heavy rain as the radiation cloud passed over were heavily effected.

So to answer your question.....not long....days to reach east coast USA. If you happen to have heavy rains that day, you are screwed.

An event that all the experts gave such a small possibility of occuring, has occured !!

Now we have thousands of spent fuel rods (the most radioactive kind) suspended 40 feet up in the air on 3rd floor of heavily damaged reactor four which is teetering. Motley mentioned a catagory 7 to trigger a collapse/breach of the suspended fuel pool. Or maybe 30 fives mags (which have occured in past 48 hrs) would do it.....who knows. It doesnt seem like a matter of if but just when !!!

I repeat.......everyone will be rushing for the "here and now" when it does.

This is NOT off topic !!! This occurance would probably lead to at least an evacuation of large swaths of Japan. I'm sure the BOJ would HI in this event. Possibly a run on food supplies globally. The future will be abandoned just as Adder theorizes. Maybe he's not so far off on his timing either.

My gut tells me Fukushima Di-Ichi is the game changer. The catalyst that ignites (literally) the mad rush to the "now" and whatever that means for monetary change..........

Here is a great link for news


good luck to all, Enough

burningfiat said...


While waiting for radioactive fuel rod fueled OneBadAdderGeddon...


enough said...

read and watch the video with english subtitles if you dare............


Anonymous said...


As far as the decision to terminate convertibility rather than revaluing the gold to, say, $200/oz., I think that was a huge (and probably foolish) gamble.

isn't this inconsistent with


The Middle East nations, in particular, have shown their reserves to be much greater than ever thought possible. These “new/ larger” reserves have come to be known about, only in the last eight years. It was the “possible existence” of this oil that created much fear in the American Capitol, prior to the 1970s. In that time, it was known that the Western economy was growing on low priced energy. This growth would soon consume all “local / domestic” reserves that, in turn, would bring much dependence on low cost Middle East oil. The reserves in this region were, and now even more so, are the lowest cost to produce in the world. As all oil was sold in dollars, and US$s were then, still somewhat attached to gold, the ME producers had “no need” to raise prices! The political forces in the West needed much higher oil prices to “stimulate exploration” to avoid the “strategic problem” of “all oil supply from one region”. Make no mistake, there is enough oil reserves in the ME to supply “all world” for “many grandchildren”! It was in this time that the events created by the “politics of dollar currency”, allowed the decision to remove the gold backing from the US$. This move, broke the “gold bond to oil”, and created a need for more dollars per barrel of ME oil. The oil producers, as expected, did create “Beirut Resolution titled XXI. 122″! [VtC: It was Beirut XXV.140 which followed Caracas XXI.122]
this was the beginning of a move by dollar advocates to raise this commodity price by inflating the “world reserve currency”. As an “also”, the ME was shown to be and caused to be “unstable” for dependence for oil production


Anonymous said...

... and

Date: Sat Apr 04 1998 19:55

To what end did the world financial system gain with the dollar off gold backing, and then allowed to “dirty float” against all currencies? Would the world not have been better off to find gold revalued to, say $300 and then begin a “dirty float”? Noone would have lost, and the inflation would have , at best, not have been worse!

Truly, I tell the reason for this action. The US oil companies knew that the cheap reserves were found. The governments knew this also. The only low cost oil reserves in the world at this time were in the Middle East, and their cost to find and produce was very low. It was known, that, in time, ALL oil would come from this land. As much higher US dollar prices were needed to allow exploration and production of other reserves, worldwide. But, how to get crude prices, up, when the Gulf States were OK to pump and produce in exchange for “gold backed dollars”? I will not name the gentlemen that brought this thinking to the surface in that era, but it was discussed. It was known that oil liked gold. It was known that “local oil” would be used up without higher prices. What if, the US dollar was taken off the gold standard, and gold was managed “upward” to say, $208 per ounce? The dynamics of the market would force oil to rise and allow for much needed capital to search for the higher priced oil that was known to exist! The producers would find shelter in gold even as the price of oil was increased in terms of a now “non gold dollar”! Price inflation would rise, but gold and oil would also increase. The dollar would continue to be used as the only payment for oil, and in doing so replace gold as the backing for this “reserve currency”. All would be fair.

The war in 1973 and the Iran problem did make markets “overshoot”, but all did work to the correct end. The result was “a needed higher price for a commodity that was, as reserves, in much over supply by the wrong countries”! It was known that the public would never have accepted this “proposition” as fair. To this end, we have come.

From the declassified documents I have seen, the 400% increase was actually from spring 1973, and it was only much much later that the Shah went overboard with the price increases and violated the original agreement.

I am not claiming that in 1969, there was a master plan that covered everything until 1999. Certainly not. Still, the people in charge of the USG knew very well what they were doing, what they hoped to achieve and why the USG would benefit from that.


50sQuiff said...

Did anyone notice Paul Mylchreest quoting ANOTHER in his latest Thunder Road Report? From Page 3:

An almost unknown, except to a few, “sage” of the gold market once forecast (I’m paraphrasing but it is close enough) that: “Physical gold will need only to be ‘priced’ once during this lifetime and that will be more than enough.”

JR said...


I really like you which I why I bother.

But WTF? You have been so good lately but it appears we are regressing. It seems like Mortymer's worms have infected your brain again. Mortymer and his merry band of conspiratards are
1) dumb and
2) crazy.



Of course the US want to go off gold to raise the dollar price of oil so the oil the US paid for with fiat dollars (basically North american oil in US/Canada/Mexico) could be raised in fiat price, allowing for greater exploration of these reserves:

It was known that “local oil” would be used up without higher prices. What if, the US dollar was taken off the gold standard, and gold was managed “upward” to say, $208 per ounce? The dynamics of the market would force oil to rise and allow for much needed capital to search for the higher priced oil that was known to exist!


Yup, the dollar collapsed less than 10 years later.

The decision to terminate convertibility rather than revaluing the gold to, say, $200/oz. - sounds like a foolish gamble to me, yes?

The dollar collapsed less than a decade after they did this, and before it collapsed they had a big oil crisis in the middle, yes?


You best conspiratard argument (its still dumb, but at least its plausibly consistent with history, unlike the stuff you advance in this thread) is that they torched the dollar because they knew the Euro folks would come in and save the day and support them.

So good luck with that one, its LDO real dumb too but you can probably catch a few more suckers if you at least *try* to make it consistent with history.

Jeff said...

The UK seems awfully nervous.

Stretched Britons begin stampede for stamps

(Reuters) - The latest round of panic buying sweeping British consumers isn't for fuel, as it was earlier this year when threats of a strike by the tanker drivers' union led to long queues of cars snaking their way around filling stations.


JMan1959 said...


I don't believe they are "planning" hyperinflation either. But I do believe 1) they are preparing for an inevitable, substantial devaluation, as they know they must continue the printfest; and 2) that they have considered the strong possibility/prepared for the consequences of HI at high levels.

Great Maybury video, hadn't seen it. While there very well may be some smart people in politics, there are lot more idiots than geniuses.

Nickelsaver said...

Here is a clip called Gold or Silver from Kitco news. In it people are asked what metal they prefer and why.

Notice that there was only 1 person that got the answer right - about the 1:10 minute mark.

Anonymous said...


don't get this 'logic'. How does this contradict what I wrote above?


Anonymous said...


one more,

Yup, the dollar collapsed less than 10 years later.

So what? The dollar was the only game in town, and the ROW had to keep supporting it.

If you tell the Shah to increase the oil price fivefold during the Arab embargo so he can purchase more fighter planes, and if you are happy doing this although you know this triggers one of the most serious economic crises for your allies in Europe (and also in your own country btw), then this isn't that far off, is it?

High stakes poker. If your hand is better than that of your adversaries, you still make it somehow.

Sure, there are about ten occasions at which it could all have collapsed, for example, the inflation towards the end of the 1970s, the 1987 crash, the near-crash of the London gold market in 1999, oil countries starting to switch to Euros around 2000/1, the debt crisis 2008/9. But fact is that it hasn't. Each time, they had an idea that worked out and still enough influence over the ROW in order to make it.

All this looks pretty reckless to me, often some high stakes gamble, but definitely far from stupid.


Anonymous said...


I am also not sure about this one

The rest, that "continuous cash flow" from 1980 to present, can be mostly attributed to foreign support, not ingenious USG planning.

As long as oil was priced in US$, did they have a choice?

The only period that is not mainly related to oil or political influence is China since 2000 - that was luck.


costata said...


Off-topic but I thought you might find this interesting:

Physicist: [sigh of relief: not a space cadet] Alright, the Earth has only one mechanism for releasing heat to space, and that’s via (infrared) radiation. We understand the phenomenon perfectly well, and can predict the surface temperature of the planet as a function of how much energy the human race produces.

The upshot is that at a 2.3% growth rate (conveniently chosen to represent a 10× increase every century), we would reach boiling temperature in about 400 years. [Pained expression from economist.] And this statement is independent of technology. Even if we don’t have a name for the energy source yet, as long as it obeys thermodynamics, we cook ourselves with perpetual energy increase.

Economist: That’s a striking result. Could not technology pipe or beam the heat elsewhere, rather than relying on thermal radiation?

Physicist: Well, we could (and do, somewhat) beam non-thermal radiation into space, like light, lasers, radio waves, etc. But the problem is that these “sources” are forms of high-grade, low-entropy energy.

Instead, we’re talking about getting rid of the waste heat from all the processes by which we use energy. This energy is thermal in nature. We might be able to scoop up some of this to do useful “work,” but at very low thermodynamic efficiency. If you want to use high-grade energy in the first place, having high-entropy waste heat is pretty inescapable.


Warren James said...

re: discussion on the intelligence of the US Government, I want to add that a superorganism view of the world also requires recognition of the USG as a (smaller) organism. It makes sense to allow for and expect, emergent life-like behaviour such as survival instinct, reaction to threats, adaptation and collective intelligence. Battle of the superorganisms, if you will.

Few get to see this world in operation, yet FOFOA's work allows us a glimpse and I find it amazing, every time.

Motley Fool said...


As a point of curiosity, the theoretical model of radiation of heat to space has recently ( last few months or so) been shown to be wrong, experimentally. Which significantly impacts the global warming debate.

I personally would take those estimates with a pinch of salt.


DASK said...

Motley Fool,

Precisely which part of it has been shown to be wrong and how does it alter the debate? Perhaps some of the balance between factors, but the thermodynamics are pretty fundamental.. if an experiment shows it to be wrong, almost certainly the equipment, or the experimenter's math skills.

Very interesting article costata.

Motley Fool said...


The energy loss was shown to be much greater than assumed.

I'm not arguing against thermodynamics, it is on solid footing. Just noting that the assumed retardation effect of the atmosphere is less than currently modeled, and also a bit more complex (ie not linear).

But hey, we will see if he is right in 400 years eh? :P


Nickelsaver said...


When reading that article, I could't help but wonder about population growth compared to energy consumption.

Here is an interesting site with some relevant data for comparison. Notice the a shift around year 2000.


mr pinnion said...

All this talk of Fukushima disaster is unfounded.
There is more than enough space in all the massive underground nuclear bunkers for the great and the good to hide in, for fifty years or so, till things cool down.(ironically, nuclear powered).

Animals are living happily in the shaddow of Chernobyl, so there will be food to eat when they emerge from their bunkers.

Ok, the rest of us shrimps might die in the chaos form starvation and radiation sickness, but this expotential population growth is unsustainable. So best nip it in the bud before the planet boiles up.
And lets be honest, we are all going to be dead in fifty years anyway, so no big loss.

So the human race can start anew in fifty or so years time with 100 000 people and the earth doesnt boil .Result!
Or do you want 400 years of the dark ages like when the roman empire ended?
I dont know , its all self self self with you guys.


DASK said...


Fair enough, there is loads to take issue with regarding that particular estimate, but the broad point in the article is a good one :) I won't be betting on even 40 years of BAU per-capita energy growth in my plans anyway.

NS: That spike is essentially coal electricity in china. Oil per capita has peaked, nuclear and wind/solar can still grow immensely, natgas and coal, on a per capita basis, have some room to grow but not nearly as much as people seem to assume.

Edwardo said...

That is interesting, costata. Thanks. BTW, I've been
meaning to ask you, what is the provenance of costata?

jonny49 said...

'the U.S. exorbitant (is there a stronger word?) privilege of the last 40 years'

An alliterative suggestion Fofoa:


Great post, which I finally managed to finish reading. I'm wondering how 'short-term' you think short-term will be?

Aaron said...

Preposterous Privilege.

I like it Gary. It's certainly shorter than the utterly ridiculous beyond belief privilege -- and URBBP does't look very sexy in print.

I can see the headlines now.

"And as a result of the USPP, US citizens shall in short time acquire a distinctly tangible and hopefully brief understanding of the double coincidence of wants."

costata said...

Hi Edwardo,



I'm interested in any exploration of the limits of exponents (is that a word?). I agree that any rough estimate like Tom Murphy's is going to be subject to revision. "The science is never settled."

I thought the epilogue was, in some ways, the most interesting part of the post:

The conversation recreated here did challenge my own understanding as well. I spent the rest of the evening pondering the question: “Under a model in which GDP is fixed—under conditions of stable energy, stable population, steady-state economy: if we accumulate knowledge, improve the quality of life, and thus create an unambiguously more desirable world within which to live, doesn’t this constitute a form of economic growth?”

I had to concede that yes—it does. This often falls under the title of “development” rather than “growth.”

If we cast down GDP as a false God I wonder which econometric best reflects quality of life.

A couple of thoughts to ponder if you please:

1. The "front lawn dump" of cash for debt is de facto 100% reserving of the system in nominal terms.

2. If there are finite limits and in future gold operates as the brake and spur of international trade could that lead to a steady state economic regime?


...its all self self self with you guys

The conversation here often drifts back to approaches to the task of persuading people to hold some gold. Our physical gold advocacy argues against this charge of selfishness. On the other hand we do argue for taking steps to protect yourself and your wealth. So I suppose this could be seen as an argument that selfishness is a virtue (in the spirit of Ayn Rand).

costata said...

Comment Of The Week

Bicycle Repairman

I'm with Sheila on this. One minor note, I want my check 6 months before anyone else.

Thanks in advance.

Sheila Bair's Modest Proposal To Fix Everything: Hyperinflation


Nickelsaver said...

"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.

What's a country to do? What any other country would do!

And with the advent of the Euro, many of the same countries that bestowed that privilege upon the USA, sought to correct the mistake that THEY made a generation before.

And the world stands ready to enter an era of liberty, justice, and PRIVILEGE for all.

That is, if the "TERMITES" can help it.

JR said...

Yay Victor,

Indeed, the US took a huge risk that:

1) they could take the dollar off gold and
2) the ROW wouldn't bail.

It is easy in hindsight to see someone's great success and to rationalize how it must have been ingeniously planned that way. As far as the decision to terminate convertibility rather than revaluing the gold to, say, $200/oz., I think that was a huge (and probably foolish) gamble.


The "mastermind paradigm" will lead you down a spurious trail, I'm afraid. There's always a little bit of silly planning and a whole lotta luck involved when we evaluate the past winners honestly.

Wendy said...

costata, You don't seem like the rough bark type to me..............hmm perhaps I should reword that, i've witnessed your rather rough bark at times, but I suspect it's louder than you're bite. i suppose what I meant to say is you seem not so rough skinned :D

costata said...


Sadly it's what I see when I look in the mirror but thank you anyway.

Anonymous said...


it's called Realpolitik.

2) the ROW wouldn't bail.

They had the power to make sure that the ROW (which consisted only of Europe and Japan) did not bail. So it was a reasonable move.

The "mastermind paradigm" will lead you down a spurious trail, I'm afraid.

It's not a "mastermind paradigm", it is acknowledging that political realism exists. If you didn't and only read Another, you might have thought it would blow up in 1999. It didn't.

Reality is richer than you might think. Get ready for the next move.


Nickelsaver said...

For Uncle Costata


costata said...

Woo hoo if it is adopted this proposal would give the EBA/ECB some teeth (my emphasis):

April 13 – Bloomberg (Jim Brunsden): “Europe’s biggest banks may need to hold core-capital reserves of as much as 17% under plans being weighed by European Union lawmakers. The region’s parliament is considering allowing regulators to impose capital surcharges of as much as 10% of a bank’s assets, weighted for risk, according to a set of suggested compromises on a draft law prepared by Othmar Karas, an Austrian lawmaker guiding the adoption of global bank-capital and liquidity rules.”

h/t Doug Noland


costata said...

Thanks Nickelsaver, great clip.

FOFOA said...

Hi Victor,

You wrote: "there are about ten occasions at which it could all have collapsed, for example, … oil countries starting to switch to Euros around 2000/1… Each time, they had an idea that worked out…"

And a couple of weeks ago:


sure, this is where Mortymer got the email from. You are getting closer. Just keep digging.


You were encouraging Aaron to "keep digging" so that he would find William Clark's petrodollar warfare theory, right? The same one Mortymer excitedly emailed me four days earlier. And then today:


it's called Realpolitik.

2) the ROW wouldn't bail.

They had the power to make sure that the ROW (which consisted only of Europe and Japan) did not bail. So it was a reasonable move."

I'm assuming, Victor, that you consider Clark's theory to be a good example of "Realpolitik" in action, yes?

It's complete bunk, but if you want to press this, you will get more from me. You also wrote:

"As long as oil was priced in US$, did they have a choice?"

Yes, of course they did. You don't have to ship real stuff to the US to get the dollars you need to buy oil. You can simply buy dollars with your own currency. Stacking Treasury debt (supporting USG exorbitant privilege with real stuff) has always been a choice. This idea that pricing oil in euros was ever a big threat to the $IMFS and therefore they created reasons to invade Iraq is utter nonsense. You are confusing correlation with cause. You of all people should be able to see through this BS. And it is the opposite of what A/FOA explained.


FOFOA said...


"Where shall I begin? Well, for starters, you don't need to acquire any U.S. assets in order to purchase a barrel of oil that is priced in dollars. You could pay with eurodollars, which are dollar-denominated accounts that could be issued by any bank anywhere in the world.

And even if the oil were purchased with dollars drawn on a U.S. bank, there is no reason at all that the seller needs to retain the proceeds in that form. Those selling oil could convert those dollars back to euros or Japanese yen or whatever their hearts desired, and likewise could convert euros obtained through sales on an Iranian bourse back into dollars, if they wished. What ultimately determines the demand for dollars is not the unit of account for the transaction, but rather the desired asset holdings of those who are accumulating the wealth.

…Which is also my explanation for the prevalence of these theories on the internet-- there is a demand for a deeply conspiratorial interpretation of world events, and always someone willing to supply such.

That's James D. Hamilton, an economist at UCSD.

"It is therefore with wry amusement that I have seen a myth being widely propagated on the Internet that the genesis of this "Iran bourse" project is a wish to subvert the US dollar by denominating oil pricing in euros.

As anyone familiar with the Organization of Petroleum Exporting Countries will know, the denomination of oil sales in currencies other than the dollar is not a new subject, and as anyone familiar with economics will tell you, the denomination of oil sales is merely a transactional issue: what matters is in what assets (or, in the case of the United States, liabilities) these proceeds are then invested.

And that's Chris Cook, former director of the International Petroleum Exchange in London.

Check your foundations Victor, because you're on the wrong trail and you're not going to redirect this blog. I left that other site because this is the trail they wanted to walk.


Anonymous said...


perhaps you would actually benefit from getting a bit up to speed as far as the 1970s are concerned.

Yes, of course they did. You don't have to ship real stuff to the US to get the dollars you need to buy oil. You can simply buy dollars with your own currency.

You may need to rethink this one. Your economy has recovered from WWII and you have just reached a point at which you have something to sell (not only to the U.S.). But you still need a lot of oil in order to sustain your economy.

Now oil in US$ gets 400% more expensive within 2 years. Your oil bill in one year is suddenly twice as much as what your CB has accumulated in US$ over two decades (Bretton Woods legacy, but who cares at this point, you actually happen to need these US$ in a minute).

Sure, at this point you have to buy more US$ with your own currency, causing said currency to go down and the oil price to rise even more relative to your own labour costs. Thank you very much.

Now you think about your balance of payments, and you keep the two currencies separate (your own currency versus US$), and the accounting identity tell you that unless

a) you export goods and services to someone who pays in US$,
b) you export capital to someone who pays in US$ (who buys your companies with it, say),
c) you have enough revenue from your existing investments in US$

you run a persistent balance of payments deficit (which means your currency would continue to go down relative to the US$).

Those selling oil could convert those dollars back to euros or Japanese yen or whatever their hearts desired, and likewise could convert euros obtained through sales on an Iranian bourse back into dollars, if they wished

Exactly. Unless the seller of the oil converts his proceeds precisely into your currency, you would have the balance of payments deficit.

But the seller of the oil doesn't. For very well known political reasons as well. So how does this contradict what I wrote above?

Further, another incentive to get more familiar with the 1970s:

Stacking Treasury debt (supporting USG exorbitant privilege with real stuff) has always been a choice.

As far as China since 2000 is concerned, I agree. But I was talking about the 1970s.

Already in the laste 1960s, then Bundesbank presidents Blessing and Klasen, for example, recommended to redeem more US$ for gold (just as France had done). Guess what? The USG phoned and basically said, you have the following options
a) you pay us directly for our troops in Europe
b) we withdraw some of them
c) you keep stacking treasuries

Their politicians (no surprise) went for option (c). Is well documented by the way and is no BS at all.

The 'exorbitant privilege' is not only the blunder of 1922 - it is also the more or less official way in which the Western military security (aka America protects Europe and Japan) was funded. Monetizing US$ was the contribution that was payable in exchange for the security provided.

I am not saying this is morally right or morally wrong, but this is one of the key roles that the 'exorbitant privilege' has played in history.

In 1971-1974 the Nixon/Kissinger government in effect substantially raised these contributions.

Well, of course, you can argue it would have been a cleaner solution if
1) the US had removed the gold backing and had gone to a free floating gold reserve and a market price for physical gold
2) they had sent the Europeans an invoice saying "stationing troops in Europe costs XYZ ounces"
3) in 1969, Nixon had written to the Europeans "we have decided to spend more, and so we are raising the contributions."

But this is not how it happened. And, yes, all this has left a lot of traces in the monetary system, not the least in the health of the US$.


Anonymous said...


you wrote further above

That's when they confronted the brand new Fed Chairman, just appointed by a desperate Jimmy Carter to head the "deeply divided, inexperienced, soft and indecisive" Federal Reserve Board, ganged up on him during a trip to Europe, and told him what he had to do (which he then did).

It seems you don't know this: Volcker wasn't brand new and had to be told by the Europeans what to do next. He was actually one of the architects of the 1971 removal of the gold backing. Wikipedia:

From 1969 to 1974, Mr. Volcker served as under-secretary of the Treasury for international monetary affairs. He played an important role in the decisions leading to the U.S. suspension of gold convertibility in 1971.


Anonymous said...


because you asked. Of course, he did not only use Euros in the transactions and then purchased US Treasury bonds. He started stacking euros:



Anonymous said...


finally, you cite James D. Hamilton

What ultimately determines the demand for dollars is not the unit of account for the transaction, but rather the desired asset holdings of those who are accumulating the wealth.

How do you square this with

Date: Wed Nov 12 1997 20:41

The world currency system has, for years been little more than digital credits backed by "usage demand". In the long run it was oil backing the US$ that kept it all together!


Clyde Frog said...

In the long run it was oil backing the US$ [as its desired asset holding] that kept it all together!


J said...

Victor - I was going to post the same. Also

Date: Sun Nov 02 1997 21:52

You see, all currencies now compete with each other, not for value of wealth but for "USAGE". The game has now become "whose currency gets used the most for trading" not for value against goods! It was easy to know the currency that got used for oil would win this game. Today, all currencies are traded against the dollar for it's usage as a medium of oil exchange! Take away that link and the entire currency/ debt exchange system, as we know it will collapse! The US$ must be maintained as the "most used" if the other currencies are to have a chance to survive.

Date: Fri Nov 07 1997 21:59

Turn slowly now and view all directions. The wealth that was had was not real. The Pacific Rim started, now South America. Next will be Europe closely followed by the US. Remember, all currencies are the same now as they are "digital paper"! Nations will defend the system at all cost They will never sell US$ treasury debt as that debt is their currency! The dollar will soar as a final defense! As part of this defense they will allow oil to rise as oil is priced in dollars. How do you get oil to rise? Today, we stop our CBs from selling gold!

...Maybe I'm missing something

FOFOA said...

Fine, so you want to press this. I'll get back to you.

Comments are on moderate.

Woland said...

Victor and FOFOA:

I am having a deja vu (or better, a deja entendu) moment. It goes
to the Aristotle/Oro discussion of (1/18/00) Msg ID 23127 and
23135. This very topic was weighed in on most clearly by Ari, who
made clear that the decision to end convertibility was intended to
be a temporary measure. Haldeman: "He argues it shows the wisdom
of or refusal to consider convertibility until we get a NEW MONETARY
Nixon: "Good. I think he's right. It's too complicated for me to get
into... (unintelligible comment) ....I understand.
Haldeman: (Fed chairman Arthur) Burns is concerned about speculation
about the lira.
Nixon: "Wel, I don't give a f@<% about the lira."

Just a little perspective building food for thought. (Ari)

Edwardo said...

While FOFOA and VTC engage in a pas de deux, here is
BK's latest.


Anonymous said...

Heads up to anyone who has been using the PDF Compendiums at the Ron M's Air-friendly PDFs link, I have made an important upgrade. The hyperlinks now are active and will direct your browser to the proper page.

I was initially dismayed why the links did not work when I converted the Word files to PDF. As it turns out it is an issue with Word for MAC OS. I changed to OpenOffice, a free open source office suite, and bingo it works perfectly. The only issue is that Open Office does not handle videos very well, so I am creating hyperlinks with the video title that will direct to the appropriate web video.

So far, 2012 is current and I am working on 2011. As I finish them they will be available at the Ron M's Air-friendly PDFs link.


JR said...

Great strategy Victor,

Yes, you "win" when you can control the goalposts.

But you forgot that sophistry only has a chance of working in oral debate, where the tracks you leave are not so obvious.

FYI you're no Captain Hook. Only one Superman could move and Can't Be Touched

JR said...

The dollar is backed by oil because the dollar acts as a SoV as long as you can get gold for it.

As Another taught us, gold prices dollars, and then dollars price everything else.

If oil can get gold, oil will hold dollars. Its all about what the excess producers hold to store wealth.

Date: Fri Jan 23 1998 19:01

All modern digital currencies do not go into an investment, they move THRU it... There is an alternative. Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies".

If the gold-to-oil ratio (GoR) gets out of whack, there is not enough gold for the dollars and Oil won't back the dollar anymore:

Date: Sat Mar 07 1998 13:08

Today, the world reserve currency is not on a "fixed" gold standard, it is on a "freely convertible" gold standard. One may, anywhere in the world, convert US$s into gold. This new "freely convertible" standard does still allow the dollar to be backed by gold for those who still demand a gold "fixing". That requirement is enforced by a certain commodity, oil. Yet, there is a price for the benefit of having all oil sales settled in US$. Yes, even in this modern era, for the US$ to remain on an "oil standard" it must be on some form of "gold standard"! Regain the perception in the top paragraph. Then understand that for oil to back the dollar, the dollar must find value in gold. And the dollar finds more value if it is fixed by the "freely convertible" gold standard, to buy more gold!

Cheap oil prices means oil doesn't get as many dollars and can't get as much gold. Which means bye bye $IMFS as reserve currency:

" Mr. Junior,
Be very sure to understand this: They can "stand cheap oil prices". But, it is the loss of having the US$ removed as the "world reserve currency" that makes them "fight" a lower oil price, and the new "world oil currency" that it would bring. Bring this thought into focus and you will understand why Iran and Iraq did fight so long. And why Iraq invaded. The warships are an attempt to keep prices from "falling"! You think long and hard on this! "

Look now and see if the US dollar does not "fight" for a high oil price! In every way, the question of supply disruptions is shown as the need for other suppliers. But, other suppliers cannot produce at a lower price? If the gulf states are allowed to bring oil "down" to it's true "fair" production price, in terms of a "correctly higher revalued" gold price, the US dollar would no longer be priced and backed by oil. Any paper trading currency would do. I would say, "if the Euro is strong in gold, and crude oil is allowed to be devalued by gold at $10,000 to $30,000, then all other paper currency reserves held against the EURO would be , "for show?"

Motley Fool said...


The discussion on motivation of actions a lifetime ago I find amusing, and of little relevance.

Motivations then are only relevant as they pertain to what action was taken then.

Motivation today is relevant as to what action will be taken tomorrow.

My two cents. :P


holdinmyown said...

Hello Costata.

"If we cast down GDP as a false God I wonder which econometric best reflects quality of life."

One place to start reading about alternatives to GDP as a measure of "progress" is a book by Mark Anielski titled "The Economics of Happiness". Although it is not the best written academic work that I have read it certainly provides ample food for thought. For example in chapter 5 he describes and proposes the Genuine Wealth Model. He distinguishes 5 different forms of capital for genuine wealth: human capital, social capital, natural capital, built capital and financial capital. His genuine wealth model proposes an accounting system that attempts to measure the changes in all 5 forms of capital (very ambitious no?).

I do not agree with all (most?) of his conclusions but as I said it is a good a starting point for thinking about a very difficult challenge for the superorganism and it also provides a good list of references.

mr pinnion said...

Oh no! Now FOFOAs cats been reading VtC s comments

sean said...

this topic may be a sore point(?), but I'm afraid Victor's not the only one side-tracked by this thorny trail... I also thought that "function of a currency is 90-95% of its value" as Ender said... or am I misinterpreting "function"? I really would be grateful for your help in understanding this issue, as I'm sure would others!

JMan1959 said...

Lira has posited that while commodity prices will rise in HI, asset prices (houses, etc..) collapse. I thought all prices went up in nominal terms during HI. Anyone have any data?

Wendy said...

WTF? why moderated comments FOFOA? Victor's comments do NOT abuse his privalege to post, He is simply challenging you and JR. Big Deal! I'm confused.

Michael dV said...

has HAL gone off-line?

FOFOA said...

Hello Sean,

This is not about what gives a currency its value. It is about someone who wants to guide the hikers at this blog off the trail A/FOA showed us which I am following, some would say, religiously. I don't really expect anyone to fully understand why I felt the need to make a stand here, but luckily it's my blog, so I can just do it without anyone's full understanding.

This is nothing new. I've dealt with people who wanted to take the discussion in their own direction many times before. If it's at another forum, I can simply walk away and they are free to continue hiking in whatever direction they please. But here at my own blog, the earlier I can nip it in the bud, the better. Victor is a smart guy, and he knows exactly where he's trying to lead you.

You'll notice that he delivers outstanding, clear analysis when he sticks to gold and banking, but then he occasionally drops cryptic and vague comments like this, this and this. And then here he quotes someone from another forum. That's precisely who and what I walked away from, and now it sure seems like Victor is trying to redirect the discussion at my blog in the same direction as one I walked away from.

Victor has also apparently disavowed "conspiracy theorists" while at the same time recommending three books meant to lead you to the conspiracy theory he's working on: Petrodollar Warfare: Oil, Iraq and the Future of the Dollar by William Clark, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets by David Spiro (and recommended by William Clark as his initial inspiration), and A Century of War by William Engdahl who Victor himself called "sort of a full-time conspiracy theorist" here.

As I said, it's nothing new. This kind of thing has been going on since online forums began. It happened many times at USAGOLD and MK would simply pull people's accounts. To this day there are groups of people who got banned from USAGOLD and Kitco in the old days still posting on sites with names like "The Outcasts" and "The Refugees". I'm sure Victor doesn't view his pet theory as a "conspiracy theory" because he thinks he's right. That's fine. But I'm not going to sit still while he tries to guide my readers over to his trail.


FOFOA said...


It's funny that you decided to pick on this statement:

"That's when they confronted the brand new Fed Chairman, just appointed by a desperate Jimmy Carter…"

You wrote: "It seems you don't know this: Volcker wasn't brand new and had to be told by the Europeans what to do next. He was actually one of the architects of the 1971 removal of the gold backing."

And then you quote Wikipedia to show me. Instead of Wikipedia, allow me to quote from my own blog:

"Paul Volcker, as Undersecretary of the Treasury in 1971, was an influential voice when President Nixon broke the dollar/gold exchange standard … Ten years later the same Paul Volcker as Fed Chairman…"

In fact, he actually was the brand new Fed Chairman having been appointed by Carter to replace Miller just two months before the meeting where he was confronted.

Alright, I'll try to make this as clear and concise as I can. This blog is a tribute to the Thoughts of Another and his friend. It is not a tribute to William Clark and a theory he came up with after A/FOA stopped posting, which is all it is: a theory. And it is one at odds with A/FOA. If you think you can marry the two together, you are welcome to try… somewhere else.

Your theory is that countries like Iraq and Iran, who were America's enemies in the late 90s, could end the dollar's reserve status by simply switching oil pricing to euro. And therefore, the USG went to extreme and brutal lengths to stop that from happening. Here's William Clark in an interview for The Peak Oil and Global Warming Channel:

Interviewer: "So as you see it, why did President Bush and Dick Cheney and Rumsfeld and Condi Rice decide to invade Iraq?"

Clark: "For control over oil and preservation of the dollar as the world reserve currency."

I reject this theory on several grounds. Iraq could no more have killed the dollar in 2001 than Iran could usher in Freegold today by bidding for Indian gold with its oil. But more importantly, you are having to twist the meaning of the Thoughts of Another and FOA in order to support your new theory. One of the big points in the post above is that exorbitant privilege is something that is given, not something that is taken. This is wholly consistent with A/FOA's story and message, but if you start with your premise that the USG was the mastermind playing its high stakes poker hand, then you will see what you expect to see. Let's take a quick look at an example. I'll bet you read this one differently than I do:

"Date: Tue Mar 24 1998 20:01

Mr. Allen, the "Beirut Resolution" was real. In that time, the threat was to price oil in all currencies, not just US$! When the US$ went off the gold standard, the problem was not that oil would buy gold. The gold "free"market was very small for oil. In the back rooms, all talk was "how to keep oil prices and "settled" in US$! As the dollar was the reserve for all countries, a move from oil in dollars would have destroyed it and the financial systems of most large economies. With the US$ just off the gold system, it was very susceptible to any loss of usage.


FOFOA said...


The price rise of oil was much more than many thought would hold ( SDR_er ) . We found that it was the fear of "oil not priced in US$s" that kept the price rise in tact. As the resulting price of oil in dollars, after it's removal as "oil reserve currency" was the true reflection of pricing in the, then current market. Not the oil supply cutbacks. All knew that high price from cutbacks, "alone" would have never held!

To hold a dollar backed oil system, the governments agreed to create a liquid "free" gold market. They did this by selling much gold over years and allowing it to rise to $200 US. Then, as now, free dollar reserves could go into gold. As the US treasury did no longer back US$ with gold, it hurt not the currency. In a very real way, the dollar went onto a "oil standard" to replace the old "gold standard". As $180/$200 was to be the limit, for gold ( the BIS set at $180 then ) , in 1978 the US did bomb the gold when it went to $250. The market went out of control and rest is history.

For many years, gold was kept high for the price of "oil standard", after gulf war this system fell apart. But, I am ahead of self, questions / comments?"

Did that support your theory? Well here's how I read it:

"the threat was to price oil in all currencies"

Threat to whom? The US? Perhaps, but that's not what ANOTHER was describing:

"all talk was "how to keep oil prices and "settled" in US$!"

All talk by whom? The USG? Perhaps, but that's not what ANOTHER was describing:

"As the dollar was the reserve for all countries, a move from oil in dollars would have destroyed it and the financial systems of most large economies"

Ah, yes, so he was talking about everyone else caught up in this "unbelievable collective mistake which, when people become aware of it, will be viewed by history as an object of astonishment and scandal."

"We found that it was the fear of "oil not priced in US$s" that kept the price rise in tact."

Whose fear? The USG? Perhaps, but that's not what ANOTHER was describing. He was talking about the European's fear, and the BIS. How could USG fear keep the price rise intact? Obviously he was talking about everyone else. You can't take exorbitant privilege, it must be voluntarily given.

"To hold a dollar backed oil system, the governments agreed to create a liquid "free" gold market."

Ah, the governments (plural) agreed. See that?

"the dollar went onto a "oil standard" to replace the old "gold standard". As $180/$200 was to be the limit, for gold ( the BIS set at $180 then ) , in 1978 the US did bomb the gold when it went to $250."

Wait, what does the BIS have to do with this if it was the Kissinger/Shah show? Oh yeah, even the Kissinger bomb IMF/Treasury auctions couldn't stop the dollar from dying. The gold price just ran away until the rest of the world came in with a stick save to support the dollar. Here's some more:


FOFOA said...


"Date: Tue Nov 25 1997 10:06

The US$ is today, backed by oil. As all other currencies are but "digital units" tied directly to the dollar, they are indirectly on the oil standard also. This world currency position is supported thru the BIS. In CB circles, it is well known that the world debt markets as we know them, can only be maintained with cheap and cheaper oil! Without cheap oil the entire system fails and reverts back to pay as you go economies. This is the central reason for "two price gold"."

Supported through the BIS, see? "Oil backing" does give a currency usage demand, but oil backing is an effect of being the reserve currency, not its cause. The cause is the choice of foreigners to support that reserve role, and that choice leads to oil being priced in dollars. The $IMFS is simply dying of natural causes, old age as it were. It's at the end of its timeline. It is not dying because Saddam wanted to price his oil in euro and now that they killed him that threat is gone. That's silliness and not what A/FOA wrote about.

Here's FOA responding to comments in October of 2000 right after these two news items hit the wires:

Dubai Monday, October 09, 2000 - - Mr Jacques Santer, former president of the European Commission, has called on Gulf Arab oil exporters to price their crude in the euro rather than the US dollar.


BAGHDAD (AFP) - - Iraq's central bank has begun to buy European currencies, following Baghdad's decision to stop using the dollar, the INA agency reported.

FOA: "We must defend their oil production at all costs, no matter what currency they use… For us (USA), keeping all oil, worldwide, priced somewhat par (in any currency vs the dollar) is extremely important to US vital interest. Both military and economic."

Does "no matter what currency" and "in any currency vs the dollar" sound like FOA was focused on a currency change as the game changer? Of course not, because that would be the same fundamental error which Clark makes. And how about that? Santer calling on them to price oil in euro. And apparently it was Chris Cook who told the Iranians to do it. Good thing we killed Saddam and not Cook and Santer.

The dollar is at the end of its timeline. When that end comes, oil will switch to euro pricing. But switching oil to euro pricing is not what threatens the dollar with its end. Correlation does not imply causation. Here is FOA talking about the real threat to the dollar:

FOA: "We call this a money's "timeline" and it's as new an idea as life, death and taxes! Time and debt age any money system until it dies. The world moves on. Only this time gold is going to play a different part in the drama. We will all watch it unfold."


FOFOA said...


"Oil still had its political ups and downs over the years and the same reflected in its prices. But supply was mostly assured from a level to falling gold price. During the next ten years from 85 through 95, few really noticed that although gold and oil charted in the same direction, they never flowed in the same direction. Nor did they grasp how the gold market was engineered to supply gold for this very reason.

With most of the dollar oil problem licked, the G-7 began an effort to keep the dollar in play. Even though its debt had aged it and its timeline was running out. In 1985 they started a series of currency moves that would last until the early 90s. From the "Plaza Accords" (85) to the "Louvre Accords" (87), it was all an effort to stall and stretch out any crisis of the dollar. It seemed that no matter how much the dollar was inflated or how much debt was built upon it, it would be supported for all the world to see."

"As paper debt increases, it ages the currency by always generating more "fiat receipts" than human production can ever service. Then, at the end of the "currency timeline", in a great flood of human emotions, we reach for "natural conclusions" to a non-retractable financial problem!"

"Again, for most of us this recent period offers only a fiat value comparison and leads us to accept its present low fiat valuation. Yet, gold's fiat values over this era were only relative to its manipulated price during an extended Anglo-Saxon currency timeline. A period that saw the dollar take over the pound's role of representing and dominating all world wealth. Including gold wealth!"

"Breaking the dollar's hold on world reserve status means forcing it into a major price inflation at the end of its timeline. This is done by tying the hands of policy makers so they can only create (pump) more dollar assets into the world system. That "tying of hands" is done by creating for the first time an alternative currency structure that does not fail from continued dollar "crisis strength" or "crisis weakness". The world economy will run to just such a system as their current system (the dollar) fails."

See that last sentence? The world will run to the new system when the old one fails. Not the old system will fail when the world runs to a new system. Don't confuse correlation with causation just because it suits your theory. When you see words like "engineered" or "an effort to stall and stretch out" or "manipulated" or "take over" your first thought should be the BIS, not the USG.

FOA also called Iraq's move a convenient trial balloon, and remember the Europeans were pushing for it:

FOA: "The next dynamic of that process in the transition of oil settlement support into Euro denominations. Notwithstanding Iraq's move as a convenient trial balloon, the mass of this transition will not begin until the US has clearly embarked on a slowdown. And that slowdown, energy induced as it is, will, this time, force the fed to fight it with a super inflationary buyout of anything and everything that defaults. Right down to your shoe laces. This, my friends is the inflation dynamic unleashed once a currency is removed from reserve status."

See that? FOA was not all "ooh, they pricing oil in euro, the dollar is finished." Instead, he said that the US economy would embark on a slowdown which would force the Fed to buy anything that defaults. Can you even see the difference?

Of course I don't expect to change your mind or your friends' minds, Victor, but I will ask that you take your petrodollar theories elsewhere. Or keep trying here, but at least now you have an idea how might respond.


Beer Holiday said...

Great clear post FOFOA. It answered a lot of questions about the $IMFS I had.

I think taking the time out to write a clear response VtC was a good idea. The discussion was getting too quick and frenetic to follow.

costata said...


Thanks for the suggestion. If I have time I'll delve into that work but I have quite a backlog of reading to do at the moment.


Totara said...

A question for the Canadians here. Next month I have a business trip to Canada and was hoping to pick up a small souvenir of my visit. According to the Royal Canadian Mint's website, "The Royal Canadian Mint does not currently sell bullion to the general public. However, our bullion products can be purchased through ... banks...".

How common is that in practice? I know FOFOA talks about sales from European banks.

Can anybody (including a non-account-holder) just walk up to the counter? Do you need to pre-order several days in advance? Is it just a few of the biggest banks in major cities where this is available? And are their premiums (say compared to a coin shop) reasonable?

Clyde Frog said...


Hello. Sorry, no data - only opinion (beats my usual just questions though, right? :) ).

Actually... my comment IS a question after all: what is Lira's baseline term of reference?

If his baseline reference were a loaf of bread, or some other consumer staple, then "commodity prices" might be roughly stable I suspect? (Depending on whether you looked at a specific "commodity" that was an input to consumer staples or not.) I would expect asset prices to fall, relative to this baseline. In FOFOA terms, this would be using the "real world" fulcrum of "goods and services" as the baseline reference point.

If his baseline reference were a US$ then "commodity prices" would IMO rise strongly, and my feeling is that (since this is HI we're considering and assets are "more real than a US$") asset prices would also rise, but less strongly.

If his baseline reference, like mine, were physical gold... then I would expect everything to fall in value against this yardstick. Consumer staples/commodities/"goods & services" ("the fulcrum") less so than "assets", which in turn would fall less so than US$ ("the force").

I assume Lira uses US$ as his baseline. So I anticipate that, in his terms, he will be wrong about asset prices falling nominally in US$. But I am just a frog, so what would I know? Lira is a semi-famous HI prophet with a few people paying just $35/month for his subscription service. So he must be right. Right?

Somehow, and somewhat confusingly perhaps, this semi-famous HI prophet appears to at the same time forecast nominal asset price deflation. Where do I sign up again?

Live long and prosper.

Thank you.

DASK said...


as far as I can tell it is just ScotiaMocatta and involves a preorder in all but their downtown Toronto branch. No acct required. Documentation is taken, cash only acceptable up until 3k. See here: http://www.scotiamocatta.com/products/buy.htm

Premiums are reasonable, but coin shops can match them/ provide better anonymity (cash up to 10k I believe). I have never known anyone who went through a bank.

And the mint does/will sell to the general public via an IPO'd etf (fully reserved, non allocated) with physical redemption in any mint products (bars, maples, etc. ), but 100 Oz minimum to redeem.


DASK said...

And FOFOA, thank you for your blog and your tireless dedication to explaining your vision. Long time lurker, first time donator today.

Robert said...

Totara: In Austria the premiums in the banks for Austrian gold coins is about 3-4%. No, you do not need an account. No, they will not ask for ID. Premiums in the coin shops for other European gold coins is frequently lower. For the Austrian 100 Corona it is usually very low -- about 1%

JR said...

Hey Jman1959,

"Lira has posited that while commodity prices will rise in HI, asset prices (houses, etc..) collapse. I thought all prices went up in nominal terms during HI."

While its not data (which IMO isn't too helpful because the world has never been on a full fiat reserve, much less had it hyperinflate), below is good stuff on the idea that credit dies in a HI, and what matters is base money. Although house prices for example are a credit driven asset that will ultimately collapse to its non-leveraged cash price, the base money flows so much in HI that that may be higher than today's credit driven price.

Deflation or Hyperinflation?

Residential real estate will ultimately crash to its non-leveraged cash price as credit disappears, just like the deflationists think. But that ultimate cash price, once reached, may actually be higher than today's leveraged prices and be outrunning the availability of cash needed to clear the market! And all the while real estate will keep crashing in real terms (gold).

There is always a shortage of cash during a full-bore, in-your-face hyperinflation, which is why the printer has to keep adding zeros. His press simply cannot keep up with prices at established denominations. It is also why the first to touch the new cash (the "elite") have a very valuable advantage. Hyperinflation is a grand competition for lifestyle retention in the face of forced austerity, just like a race! Here, look at this from the excerpt:

"Honey, I talked to Fred again, he can't sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that's not so bad, we had to jump ours up three times before selling."

I'll bet the deflationists were thinking in terms of deposit+loan=price, rather than cash. Wrong paradigm. Sorry. When the hyperinflation hits in a reference point purely-symbolic fiat currency paradigm, the market will try to clear for the rising symbolic cash price while the hard currency price (denominated in gold) continues to drop like a stone. Deflationists do have one thing right. Real estate is not a very good investment when preparing for what's coming. That doesn't mean home loan debt won't be hyperinflated away though. It most likely will be. And if you are lucky enough to catch the bottom in the reference point gold paradigm during the crisis, bless you. But it's still a poor investment choice right now, even at 5% down, compared to putting that same cash into physical gold.

MatthAu said...


You can go to Scotiabank in downtown Toronto at Yonge and King. AFAIK, that is the only bank (and branch) that you can walk in to, and buy bullion.

Don't do it, they make you sign paperwork!
plus they charge you a "bar charge" which hikes the premium.

Head to a coin shop, pay cash under $9999 and keep your anonymity.

holdinmyown said...

Hello Totara.

Canada is a large country and the situation varies between the largest centers (Toronto, Montreal and Vancouver) and the rest of the country. Throughout most of Canada you would be hard pressed to even find a coin shop. They are few and far between. The most reliable place that I am aware of to buy Maples or bullion is from a major branch of Scotiabank (Bank of Nova Scotia). Only the main brances of Scotiabank in the larger cities have a precious metals window. You typically can walk right up to the window, show your ID, put down your cash payment or bank draft (unless you have a Scotiabank account in which case you could simply debit your account) and walk out with your coins. This becomes a bit more difficult if you are looking to make a large purchase however. Best to phone ahead and explain what you want to do and they will explain the process to you. If you are not going to be near a main Scotiabank branch you can also arrange to have a smaller branch make the transaction for you but this requires several days.

It is also possible to buy through larger dealers such as Kitco (Montreal) and Borders (Vancouver) but I have never done this personally. Perhaps someone else can help you with this.

jonny49 said...

Thanks Fofoa.

I confess to having been lead astray by the oil/dollar trail in recent times, so glad to be put back on the right track. Thanks for your time and efforts, we are all blessed that you provide this public service.

I hope the donations are flowing nicely too.

Edwardo said...

And in currency news today.


Anonymous said...


There's some data we can use from Weimar.

Here's the book source for the data and here is the table.

Based on that data, Rent went down to 0.2% of a household's expenditures, while food went up to 91.6%. (as measured in Mark).

Using your baseline reference as $US for a HI scenario doesn't make sense IMHO, we should be using the baseline as something real and stable, but well--I don't plan on making bets to earn a 'nominal' profit.

A house would still be a tangible wealth in a HI scenario, so I would expect it to simply hold in value (as measured again in something stable and real). There is actually historical data which states that a median sized home in the US is around 100 ounces of gold.

IMHO, I don't think Lira has a deep understanding of HI and therefore had to eat crow for an extremely early HI call -- he actually published a timeline for HI and posited it would happen through the bond market (just like Jim Willie, Peter Schiff).

If you spend enough time here at FOFOA, then you will get an in-depth understanding of HI and how it would unfold.

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