Thursday, August 23, 2012

Four!



Four years and three months ago I stumbled upon an extensive archive of ten-year-old posts by anonymous writers with names like ANOTHER, FOA and ARISTOTLE. Prior to that momentous stroke of luck, I'd been poring over anything and everything I could find that was attempting to explain a series of events that I found very troubling.

I had already been exposed to personal losses a year earlier due to the reversal of the real estate market which initially caused me to sit up and pay attention. And so I was hyper-aware during a string of alarming events related to sub-prime and its securities in August and September of 2007.

As time wore on I started to take notice of other odd occurrences in the markets. In late 2007 the Canadian dollar suddenly became more valuable than the US dollar… for the first time in 30 years. Then in February of 2008 an entire market collapsed for a specific kind of security that had been marketed to conservative investors as "safe as cash—kind of like money markets but with higher interest rates," cutting little old ladies off from their savings. And then one month later Bear Stearns collapsed.

I quickly read any book I could find in the small (but growing) financial crisis section at my local book store. I read "America's Bubble Economy", "Crash Proof" and "Financial Armageddon" in early 2008. Online I spent a lot of time reading the likes of Jim Sinclair, Peter Schiff, iTulip and anything that came up on forums like the old Gold Is Money forum. But I had yet to purchase my first gold coin.

With such a rush of new ideas coming in over maybe a six month period, I found myself struggling to make sense of it all. The message I was receiving seemed complicated and disjointed. I knew there was something important in there, but for some reason it felt like an incomplete puzzle. Something was missing.

Then one day someone posted an excerpt of ANOTHER (THOUGHTS!) on the GIM forum with a link to the archives. It was a strange quote, but something in it caught my attention like a beacon as bright as the sun, so I clicked on the link. And for the next two months I stopped reading everything else I'd been reading while I worked my way through maybe a thousand-pages-worth of USAGOLD archives. Then I went back and read it again.

In August of 2008, while still digesting it all, I wanted to talk to someone about the most amazing and mind-blowing ideas I had ever encountered. The markets were teetering on the precipice of an abyss, Hank Paulson had his new "bazooka", and all I wanted was to talk to someone about Freegold. So four years ago today, I started this blog.

Four years, 370 posts, 37,000 comments and millions of hits later and we're still talking. All I can really say is THANK YOU to everyone who showed up to chat! Well, almost everyone. ;D Those of you who have been here any length of time know that I certainly attract my fair share of detractors. And I do realize that the subjects I write about are controversial. It's not easy to encounter a foolproof argument for something you never even considered before.

It's not easy because it runs counter to all the baggage you've picked up elsewhere. I've seen the baggage, so I know what it looks like. There are myriad morality plays based on a poor understanding of money, and wonderful stories of monetary and financial intrigue, depraved intent and consummate, destructive comeuppance all over the internet. But the truth, as it is revealed first logically and then empirically, is so much more remarkable, so utterly amazing, a beacon as bright as the sun.

These are not my foolproof arguments. I take no credit for them. They come from ANOTHER and FOA and I simply distill and extrapolate from their posts because they are no longer doing it themselves. My blog is a tribute to them. If you believe the arguments are not so foolproof, then by all means, bring it! I have never shied away from a worthy debate, but I do tend to ignore tired old arguments which I already dealt with so as not to waste any more precious time.

But if you are one of the many people who incessantly email me requesting that I address Martin Armstrong's failed attempts to bring it, I'll waste a little time for you now. I have read a few of his recent posts and it is clear that he thinks I am using hyperinflation as the reason to buy gold:

The presumption here is you move in a straight line until HYPERINFLATION somehow makes gold $50,000 and ounce, everything else remains the same, and this is better than a Miracle of 34th Street. This is being marketed trying to suck people in like those who are broke sitting in a casino desperately trying the pull that leaver and become a millionaire. This a just pathetic preying upon those who can afford bad advice the least. [sic]

This, like his many other remarks directed this way, is so preposterously off the mark that it is not even worth a comment. He apparently considers predictions of dollar hyperinflation to be a scare tactic meant to frighten you into buying gold:

So Don’t Worry – Be Happy. Gold is not going up because of all the conspiracy claims nor because the real gold will conquer the paper gold. This is all about reality.

But then he delivers his own (less scary?) prediction:

It is not… HYPERINFLATION we need to worry about. How about plain old fashioned extinction of society as we know it today?

That's not scary? Well, fear not, because three paragraphs later he lets you know that you'll soon be able to purchase his famed computer prediction system so you'll know when the plain old fashioned extinction of society will arrive:

Institutional clients seeking the stand-alone systems to monitor the entire global portfolio are nearly ready. We will be providing those systems at $25 million annually.

We will be providing only three global systems fully covering everything worldwide for $100 million. We guarantee that the long-term forecasts will be correct or your money back.

Umm, give me a break? As for his argument that hyperinflation is impossible in a core economy, he is not only way too focused on the monetary plane (bondholders, financial assets, capital flows), like the deflationist that he is, but he is also apparently completely unaware of FOA's slam-dunk rock-solid reasoning for inevitable dollar hyperinflation which I extrapolated in these posts among many others:

Peak Exorbitant Privilege
Inflation or Hyperinflation?

Another one of my more notable (albeit indirect—he simply dismisses me as an anonymous blogger and then says I'm wrong) detractors is Gary North, ever since I caught his attention by extracting a concession from a prominent deflationist with whom Gary had argued for years. You can read more about it (along with references to me) in these two posts:

Rick Ackerman Defects to the Hyperinflationist Camp After 30 Years
by Gary North
Wherein Gary North Rallies My Deflationist Side by Rick Ackerman

Anyway, Gary is an inflationist and he therefore argues against both deflation and hyperinflation. Just this month he wrote separate posts against the arguments for deflation and hyperinflation. I mention this mainly to demonstrate how those arguing against dollar hyperinflation from any side are apparently completely unaware of FOA's slam-dunk reasoning. If this was not the case, I'd expect someone credible to critique it.

My case in point is that Gary's latest (and therefore presumably toughest) argument against hyperinflation is that the Fed cannot solve the USG's problem of unfunded future liabilities of $222T through hyperinflation and it therefore will not adopt a policy of hyperinflation. Furthermore, he believes that the Fed will be able to somehow resist the USG's spending addiction if push comes to shove. He writes:

I am convinced that, unless Congress nationalizes the Federal Reserve, the Federal Reserve will not adopt a policy of hyperinflation. That would be to the detriment of the banking system in general.

Now I realize that his post was not directed at me because I'm just an anonymous blogger who's wrong, but if it had been, just like Martin Armstrong's attempt, it's so far off the mark it's hard to know where to begin. My (which is FOA's) hyperinflation reasoning is not about a Fed (or USG) policy decision to solve the debt problem. It is simply the corner that the dollar is backed into and there's only one way out.

The rationale is so remarkably simple that I'm surprised no one like Gary or Martin who believes dollar hyperinflation is anything less than certain has attempted to tackle it. It's not a difficult argument to understand. It's basically that the only thing preventing high rates of dollar price inflation is foreign support for the dollar. Take that away and you'll have a high rate of dollar price inflation. And then, partly because the USG budget deficit eclipses the trade deficit today, the government will be forced to quickly hyperinflate the dollar simply to maintain its status quo. The alternative would require the government to shut down, but it won't even consider that option. Simple.

I'll add one other post to my above recommendations for anyone who wants to "bring it":

Moneyness
Peak Exorbitant Privilege
Inflation or Hyperinflation?

Like I said, these are not my foolproof arguments. I take no credit for them. To prove it, here are a few quick quotes from FOA in 2000 and 2001:

So, dollar hyper inflation never arrived and gold did not make its run because world CBs bet your productive efforts on supporting the dollar reserve. In the process, the US standard of living was raised tremendously on the backs of most of the world's working poor. But this is not about to last!
---
Central banks gorged themselves with worthless dollar reserves and prevented a hyperinflation of the dollar in the process. They did this, because they knew that gold had the ability to completely replace any and all loss of dollar reserve value once a new system was in operation.
---
We are only just now arriving at a time period that will bring about "The Currency Wars". Everything prior to this was only a preparation period to build an alternative currency. The years spent traveling this road were done to prepare the world for an escape medium when the dollar finally began its "price" hyper-inflation stage.

Few investors can "grasp" that in reality, our dollar has already been hyper inflated, but without the higher price effects. Years of deficit spending, over-borrowing, debt expansion have created an illusion that the dollar was immune to price inflation. This illusion is evident in our massive trade deficit as it carries on with no negative effects on dollar exchange rates. Clearly other investors, outside the Central Banks were helping in the dollar support process without knowing they were buying into a dying currency system.

The only thing that kept this process from showing up in the prices of everyday goods was the support other Central Banks showed for our currency through exchange intervention. As I pointed out in my other writings, this support was convoluted at best and done over 15 to 20 years. Still, it's been done with a purpose all this time.
---
A grand hyper inflation of prices is now directly ahead on the trail. It should be ushered in with a large "crackup" in the currency derivatives market. Once this event is "in process" the paper gold markets will quickly rush to discount against physical gold. A discount that will break our gold market pricing and physical allocation system.
---
This country is diving head first into a grand hyper inflation and no amount of Fed maneuvers will stop it. People that learn this early on, before the physical comes into short supply, will be miles ahead. Buying gold between $400 and $200 will be like knowing a member with Masters Tickets.
---
Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place.
---
For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained
---
The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!
---
Again; this all works as long as the world "buys into" using our dollars. As I said; an expanding fiat works to grow the economy thru expanding credit buying power because the fed can support the system with credit creation that has no "inflation premium". That lack of premium only exists as long as Americans can exchange free credit for real physical goods. Once this perception changes it's over. Once the world understands that it's not local US goods that stands behind dollar growth, but less expensive foreign goods,,,,,,,,,, the stage is set for our "supporters" to sell to themselves!
---
The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of their last 30 years of hard money success.


Of course, as I mentioned earlier, hyperinflation is not the main reason to buy gold. You can get the same "hyperinflationary gain" by buying artwork, antiques, classic cars, baseball cards or any other hard asset. The reason to buy gold over those other choices is Freegold. Freegold is gold revalued in real terms, independent of hyperinflation. Those are my two main topics, Freegold and hyperinflation, because those were ANOTHER and FOA's two main topics. I'm not really going into Freegold in this post but I will give you a quote that a reader named Steve sent me. It comes from Bill H at Lemetropole Café and I think it captures the relevance of Freegold to shrimps like us:

We used to be a nation of "choices". Many many choices, good ones, bad ones, whatever, but there were multiple choices at every turn.

Now, do we as individuals have "multiple choices"? Not many. Many are unemployed, many have negative equity in their homes and cannot move even if they want to, many rely on food stamps to eat, savers are being forced to "eat" their balances or take on the higher risks of the rigged stock and bond markets. The only "choices" that we as individuals have left are those involved with protecting ourselves and families. It is no longer about living the American dream, living within your means and enjoying your "golden years". No, it is now about "keeping what you have" or just plain outright survival. I believe that even today's current circumstances will be looked upon in the future with "too bad it can't be like it was back in 2012".

It is not however ALL bad, we will "reset" and hopefully go back to a rule of law and respect where everyone is not looking to rip everyone else off. Right now it is imperative that you be ready for this coming reset because once it happens there will be no "do overs". You will "have what you have" to start out in the new system and nothing more. Think about it, how many times have you thought back and said "gee, it really would have been nice if my Great Grandfather had invested in oil wells" or "if my parents had invested in coastal real estate or IBM back in the 1950's". What if you had the smarts to invest in Gold back in 1971? As I said, there are no "do overs" but it would be nice. What we have coming in our immediate future is not only "one" of these past opportunity moments in time, this era, right now, is THE moment in time where futures will be altered... permanently. You are either locked and loaded...or you are locked out. This as I see it is the last "choice" that investors can still make that will affect the rest of their lives and probably several generations to follow.

And lastly, you Martin Armstrong fans might be interested in this. FOA critiqued Martin's public/private dichotomy, one of the core foundations of his Economic Confidence Model… back in 1999! And if that doesn't draw some ire, I give up!

So that's basically what I do, and what I've been doing here for four years now. Please click on the gold bar below if you'd like to send me a little blog birthday present and encourage me to keep this thing going for another year. Or, if you'd prefer that I "make like 'N Sync and quit while I'm ahead" (which someone actually suggested by email this month), then don't click on the gold bar. I have only been here this long because of your generous support. I have no other income.




Thank you!

FOFOA Playlist #4

As it has become a personal tradition, I periodically gather my favorite YouTube song selections from the last few months into a playlist with links to the posts. Here is where you can find my #1, #2 and #3 playlists. And here's #4. Enjoy!

Glimpsing the Hereafter

…this is a deep concept, a timeless truth, a little bit of wisdom from the ages. Savers are not investors, traders or speculators. And since this post is about glimpsing the hereafter, give me a few minutes while I consult my crystal ball. Here's some music while you wait…



…my crystal ball does work for the monetary and financial future. It paints a nice, clear picture, yet on timing it's still a little hazy. But one thing it does make perfectly clear is that it's just a question of time.




Superorganism Open Forum

…in a wild colony of ants these individuals end up specializing in what they do best which leads to a collective intelligence far greater than the intelligence of any individual ant.

…an “extraordinary miracle … millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding!”




Savings & Capital Theory Open Forum

…The Superorganism's natural drive is toward economic sustainability while the $IMFS is a pedal-to-the-metal consumption binge thrill ride toward economic collapse. Savers drive the economy, the Superorganism organizes it, and the $IMFS kills it softly.




Ball of Twine Open Forum

FOA: "They will not be pushing on a string; rather picking up the ball of twine and throwing it!"

I may be crazy, but if there was a contingency plan/how-to manual on throwing the world's largest ball of twine, it might just look like this:






Peak Exorbitant Privilege

…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? ;)




Inflation or Hyperinflation?

…The dollar is so vastly overvalued today because the rest of the world has kept it on life support for 30 years past its expiration date. It is the stability of dollar prices at that small marginal flow that sustains the illusion of wealth in the entire, massive monetary plane. And yet the modern "hard money thinkers" think that we can somehow retain this level in real terms by simply devaluing the dollar against gold and then managing that new "gold value". I wish all the modern hard money thinkers – you know who they are so I don't need to mention any names – would just take a few minutes and listen to FOA and maybe, just maybe, see how wrong they are…




The Debtors and the Savers 2012

…Thinking for yourself pays. Seeking reassurance feels good, but it doesn't pay. Waiting for official confirmation is also rewarding, but the reward isn't money.

"Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve."




Fallacies – 1. Paper Gold is just like Paper Anything

…it is the very existence of the paper gold market which is keeping the price too low, because if you took it away, price alone would have to regulate the flow.



___________

As a bonus track I thought I'd include Freegoldtube's latest creation, even though it didn't make it into a post. Here's No Time to Lose:



Sincerely,
FOFOA

374 comments:

«Oldest   ‹Older   201 – 374 of 374
DP said...

(Extract from Jeff's link…)

The current price of gold is about $1,665 an ounce. Theoretically, the US government could promise to redeem dollars for gold at that price. Alternatively, the US could in effect devalue the dollar against gold by fixing the price lower, at say $2,000 an ounce.

Or…

The current price of gold is about $1,665 an ounce. Theoretically, the US government could promise to redeem dollars for gold at that price (and commit that there will be both a buyer and seller in the market, at the stated price, itself if necessary). Alternatively, the US could in effect revalue the dollar against gold by periodically marking its gold reserves to their market value and influencing the market in the direction it finds desirable from time to time in order to achieve it's policy objectives. #FGFTW!

#FixedHisPost?

Phat Repat said...

@anand srivastava
The 'sins' of our Fathers, unfortunately, carry with us. We have to do our best to move forward and improve upon a terrible legacy. Some do, some don't. I don't weep for the demise of dictators; live by the sword, die by the sword.

Not sure if you've been to China but your views are inconsistent with my experiences. Try to romanticize it if you will; however, they are anything but the victim.

"Why get into all that? This is not the forum for all that."

Not exactly; there is some understanding of where we have been required. The rest is fluffing.

@Woland
Appreciate your view. I recall a lesson from not too far back of 3 topics typically left alone; Sex, Politics, and Religion. So far we have broached Politics and Religion... Hey, this is getting good... "How much for the little girl? How much for the women?" There, that covers it.

@Jeff
"But this is not about to last!"

And that's a no kidder. Shaking the ROW off our back is the best thing that could possibly happen to the US. I am grateful... Just another reason I am fervently in support of Freegold and the changes to be ushered in as a result.

Woland said...

Hi JR;

I certainly never intended to inject issues of religious faith into
FOFOA's blog with my comment, but everything I continue to
learn here has some value to me, including the links which you
provided. Personally, I am a devout apathist, half by ignorance
and the other half by temperament. But were I to ever embrace
a theism of whatever sort, it would be informed by the only
religious passage that has ever moved me.

"He comes to us as One unknown, without a name, as of old,
by the lake side, He came to those men who knew Him not.
He speaks to us the same word: Follow thou me!" and sets us
to the tasks which He has to fulfill for our time. He commands.
And to those who obey him, whether they be wise or simple,
He will reveal himself in the toils, the conflicts, the sufferings
which they shall pass through in His fellowship, and, as an
ineffable mystery, they shall learn in their own experience
Who He is"

Albert Schweitzer, "Von Reimarus zu Wrede" 1906 translated
as "The quest for the historical Jesus"




Jeff said...

Pascal was no fool. Neither was FOA.

FOA: Am obviously a male and in the second half century of my life.Have been married only once, to the same wonderful woman for several decades.I am religious, understand the bible and do physical deeds to convey that knowledge to others.I strive to live a moral life in every physical sense.

Edwardo said...

It seems that when talking about a "gold standard" those who are interviewed have little to no imagination. None of these commentators seems to have considered, as per DP's last post, how one key change in the setup would make all the difference.

Don't fix the bleeping price. Let gold float in a world without paper gold products, and it will act well as the reference point for all other assets. If you want stability you will have it.

JR said...

Next to lawyers, guns and money, it's one of my favorite topics!!

Spirituality is not religion, not to diminish the spirituality of the religious. I'm agnostic and I read and enjoy CS Lewis. I dig spirituality, which requires a bit of the subjective/personal take in things. Do it how you feel it, just make sure YOU really feel it.

TLT said...

Hi all. I was away, only now I read all comments, really good discussions.

I would like to go back a little, as I would like to discuss some points and have some doubts.

A lot was said about when to sell some gold (or silver), a parallel currency with HI going and so on.

I believe how things will develop in the collapse really important to one`s personal wealth. After all, time has offered us a trade – buying PMs with fiat – and the goal is to profit during this crisis. How you act/buy/sell during the transition – the timing – is, perhaps, most important. Yes or no? One will keep gold after Freegold? 50%? How much? Go to RE?

This is just some idea that occurred to my mind, please feel free to add or subtract.

HI Shock

In this stage, people became paralyzed with the currency collapse. Global trade is only a fraction of what used to be. One should stock food, if not done already. While some people figure what just happened, people like us will be acting as fast as we can.

You see, during HI in Argentina, the dollar always worked as a parallel currency. Mostly HI always had a parallel currency – usually a strong foreign currency. But, in the soviet collapse, there was a relation – X gallons of gas for Y liters of vodka (from Dimitri Orlov, Reinventing Collapse, don`t remember the exact numeric relation). I guess there wasn’t many dollars circulating. My point is, if the dollar is set to hyperinflate, no euros, no yen could act as a parallel currency. Or they would be already gone or wouldn`t exist reasonable quantity to trade with.

The dollar today is what most people have faith – yet – for them, is the best form of storing value. When it becomes clear that the dollar is trash, no fiat paper in the world will have the status that the dollar has had for decades.

During the Weimar HI, most people lost everything. Who made good? Those who held some francs, swiss francs and sterling. Who most profited? Industrialists, who exported and therefore got paid in foreign currencies, and farmers. This is from Adam Fergusson, When Money Dies.

But, as there isn`t faith in any fiat currency, SHTF. Global commerce can actually go to zero.
The point is: in a HI where you don’t have a parallel currency to give you a price relation of trade, the soviet relation kicks in. It is, as I see, the most possible outcome.

I live in SA. I was with my father visiting some countryside houses to buy. We saw some better houses that were actually cheaper than the worst ones. We reached the conclusion that price depends in the willingness of the buyer to buy and the willingness of the seller to sell. This is SA, 2012. Imagine during a HI event without any parallel currency.

From Blondie: “What is the price of 1 oz of physical gold? Priceless”.

What is the price of food when most don`t have it a HI event? Priceless.

My final point: abstract! Imagine your fiat is worthless. You do have some gold and you do realize what its real value. Today`s USD50k for 1 oz. Imagine you are low on food and need desperately to buy. You have a lot of 1g gold “bars”, which equals to today`s USD1600.
What deal will you get for USD1600 for food? I really bad one, I would say. But how is that with silver?

TLT said...

-------

@ JR

You gave me all the reasons for that silver will not became “money”. I do agree that gold is much better as a SoV, UoA, and so on.
But that doesn`t mean that silver will be a bad trade (as some commenters already said everything needed).

The question is WHEN Freegold will emerge! If it happens together with the HI shock, those in gold will have little to worry about. But, if doesn`t, as things start to get ugly, having some silver is wise. My opinion.

-------

As MF said, silver is brought up with preparedness.

If I buy food with silver, even with a 50% haircut, I will be extremely happy.

HI is survivable. Brazil, Argentina, Chile, and many others. I remember, as a kid, wanting to buy a fire truck in the 80`s and went to the supermarket. I had enough fiat. But decided to think more and returned the next day to buy. But now I had to request a bailout from my mother. Luckily, it was granted.

But with the hyperinflating dollar, things get unique.

Riots can get blown in full scale. Food disruptions could arise.

I believe – after the shock - this could be a period where you could get a great deal for some PMs. Mike Maloney, in Guide to Invest in Gold and Silver, said that 1 oz of gold would buy you a block of commercials buildings in Berlin, at the worst point of the HI crisis. Although I could not check his source, it is a great deal, isn`t?

But Adam Fergusson, in a line in this book When Money Dies, said that gold didn`t perform well during HI (I don`t know if he was referring to a phase or the whole HI period).

The end of this stage could be marked with plans for a new currency, but backed by something. In the Weimar HI, things started getting better when the government issued bonds backed by farmland (also from When Money Dies). Although the German government kept printing fiat, people started to have more faith and HI slowed its pace.

Now, some questions: when is likely Freegold/Physical Gold Market set to emerge? One would trade gold for RE? Before or after Freegold?

And most of all, I repeat Blondie`s comment (something like that): “One should work to acquire one`s desirable amount of gold. Then, live life as it is supposed to.”

JR said...

Hi The Engineer,

I and many others own silver for reasoning similar to yours. It's all about being a good shepard of the wealth you might hope to preserve.

Good luck to you and all

Michael H said...

Woland,

"I am a devout apathist, half by ignorance
and the other half by temperament."


What's the difference between ignorance and apathy?

*****

Going back a bit, I find the suggestion that silver can act as a MoE during a USD HI to be somewhat laughable. There is not even enough physical dollar currency to lubricate trade; there is zero chance that there is enough silver out there to act as a MoE.

Keep in mind, for a MoE, the price does matter. In other words, for gold acting as a SoV, there is always enough gold at a high enough price. But a MoE cannot undergo a 20x or whatever upward revaluation and act as a MoE.

****

Aquilus, I liked your comments on the HI scenario. I agree that for multinational corporations, the Euro (or perhaps the USDX index) would act as a unit of account.

Just to be clear, though, that doesn't mean that I would necessarily want to hold Euros through the transition, since they might still lose a significant amount of real value.

For the common American, I'm not sure that the Euro would act as a UoA since most Americans have zero experience with Euros, and there's no border for them to cross into the country.

Instead, would there be a chance that Americans reference value based on 'old' dollars, or the dollar's value 'before'? Not sure how this squares with experiences during other HI events.

And what will happen to the Canadian dollar? I have heard it said that it will HI right along with the USD, but now I'm not really sure why it would.

Aquilus said...

Michael H,

As UoA, any non collapsing currency should do. The bigger the better because it prices more things.

If the Euro still priced things in Europe and was not collapsing with the dollar, corporations would use it as unit of account because prices are already somewhat stable in it.

As soon as oil, and daily staples staples use Euro as UoA and index the dollar MoE to global Euro prices, it takes people hours, not days to learn to pull up the $/Euro quote and look up the Euro price of something. Everything is already in place! Try that with an improvised UoA like silver..

Edwardo said...

Well, Michael H, What I find somewhat laughable is the apparent certainty that almost everyone out here seems to have about just what will or will not function as a MOE in a hyperinflation in the The US of A.

At least to me, what is clear is that what will operate in the role of a BAM- barter avoidance mechanism- will very much depend on a host of factors such as the type and size of proposed transactions, the kind of entities involved in transactions, and regional and cultural preferences.

I would be willing to bet that all manner of "monetary" arrangements will be in play simultaneously across what is a very large and diverse nation. I can easily imagine certain day to day necessities, everything from toothpaste to Laundry detergent to toilet paper to diapers to canned peas will likely function very well as mediums of exchange for what should be obvious reasons. In the immortal words of George Bush, "Don't rule anything out or anything in."

Aquilus said...

Edwardo,

Just a followup (and please don't take it as a personal attack - it's just that I've seen hyperinflation first hand):

1. What you're describing above is actually barter, not a barter avoidance mechanism.

2. Sure, we can imagine many things, but experience of living through hyperinflation shows that a paper medium of exchange is still preferred, and that the medium of exchange is indexed to a (relatively) stable unit of account.

3. Will barter exist? Yes. Locally, for people empowered to make decisions (ex: is your bag of peas enough value for the eggs I have). When it comes to clerks working for stores (remember, they will still exist), those clerks will not be empowered to decide the exchange ratio of a bag of peas for eggs. It's too cumbersome for the volume of transactions a big store has. No, they will price the merchandise in a stable UoA, and change the prices a few times a day based on the exchange rate + a few extra percent to allow for time between the cash register and the supplier.

If we ever get where there are no stores and only barter, God help us!

The euro was created to avoid this very scenario at a global level. Imagine if oil had to price in lumps of silver in one country, and in a combination of brick and concrete in a different part of the world, because no fiat MoE was trusted... Sounds ridiculous, no?


Phat Repat said...

"The Global Shoelace Economy"
Something that anand might like; but many points that I can agree with as well. Change is an absolute necessity and it is coming. Welcome...

http://www.youtube.com/watch?v=WtyY27ZRCd0&feature=g-all-u

Totara said...

Slightly off topic. But where does money actually originate from?

These children have a few ideas about how to make money in a charity song for sick children.

The troubling part is that most of their parents probably don't have much of a better understanding about money.

http://www.youtube.com/watch?v=LIj95GNumrQ&feature=youtu.be

Motley Fool said...

Totara

A nice bit of history as told by FOA on money here. I think this will answer your query.

Moneyness

TF

Edwardo said...

Acquilus,

My personal experience with HI is nil. What I know of it is the result of reading a variety of accounts of personal experiences of different HI throughout the 20th and 21st centuries. Thank you for providing your perspective.

However, while what I allude to may sound like barter, it isn't really barter except in the strictest sense. Barter, as you know, is the act of two parties getting together and working out their so called double coincidence of wants.

But, certain key items will act as MOE as they will be, in a period of chronic shortages (a hallmark of all HIs) universally and ubiquitously desirable. Granted, toothpaste, bars of soap, rolls of TP, and bags of certain (relatively non perishable foodstuffs) etc. etc. are a tad unwieldy to tote about since they don't fit inside one's wallet (but they do fit quite readily in a backpack or large pocket book), equally they are not standardized, and therefore unlikely to function as units of account. However, in a situation of chronic shortages, such items, which may more properly be said to act as stores of value (at least within extraordinary periods like HI) will be widely accepted in a variety of settings in exchange for all sorts of other necessities of day to day life.

I am well aware that proper stores will still exist, and will be constrained from accepting items like TP in exchange for their (fleeting) merchandise, but, proper stores will, for obvious reasons, spend a lot of time unfrequented by their customers, and, so, alternative outlets for acquiring items will, especially in certain settings, emerge. In such "venues", the roll (or pack(s) of rolls) of TP will act as well, or better than any fiat scrip.

Having said that, I am well aware of The Euro's purpose, and here's to it acting as its architects intended when the moment of truth arrives, but, if the forecast HI to come is merely well within the bell shaped curve of historical HI events, I feel reasonably confident that there will be contexts within which certain key items will serve at least as well as MOE than those MOE which we presently use during far less fraught times.



Piripi said...

Hi Totara,

Your question seems far more on topic than most to me.

”…where does money actually originate from?“

I have been writing something on that very topic for a while now, but I don’t know if I will either finish, or if it will be worth sharing if I do, but I did read just yesterday a review of Mark Graeber’s book “Debt: The First 5000 Years” (which I have not read, nor have I found the time to watch the associated video of Graeber linked here last week) in which the reviewer (who apparently disliked the book on several levels) summed up a part of Graeber’s thesis which I found extremely close to my own:

”If there is one argument that provides a thread through the whole narrative, it is Graeber’s view that money has its origins in debt and not exchange, and that economics has always got this the wrong way around. He establishes (1) that economics texts typically present the need for money as rising out of the inefficiencies of barter; and (2) that nevertheless there is no historical record of money rising out of a prior system of generalized barter.

Graeber considers the “myth of barter” so central to economics that to point out its status as myth is to pull out the Jenga block that brings the whole structure down. Economics has little worth saying on money, and so economists can safely be pretty much ignored...“


Money is credit/debt. It is, and always was. Barter, at least the historical assumption thereof, is a myth, a myth that has launched a flotilla of fantasies as to how the monetary system can be fixed by somehow getting the debt out of "backing" the money. Fantasies which would work about as well as removing all the oxygen "backing" the air we breathe.

The general acceptance of this myth is exactly why gold is misunderstood, because gold is the agent which devalues the debt, and this is how the system naturally worked. Once gold was pressed into service as MoE the system had a dilemma, which it has not yet resolved. Debt ceased to function properly along with its antithesis, gold.

The myth seems plausible because it masks the dilemma.

Any consideration of money needs to start there, in my humble opinion. There are a wealth of fascinating historical monetary events to explore, and they paint quite the different picture when viewed through this lens.

Hope this helps.

Woland said...

Hello Blondie:

I read "David" Graeber's book about a year ago, and found it to
be excellent, particularly the first half, which contains most of
the cross cultural anthropological material on how "money' was
actually used. You will maybe not like it that Steve Keen, whose
work I follow, is a BIG supporter of Graeber, and that both of
them advocate the "necessity", as in biblical times, of a periodic
"debt jubilee". Graeber does a good job of explaining the social
(and political) function of this practice.
Today, of course, the problem of remission of debt is complicated
by the fact that, as FOFOA points out, most people are at some
level both debtors AND creditors (as in their 401K's or pension
plans) simultaneously. Anyway, if some ambitious person would
care to attempt a review here, I think all would benefit, and lots
of interesting discussion would be assured.

Piripi said...

Hi Woland,

If Keen et al took their time to think about it, they would see that free market gold is a far superior mechanism to a debt jubilee as it regulates the quality and the quantity of debt, not allowing it to outstrip real productive growth. Jubilee is moral hazard writ large.

Jubilee is an indiscriminate blunt object, whereas freegold is a natural equilibrium.

Remission of debt is complicated only by the fact that we don't currently enjoy free market gold.

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

Hi Blondie:

What I said above regarding Graeber and Keen was descriptive,
not proscriptive, as in "That's what they think." However, we still
have to get from now to the future, and a Freegold transition will
destroy a lot of "virtual wealth" (as in "all paper will burn with
great heat") in just as indiscriminate a fashion as would a partial
remission of debt. Of course, the fault will not be with freegold,
but rather with the mistaken assumption, by nearly everyone,
that their paper was real wealth, rather then merely a claim on
the system's productive capacity. I agree that Jubilee is an
indiscriminate instrument, but that is not my objection to it.
The real problem is that it fails to "reform the system" that leads
to the need for its recurrent use. THAT is the beauty of freegold.
I'm sure you remember that, when the HI starts, those closest
to the printer will have the first crack at spending the fiat. Is
that not pretty indiscriminate as well?

What should perhaps interest you in Graeber's book is that, even
in those ancient civilizations where gold was indeed a form of
tradable wealth, and not fixed to any other physical or fiat anchor
by law, debt crises periodically occurred, and most often were
the result of agricultural loans, leading first to debt peonage and
later to slavery. A seed corn loan followed by a crop failure was
all it took to get the ball rolling. The accumulation of land, over
time, into the hands of a few large holders led to such political
instability, observed over many hundreds of years, that some
mechanism needed to be found to prevent it. This goes all the way
back to ancient Mesopotamia, India etc. I hope that you will
still give the book a try, despite the authors conclusions. There
is a wealth of fascinating information in it. Cheers.

JR said...

An interview with Graeber - http://www.thewhitereview.org/interviews/interview-with-david-graeber/

Despite being a marx influenced social anarchist, he is not all that different from the ZH/Gata folks with the whole "debt is the chains of our servitude" theme. You have to understand that he has sorta defined the problem and the "bad guys" and is writing to prove out his predetermined thesis.

So perhaps even more than otherwise, it's important to keep in mind that history is really just " his story."

Jeff said...

Having bought silver before I had heard of freegold, I saw it as a possible MoE during the chaotic phase. After hearing of freegold I see silver as just another barter good with the drawback of being inedible. If I believed silver would rise I could just as easily see platinum rising as much, and I'd buy platinum to save weight.

IMO silver will crash with the dollar (and platinum), euro will be UoA, and canned peas will be a hot barter item. No silver for me.

TLT said...

@ Jeff

Silver will never act as a MoE. Isn`t enough quantity.

But that doesn`t mean that isn`t going to be something to trade with during HI.

If you ask any Argentinian if he would accept silver for food, if he was a farmer, I bet he would.

I just doubt that the Euro will be a MoE during a HI in the US.

I believe the dollar will be, after all, the last domino to fall. Dollar is still seen as the ultimate store of value for most.

I know the Euro is supposed to be stronger, but I can`t see the Euro retaining confidence before or after the Dollar collapses.

What do you think?

Michael H said...

Totara, Blondie,

There's an article at Naked Capitalism today: What Is This Money Thing Anyway? -

http://www.nakedcapitalism.com/2012/09/what-is-this-money-thing-anyway.html

excerpts:

"Money, it seems to me, is rules. Rules about value and obligation. The rules can be enforced or overseen by government or they can be loosely enforced through private self organisation. The opposing arguments about money being from the state or private sources is really a non-argument. They are just different kinds of rules."

"Whatever, the building block approach to understanding money is arid. It ends up only telling us what money does, not what it is. A much better approach is, having defined money as rules, to then ask how human beings create, and are affected by, the rules."

"Money is rules, and the patterns of individuality and co-operation or colectivism are revealed in relation to those rules. The question should be in this current bizarre world of meta-money: “What rules are good and what rules are either bad or dangerous?”

The answer will be found in looking at the balance between individual rights and freedoms and the collective good."


***

Edwardo,

I agree with what Aquilus wrote in response, and also in what the Engineer said about there not being enough silver to act as a MoE.

There are certain outcomes that we can eliminate with close to 100% certainty.

By the way, the comment I was referring to was the following by Dimitri:

"(2) If dollarization hit the USA, there would be no dollar to act as the dollar. You might have Euro-ization or Sterlingization except that there are not enough pounds or euro notes in circulation here to make that possible. You might think you could hold these digitally in a local account but have you tried doing a forex deal with your local bank lately? Hah. U.S. dollarization would be silverization. There are tens of millions of silver coins held in this country that were minted and are legal tender. This would circulate in the interim."

"One stable reference unit, if not the stable reference unit, will be silver since so much of it is owned by the US public."





JR said...

Philip Pilkington: Let’s begin. Most economists claim that money was invented to replace the barter system. But you’ve found something quite different, am I correct?

David Graeber: Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one.

What is Debt? – An Interview with Economic Anthropologist David Graeber

FOA: The original actual term of money was often in a different concept. In those times barter, and their crude accounts of the same, were marked down or remembered as so many pots, furs, corn, tools traded.

========

DG: So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?
What is Debt? – An Interview with Economic Anthropologist David Graeber

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

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

Midnight Gardener said...

I'm tired so please excuse my laziness as I post something sent earlier to friends and family...it was inspired by what I have learned here.

Greetings all,

This is an interesting overview of gas prices around the world...Norway is #1, but they are near the bottom in terms of percent of average daily wages. There must not be any poor people there, i.e. they could not survive if they had to drive and probably not anyway as everything must be very expensive when energy cost is included.

Oh, the US comes in below Norway in terms of % of daily wages, but it is obvious they failed to include the cost of the stupid oil wars or we would have been pushing up against or even overcoming #1, i.e. a gold metal...HOORAY!!! http://www.oneradionetwork.com/latest/where-gas-prices-are-highest/

This reveals the true cost of naked inflation, i.e. I could still get the same # of gallons as I could while growing up for a silver dollar even at those inflated prices in Norway...do not try this with a paper dollar. If you try to save value in dollars or any other medium of exchange, you are merely bait for the sharks. Savings belong in something that is a store of wealth...yeah, not Dollars or Pounds or Pesos or Lira or Rand or Euros or Real or...well you get the idea.

Unknown said...

Is Physical Gold the only (major) SoV post-transition in Freegold?

Anand Srivastava said...

Ryan Lau: No ofcourse not. But it is the best SoV. So obviously most of the money will flow into it post transition. Other SoVs will be secondary to Gold. There will be others like rare works of art.

Silver will lose its luster, when it does not increase enough. And will be relegated to the position of an industrial metal.

Jeff said...

Engineer,

Two questions.

1. How long do you expect the chaotic phase to be?
2. Do you believe the euro will HI?

My view;

1. Weeks not months. The USG can end it at any time.

2. No, it will be UoA.

Because of my views, I don't hold silver. If you see a long chaotic period and a euro HI, then I understand holding silver.

I think you would agree Argentina is currently a different situation; it is currently undergoing high inflation, not HI. But during their collapse didn't their currency still function as MoE? It devalued against the USD.

Motley Fool said...

This is interesting enough to repost here :

http://t.co/k4qkYaOp

H/t Burningfiat via twitter.

TF

TLT said...

Jeff,

I was talking about Argentina during HI. Today they have +/- 30% inflation year/year.

Their currency during the collapse (not today) served as a MoE, but there was the dollar to serve as a parallel currency.

My point is that there must have something to mark price in the nation`s hyperinflating currency.

The Euro could be as use, but as the EuroZone population is 300 million people, I can`t see how it will be US`s MoE during the hyperinflating dollar from one day to another.

The Euro would have to overcome the dollar as the world`s reserve asset before the HI phase. But I can`t see that happening, as the EuroZone is in worst shape than the dollar or much alike.

Why do you think the Euro would not HI and the dollar would?

It a question of confidence. People go crazy in crazy times. Rationale or logic is not always applied.

What people would prefer to hold today? Dollar or Euros? I can`t see they shifting to the Euro before a dollar collapse. The shock would be too great for people to be confident in holding paper, IMO.

Truth is, I can`t see HI in the US for more than a week. Global commerce can`t happen in a HI dollar. Freegold would sure solve the problem, but I have my doubts about when will it happen, as I asked before in a long post (if you have time to read, tell me what do you think).

Cheers!

Wendy said...

Woland said:"Finally, I ask this rhetorical (in the sense that I do not expect
or wish to receive an answer) question of FOFOA himself: Did
it ever occur to you back then that you may have been visited
by the White Buffalo?"

Woland might this answer your question?



FOFOA: "Ender,

I almost forgot to thank you. Your thoughts help mine proceed. Almost like a trail guide. ;)"
September 27, 2008 6:54 PM

Happy aniversary FOFOA, I wish you many more to come.

Michael dV said...

Engineer
the structure of the Euro is different than the dollar. As the $ goes HI the price of gold goes up. As that happens the Euro becomes a stronger currency. Also there are already a lot of dollars in place for an HI event. Not so for Euros. The Euro COUNTRIES are in deep doo doo due to their policies of socialistic freebies without the ability to pay for them. The Euro currency however has few worries. Listen to Mario Draghi...he's not stressed. It is the politicians of the countries with large bond auctions coming up that are feeling the pain. I believe there will be some compromise to help these countries out but they will not allow the Euro to suffer...not until it has served its purpose.
Triffin high tailed it back to Belgium when he realized that the dolar was cooked. He did not return for the weather, he helped form the Euro.

TLT said...

@ Michael dV

I do get you got a lot of great points.

I know the Euro is supposed to be stronger in its formation than the US dollar.

But, in the way I see things today, there is a battle going to see which currency will be the first one to fall.

If that`s the dollar, I can see the Euro working as a MoE perfectly.

I just think the Euro Zone, as it is today, will not last much longer. If any of the PIIGS go out and default, would the Euro rise or fall? With rising interest rates for the PIIGS, what will that impact be?

I do admit I have to understand better the Euro and what do you mean as "as HI happens the Euro becomes a stronger currency".

But LTRO`s isn`t a similar mechanism as the ZIRP from the FED? Although not inflationary in its essence, wouldn`t work as lowering the confidence in the currency?

It comes to a question of faith in the currency. With the USD falling (with all confidence the world still has on it), will people be willing to choose another paper currency as a SoV?

I think Another and FOA were 99% correct on everything they wrote (luckly to us). But we need to admit that they were expecting the dollar to collapse 10 years ago, no? The Euro and its strengh - as they saw at that time - was very different from it is today.

The Euro may survive everything - just the countries that are in it that I belive won`t.

Thanks!

Woland said...

Hi Wendy:

FOFOA was kind enough, in an email, to explain to me that Ender
was indeed a person, separate from FOA, who had used another
name previously. He directed me to some earlier posts by that
person. His comments back in Sept 2008 helped me a lot recently,
as they did for our gracious host back then. So I was wrong in my
guess, but am happy to be corrected. Cheers.

KnallGold said...

History = his story, wow, that's a good one! In deutsch, its called simply "geschichte", but then, eine (ge)schichte, is a layer on a layer, a wonderful description of an evolving continuum - what a nice description of the existing Truth/Wirk-lichkeit/physical Reality we are blessed to experiencing!

And here is Another (albeit rather esoteric) proof, that "the gold of savers will always lie still" - a piece of furniture, made of wood and gold-leaf, to last for ages, on a certain place on this planet....

http://www.antik-liquidationen.ch/images/Blattgoldnachttisch.JPG

(sorry for the Whisky driven linguistic mystic, at this late night Sunday September...).

Lets see 1700 next week and wake me up when September ends...

Jeff said...

Engineer,

You are right, the war is between the euro and dollar, but the dollar is in a catch-22. Do you see it?

FOA: "Yes, the war now is between the Euro and the dollar! The Washington Agreement [a Central Bank agreement] placed gold 'on the road to high prices'." "The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold. Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it. A market caught between how Western perception thinks gold's price should be "discovered" and at what price level trading in physical gold craters the entire paper structure. A structure of American based "paper gold".

We have been saying for some time that this will be "the" show to watch unfold; but only if your holdings allow you to stay still in your seat as it happens (smile).

They shifted their war on gold to become a war on the Euro,,,, only too late. Now, knowing that the Euro is a fact, we must have a super gold price if the dollar is to stay in the game! The question becomes one of supporting a cheap paper price for the sole function of keeping the market and all its bullion players alive. With the war on gold over, they need to turn their tanks around to face the real enemy but cannot."

FOFOA: So the paper gold of the bullion banks is now TBTF. Of course that doesn’t mean it can’t fail. It either fails, or the USG hyperinflates the dollar as prices rise. They are related, and each will likely cause the other almost immediately, but either one could end up being the initial cause IMO. If price inflation forces the USG to hyperinflate then the paper gold insurance stickers will have to fail to perform. And if these price rises in the gold market fail to manage the flow (demand) of physical as they have so far, we’ll likely see a 10% or larger GLD puke at some point. That would signify more than a 120 tonne allocation demand, a system-busting size.

Michael dV said...

Engineer
Every quarter Fofoa notes the 'mark to market' party that happens at the ECB. He then usually gives the rising price of gold over the years. Ever wonder why?
The Euro has a balance sheet. On the left side are the things the Euro has to 'back' the Euro...it is not a firm backing as in 'we promise to give you gold in a certain quantity if you bring in a Euro'... listed. In 1999 there was 30% gold and 70% currencies or bonds of other countries on the left side of that sheet. Even though they sold some gold and the actual weight of gold is less, the value of that gold has gone up! In dollar terms it is up about 5 fold.
Imagine if the dollar went to zero. Gold would by definition go to infinity in dollar terms.
The balance sheet of the ECB would say "gold 10,000 tons", foreign currency 'who cares'. The gold would fill the left side of the balance sheet. The Euro would have only gold (and maybe a few British pounds).
The dollar on the other had is backed by some dicey bonds, all of which would be worthless. All the gold belongs to the USG not the Fed. It is out of the picture.
It is the intention of the ECB to have a market in physical gold but NOT AT A FIXED PRICE...it will be at market price.
So when the dollar is zero what will gold be worth? Assume the paper gold market died with the dear old dollar. The price in Euros? ...who knows but with no paper market to suppress the price it will go much higher than it is at present. You will hear figures of $55,000 per ounce but if this happens as the dollar dies that won't make sense. In that case it would only be the Euro price that mattered if the dollar dies.
If the Freegold breakout occurs before HI then the estimate on this site for the purchasing power of gold in 2012 dollars is something in that 55k range..
Back to the ECB and the Euro. The Euro only looks stronger as gold rises in price, the dollar always looks weaker as gold rises.
Since the trend (and for good reason) is that gold is rising, the Euro looks fine. Now Greece, (at some level) knows this. China sees it. The USG sees it too but can't speak of it publicly (it would crash the confidence in the dollar ) I hope they have a committee working overtime because the dollar is dying and we will need a new way of commerce to keep 7 billion souls alive on this planet.
Central bankers do not seem to take politicians under their wing and give them a course in Econ 405. Elected officials tend to be of average smarts and have average interest in how money works. They like spending like a mall rat but the basics?...who cares right? Do not expect Mitt or Barry to tell the American people what is coming, they likely do not even understand themselves. Ben probably does and Larry Summers too. I'm hoping some good minds have a 'white paper' ready to slap on the presidents desk on day 2 that advises a prudent course for a newly bankrupt nation.
Mario Draghi knows too. He knows that he can do 'whatever it takes' and he knows that 'it will be enough'.!! Think he is bluffing?
Here we talk about a big red button. It is on Mario's desk. If the Euro has a real crisis he can press it and with one day of gold buying IN THE OPEN MARKET he could send the price of gold to $50k, the Euro to heaven and the dollar and the paper market for gold...well there is no purgatory in the monetary universe.

Jeff said...

Engineer said 'With the USD falling (with all confidence the world still has on it), will people be willing to choose another paper currency as a SoV?'

No, euro won't be SoV, but it can function as UoA during a dollar HI, just as dollars were UoA in Argentina during HI.

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

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

Wendy said...

Woland,

Thank you for sharing that. The fact is if it walks like a buffalo, quacks like a buffalo, smells like a buffalo, and is white, it's a white buffalo. Doesn't matter if the buffalo name is Another, FOA, Sir Ender or bullwinkle.

I agree with you that FOFOA received a visit from a white buffalo =8o)

Phat Repat said...

Though I do subscribe to the notion of having goods on hand for a calamity; I don't believe HI will be tolerated for long (if at all) in the US. As the saying goes, "any country is 3 missed meals away from a revolution." I don't believe the PTB would want such a scenario in the US as it would dissolve their authoritay almost instantly; and with a well-armed populace, that truly is a recipe for disaster (on many levels). Time tells all...

@MF
Bah on that gold replacement article non-event. How many times have we heard the replacement of Platinum as a catalyst (e.g. with Pd)? Good for a bit to correct the price down (time to load up) and then boom...

Chico_hawk said...

Jeff

FOFOA: What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over valued dollar that we spent without the pain of work.

Given the size of the growing trade deficit of the US over the past 30 years, I suspect a "sudden" collapse in the dollar will quickly create the recognition of just how far beyond their capabilities the US has been living.

I question whether such a discovery will lead to a smooth transition to the use of the Euro as a MoE in the US as suggested by some here.

I suspect that in the aftermath of such a sudden event there will be shock, disbelief, denial, confusion & ultimately anger among a large segment of the population as the standard of living of a large portion of the US population, particularly the middle class, is suddenly cut out from underneath them seemingly without warning.

I think that leads to large displacement of people, as the financial industry is at least partially paralyzed and the government is forced to cut services &/or raise taxes to balance its budget going forward (or sell some of its remaining gold reserves more precious than before...)

To somehow expect a "rational" response from the large segment of the population that failed to see & prepare for this predictable serious event...is another example of cognitive dissonance, imo.

Phat Repat said...

"We will come to know just how "above" our capabilities we have been living."

What are some examples of these "capabilities" we have been living "above"?

Michael dV said...

AS we know here revolutions usually happen after a hard money regime is replaced by an easy money regime. Yes the people can kill the hard money bastaeds and put in place stooges who will give them quickly debased currency.Things feel better for a whle.
The flip side of that doesn't work. If you are living in an easy money time just who are you going to kill?...the guys who broke the currency giving folks all they could give?
Nope. No revolution this time. We will just have to endure the decrease in standard of living that having a hyperinflating and then a new 'just average currency' will bring. We will soon see how the rest of the world lives with having to pay for imports with hard earned money.
Hopefully we get the benefit of a good enema and not Hitler redux.

Phat Repat said...

Okay, great, no revolution. In fact, I am relieved; no sane individual wants to live through something like that.

But, I really want to know what these "capabilities" are we have been living "above". Please enlighten...

Are you referring to imports?

Anand Srivastava said...

@Engineer:

"But, in the way I see things today, there is a battle going to see which currency will be the first one to fall."

I don't see this as a war. This is just a war for survival.

For US the war is to keep the USD alive for as long as possible. The HI in USD terms has already happened, ie to say there is so much USD in the world, that if it all came back to the USA, the HI is a given. The only way to keep USD alive is to keep alive the trust.

For Europe the war was fought and has been won. They have the Euro now, that will help them survive the crisis, ignorant politicians notwithstanding. The Euro as others have already said, has three things going for it.

1) The Politicians of individual countries have no direct say on its working. All countries need to vote for any changes with the debtor and the creditor nations voting together. This means that consensus on changing the working of ECB will not happen.

2) The only mandate for ECB is price stability. And they can do this very easily. It doesn't matter that the media and the politicians do not understand that this requirement, in no way requires ECB to print money for their deficit budget.

3) The ECB is backed by gold. So Euro value is dependent on the value of gold. Unless ECB prints Euros indiscriminately, Euro will not lose its value. And the above two points ensure that ECB will not print indiscriminately.

So Euro is very safe, even if some of the countries go bankrupt. Yes they will have to lay off many many people, but the currency will not become worthless. Its not related to the financial health of any countries. It will print to save the banks, and will also print to avoid deflation, but it will not print to buy the debts of debtor nations.

The war for China is to obtain as much gold and seek as wide distribution of its currency as possible. It's goal is to obtain 10,000mt of gold. I don't know how much it has already obtained, but considering it has been collecting since late 90s, it must have a lot more than the 1000mt figure they are accepting. Also now the higher priority for them is to gain more currency swap agreements. These are helped if the economy looks bad. I would think that they have stopped supporting USD for this reason, rather than any ability.

The rest of the world will use the currency swap agreements to survive the crisis. The countries which have agreements with more countries will survive better. These currency swap agreements are in essence the precursor to the Reference Point Gold (RPG) we will have in the future.

"The Euro may survive everything - just the countries that are in it that I belive won`t."

Actually it is the currencies that are under fire, its not the countries themselves. They will survive just fine, although the debtors will go bankrupt and the creditors will lose their credit money. All the countries that are not self sufficient (ie all countries) will be in trouble. Lots of companies will go out of business. Lots of people will lose their jobs. People who will not prepare for the crisis will be in a bad position. Lots of people will lose because of theft and arson. But the countries themselves will survive.

Unknown said...

What are these other major SoV then?

Physical Gold is the best SoV, no doubt about it, but isn't that true now as well (especially for giants that don't care about "price" per se)? So if there are still other major SoV post-transition, wouldn't there be leakage from MoE into all these other major SoV such that the reference point function of gold might fail or at least delayed?

Anonymous said...

Jeff,

does that mean that Europeans don't need gold as SoV?
They just have euros and they can sleep at night without gold reserves. Is that the conclusion for Europeans savers? So even if they store gold they won't make a smashing speculation as their euros as just as good as euros? Then why buy gold, they actually don't neede it.

Michael dV said...

Ryan
I suspect many will prefer their SoV to be fairly liquid. Sure one might be able to 'save' art but selling it when one needs a kidney transplant could be a hassle.
For the very rich things probably won't change much but gold will likely become more accepted as its price stabilizes and use begets more use.

Anand Srivastava said...

Ryan: Why do you think The Scream fetches so many millions? It's price is so high because gold is not a good SoV at the present time, not for the giants. Giants cannot really use gold for SoV. If they tried the system would collapse, so they save in rare works of art.

After transition, they will be able to save in gold. The works of art will carry the value across the transition, but will not provide an increase. But this increase is only open for us shrimps, who can go to the All Inn.

thedeadfauvi: The euro will hold its value more or less, in comparison to dollars. But it will still devalue quite a bit. So its not a Store of Value, but for Europeans getting Silver is not that much of a necessity. Getting gold is anyway important for storing of value and getting the benefit from the revaluation.

Jeff said...

Phat Expat,

Living beyond your means = having the rest of the world give you stuff for paper you print up without work. But this is not about to last.

FOFOA: The US is the only originator of new dollars and the US has run an unending trade deficit for 37 years, so the US has been exporting an unending stream of dollars for 37 years...

Yet for the last 30+ years, the fully fiat dollar, a purely symbolic token currency, has been behaving as if it actually is an item of value equal to the real goods and services the US has received through its perpetual trade deficit.

Without foreign CBs supporting this system of foreign dollar settlement by mopping up the unending glut of dollar emissions, the market price mechanism would collapse the US trade deficit in a heartbeat.

Here's how fragile the dollar actually is. It is supremely overvalued because its SoV arena, its "trading asset arena" as FOA termed it, simply dwarfs the MoE arena where all currencies get their value.

TLT said...

@Jeff
@Michael dV
@Anand Srivastava

Thank you so much for your comments. I learned many interesting points and will give it a thought.

Cheers!

Robert said...

I do not see how the Euro can hold its value while the dollar hyperinflates. There are too many currency swap agreements in place. The major currencies are all anchored to each other.

Besides, the fact that gold is marked to market on the ECB balance sheet doesn't sound like a very convincing argument to the Germans, who are always worried about the specter of hyperinflation. If market to market accounting on the balance sheet was the panacea, why would the Germans still be talking about hyperinflation risk?

At the end of the day the Euro is a fiat currency, and it is a much better idea to save in gold than to save in Euros.

Jeff said...

Of course FOFOA never claimed there was "€-stability", but that euro depreciation would be targeted.

FOFOA: All the benefits and architectural innovations of the ECB stand in place now as a kind of safety net for the Eurozone for whenever the $IMFS collapses under its own weight. And the signs of this happening sometime soon are ominous and many.

It is easy and convenient for the financial press to blame the Eurozone problems on the euro itself. But I am here to show you that they are actually caused by the dollar system, counterintuitive as that may seem...

Unsustainable Deficits

The pressure on the $IMFS is building EVERYWHERE! From Greece to California, from the ECB to DC. And what exactly is all this pressure? It is unsustainable deficit spending... DEBT!

And what is the ONLY solution to this? What is the pressure release valve? It is different depending on whether you are a sovereign net creditor/saver or if you are a sovereign debtor. For the creditor/savers the ONLY solution is CUT OFF THE CREDIT and thereby FORCE AUSTERITY. If you are a debtor, the ONLY solution is DEVALUE THE CURRENCY, or more precisely, ALLOW the currency to hyper-depreciate. Yes, default is an option, but not for a sovereign that prints its own money, and not for any too-big-to-fail entities under the umbrella of such a sovereign...

The US dollar MUST devalue (one way or another) against the entire physical world. Think about this. The euro, on the other hand, might just hyper-depreciate against only one specific asset. An asset that happens to also be a MONETARY asset held by its member debtors.

The hyperinflation of the dollar is already a done deal. It has been since the 90's at least. Massive quantities of perceived dollars already exist stored in debt held globally and inside the US. Europe knows this. They have known this was inevitable since at least the mid-90's when they changed plans and went with higher gold reserves for the new ECB. They have always been willing to wait for it to happen naturally, unless the EU itself faces an existential threat from debt brought on by the $IMFS. And in this case, I believe their only option is a targeted hyper-depreciation of the euro.

By "targeted", I mean that the euro devaluation would be targeted to go only into gold. Gold can absorb a devaluation if you do it carefully, and in turn devalue the debt without causing inflationary havoc.

Of course this would cause the hyper-depreciation of the dollar as well. Only the dollar's collapse would be against all of creation, not just one asset."

Jeff said...

FOFOA: Here is an important question: Is it theoretically possible for a fiat currency to devalue, or more precisely, to hyper-depreciate against only one single asset without affecting the price of a can of peas?

Of course it is! Just look at any number of investments that have appreciated quickly by an order of magnitude or two. Look at GOOG! Or how about AAPL? When an asset appreciates against a currency can we not also view it as the currency depreciating against that one asset? Or more precisely, can we not say that the asset was awaiting massive revaluation based on market recognition of its value?

Robert said...

Here is an important question: Is it practically possible for a major fiat currency tied into the global monetary system through a web of currency swap agreements to devalue, or more precisely, to hyper-depreciate against only one single asset without affecting the price of a can of peas?

Of course not! Not without a severe shock to all of the other currencies and the entire global system. Which is why the $IMFS may have more staying power and resilience than most of us would like to admit. It is not so easy to cut all ties to the USD.

Phat Repat said...

@Jeff
"...the market price mechanism would collapse the US trade deficit in a heartbeat. "

And that is exactly the reason I am so optimistic. GlobalCorporization (GloCorp/$IMFS) has failed. This is an incredible gift being handed to the American people. How many shuttered factories will be coming to life as a result? Our infrastructure, which has been severely degraded, will finally receive the attention it deserves... And on, and on...

So the dollar is reintroduced in some other format (let's use a cover story of counterfeit protection). Inshallah...

I can't imagine the feeling of people who are sitting around, collecting a check, receiving SNAP, being unproductive. Is that human nature? I think not.

Jeff said...

Of course, there will be a severe shock to all the other currencies. Who said there wouldn't? That's why Europe had to support the dollar until they could create something to survive the shock.

FOA 10/3/01 - Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

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

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained… Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.

If our dollar is going to fall so fast and so far in value that it will be called "hyperinflation", then the dollar must be tremendously overvalued today, right? In fact, and these are FOA's words, "Dollars have no value at all except for our associating remembered trading value with them." A barrel of crude oil isn't worth $100 because a one hundred dollar bill has a value equal to a barrel of oil; rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 100 units. Money is an associated value in our heads. It's not a physical item.

Yet for the last 30+ years, the fully fiat dollar, a purely symbolic token currency, has been behaving as if it actually is an item of value equal to the real goods and services the US has received through its perpetual trade deficit. Understanding how this was even possible is the only way to understand how it will end.

FOA 10/25/01 - I mean that our whole dollar landscape has now become just a trading asset arena: it's now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

FOA 10/5/01 - The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!

Anand Srivastava said...

Robert:
"Of course not! Not without a severe shock to all of the other currencies and the entire global system. Which is why the $IMFS may have more staying power and resilience than most of us would like to admit. It is not so easy to cut all ties to the USD."

True, that is why the ECB will not do it. But doing it is quite easy, just try to buy a few tens of tonnes of gold from the open market with proper advertisement. People will immediately realize that something weird is going on.

Robert said...

Jeff, in that case we have gone from a "theoretical" hyperdepreciation that would "not affect the price of a can of peas" to an acknowledgment that in the real world collapse of the dollar will affect everyone, and the Euro is designed to "survive the shock". I have no problem with the latter, and I agree that the structure of the Euro is more suited to the coming apocalypse.

And I wonder what you (and perhaps FOFOA himself) thinks about my suggestion that the vast shadow banking system and all of its currency swaps are a big reason why the system has the outward appearance of resiliency.

Jeff said...

Shadow banking = derivatives = inflating the dollar arena.

FOA: The dollar faction saw its match early in the 90s as the Euro was taking shape. To counter this threat, as I have outlined here in several ways, they promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar / IMF system beyond its ability to serve as a real fiat money system, today.

So what does this have to do with Real estate?

Take a look at any broad section of the US; Northeast, SouthWest, etc.. If any of the deflationists were correct, their reasoning back in the late 70s and early 80s should have produced at least an average fall in Residential real estate. Can any of you find an "average" of property today, that is lower than early 80s prices?

Of course I'm not talking about the spikes in Hawaii, New York, Denver or San Francisco; those are just blips on an ever rising inflation scale. Even if they fall some from here, it isn't part of a deflationary act playing out. Average home prices will rise all across this country no matter what the future economy holds. A super inflationary stance by the Fed means that even unemployed workers can buy a house and pay for it! Watch how this all comes about. The Dow will not be much different when seen ten years from now; a drop to 5,000 then off again, is a real possibility!

The difference is in the drastic ups and downs derivatives will place on all asset markets. My point is that we are on an "end time run" in fiat dollar production that will soon produce a spike in real price inflation that crushes hedge vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system [See: RPG #1], will outrun everything by a wide margin. No matter the derivative's hold on it!

As the Euro builds a base, it will drive an inflationary recognition into our credit markets, then freezing up our derivative markets. That perception will fuel a complete failure of our bond markets and force the Fed to buy up any and all credit; paying in full. If needed, Bush and congress will see to it that enough money is printed so we are paid in cash for everything! Don't laugh, this is where we are headed.

JR said...

FOA (10/9/01; 10:05:48MT - usagold.com msg#117)

What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because worldwide dollar expansion reached its "non-hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work these items don't need to really perform "dollar price movements" in the holders favor as much as they are present in the portfolio to act as insurance stickers.

In that truth, these paper gold positions act like FDIC insurance at our banks. It can and will manage only a small determined portion of bank runs,,,,, not a full scale failure of the banking system. In a real full banking failure we would all get, perhaps, 80% of our covered $100,000 and 10% of the rest.

The same is true for these gold position's performance; real gold delivery along with true price performance, matching real bullion trading, would be only for the very few. For that matter, an actual functioning paper gold marketplace would be for the very few, too! But, in the same way a bank account owner understands the credibility of FDIC insurance when times are good; the international dollar asset owner will not grasp that modern paper gold hedges cannot be allowed to work until after a real serious price inflationary run begins.

For the first time in this portion of the dollar's timeline and our lifetimes, such an inflation is about to show its face!


http://fofoa.blogspot.com/2012/06/gld-talk-continued.html

JR said...



FOA: It's no accident of nature that our world monetary structure embraced derivative expansion as it has over the last ten or twelve years. I think we can say that this modern creation of risk management began around 1988 or so. (It's funny, but I remember living in San Diego and reading a paper about a gold company called Barrick that just started only a few years earlier?)

The record of derivative evolution meshes seamlessly with the recent need for supportive dollar currency measures; a strategy of maintaining a failing system that was ending earlier than expected. Truly, in 1990 no one was going to carry the dollar any further, waiting on the endless delays of Euro creation, without some way to hedge risk. We had hit the end of the dollar's timeline too early; we had missed the mark.

The US could not physically save the dollar then, neither with gold backing nor the production and sale of real goods. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on. This "just in time risk management" was and is adopted into every present day currency that carried the dollar as reserve backing.

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


http://fofoa.blogspot.com/2010/01/gold-ultimate-hedge-fund.html

Michael dV said...

Robert
zee Germans are worried about HI because their currency has been destroyed 3 times in the memory of some still living! But the real reason is that they don't understand any better than any one else!! Where besides here do you even see a discussion of how the Fed and the ECB are different?

JMan1959 said...

So much for the deflationists. A study looked at the results of 56 recent monetary failures. The score? HI 56, deflation, 0. And once HI built up a big lead, they put their third string in, lol...

Check out this table here, from Zero Hedge:

http://www.zerohedge.com/news/monetary-endgame-score-date-hyperinflations-56-hyperdeflations-0

Phat Repat said...

@Jeff
Like your contributions but sometimes hard to see where your comments are relative to FOA or whoever you might be quoting. JR does a good job of separating in this regard. Thanks.

Woland said...

(from the department of things that make you go "hmm")

FRANKFURT (Marketwatch) It may have been inadvertent,
(me: yeah, right, like CB heads ever say anything "inadvertently")
but Mario Draghi provided European bond markets with another
dose of verbal intervention by reportedly indicating the ECB
could buy bonds of up to 3 years duration without violating
its charter, fueling a massive rally by short dated Spanish
and Italian government debt on Tuesday. The yield on two
year Spanish government debt plunged 30 basis points to 3%,
while two year Italian yields dropped 25 basis points to 2.38%.

I'm wondering, rhetorically, what the benefits of a bit of inside
knowledge might have been worth in the interest rate swaps
market, over a long week end, and who might of had it in
advance (or not).

On another note, I had one of those FOFOA light bulb epiphanies
this morning while lying awake at 4 am, which I hope to share
with y'all sometime soon, if I can get it composed nicely into a
short, well ordered few paragraphs. Greets!

Tony said...

Woland,
Love to hear the epiphany, assuming it doesn't end with another "Greets!". Brings back bad memories--ones I'd sooner forget

Dr. Octagon said...

I had an interesting conversation with someone at a neighbor's barbecue this weekend. There are a couple of small restaurants that he frequents regularly enough, and has been going to for long enough, that he knows the owners. Within the last few weeks the owners at two restaurants were approached about accepting "these new foodstamp payment cards". This came out of the blue - I don't know why he felt compelled to tell everyone this story, or why the owners told him about it in the first place.

I told him that these are EBT cards - he had never heard of them. Both he and the owners of the restaurants thought this was crazy. They have plenty of customers able to pay, why would they need to accept benefit cards? I mentioned briefly that it could be just the banks that manage the cards (JPMorgan I believe) trying to get their card accepted everywhere, as Visa or Mastercard would do.

But in the back of my mind I was reminded of the executive order for National "Hyperinflation" preparedness from March 16th.

An expanded EBT card program seems like the perfect way to ensure that the population has access to critical things like food in a hyperinflation. It also seems like a decent way to ensure that small businesses like restaurants survive such an event, because EBT holders will always have enough benefits to buy food, while cash holders are scarce.

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

http://www.zerohedge.com/contributed/2012-09-04/tears-fot-two-tiers

The end is nigh.

Phat Repat said...

Yeah, and, it looks like the deflationists are going to be right too:

http://www.zerohedge.com/news/chart-day-803-years-global-inflation

I'm waiting for the Mea culpa.

Anonymous said...


Will the Euro serve as a SoV?

I think it actually might. In some lecture, one from the ECB directorate said (from memory) "The period in which debt was held as a reserve is coming to an end. In the future, this role will be played by the currency itself". [it is my fault to have lost the precise reference.]

I understand this to mean "in the future, this role will be played by base money itself". Now imagine the ECB manages to maintain their 2% inflation target in spite of what happens to the other currencies.

If you are a huge investor and have some $100bn in dollar debt to move to a safer vehicle, what do you do? Buy gold while it is hugely volatile or simply buy Euro base money and pay the 2% charge (in real terms) for holding it? Can you buy $100bn worth of gold without affecting the price? But you can indeed buy $100bn worth of Euros. You see, big investors hate volatility and might actually hesitate to buy gold - at least until things have eventually settled down.

Why not buy Euros instead? Wages and goods and services for some 300 million people are priced in Euros. A big anchor in the real economy. If the ECB keeps the price level stable up to their 2% inflation target, there are good reasons to hold Euro base money as a reasonably safe asset, even for 2-3 years if that's necessary. Follow the example of the SNB?

Robert,

the fact that gold is marked to market on the ECB balance sheet doesn't sound like a very convincing argument to the Germans, who are always worried about the specter of hyperinflation. If market to market accounting on the balance sheet was the panacea, why would the Germans still be talking about hyperinflation risk?

Is this perhaps the marketing strategy to get the Germans out of paper assets? Perhaps not actually true, but nevertheless effective?

Victor

Anonymous said...


PS: The Euro zone inflation rate in August was 2.6% (average over all countries). It will be interesting to see when and how the rate will eventually come down. A lower oil price in Euros might do. They could raise interest rates as well.

Victor

KnallGold said...

"...If you are a huge investor and have some $100bn in dollar debt to move to a safer vehicle, what do you do? Buy gold while it is hugely volatile or simply buy Euro base money and pay the 2% charge (in real terms) for holding it? Can you buy $100bn worth of gold without affecting the price?... " ---vtc

Yes we can, at 55'000$/oz., or not? Interesting question.

KnallGold said...

I heard a rumour that the Swiss want to help the Chinese to establish a big Yuan market!? They better hurry up to make a big (Gold) physical only market branch of the EBES. Lets see who will be first to take up the ball, the SVP (no, typcal HMS'lers) or the renewed "frei-sinnig" FDP.

Woland said...

OMFG! Ron Paul is channeling FOA

"How long will the dollar remain the World's Reserve Currency".
Ron Paul, Sept 4, 2012 (paragraph 3) (Link at Jesse's Cafe)

"Amazingly, a new system was devised which allowed the U.S.
to operate the printing presses for the world reserve currency
with no restraints placed on it - not even a pretense of gold
convertibility! Realizing the world was embarking on some-
thing new and mind boggling, elite money managers, with
especially strong support from U.S. authorities, struck an
arrangement with OPEC in the 1970's to price oil in U.S.
dollars exclusively, for all worldwide transactions. This gave
the dollar a special place among world currencies and in
essence backed the dollar with oil."

We can debate the degree to which the work done by our
gracious host has brought this consciousness to its present
state of public awareness, but I think no one can question
the importance of of a person with Ron Paul's devoted
following bringing it to a far wider public. Perhaps, his
public career in government now ending, and with the
shameful way his delegates were treated at the RNC, he
saw fit to "bring it" as FOFOA would say. (hooray!)

Woland said...

Hello victorthecleaner:

Would you be so kind as to indicate the post at FOFOA where
your Kissinger/Exter transcript is contained. I am having a hard
time locating it, for some reason. Thanks,

JR said...

Here's RP from 2006 - he basically thinks $IMFS = a gold price suppression conspiracy by Gs to allow them to avoid hard money (aka the GATA/ZH thesis):

It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it — not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.

Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.

This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo—gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.

During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ's claim that we could afford both “guns and butter.”

Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.

Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper money — i.e. the dollar system — to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.

In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.


http://www.lewrockwell.com/paul/paul303.html

JR said...

More from that RP 2006 speech (like a classic AE/HMSer he thinks the bond market will collapse as foreigners reject our debt and the evil of fiat currency is revealed again. He thinks we war the middle east to force them from using euros and to protect $ hegemomy:

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that's the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars — due to their depreciation — will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can't last.

[...]

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged — as it already has been.

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O'Neill, the major topic was how we would get rid of Saddam Hussein — though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O'Neill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

Anonymous said...

Woland,

I posted some Nixon/Kissinger here. But I don't have anything involving Exter. Is that what you were looking for?

Victor

Woland said...

Hello, Victor:

No, not the Kissinger Nixon stuff. I little later in the same thread
you post 2 transcripts at 4:19 PM and 4:20PM of June 26, and the
title is:

Kissinger and Enders (meeting) They are discussing how the
French could use gold as a monetary asset to create liquidity,
which would undermine the US (my term: monopoly). And what
I really want to know, now that you have graciously located the
comments thread for me is, "WHO THE HELL IS ENDERS?"

(I obviously conflated Enders with Exter, (as in John))

Woland said...

Aha. Thomas O. Enders, Deputy Asst. Secretary of State for
International Monetary Affairs. Died before 20008, so no
connection to my esteemed Sir Ender.

KnallGold said...

Ender is not a very rare name here around, but I always liked Enders rare and precious posts here.

Woland said...

Hello Victor:

I promise, last question of the day. By the way, I can't tell you
how valuable that June 26, 2012 at 4:19 PM comment is. I am
going to reprise it here in part, and then ask my question.

K: Why are we so eager to get gold out of the system?... Why
is it against our interests to have gold in the system?

E: It is against our interest to have gold in the system because
for it to remain there it would result in it being evaluated
periodically. Although we still have some substantial gold
holdings - about 11 billion - a larger part of the official gold
in the world is concentrated in Western Europe. This gives them
the DOMINANT POSITION in WORLD RESERVES and the dominant
means of CREATING reserves. We've been trying to get away
from that into a system in which We can control.....

K: But that's a balance of payments problem...

E: Yes, but it's a question of who has the most leverage
internationally. If THEY have the reserve creating instrument
by having the largest amount of gold, and the ability to "change
its' price" periodically, they have a position relative to ours of
considerable power. For a long time we had a position
relative to theirs of considerable power "because we could change
gold almost at will".** This is no longer possible, no longer
acceptable. Therefore, we have gone to special drawing rights,
which is also equitable, blah blah blah. (So the MTM idea was
already understood in 1974,eh)

So, Victor, (or anyone) what is the meaning of, "because we could
change gold almost at will" in the context of the pre 1971 closing
of the gold window? Thanks



burningfiat said...

Woland,

So, Victor, (or anyone) what is the meaning of, "because we could change gold almost at will" in the context of the pre 1971 closing of the gold window? Thanks

They could change the number of gold certificates (aka US dollars) almost at will... yeah? That circus stopped once the other countries tried to redeem the certificates in size.

JR said...

Kissinger and Enders talking about the balance of payments and the importance of controlling the international reserves

K: But that’s a balance of payments problem.

E: Yes, but it’s a question of who has the most leverage internationally. If they have the reserve-creating instrument, by having the largest amount of gold and the ability to change its price periodically, they have a position relative to ours of considerable power. For a long time we had a position relative to theirs of considerable power because we could change gold almost at will.


FOFOA on balances of payments and the importance of the evolution of the international reserve from Once Upon a Time

FOFOA: What the 1922 Genoa Conference did was to institutionalize the "sterilization" of gold for the rest of the world through the reserve structure of the international banking system. And this bit of genius was decided by a "committee of experts" from 34 different countries. They did this by introducing paper gold—or paper promises of gold—into the international banking system as reserves equal to the gold itself. This wasn't the first paper gold, but it was the first time that specific paper gold (that from New York and London) was used as an equal reserve upon which credit can be expanded. What is acceptable as international reserves is critical because trade settlement is a function of the reserves. This conference was the birth of the $IMFS...

With the gold mostly staying put in London and New York, and paper promises of gold flowing as equal base money elsewhere, the monetary base was effectively duplicated. Credit could now expand without ever having to contract, at least not because of the unwanted flow of gold...The US exorbitant privilege began at the International Monetary Conference of 1922 when for the first time international banks were allowed to accept not only physical gold, but also US dollars (paper gold) as reserves. But all US dollars held by foreign banks were put on deposit back in New York City banks. And there they were counted as local US deposits, the same as if you and I put our gold into the bank, in addition to being counted abroad.

These deposits were used as the basis for credit expansion in both the US and in the foreign countries claiming them as reserves. This process doubled the money supply paid out through the US balance-of-payments deficit for the last 88 years (except that money which France demanded in gold). US deficits never contracted the aggregate purchasing power of the US after 1922, the way deficit settlement is supposed to. It also exported US inflation outward. And it continues today.

JR said...

More form Peak Exorbitant Privilege

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]

[...]

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.

[...]

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.

JR said...

They could change the number of gold certificates (aka US dollars) almost at will... yeah? That circus stopped once the other countries tried to redeem the certificates in size.

Or maybe the circus expanded with a few more big tops full of jugglers, rings and clowns everywhere?

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.

JR said...

Inflation or Hyperinflation?

Structural Support

FOA 10/3/01 - Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

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

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained… Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.


If our dollar is going to fall so fast and so far in value that it will be called "hyperinflation", then the dollar must be tremendously overvalued today, right? In fact, and these are FOA's words, "Dollars have no value at all except for our associating remembered trading value with them." A barrel of crude oil isn't worth $100 because a one hundred dollar bill has a value equal to a barrel of oil; rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 100 units. Money is an associated value in our heads. It's not a physical item.

Yet for the last 30+ years, the fully fiat dollar, a purely symbolic token currency, has been behaving as if it actually is an item of value equal to the real goods and services the US has received through its perpetual trade deficit. Understanding how this was even possible is the only way to understand how it will end.

[...]

And here we find the key to the kingdom: "supporting foreign dollar settlement with CB storage."

All currencies have the value of whatever they can buy. In a sense, they get their value from price tags offering prices denominated in their unit. But this MoE (medium of exchange) usage demand is not enough for the dollar. It is not enough that foreign goods are priced in dollars. The dollar requires another kind of usage demand: SoV (store of value) usage.

The reason for this is simple. The US is the only originator of new dollars and the US has run an unending trade deficit for 37 years, so the US has been exporting an unending stream of dollars for 37 years. To some extent, that pool of external dollars can circulate outside of the US as long as some foreign goods, like oil, carry a dollar price tag. But that is not enough.

Without foreign CBs supporting this system of foreign dollar settlement by mopping up the unending glut of dollar emissions, the market price mechanism would collapse the US trade deficit in a heartbeat.

Aquilus said...

I want to post another relevant part of the Kissinger/Enders dialog (same one, same day). The original can be found here

Emphasis is mine:


Secretary Kissinger: Have you accepted it or is this just a French proposal?

Mr. Enders: It's an informal consensus that they've reached among themselves.

Secretary Kissinger: Were they discussed with us at all?

Mr. Enders: Not in a systematic way. They're proposing to send over to Washington the Dutch Finance Minister and the Dutch Central Governor would talk to the Treasury.

Secretary Kissinger: What's Arthur Burns' view?

Mr. Enders: Arthur Burns—I talked to him last night on it, and he didn't define a general view yet. He was unwilling to do so. He said he wanted to look more closely on the proposal. Henry Wallich, the international affairs man, this morning indicated he would probably adopt the traditional position that we should be for phasing gold out of the international monetary system; but he wanted to have another look at it. So Henry Wallich indicated that they would probably come down opposing this. But he was not prepared to do so until he got a further look at it.

Secretary Kissinger: But the practical consequence of this is to revalue their gold supply.

Mr. Enders: Precisely.

Secretary Kissinger: Their gold reserves.

Mr. Enders: That's right. And it would be followed quite closely by a proposal within a year to have an official price of gold—

Secretary Kissinger: It doesn't make any difference anyway. If they pass gold at the market price, that in effect establishes a new official price.

Mr. Enders: Very close to it—although their—

Secretary Kissinger: But if they ask what they're doing—let me just say economics is not my forte. But my understanding of this proposal would be that they—by opening it up to other countries, they're in effect putting gold back into the system at a higher price.

Mr. Enders: Correct.

Secretary Kissinger: Now, that's what we have consistently opposed.

Mr. Enders: Yes, we have. You have convertibility if they—

Secretary Kissinger: Yes.

Mr. Enders: Both parties have to agree to this. But it slides towards and would result, within two or three years, in putting gold back into the centerpiece of the system—one. Two—at a much higher price. Three—at a price that could be determined by a few central bankers in deals among themselves.

So, in effect, I think what you've got here is you've got a small group of bankers getting together to obtain a money printing machine for themselves. They would determine the value of their reserves in a very small group.

There are two things wrong with this.

Secretary Kissinger: And we would be on the outside.

Mr. Enders: We could join this too, but there are only very few countries in the world that hold large amounts of gold—United States and Continentals being most of them. The LDC's and most of the other countries—to include Japan—have relatively small amounts of gold. So it would be highly inflationary, on the one hand—and, on the other hand, a very inequitable means of increasing reserves.

Aquilus said...

And one more piece. The names in bold should raise some eyebrows :)


Secretary Kissinger: If they go ahead on their own against our position on something that we consider central to our interests, we've got to show them that that they can't get away with it. Hopefully, we should have the right position. But we just cannot let them get away with these unilateral steps all the time.

Mr. Lord: Does the Treasury agree with us on this? I mean, if this guy comes when the Secretary is out of the country—

Secretary Kissinger: Who's coming?

Mr. Enders: The Dutch Finance Minister—Duisenberg—and Zijlstra. I think it will take about two weeks to work through a hard position on this. The Treasury will want our leadership on the hardness of it. They will accept our leadership on this. It will take, I would think, some time to talk it through or talk it around Arthur Burns, and we'll have to see what his reaction is.

Woland said...

JR and Aquilus: You've made my day, week month and year. We
all owe you big time for these efforts. I'm printing it all out now
(as I misplace things easily) as we speak. Cheers!

JR said...

Euro Gold

You see, there are two fundamental differences between the euro and the dollar that most Westerners simply can't grasp, no matter how many times you try to explain their significance. Wim Duisenberg, the first ECB president, stated them pretty clearly in this 2002 speech:

"The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro."

There's a lot in that one paragraph, but the two fundamental differences with the dollar are the severed links to gold and the nation-state.


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

RPG Update #4

On April 18, 1998, eight months before the launch of the euro, ANOTHER explained that the idea of any gold being part of the initial buy-in had been a recent development. He wrote that it was initially discussed that gold would be only 5% of the buy-in, but that the BIS had decided that making gold 15% to 30% would render a euro that was stronger in oil. Less than three months later, on July 8, 1998 at a press conference, Willem Duisenberg, President of the ECB, announced the final decision:

Ladies and gentlemen, the Vice-President and I are here today to report on the outcome of the second meeting of the Governing Council of the European Central Bank held yesterday.

…The Governing Council decided on the size and form of the initial transfer of foreign reserve assets to the European Central Bank from the national central banks participating in the euro area. This transfer is to take place on the first day of 1999. It has been decided that the initial transfer will be to the maximum allowed amount of EUR 50 billion, adjusted downwards by deducting the shares in the ECB's capital subscription key of the EU central banks which will not participate in the euro area at the outset. The transfer will thus be equal to 78.9153% of EUR 50 billion, i.e. approximately EUR 39.46 billion.

The Governing Council furthermore agreed that this initial transfer should be in gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaining 85% being transferred in foreign currency assets. I should stress that the decision on the percentage of gold to be transferred to the ECB will have no implications for the consolidated gold holdings of the ESCB.




JR said...

"The Gold Man" (not Goldman) at the BIS

Transcript of the questions asked and the answers given by Dr. Willem F. Duisenberg, President of the ECB, and Christian Noyer, Vice-President of the ECB

Question: I'd just like to talk to you about gold reserves. The ECB said it will readjust the value of its gold reserves on its books each quarter, and I think it is also decided to keep about 15% of its exchange reserves in gold. If there was a major change in the price of gold on the world market, that percentage would be likely to change, and so I would like to ask you if that means that the ECB would buy or sell gold in order to keep its proportion of reserves at that amount of percent.

Wim Duisenberg: Christian, you're the gold man!

Christian Noyer: No, there is no such conclusion to draw, because it was not a decision to hold 15% of foreign exchange reserves in gold, as a structural decision of the Governing Council. The decision of the Governing Council at the time was that in the initial transfer 15% would be made of gold, but that has no consequence on the structure of foreign exchange reserve to develop in the future, nor has it any consequence on the total percentage of gold holdings of the system, including the reserves that are still in the balance sheet of national central banks, and we know that in some cases they have more than 15% gold, and in some cases they have less, but they are for the moment and for the foreseeable future keeping the proportion they have.

Duisenberg: And in this case, the foreseeable future is much longer than in the earlier case

JR said...

Flow Addendum

Jelle Zijlstra, who became head of the Bank for International Settlements, said while with the Bank of the Netherlands in regard to the 1971 severing of Gold from the dollar, "When we left the pound, we could go to the dollar. But where could we go from the dollar? To the moon?"

As I continue this tale, I hope it becomes clear that not only have we gone to the moon, but that Gold is going there also.

[...]

Remember Jelle Zijlstra with the "moon" comment earlier? As head of the BIS in 1980, he confidently predicted that the Second Oil Crisis could be worked through, slowly, but that the System (international financial system) could not survive a Third Oil Crisis--the inflation would make it impossible to recycle the petrodollars to the oil importing countries with any hope of repayment, trade would crumble, and the System would be brought to its knees. On that grim note, we need to take a quick look at how the world reacted to the Second Oil Crisis. It opens the door to everything that follows.

[...]


Gold. Heading to the moon at a world near you. ---Aristotle

Aquilus said...

@Woland You're welcome. Please make sure you read the original from the link.

@JR Thanks for adding "meat" on the bones

@Jeff I personally do like your style of commenting, using your own words to describe the content.

TLT said...

Friends, after thinking about the Euro and reading Robert`s comments, I realized that the Euro is better structured than the Dollar and could work better in HI. No doubt. Gold will, at a point, be 90-100% of the ECB reserves, as the Dollar and the Euro devalue comparing to gold.

But, as the Dollar falls down, confidence in paper currencies will shrink.

Imagine the average Joe holding Dollars in Peru, Germany or Vietnam. When he wakes up and realizes that the Dollar won`t buy him real goods (as HI happens), I just find highly improbable that he will start holding Euros. For his life, from the moment he was born, he learned that by holding Dollars he would be safe for good. The HI shock on the Dollar will represent a shift in the form of thinking for most people. Most will never in their lifetime understand what happened.

The fact that the Euro may devalue and only devalue against gold is theoretically possible, but I can`t see this happening.

The Dollar is so connected with all currencies with swap deals and on, as Robert said, that will make the Euro devaluate relative to goods and services as well. Why are we all holding physical gold? Because it is not tied with the US Dollar! It represents another class in our crazy world of financial derivatives! The Euro is totally connected with the Dollar today. As are most fiat currencies.

I believe that the fact that the Euro is structurally stronger than the dollar will mean little for most people, as they do not benefit directly from the fact that the gold is 100% of the ECB`s reserves. Is the same as the Dollar. US are the country that holds more gold. This fact also means little. “At the end of the day, the Euro is a fiat currency.” – Robert

But anyway, I just wanted to post my view. I know most will not agree with me. That`s okay. I believe that now is the time to sit and watch. As the crisis develops, we can have a better view of things.

Cheers!

TLT said...

Theoretically thinking, the Euro will devalue and only devalue against gold.

But in time of crisis, people become irracional.

I am not arguing against the Euro structure. It is indeed much stronger than the basis that the US Dollar is based on.

Let's see where we are going!

Good luck to us all.

Aquilus said...

@The Engineer,

From what I read in FO/FO/A, from looking at the euro structure, and from my experience with hyperinflation here's my 2c:

1. The one and only major role for the Euro is to avoid hyperinflation when the dollar enters that stage. That's what it was designed for.

2. The Euro was designed to devalue (2%/year in "good" years), and there is no indication that at dollar hyperinflation time it will not loose purchasing power. But loosing purchasing power in time of crisis is what an MoE does, and is very different than hyperinflating.

3. Even with losing purchasing power during a dollar crisis, the euro should be a major, pretty stable unit of account for transactions, since as soon as the ECB makes public the euro/physical gold market, and it's shown to work, the panic just stops. When your currency is freely convertible to gold, and is not printed to support structural deficits (by design, but being addressed further on a nation by nation case as we speak in Europe), there's no reason to lose more purchasing power. And that means a stable currency that can serve as an UoA for contracts, and a mildly depreciating MoE year after year, and more so during any future debt crisis (without affecting, but rather helping gold savers of course at that time)

Does it make sense now?

Aquilus

TLT said...

@ Aquilus

Well, all points make sense, but point #3 kills my previous assumption.

But as long as the Euro/Physical Gold Market is created. This happening, owning Euros would make perfect sense.

My only concern is the "gap" between the HI dollar and the physical gold market beeing created.

Hope it is implemented soon :)

Thanks!

Aquilus said...

@The Engineer

Based on the euro structure, the "gap" should be almost an automatic. Here's why (in my favorite number list format):

1. Assume $ goes into HI today

2. What does that mean for the Paper gold market? Does it mean that the paper gold gets to appreciate in reverse to the $ depreciation? Maybe for an hour, a day or two, but at that time it's time to "cash in the chips". And as in GLD you cannot under a certain threshold, and trying to switch from un-allocated to allocated will not be possible in fractional reserve bullion banks ( see The View: A Classic Bank Run, the paper gold market implodes.

3. Now that a physical only paper market is left, the ECB/BIS simply has to ensure that gold flows and let it find whatever new price level makes sense at that time. They will have no reason to constrain the price, quite the opposite, it's in their interest that a new equilibrium is reached using gold (which recapitalizes their balance sheet from all the bond losses).

4. Once physical gold continues to be available in euros, and all the "scared" money can see that, the panic cause (in euros) stops because one can swap extra euros for gold at will and that confidence is there. The second part of the confidence comes from the fact that there is no new printing to monetize any national deficit (Euro cut the cord to any nation state). So as one can acquire the ultimate SoV (at much higher prices, but stable after the shoot-up) and there's no obvious need to keep printing, the euro will remain stable.

So do you see how there is a small period (until physical gold market credible) that the credibility of the euro will be in question and there will be loss of purchasing power?

But, now, do you also see how that period is likely to be extremely short for the euro itself?

So, yes, if you hold euros between now and then, more than likely you will buy less real stuff in the future. But, that fast slide in purchasing power stops pretty quickly, as confidence returns.

Do you see how this transition is natural, and actually in the interest of the ECB/BIS, and how everything is already in place? Therefore, the transition period for the euro is very short?

Aquilus

Edwardo said...

http://www.telegraph.co.uk/finance/financialcrisis/9521465/Brinkmanship-as-Spain-warns-over-bail-out-terms.html

The line of thinking that is prevalent on this blog, namely that the ECB has in its arsenal the ability to stave of its own destruction by opting for the gold plated "nuclear option"- would seem to be called into question when an ECB board member utters the following:

"Jorg Asmussen, Germany’s ECB board member, said today that bond purchases are necessary to save the euro and, therefore, within the bank’s mandate."

Would not an ECB board member be well aware that IT IS NOT the case, nor would it ever be the case, that making bond purchases is the sine qua non of the euro's survival, and, therefore, would not uncategorically assert that "bond purchases" are necessary TO SAVE THE EURO."

In any case it makes a mockery of the very idea of an an ECB mandate since what Mr. Asmussen is asserting is that upon labeling a condition, or set of conditions, as life threatening, (to the euro) any action is justified aka "within our mandate". Why bother to specify a mandate when the mandate is "We can fire off any bazooka we choose should we decide (rightly or wrongly) that our very existence hangs in the balance?"



JR said...

Don't believe all the noise, and there's a tonne of it right now. They don't know what they are talking about. The euro survives and thrives regardless of how the European debt crisis is ultimately resolved, and no countries will leave the euro. In fact, there are countries trying to get in, and none that will leave short of a coup, revolution or state failure, which isn't even a consideration right now. And even if that happens, the euro will still survive and thrive while the country that leaves will suffer greatly, the local hyperinflation that will ensue being the least of their problems.

Spend some quality time with the Eurosystem's balance of payments and marvel at how remarkably balanced Europe is with the rest of the world. Then compare that with the US balance of payments. As just a quick example, in April (one month) the Eurozone imported only €4.1 billion more goods than it exported. The US, on the other hand, imported $58 billion more goods than it exported, and April was the lowest month yet this year for the US. Of course that's just goods. For services, the US exported $14.5 billion more services than it imported. How much of that do you think was "Wall Street financial services"? Europe also exported more services than it imported, but only €2.8 billion.

So for goods and services combined, the Eurosystem ran a trade deficit of €1.3 billion in April, while the US ran only a $43.5 billion deficit (down from its previous normal $50 billion, but back up in May). Looking back at 2010 (just to get a full year's picture) the US ran a $500 billion goods and services deficit for the year. The Eurosystem (even with those lazy PIIGS) actually ran a trade surplus for the year, exporting more goods and services than it took in! So how can that be? As a currency representing a community of more than 300 million people, the euro is quite healthy compared to the dollar!

Of course there is a huge imbalance inside Europe between the states running a large surplus and those running a large deficit. But with a shared currency the adjustment pressure for such an imbalance is foisted elsewhere, not on the currency. It lands squarely on the politicians, who, like Costata said, couldn't be a more deserving bunch of Aholes. For the dollar, the structural deficit and debt of the US places a massive devaluation pressure directly on the dollar. But for Europe the currency is balanced with no (or very little) adjustment pressure.

The economic flow of goods and services within Europe will of course have to contract as the imbalance retreats. If the euro weakens on the global currency stage Europe will start running an overall trade surplus again, like China, which will soften the blow of a contracting internal economy. If the euro strengthens, things like cheaper oil will help soften the contraction. Internally the politicians have their hands full. No doubt! Externally, the euro is just fine. To the euro, just like FOA said, the politics of the PIIGS and Germany are little more than a sideshow.

And notice I didn't even mention gold yet. Anything that would appear to seriously threatens the euro, like an outright sov. debt default, would explode the price of gold which would simultaneously rescue the euro balance sheet and kill the dollar.

Sincerely,
FOFOA


http://fofoa.blogspot.com/2011/07/forum-1600.html?showComment=1311049362056#c5333697023963140198

JR said...

What about the euro debt? Fun thought experiment:

Greece essentially borrows commercial bank liabilities which it spends. Then the commercial banks borrow CB liabilities which they use to clear all the spending. There are less CB liabilities floating around than there are commercial bank liabilities because you only need X base to clear about 10X M2/M3 etc…

The economy’s “money” is the commercial banks’ “liability” or obligation to provide CB liabilities which make up the base. The commercial banks can borrow these CB liabilities at a low cost. The argument is that the commercial banks’ balance sheets are insolvent because when you MTM their assets (Greek promises to pay back the loan of liabilities), they have more liabilities outstanding than they have assets (at MTM price).

The reasoning is that the commercial banks sell these assets on the secondary market when they need CB liabilities to fulfill their obligation to provide CB liabilities. So they should be MTM. But that’s not the only way they can obtain CB liabilities. They can also obtain them by borrowing them from the CB itself. In doing so, they sign their own “promise to pay back the loan” to the CB, much like Greece did for them. This “promise to pay” is held by the CB as its asset offsetting those CB liabilities it issued. But the CB doesn’t MTM that asset, because A) there is no market for those and B) the CB doesn’t need to sell those commercial bank promises to pay in order to raise euros for clearing. The only issue is a technical one regarding the collateral that would be confiscated by the CB if the commercial bank went bankrupt.

So let’s say a commercial bank does go bankrupt for whatever technical reason. The CB then confiscates that Greek debt that was used as collateral. The argument is that there are too many CB liabilities floating around out there versus the assets the CB holds, which are now Greek obligations rather than the (now-defunct) commercial bank obligations. So the market (superorganism) sez the euro should devalue. This is where the CB reserves come into play.

The CB can “buy back” some of its own liabilities with its reserves. If a commercial bank fails and the market tries to take the euro down, the CB simply defends the euro. And what do you think it would use first? It’s dollar reserves, or its gold reserves? Let’s say Greece defaults, which takes down some commercial banks and now the ECB has all this devalued Greek debt on its balance sheet so the marketplace attacks the euro. What would the ECB do?

It would first sell all its dollars to buy back its own liabilities. But what if… just saying, what if… it used its dollar reserves to openly bid for physical gold in London? What if it did this instead of buying back its own liabilities? Think about the RPG effect on its reserve account! Suddenly you’ve got Freegold and now the ECB can quietly buy back any excess liabilities using a very small amount of gold. Just sayin’


http://fofoa.blogspot.com/2011/12/rip-kim-jong-il.html?showComment=1324393481916#c4110605353804728583

JR said...

In terms of trying to understand the future debt obligations, think on this:

The euro might quickly devalue against the physical plane during the transition when the $IMFS goes to relieve some of the past debt burden, with gold going up as an asset on the balance sheet to provide an offset for the saver class. not a running hyperinflation, but a devaluation.

A quick devaluation (against the physical plane) in both the euro and the dollar would have very different outcomes for the two currencies.

Remember, its not about printing per se, its about market demand for the currency, the printing is a response to the loss of value. So what happens when both the dollar and the euro devalue? **Very different outcomes for the two currencies.**

TLT said...

Perfect Aquilus!

Your points made me realize what I didn't see before.

I was thinking that a gold-backed something was needed to ensure confidence before the Physical Gold Market took place. At the same time, I knew that no fiat paper in the world could become a gold-backed currency at today's gold price.

Gold being 99% of the ECB's reserves, relatively to bonds, its a zero-sum game if gold reaches a much higher value - the ECB won't have any loss in the revaluation process.

The Euro, although devalued at a lower level, will, at a point, hold its value.

Is the interest of the ECB/BIS to create the PGM. The transition will be smooth, actually. The harder work is already done.

Being this the easiest way to solve the problem when the Dollar goes to HI - despite the pressure that may come from the US - is the most probable solution to occur.

Did I get it right?

Thanks again!

TLT said...

@ JR

Thank you too, great points indeed.

Aquilus said...

@The Engineer Congratulations! No more needs to be added :)

@Edwardo The nuclear (gold) option is not an offensive weapon. Plus look at what they do, not just what they say. Remember Victor's point? That they will buy the bonds of the regions experiencing deflation and sell the ones of the regions experiencing inflation?

And why hurry? They are using this crisis to get their house in order between getting the fiscal pacts and wrestling control as bank regulators from the nation states (so no future monetization of debt when banks buy national debt or else the national regulator finds faults).

So, honestly, if I was on the ECB board, I would also buy bonds to make sure liquidity exists. And I would doubly buy them also knowing that any losses from them will mean diddly-squat after freegold emerges (and I kept the banking/social system working until then). Just putting myself in their position, that's all...

Edwardo said...

Aquilus wrote:

"@Edwardo The nuclear (gold) option is not an offensive weapon."

-Meaning what?

"Plus look at what they do, not just what they say. Remember Victor's point? That they will buy the bonds of the regions experiencing deflation and sell the ones of the regions experiencing inflation?"

-I think you are skirting the issue. We just had a an ECB director make an unqualified statement that without bond buying (of some unspecified kind) the euro would go tits up. As far as Victor's assertion goes, and it's not just Victor's, unless someone can show that his claim is supported by hard data, I'm not prepared to accept it just because it fits comfortably withing the general freegold framework.

You know, I almost put in a request that if anyone (JR) was going to respond by way of FOFOA passages, to not bother.

JR said...

Would not an ECB board member be well aware that IT IS NOT the case, nor would it ever be the case, that making bond purchases is the sine qua non of the euro's survival, and, therefore, would not uncategorically assert that "bond purchases" are necessary TO SAVE THE EURO."

Why?

Germany now seems fully behind the bond plan of ECB chief Mario Draghi. Jorg Asmussen, Germany’s ECB board member, said today that bond purchases are necessary to save the euro and, therefore, within the bank’s mandate.

“The risk premia of sovereign bonds now reflect not just the insolvency risk of some countries but an exchange rate risk, which should not theoretically exist in a currency union. The markets are pricing in a break-up of the eurozone. Such systemic doubts are not acceptable,” he said.

Aquilus said...

@Eduardo

I'm not sure why the attitude. It certainly does not help this discussion. I will try to give you my opinion. If you don't want it, just say so in your answer and I will stop answering you.

- Not offensive means the obvious - one does not use it first.

- The euro would go "tits up" without bond purchases CURRENTLY, as bond purchases are the way to introduce liquidity in different zones of the euro area. They cannot allow deflation to creep in, they need low inflation.

- as far as hard data, we all look at what the ECB does. Let us see what they do with the next batch of purchases. If they buy the periphery's bonds and possibly sell German ones, that is hard data. If you'd like to present different hard data, please do.

- not sure why JR's quotes are not welcome. They usually highlight points that have already been made about the topic at hand. And he has lately even added a summary at the top of most posts to indicate what the passage refers to instead of just pasting the raw passage.

Either way, not sure what else you expect from participants in this board... No secret leaked ECB documents will show up here, no "proof" other than what the ECB and gold markets actually do. And that's only after the fact...

So again, if my answers annoy you, please say so and I will stop answering you.

Aquilus

Anonymous said...


Woland,

yes, Enders is this person (that's explained in the header of that transcript in the National Security Archive).

because we could
change gold almost at will


I guess this means that the US government could change the official price of gold at will. In fact, they almost never did (official price: $19.75/oz until 1834, then $20.67 until 1934, then $35 until 1972, then $38 until 1973 and $42.22 ever since). But what they did change was the money supply in terms of US$ which was a paper claim on gold until 1968 (and for foreign CBs until 1971).

Speaking in 1974, I'd say the key point here is that the USG controlled the money supply in US$. They could create debt (=credit money) and go and purchase oil with it whereas everyone else (Europe, Japan, etc) had to export real goods into the US in order to get hold of some US$ first. In this situation, the ability to create reserves (here: those reserves that you can use to buy oil) meant power.

Had the Europeans used gold as their official reserve, parallel and in competition to the US$, they would have been in that powerful position. Well, we know that they have done a lot in order to prepare for that switch, but that they have never openly advertised their new position, and that oil still supports the US$.

In fact, the documents show that the idea of revaluing and using gold was born out of the need for reserves. Immediately after 1971 during the years of rapidly rising oil prices (thanks to Kissinger and the Shah), countries such as Italy and even France suffered from a lack of dollar reserves (because of the higher oil price, they suddenly needed more than they received from their usual exports to the US), but they nevertheless still had a lot of gold (whose value went up with oil - surprise, surprise).

Edwardo,

in the Telegraph article you quote, Evans-Pritchard writes

The ECB’s executive board met today to prepare crisis proposals for the governing council’s meeting on Thursday, including a “yield band” to lower borrowing costs for Spain and Italy.

I am pretty sure this is bogus. As I understand what they said (rather than what the press said about them), they want to restrict any bond purchases to short-term issues. Why would they do this (note the Fed, in contrast, buy long-term bonds and sell short-term ones under their Operation Twist 2)? Well, if you don't want to artificially lower interest rates, this is the best option you have. Work only at the short end of the yield curve.

Also, E-P writes about Asmussen

Jorg Asmussen, Germany’s ECB board member, said today that bond purchases are necessary to save the euro and, therefore, within the bank’s mandate.

but then, Asmussen did not say this. Asmussen rather said

“The risk premia of sovereign bonds now reflect not just the insolvency risk of some countries but an exchange rate risk, which should not theoretically exist in a currency union. The markets are pricing in a break-up of the eurozone. Such systemic doubts are not acceptable,” he said.

Where does he say that they want to lower the borrowing costs? Where does he say that this is needed to save the Euro? From what he says, he is perfectly happy with the fact that the bond market prices in some insolvency risk, no?

Of course, some Spanish politicians would like to receive some free money. This is good for some big drama in Spain. But it has little to do with what the ECB will eventually implement.

Finally, when one of them says "within out mandate", this means the 2% inflation target.

Victor

Anonymous said...


PS: GLD keeps growing albeit without any new sell signals. Now 1293 tonnes, almost back to the level on December 14, 2011, before one of the largest pukes.

Victor

JR said...


You know, I almost put in a request that if anyone (JR) was going to respond by way of FOFOA passages, to not bother.


Good thing some people don't listen.

Did you ever ship FOFOA that gold for explaining to you the importance of the severed nation-state in distinguishing the Fed and the ECB. Oh that's right, you already read it and understood FOFOA the first time, which is why you didn't need to read it again despite asking questions directly answered by it.

JR said...

We just had a an ECB director make an unqualified statement that without bond buying (of some unspecified kind) the euro would go tits up.

Yes, the euro is a debt based fiat that will collapse in deflation if they don't monetize the defaulting debt to ensure the credit system stay working - is this something that just occurred to you?

Of course the ECB will monetize debt- here is FOFOA making that point:

The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed...

...The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy."


http://fofoa.blogspot.com/2011/07/euro-gold.html

Bjorn said...

http://www.ecb.eu/press/pressconf/2012/html/is120906.en.html

Draghis introductory statement to today´s press conference. (Didn´t read it yet myself).

Woland said...

The following is a rather minor point in comparison with the
big issues we've just gone through, but it might be of interest
to some. From JR - "The euro might quickly devalue against the
physical plane during the transition...."

A year or two ago I printed out the price of petroleum products
for every member of the EU. It was broken down by the raw input
price of the crude, plus the 2 or 3 taxes added on. In general,
the taxes were on average 65% of the final price, which varied
around $9+ equivalent per gallon. In the US, taxes on fuel (gas
or diesel, not home heating oil) vary from maybe 12% to 20%.
We know that FOA indicated that the stronger euro/dollar
ratio post transition would be countered, in part, by oil pricing
in euro, at a much more favorable rate than to the dollar. The
EU also has the option, should they wish to exercise it, of
reducing the high taxation of petroleum products somewhat.
After all, the whole purpose, over many years, was to cause
a much more efficient use of those products, thereby helping
the balance of payments. Did they have other objectives as
well? I can only speculate (and you can too)

Edwardo said...

Aquilus wrote:


"I'm not sure why the attitude. It certainly does not help this discussion. I will try to give you my opinion. If you don't want it, just say so in your answer and I will stop answering you."

Given the mode of communication here, namely electronic type, it's understandable that one could, at any moment, infer attitude (which, for you, Aquilus, I can only guess means some expressed level of hostility) where there is none. There is frustration, however, when straight forward questions don't garner what I consider satisfactory answers. But, before I elaborate on that, I'd like to point out that your statement, "Not offensive means the obvious, not using it first" is debatable. What's more, it's gratuitous given that I used the term "nuclear option", which, by definition, means a last resort."

Setting that aside, I don't think that bond buying counts as offensive action. It's clearly reactive, questionable, at best, as to its prophylactic effect, and is obviously being enacted out of desperation in a state closer to panic than tranquility. All this by way of saying that the descriptive terms "offensive" and "defensive" may not be the most apt words to use in conjunction with these sovereign bond buying operations. That is, of course, a matter of opinion as well.

"As far as hard data, we all look at what the ECB does. Let us see what they do with the next batch of purchases. If they buy the periphery's bonds and possibly sell German ones, that is hard data. If you'd like to present different hard data, please do."

I watch, as many millions of others do, with eager anticipation. In the meantime, no one here has presented any hard data with respect to the aforesaid bond purchases. And I am afraid that the burden of providing hard data falls on you and those of like mind to buttress the thesis about how this great game is said to be evolving and will resolve.

"not sure why JR's quotes are not welcome. They usually highlight points that have already been made about the topic at hand. And he has lately even added a summary at the top of most posts to indicate what the passage refers to instead of just pasting the raw passage."

I think the operative word here is "usually".

"Either way, not sure what else you expect from participants in this board... No secret leaked ECB documents will show up here, no "proof" other than what the ECB and gold markets actually do. And that's only after the fact…"

I don't know that I expect anything, but, in the face of a lack of hard and reliable information, fewer tones of (unwarranted) certainty would be refreshing.

Now back to straightforward questions and the lack of satisfactory answers. I suppose you answered the first of the two questions I posed:

"Would not an ECB board member be well aware that IT IS NOT the case, nor would it ever be the case, that making bond purchases is the sine qua non of the euro's survival, and, therefore, would not uncategorically assert that "bond purchases" are necessary TO SAVE THE EURO."

When you said,

If I was on the ECB board, I would also buy bonds to make sure liquidity exists.

However, my second question,

"Why bother to specify a mandate when the mandate is "We can fire off any bazooka we choose should we decide (rightly or wrongly) that our very existence hangs in the balance?"

received no answer.



Edwardo said...


JR asked why in response to this:

"Would not an ECB board member be well aware that IT IS NOT the case, nor would it ever be the case, that making bond purchases is the sine qua non of the euro's survival, and, therefore, would not uncategorically assert that "bond purchases" are necessary TO SAVE THE EURO."


Because it's his job to know such things. It is his job to know that if the Euro is in imminent danger of death that bond purchases aren't the Euro's only salvation, but, rather, its survival ultimately lies in the ability of the ECB to make a two way market in physical at whatever price is necessary to get said physical flowing in sufficient quantity to keep the wheels of global commerce from coming off.

Now, while I don't expect an ECB board member- or any central banker for that matter- to state things with unvarnished honesty, I, likewise, see no reason to offer up some piffle that amounts to "We must buy these bonds or the euro's dead." It serves no good purpose since, as a tactic, that brand of extortionate fear is threadbare, and it just freights the entire enterprise with added pressure.

Edwardo said...

Okay, Victor, thanks. You get the prize for answering my straightforward questions directly and succinctly. I suppose it remains to be seen exactly what the ECB will, in fact, do. But, for now, your explanation will suffice.

Aquilus said...

If there's one thing I don't like is implications of what I meant to say or instructions as to what I'm supposed to do. That being said, let me check some of these off:

1. The myth that I have to convince you of anything:

I watch, as many millions of others do, with eager anticipation. In the meantime, no one here has presented any hard data with respect to the aforesaid bond purchases. And I am afraid that the burden of providing hard data falls on you and those of like mind to buttress the thesis about how this great game is said to be evolving and will resolve.

I accept no "burden" from you, nor do I want to labor to convince you of anything. I respond based on the contents of this blog and related studies, and I look at the existing and new data to validate my beliefs. I will not take the time to do it for you in a format that will make you understand. I presented my observations in a format convenient to myself. If you don't like it, feel free to do your own research, or not not believe them. Also, feel free to interpret the data differently. That's fine by me.

2. Creating premises for me

Setting that aside, I don't think that bond buying counts as offensive action. It's clearly reactive, questionable, at best, as to its prophylactic effect, and is obviously being enacted out of desperation in a state closer to panic than tranquility.

You are linking the words "offensive" and "bond buying" and making it sound as if it is part of my observation. It is not. Bond buying is a necessity under the ECB rules so that deflation is avoided in regions of the euro currency.


3. Creating premises for this blog

However, my second question,

"Why bother to specify a mandate when the mandate is "We can fire off any bazooka we choose should we decide (rightly or wrongly) that our very existence hangs in the balance?"

received no answer.



The statement above is a mandate that you created. As such why should anyone else feel the need to explain it or defend it. As a matter of fact I refuted it, when I said the ECB will likely not use the freegold option offensively.


So in conclusion, speaking for myself: I do not enjoy conversations of this nature (with acusations, burdens. and semantic traps), and personally I will not continue this one. That's not why I visit this blog, or why I comment.

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

With deflation in the periphery and a whiff of contrasting inflationary pressure in the core, the bond buying to mainline some much-needed liquidity into the struggling economies and thereby regain price stability there, was LDO.

A more interesting poser for today might be "how will they choose to 'sterilize' these purchases this time around?".

Jeff said...

CME Group Volume Falls 40% in August Versus Last Year

http://www.kitco.com/reports/KitcoNews20120905DeC_CME.html

KnallGold said...

The Golden valve?

http://www.goldenvalves.com/

Anonymous said...


Take a look at the inflation numbers.

Ignore non-Euro zone countries in that table and focus on the big countries. Annual rates as of July 2012:

Germany: 1.9%
France: 2.2%
Italy: 3.6%

So Italy is the issue. Why is inflation in Italy so much higher than in Germany and France? Any ideas?

Now the crisis countries:

Ireland: 2.0%
Greece: 0.9%
Spain: 2.2%
Portugal: 2.8%

So the ECB might have a reason to buy more Greek government debt, but from these figures, I wouldn't expect any large scale bond purchases at all unless the economy deteriorates substantially and inflation rates fall.

Victor

Edwardo said...

Well, Aquilus, there's plenty I could say in response to your latest, but, for brevity's sake, I'm going to limit myself to simply observing that if you don't like accusations, don't be be the first one in conversation to start tossing out provocative little gems like "I'm not sure why the attitude."

Anonymous said...

Long time lurker and a FOFOA-holic :) Found Another and FOA first on the trail but this blog kept me going to the All in :) Thank you FOFOA and commenters.

Took the liberty to add FOFA over at wiki.answers.com Spreading the meassage to as many shrimps ass possible. Actually converted 4persons while going thrugh some glazed looks of others.

Keep up the good work!

Woland said...

To those of you who enjoyed Aquilus's most helpful link to:
U.S. Department of State - Office of the Historian, above, as
it related to Jelle Zijlistra (and Wm Duisenberg), please give
a look at www.gata.org/node/11304. It is an interesting
review of his book: "Dr Zijlistra's Final Settlement: Gold
as the Monetary Cosmos' Sun". And, wonder of wonders,
it places a value on gold of 55,000 euro. Now where have
I seen that number before?? (please, no GATA comments-
it's just a link)

An amusing line to whet the appetite:
He explains how, as Dutch treasurer (1958-63 and 1966-
67) he managed his cabinet to be fiscally prudent, which he
connects to his opposition to inflationary policies. To
illustrate his objections, in the second book he writes;
"Despite an additional flow of funds due to increasing returns
on Dutch natural gas reserves and the second oil crisis, this
cabinet also proved it could grow hungrier while eating."




Biju said...

Bond King Bill Gross: Gold a Better Investment Than Bonds, Stocks

He is sounding like a HMS Gold Bug.

http://www.bloomberg.com/video/gross-gold-a-better-investment-than-bonds-stocks-67gICY2RTwy3MytiYpX8jg.html

Phat Repat said...

So now we're to believe published inflation numbers? Please...

Phat Repat said...

And Bill Gross? How short the memory. But anything to support the gold thesis? Not by the likes of him.

Chico_hawk said...

One take from Draghi’s statement today…

“OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro. Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”

So the ECB is buying short dated sovereign bonds from PIGS countries in an effort to reduce market interest rates, which are high because the markets perceive the PIGS countries’ fiscal situation is bad, i.e. their economies aren’t able or willing, depending on whether you are a debtor or a saver, to bring their deficits under control & create confidence in their economy (i.e. tax base) & their ability to service the interest on their growing sovereign debt & ultimately repay it in full.

Draghi claims there are conditions attached to this OMT – presumably to enforce austerity on the PIGS to get their debt under control going forward, however, the details of these “established guidelines” on conditions are sketchy at best.

Effectively, this looks to me like the ECB is trying to bail out the policy makers of the PIGS, creating a moral hazard where there won’t be sufficient incentive to get their own financial house in order, but instead be able to continue to suck on the tit of Germany & others they perceive to be better off. The ECB is thus intervening in the market rather than letting countries default (a normal market mechanism/response that recognizes reality rather than trying to extend & pretend) – so essentially the ECB fears that allowing the market to work unfettered will lead to a euro exit by a sovereign and create an unmanageable currency crisis that threatens the euro.

And presumably, this OMT operation will only buy bonds on the secondary market, (i.e., not directly from the sovereign), but that is merely cosmetic, putting lipstick on a PIG, since they’ll likely be buying these bonds from the relevant PIGS banks (who bought the bonds from their sovereign), so indirectly, the ECB is actually funding short term government deficits, since that is where their money ultimately ends up…(banks borrowing from the ECB to buy sovereign bonds, which they then sell back to the ECB under OMT…)

If the ECB doesn’t have sufficient confidence in the Euro to let it stand (or fall) on its own merits, but feels the need to intervene in free markets to “protect” the euro against perceived market threats that they say endanger its very existence, I don’t see how this view jives with their supposed looking to freegold to ultimately free the euro from the $US & IMF forces. Rather, I see this as a way to socialize the losses of the PIGS (debtors) to its more wealthy northern neighbours (savers) – a very political decision they attempt to camouflage by citing a perceived (& phony) threat to the currency…

Thoughts?

Anonymous said...


Phat Expat,

So now we're to believe published inflation numbers? Please...

Yes. Unless you point out a specific mistake to me or give me better numbers. What reason do you have to doubt the Eurostat figures?

(I know it's a HMS reflex. By the way, these figures are from Europe and not from the U.S.)

Chico_hawk,

So the ECB is buying short dated sovereign bonds from PIGS countries in an effort to reduce market interest rates

I don't think this is the case. Their mandate is their 2% inflation target, and I said they would buy government bonds of a specific country only in order to create inflation in that very country.

Then there is the question of whether the yield of, say, Portuguese bonds contains a Euro-zone-breakup premium. Who is able to measure this premium? I say nobody. So what is this all about?

The danger would be an all out run on Portuguese banks with a complete collapse of credit money in Portugal because some people might fear that whatever remains in the Portuguese financial system, would be converted to new Escudos and then devalued. So if the ECB says as long as Portugal's budget is under strict control (by Brussels, the ECB and the IMF), the ECB can buy an unlimited amount of Portuguese debt, this break-up scenario becomes unrealistic. So after today's announcement, the break-up risk premium should disappear, no?

What's left would be the premium for the credit risk of the Portuguese government. This premium exists for a good reason, and I doubt the ECB wants to do anything about it. After all, the governments have to learn to live within their means if the ECB wants to keep the Euro stable (well, always up to the 2% inflation target).

the details of these “established guidelines” on conditions are sketchy at best.

As I understand it, only Greece, Portugal and Ireland satisfy these conditions at present because the external auditors from the Euro group, ECB and IMF are there to watch about their budgets. Any other country can get ECB bond buying only if they surrender control over their budget. And even then it is a "can" rather than a "must".

I don't see why all the HMSs get so excited about it. It's all pretty lame, isn't it?

Finally, I don't think the ECB is too worried about a sovereign default. Just for the record: Earlier this year, Greece defaulted on about 50% of their debt. Greece remained in the Euro zone and is still a member as of today. So what? Life goes on, and the Euro is alive and kicking.

Summary: All the ECB bond buying is about inflation and about preventing a deflationary spiral rather than about interest rates or default risk.

Victor
PS: You can watch a few things to verify whether my point of view is right.
1) As long as the inflation rate is not too far below 2% in any specific country, there should be no significant bond buying by ECB. If there is, I am probably wrong.
2) The Euro zone inflation rate is presently 2.6% annually. It should not increase significantly from here - otherwise they would miss their inflation target of "below but close to 2% annually" in the medium term. If they deliberately miss it, I am probably wrong.

Anand Srivastava said...

Chico_Hawk:

"And presumably, this OMT operation will only buy bonds on the secondary market"

This is the critical difference. They do not say that they will buy all the bonds the banks have bought from the Country. They will buy only enough to keep the inflation at the target. This will keep the banks in check. The banks still have a risk of default. Greece has already defaulted half of its debt.

A default does not equate with an exit. That is just a myth. If it is just a currency union, why would ECB care whether a country defaults on its debts. That is between the country and the banks that gave the debt. The ECB might try to save the banks from total collapse, but that is all it will do.

Phat Repat said...

@VTC
I don't care which Gov entity publishes these figures; I am dubious. And what does Her Majesty's Ship have to do with this? ;-)

Also, to make sure I have it right, that puke indicator you mentioned is ultimately a "sell" indicator for gold, right (i.e. price lower)? Nice as I need to buy more. Thanks.

Anonymous said...


My indicator triggers a "buy" when GLD loses more than 250000 ounces and a "sell" when it gains more than 250000 ounces (about 7.8 tonnes or 0.6% of today's total inventory).

Lance Lewis' original GLD Puke Indicator triggers a "buy" when GLD loses more than 1% of its inventory, presently about 13 tonnes, but doesn't say anything about "sell".

Note that between a "buy" and a "sell", the London gold price increases at an annualized rate of 41%. But between a "sell" and a "buy", the gold price still increases at an annualized rate of 8%. So unless you can get more than 8% elsewhere, it would be foollish to actually sell on a "sell" signal.

Victor

Phat Repat said...

@VTC
Thanks for the breakdown. Only meant "sell" in the sense of lower paper prices. The only thing I am looking to sell is silver for gold. I will likely never sell/trade my gold (as it belongs to the future).

Chico_hawk said...

Thanks for your comments VTC (& your level headedness).

You noted in an earlier post that Italy's recent inflation rate was 3.6% annualized, way above the 2% target (in a country that also is approaching a debt wall). Unfortunately, I don't have any insight to offer as to why it would be higher there than in France or Germany, but it obviously is a concern.

The excessive inflation would suggest the appropriate ECB response should be selling (& certainly not buying) Italian bonds (i.e., increase supply, thus lower price, thereby increasing the bond yield) to bring down Italy's inflation to the 2% target, yet the OMT program announced today seems to be in direct conflict with that.

On the other hand, if the yield on Italy's bonds goes up too much, that would further threaten their solvency & possibly push them into default. Perhaps the ECB ultimately doesn't care about a nation defaulting, but the unintended & perhaps far reaching consequences of the world's 3rd largest debtor going into default would surely be something they'd probably try to avoid. I agree with watching the factors you cite, and also think Italy's inflation rate bears close watching.


The other thing that is a bit unsettling is the Bundesbank's response to today's ECB decision, which, the way I read it essentially expresses similar concerns I mentioned earlier - namely, ECB bond buying is merely financing spendthrift governments. To have the ECB & Buba, presumably apolitical entities, publicly split on a pretty important/central issue is noteworthy and also bears watching. I don't think it is mere political posturing, tho to suggest these entities actually are apolitical is probably naive.




Anand Srivastava said...

Woland: I think there is a problem with that calculation. Isn't all gold in the Central Banks which are part of the Euro considered part of the ECB gold. Then calculating with 505tonnes seems to be wrong to me. The European Union gold is 15,000tonnes. But I don't know how much of this is not part of Euro.

Anyway I don't think this is the right way to calculate the price of gold as it should be calculated at the margins. It will depend on ultimately how much gold is in circulation after the transition, and how much money is flowing into it. I do think FOFOA's estimate is very reasonable.

Candy Sange said...

We Won't Name Names, But A Wall Street Analyst Just Sent This Animated .Gif Out To Clients

JR said...

Good article on the ECB's OMT and sterilization: http://blogs.wsj.com/eurocrisis/2012/09/06/the-ecb-sterilization-and-money-supply/?mod=google_news_blog

In principle, “sterilization” is a process that ensures that individual actions by the central bank don’t result in an overall increase in the money supply. Monetarist theory dictates, after all, that it is excessive monetary growth that leads to inflation, which is what the ECB is exclusively mandated to guard against.

Every week since it started buying bonds under its old Securities Markets Program, the ECB has withdrawn from circulation an amount of money equivalent to what it had spent so far in buying them. For the last six months, this figure has hovered around €210 billion. The amount falls as the bonds it holds mature.

It has done this by offering one-week deposits to the banking system. Banks bid competitively for the deposits, and the rate bid has tracked the ECB’s own overnight deposit rate very closely. It has been only fractionally above zero since the ECB last cut its deposit rate in July.

Fears that it would prove difficult for the ECB to sterilize such a large amount of money regularly have so far been unfounded. On the few occasions when it has failed to auction the full amount of deposits, it has been due to exceptional, technical factors in the money market which have never lasted beyond a day or two.

This situation might change if the ECB and the euro zone succeed in restoring so much confidence to the region’s financial markets and economy that banks start again to lend to each other, and to businesses and households. Before the crisis, the private sector routinely created a multiple of the money created by the central bank.

Michael H said...

Here is a question for a slow comments day: Can a country be unwillingly kicked out of a currency union?

I've seen talk of how a country would willingly exit, for example,

http://gonzalolira.blogspot.com/2012/07/how-country-rationally-exits-eurozone.html

Leaving the Euro would be a lot of work: legal issues, printing currency, etc., and it all has to be done in complete secrecy.

Now, I am of the opinion that, for a country like Greece, leaving the Euro is akin to jumping out of the frying pan into the fire. Can Greece get kicked out of the frying pan?

I'm thinking it can't, but wonder if anyone has arguments to the contrary.

Outsiders cannot force Greece to stop transacting in Euros, or to stop issuing debt in Euros.

I think the most the ECB would be able to do is to refuse to provide liquidity to the Greek banks. Then, euros in Greece would become like dollars in Europe. (Euro-euros?) But this course of action seems like it would backfire and affect the stability of the currency elsewhere in the union.

Further, if I was in charge of Greece and some Euro-crat told me they were going to kick us out of the Euro, I would not roll over and secretly work to print currency etc. I would give the Eurocrat a big F-U and call every newspaper to tell them that this was coming.

enough said...

Hi VTC,

It seems to me the Elephant in the Dacha regarding ECB bond purchases is the super senior status that the ECB claims vs what should be "pari passu" private senior note bondholders claims.

Private owners of Greek Law sovereign debt took an 80% haircut and the ECB did not even lose a euro in interest, let alone principal.

Drag- Queen did mention that that super senior status might be waived but I doubt Finland, Germany, Netherlands will accept this.

Here's the rub. Private investors get an increased haircut as the ECB purchases more debt in a direct,inverse proportional relationship. The ECB pushes private investors from buying sovereign debt of a country that is getting this support from the ECB.

The ECB better be prepared to buy ALL the debt of supported countries if Greece is the model of what happens to private investors that own debt of a country the ECB is "helping".

The ECB is going to have to find alot of sterilization as they will be the ONLY buyers of these sovereigns debt unless the potencial for default and haircuts are completely taken off the table from private buyers, which is impossible......

Anonymous said...


Apologies for the unrelated material. I had misplaced this valuable reference and just rediscovered it. Here is Christian Noyer (BIS, Banque de France) in Tokyo on 3 October 2011 via

http://www.bis.org/review/r111006h.pdf

Overall, doubts have been cast on the ability of major advanced countries to pay back their sovereign debt. In different ways, to differing degrees and with opposite consequences, the same question is now being asked on both sides of the Atlantic: what kind of risk is attached to sovereign debt? We used to think of public debt in major countries as a riskless asset. Not anymore, not to the same extent. In that sense, a true regime change has occurred, with deep and long-lasting consequences, upon which I will try and reflect today

[...]

Over the last 70 years, financial markets have developed on a strong, albeit implicit, assumption. Public debt in advanced economies was considered risk free. On that basis, it was possible to build a whole architecture of asset prices, whose relative riskiness is determined according to the intrinsic characteristics of assets and investors' risk appetite. The important word here is "relative". To price financial assets, markets need a basis - a risk free rate. That basis has now been shaken.

[...]

In the next decade, the world will be divided into two: on the one hand, advanced economies, with high absorption capacity, low savings and high debt with ratios between 85% and 100%; and, on the other, emerging economies, with high savings, low debt (around 30% GDP on average) and less absorption capacity. Our common prosperity will therefore depend on our ability to create stable channels and mechanisms of financial intermediation between those two parts of the world. That, in turn, will crucially depend on the existence of assets that can be considered safe stores of value. As I have said from the start, public debt may not be able to play that role to the same extent as before. The ultimate safe asset, therefore, will be the currency itself. Markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit. On this fundamental basis, we can look at the future of the euro with strong and realistic optimism. I see the recent decision by the Swiss central bank to peg the CHF to the euro as a confirmation of this statement [...]

The ECB is going to stick to their 2% inflation target, no? Can there be a clearer announcement?

Victor

Woland said...

Hello all; it seems to be unusually quiet here recently, so let
me provide a little entertainment.

"In Zijlstra's first book, "Dr. Zijlstra", he writes about his career
and his time as president of De Nederlandisch Bank and the BIS.
While he was DNB president the international Bretton Woods
agreement collapsed, and he goes into great detail about what
happened. He writes about the "European group's" interests,
about the cultural and financial ties between Germany and the
Netherlands, the relationships with France and Great Britain,
and of course the position of the United States".

"It gets especially interesting when Zijlstra writes about then
US Treasury Undersecretary Paul Volker and FRB member Dewey
Daane of the Richmond Federal Reserve Bank. On July 7, 1971,
Volker and Daane arrived in Amsterdam to urge the Dutch
government not to convert any more dollar reserves into gold".

Zijlstra writes; (p191) "From the beginning of 1971 we had
already converted $600 million in return for gold or an asset
of equal footing."
This phrase-- "an asset of equal footing" -- is peculiar, since
from an investor's or central banker's perspective there is no
equivalent to physical gold. Let this be very clear: There is no
asset that stands on an equal footing with gold. You either
own in or you do not. (this is the author speaking)

From the author of the book (Jaco Schipper) : "As an economist,
I knew of the visit of the US officials in 1971. It is remembered
by many Dutch economists because of Zijlstra's famous anecdote
about a conversation he had with Volker, who went on to
become Fed Chairman."

When Volker visited Zijlstra, as Treasury undersecretary, Volker
said, "You are rocking the boat." Zijlstra replied, "If the boat is
rocking because we present $250 million for conversion into
gold or something that can be considered an equal asset, then
the boat has already perished". (p191)

Zijlstra refused to heed the US request and converted DNB's
dollar holdings for gold. and since the reasons behind this
"heavy American delegation" -- as he described it -- were
quite obvious, he suspected that the gathering storm he had
foreseen for some years was about to break loose. Or as we
say these days, he knew that the "fiat was about to hit the fan".

None of the above constitutes any new revelation to the
readers of FOFOA's blog, though the "local color" my be new
to some. However, it serves me as a preface for something I
might say a little later today, if I can put it together in a clear
manner. Cheers, (not Gr---s)

JR said...

Hi enough,

Didn't the ECB's Greece deal require haircuts, which is why the bonds the ECB owned had super senior status?

RE: sterilization, I think its easy because credit is deflating and banks aren't lending, they are stashing excess reserves. From the WSJ article I posted above:

Before the crisis, the private sector routinely created a multiple of the money created by the central bank.

But the link between central bank money and privately created money has changed beyond recognition since 2007. Growth in broad money aggregates has collapsed despite the ECB more than doubling the size of the monetary base, which typically consists of cash in circulation plus banks’ reserves at the central bank.

As of today, the precautionary hoarding of reserves by euro-zone banks is so great that banks are holding over €770 billion in excess reserves in accounts at the ECB, voluntarily “sterilizing” money the ECB created without forcing it to lift a finger.

The ECB is sterilizing another €209 billion by paying only 0.01% on the deposits it auctions. In the current environment, it does not seem like the ECB would struggle to withdraw from the market any amount of liquidity it wanted to.


http://blogs.wsj.com/eurocrisis/2012/09/06/the-ecb-sterilization-and-money-supply/?mod=google_news_blog

Tony said...

Thanks for the entertainment, Woland. The rocking boat is getting awfully close to the iceberg now. Gr....errr....cheers!

JR said...

The ECB is trying to create inflation amidst deflating credit. Saving the system The ECB's actions are just what is expected. From Euro Gold:

Today, the printer of the euro, the ECB, tells all the owners that the money it prints has less value in gold… once every quarter! And not only that, but it encourages people to save in gold through system-wide mandates. Dang, now that's quite a 'something different' when you really stop to think about it!

You see, there are two fundamental differences between the euro and the dollar that most Westerners simply can't grasp, no matter how many times you try to explain their significance. Wim Duisenberg, the first ECB president, stated them pretty clearly in this 2002 speech:

"The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro."

[...]

Saving the Debt

Now I want to talk about "the process of saving debt at all costs, even buying it outright for cash" because this is something they are doing in Europe as well, and, therefore, is one of the arguments the euro critics use to claim that the euro is no different—or even worse—than the dollar. Should we be surprised or shocked that they are doing this in Europe having read A/FOA all those years ago? Well, no. Unless, like many, you didn't really understand what you read.

In my 2009 post Gold is Money – Part 2, I wrote, "And it was always known, but has now been proven, that the system will be saved at ANY cost." When I wrote that I was discussing the dollar and the dollar system, aka the $IMFS, aka Wall Street. But this applies to any monetary and financial system. The system always takes political precedence over the currency. The currency will always be debased if that is needed to keep the system functioning nominally. This is nothing new and it should not be surprising, yet it's apparently very surprising to 99.9% of all financial analysts.

JR said...

cont.

This first part is a key idea: "The point is that the Eurosystem's response (volume expansion) to its current systemic threat (the debt crisis) is not surprising. Does this mean the euro will collapse (experience hyperinflation)? No. Because, for one reason, it has severed the link to the nation-state. The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion."

Not surprising - its what they do, save the system: they will always sacrifice the currency to save the system. **BUT** The euro is a young currency that has severed its link to the nation-state. The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy.

The point is that the Eurosystem's response (volume expansion) to its current systemic threat (the debt crisis) is not surprising. Does this mean the euro will collapse (experience hyperinflation)? No. Because, for one reason, it has severed the link to the nation-state. The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed.

But the dollar, on the other hand, is nominally on the hook not only for the debt mistakes of the past, but for all future dollar-denominated liabilities, obligations, entitlements and promises of the biggest debtor in all of history, on top of a debt mountain that is probably another $100T in size depending on your measurement criteria. That's a big difference. The dollar is an old currency in the winter of its life, linked to the greatest profligate debtor the world has ever known. The euro is a young currency that has severed its link to the nation-state. The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy.

Here are a few simple principles that will save you the hassle and embarrassment of constantly being surprised by the actions of politicians and central bankers. They will never sacrifice the system to preserve the value of the currency. But they will always sacrifice the currency to save the system. And there is a very simple formula for how they do it.

There are four players to keep in mind; the debtors, the savers, the banks and the printer. They never print and give the money directly to the debtors to pay off their debt. Instead they print and give the money to either the creditors (banks) or the savers (e.g. pension funds) in exchange for the older bad debt which they then put on the public balance sheet to socialize the lost value.

So they "bail out" the banks and the savers nominally, which in turn (through currency debasement) actually bails out the debtors and screws the savers. The banks come out even because they only require nominal performance. But the retirees and pensioners that require real performance at the supermarket get screwed.

Woland said...

It is considered bad etiquette, in the game of chess, to continue
play when the endgame is clearly in view. It is rightly thought to
be a waste of time. When it comes to war or politics, however,
there is always the hope, and sometimes the reality, of being able
to "pull a rabbit out of a hat". It all depends on whether you are
able to "outsmart" your enemy. People with power, however,
rarely surrender it without putting up a fight. Nor are they
generally likely to underestimate their own wisdom.

It only took 25 years, from the Bretton Woods conference to the
congressional testimony of Robert Triffin, regarding his dilemma,
before the beginning of an endgame had come into view. From
there to the Dutch conversions of dollars to gold, and the French
repatriation of their gold, is but another 11 years. No news here.

For me, personally, it is useful, for the purposes of an
"easier understanding" , to view the events of which Dr Zjilstra
spoke as a "run on the bank", the bank being the US treasury
in its role as the liquidity generator, along with the Pound (until
1968) for the entire world. Within the US, or between the US and
"private entities" , whether foreign individuals or corporations, a
bank run demanding gold was not possible. Between governments
as represented by their central banks, it was. So what are your
options when you are "put in check" by the beginnings of a bank
run, when you are still the most powerful nation in the world.

1. Friendly persuasion,(don't do this) or arm twisting, (if you do
this it will have negative consequences for you, economically or
politically)
2. Pay up. As per the Kissinger Enders conversation, this is both
self defeating and a prolongation of checkmate. You lose both
your gold and any future leverage which it might have brought.
3. Devalue against gold all at once, to a much higher price, say
$200 in 1968-71 timeframe. Same problem as #2, with same
result, but perhaps postponed a little longer. You have brought
gold back into the system.
4. Take your arm, and sweep the chess pieces off the table.
Game over. We'll figure out a new arrangement. That is what
happened. (and don't interrupt Bonanza!) I would say it was the
"only" choice that left open the hope of retaining US hegemony in
the monetary system.

Well, wonder of wonders, it worked! Another's "dollar found its'
backing in oil", and bought 26 more years. Oh for those 1980
unsustainable imbalances and "only 1 trillion" in Treasury debt.
A famous US senator from Illinois, Everett Dirksen once famously
remarked, "A billion here, a billion there, and pretty soon you're
talking real money". We have now graduated to the trillions, and
if history is any guide we will soon be reading of quadrillions.
As the human mind is unable to comprehend such numbers,
at some point, when they lose all meaning to those not at ease
with exponential notation, faith in the very significance of such
lofty quantities is lost. As JR noted in his Zjilstra quote, a second
oil crisis could be worked out slowly over time, but a third would
produce numbers so large that any notion of recycled petro-
dollars having any chance of meaningful repayment would be
lost.

As I think back over all the great FOFOA posts, and comments
they have generated, it occurs to me that, what NEWCOMERS
here might find really useful, is a kind of historical synopsis of
"the rise and fall of the US dollar : 1922 to 2012" , with links
to the significant passages of the past 4 years. A kind of
simplified introduction to the vast amount of material both
from past posts, the archives, and comments. Time may
already be to short for a newcomer to grasp, via the traditional
route long term readers have had to follow, of the concepts
dealt with here. anyway, Cheers (not Gr---s)


Jeff said...

Choices, eh Woland?

FOFOA: FOFOA: That's the choice. You can collapse your currency against the non-economic good gold, killing the paper gold market and driving up the price of physical in advance of hyperinflation by buying it up. This gives you some hope of avoiding the worst of hyperinflation by providing a real outlet for unwanted surplus dollars.

Or you can wait until your currency collapses against economic goods and then you will have to buy back your own currency with your gold, also at Freegold prices. Even if you start a new currency you will still have to make a market for it because your credibility will be shot by that point.

FOA: At the right time the Euro Zone will withdraw from the IMF, leaving the US and its factions as the only support for dollar credit assets held overseas. Then the evolution of SDR use our guide knows so well will be complete. This will leave the SDR interpretation open to only one avenue to finding support: its basket currency function dissolved, gold will have to flow from American based [gold stockpiles]. With most of the present official credit gold leverage built upon IMF protocols, the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates.

With the world credit gold markets paralyzed in default and dollar credibility placed in question along with American economic stamina; physical gold will return to official hands in Europe in exchange for Euros. A paradox observed as high gold places more demands upon Euros and sends the dollar ever lower."

burningfiat said...

Some other things to consider on a slow weekend at FOFOA blog :-)

Advanced development towards cashless society in Sweden:

http://www.youtube.com/watch?v=LoZ3Yk1l_2o

Saw this myself when I visited the country this summer. Bank-customers can't withdraw cash from their account at the desk in their own bank! If customers want cash they need to go to the ATM, with a max. daily withdrawal limit of approx. $500.
I couldn't exchange my foreign cash for SEK in normal banks either. It was only possible in "Forex bank" and then only allowed if you showed passport or other ID.
I'm personally a bit wary of this development, but hey if the Swedes like it, good for them...

Kinda related: The only places you can play online poker anonymously now is with BTC on bitcoin poker sites...

So my points is, governments around the world are tightening their grip on cash use or use of anonymous cash equivalents also on the Internet.

We know gold is a counter to this development at least in the SoV sphere. But what will happen long term when anonymous MoE is made obsolete or outlawed... Will it backlash at some point? Is it only a short term trend bound to stop when HI or Freegold arrives? Or is this development here to stay?

/Burning

Anonymous said...

@burning

If they outlaw cash something else will have to serve as the physical MoE. Drug deals and prostitution require a physical MoE. Banning cash will not halt these transactions, and I am aware of no country where drug deals and prostitution are not commonplace.

Nickelsaver said...

There's no need to fear, The Great Material Continuum is here http://youtu.be/N8hcHXwqPEo

Edwardo said...

http://brucekrasting.com/on-marios-shock-and-awe/

LD said...

Bron's recent comment on the Perth Mint blog

http://www.perthmintbullion.com/au/Blog/Blog/12-09-06/Take_Gold_With_You_On_Your_Journey_Into_The_Unknown.aspx

WHAT OTHERS ARE THINKING

FT Alphaville recently blogged on Deutsche Bank’s latest long term asset return study, subtitled A Journey into the Unknown.

Source Document

http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/17344-99FA/76174012/GDPBD00000221625.pdf

Bron's comments:
I consider it a bit odd that they did not see a stronger role for gold in an investor’s portfolio, given their judgement that:

• money printing is here to stay across the globe until it eventually works and restores stability or it creates its own problems further down the line

• inflation will win out as we haven’t seen a year of global deflation (using our median YoY measure compiled from 24 countries) since 1933 and

• defaults, deflation and hyperinflation are still all possible in many parts of the world

Probably the strongest case for gold is their statement that “we are more reliant on our politicians and central bankers to manipulate and shape markets and returns than perhaps ever before. These are not free markets.” As George Bernard Shaw was quoted as saying, "You have to choose between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."


My 2 cents: thank goodness for FOFOA and the education on gold as savings (store of value - SOV).

burningfiat said...

Edwardo,

Thanks a lot for this link:

http://brucekrasting.com/on-marios-shock-and-awe/

I like this:
C) Draghi boldly addressed the issue of subordination that has vexed the EU bond markets. The issue no longer exists. All sovereign bonds outstanding will now be treated the same in the event of default. There will be no “preference” provided to the bonds Draghi will buy in the market.

Bruce of course, don't believe it will happen that way if there are defaults, but I think for Freegold-observers this should really be the deal. Let's watch the ECB/ESCB balance sheet in coming cases of defaults. Until now the gold has mostly acted as a counter-weight to the depreciating dollar reserves. See page 5 on http://t.co/9In8gD1i (h/t Ivo Cerkel and Freegolds)

Now Draghi has explicitly put another burden onto the MTM gold price. Gold will now have to rise enough to offset any damage done to ECB bal. sheet caused by (partial) sov. defaults.

I don't know if the above interpretation is correct, but my bet is that we're going to see a new phase in the gold market should ECB/ESCB bal. sheets be hurt by defaults.

/Burning

Edwardo said...

BF, that's an interesting take on how gold is apt to behave now that Mario has made this gambit. I'll note that, uncustomarily, we've seen that, of late, gold has had moves well in excess of the usual one percent action that tends to cap daily up action in the yellow metal. We'll have to monitor the action to see if a new market paradigm, for lack of a better word, is emerging with respect to gold. Gold definitely has some catching up to do if the year over year nineteen percent appreciation is going to be maintained. More on the ECB gambit in a bit.


Woland said...

Hello to all:

Another quiet day on the comment thread, so I have a question
to ask of those more knowledgeable than me on an issue which
I have wondered about in the past.

I was recently reading victorthecleaner's "The many values of
gold" and his thoughts about the Summers Barsky solution to
Gibson's paradox, particularly the notable divergence from
the expected gold price which began around 1995, possibly
indicating some actions interfering with gold's predictive role.
It made me think about something else which happened in
1995, (or the end of 1994) which was Greenspan's allowance
of overnight sweeps out of non interest bearing accounts.

This stuff is well above my "pay grade", but, here goes. An
international bank, by definition, has operations in all time
zones. Business hours for banks around the world would be
divided into roughly 24 divided by 8, or three "business days"
in one calendar day. Is it possible that the sweeps policy
which began to take hold from 1995 onward tripled the
effective reserves of the banking system, by allowing them
to flow around the world as it rotated on its' axis? Or is this
nonsense? I would be grateful for your thoughts.

KnallGold said...

This is now all German politics/finance, and no side show as the Verfassungsgericht will deliver its verdict on the ESM, on the 12. 9. 2012, a milestone on the future of the euro so bear with me:

Just finished watching the Günther Jauch Talkshow on ARD (German's First TV channel), "Im Namen des Volkes! Müssen wir die Euro-Rettung stoppen?", about the "Eurocrisis"

http://daserste.ndr.de/guentherjauch/index.html

Guests were : Winfried Hassemer, Beatrice von Weizsäcker, Otmar Issing, Hans-Ulrich Jörges and Markus Söder/CSU.

This is just a short feedback, very busy and tired but the hour long show went very good for the Euro guys, the guests picked were first class to make a good/diverse round, all relevant points were raised and answered perfectly, a huge step forward on the euroissue, in my humble opinion!

I'd give it *****, it also answered my question "will at least only one Journalist get it?", with yess, Ulrich Jörges did a great job for his profession, showed empathy, attacking the politician cleanly (the Greek/German dispute, "shame on Söder, no good catholic")- I'll bet all other journalist/politicians will lag behind and not get the story.

Camera guy good job, when Otmar issing agreed he was inserted etc., catched all nuances in regards to ties, jackets colors and stuff for the esoteric mind, thanks.

And hey, not once during the talk they used the word Gold, but you can make it Whole now and convince skeptics! To expand I'm going more literally, the blue versus red, getting together (savers+spenders), with in between a Golden color (FreeGold/RPG), which would fit perfectly, integrate, melt, like the ying yang in blue and red with a Golden lining? Anyone following me still?

Btw there was a good joke at the end of the show where the talkmaster brought up an Ikea catalog, in it a chandelier (not an "Armleuchter"(German word for twit, fool), to cite Jauch lol, then Markus Söder: "ah, but there's also a chair in the catalog, a headchair (meaning the boss is a politic, named Markus) !" -- Jörges takes it up and says "hopefully the chair then will remain empty!" laughter.

KnallGold signing off now at exactly midnight, and I'm not gonna tell you what my first name is (just that I will buy an Italian car next week when you'll await Karls-ruhe, the car, well, blue, Euro blue, Fiat but with a son called Dino, and what a sound... I wish you Godspeed, if you wish me also, I know we'll have, and Bravo, Mario Draghi et. al., watch the dates, the Gold and signs!

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

burning fiat,

Somewhere I read that the discrepancy of assets to liabilities at the ECB is somewhere around 36 to 1. 86 billion in assets to 3.1 trillion in liabilities. That was, of course, B.M.G. (before Mario's gambit.) So, yes, prospectively gold has a lot of work to do.

The point was made in BK's piece, either by B.K. himself or in one of the comments, that now that rates have been knocked down considerably in the wake of Mario's gambit, that getting the sovs in question to take the cod liver oil will be even more difficult.

Here's the central problem as I see it. Deflation is the bogey man that must be kept at bay if not altogether slain. Unfortunately, draconian austerity of the sort that must be adhered to (in order to be granted the privilege of copiously slurping the dreaded cod liver oil) will just make these economies contract further. On the other hand, if the sovs don't take their medicine, well, they will be crushed by the markets.

I have more than a little difficulty seeing how this doesn't end up with the ECB having to push the proverbial red button. No doubt some would say that is precisely what the ECB wants. Well, while they are, arguably, angling for freegold, they, in my view, also don't want to be seen to be the ones standing over the corpse holding the smoking gun.

mr pinnion said...

Tiss quiet.
Most av probably seen this already but i thought i de post it here as the sun in the Four pic at the top reminded me of the end scene.
Thanks FOFOA for four years of wildly interesting (and always suspiciously origional)blogging.
Shine on dude.
http://www.youtube.com/watch?v=f_OawJA68jI

Vain Saints said...

"The only thing that keeps [the dollar] from cascading away is world support and use."

Yes. And the only thing that keeps us from drifting into space is gravity, so we should all be prepared for when this force stops functioning.

In all seriousness, this is not an answer to a question. It is the question itself. Why and how have so many countries allowed themselves to be sent to ruin in support of American consumption?

There are only two answers to this question that make any sense. 1st. It's the American Military Stupid; 2nd. It's part of a larger agenda that temporarily requires Americans to enjoy exorbitant privileges on the backs of the producers of the world. All other answers are transparently unsatisfactory. Countries are allowing American consumers to exploit their industry to increase exports to American consumers??? Rather than simply allow their own Purchasing Power to increasingly support their own industrial base, however gradually? Bollocks.

If 2 is the case, as is likely, then the only real source of value on earth is access to the people making this plan and information about what this master plan is, and preparing to adjust to the new conditions as various stages of this plan phase in and out, assuming that our condition in this new state of affairs is in any way salvageable. Simply put, the countries of the world are not waiting until they've "had enough" of American exorbitant privilege to dump the dollar; that moment was reached a long time ago. They are waiting until they are told to dump the dollar, which could be tomorrow or could be never, depending on what the Masters want. Logic, foresight, knowledge, none of these things have anything to do with anything, anymore than knowledge of the fundamentals of pricing securities has anything to do with making money in a stock market that is 100% rigged

Anonymous said...

Edwardo,

Somewhere I read that the discrepancy of assets to liabilities at the ECB is somewhere around 36 to 1.

Well, it's a balance sheet, and so the sum of assets always equals the sum of liabilities. Second, the ECB's balance sheet is not the relevant one, but you want to look at the balance sheet of the Eurosystem (consolidated balance sheet of all CBs of the Eurozone plus ECB) since all of them issue Euros.

If somebody writes 36:1 they might mean the debt/equity ratio or the (balance sheet sum)/equity ratio. Even that's not correct. The ECB has an equity of E495bn (paid in capital of E85bn and accrued reserves aka 'revaluation accounts' of E410bn). This supports a balance sheet of E3085bn, i.e. some 6.2:1 leverage if you want.

Just to exaggerate the point, take a look at paragraph 8 of the Fed system's balance sheet. They have an equity of $18.3bn (gold certificates at the official price of $42.22/oz, coins in the vault and SDRs) supporting a balance sheet of $2800bn for some stunning 153:1 leverage. Of course, if the Fed owned the gold and if they booked it at market price, they would have some equity of $460bn supporting a balance sheet of $3242bn for a leverage of 7:1 very similar to that of the Eurosystem.

Victor

Chico_hawk said...

FOFOA: "That's the choice. You can collapse your currency against the non-economic good gold, killing the paper gold market and driving up the price of physical in advance of hyperinflation by buying it up. This gives you some hope of avoiding the worst of hyperinflation by providing a real outlet for unwanted surplus dollars.

Or you can wait until your currency collapses against economic goods and then you will have to buy back your own currency with your gold, also at Freegold prices. Even if you start a new currency you will still have to make a market for it because your credibility will be shot by that point."

Unless I'm missing something (possible), it seems to me there isn't much of a choice to be made - revalue gold in $US terms to try to avoid hyperinflation and collapse of the currency to try to preempt assured collapse of currency due to hyperinflation and having to use your revalued gold to restore credibility to the $US

Surely this can't be hidden from the decision-makers in the US, so I'm left to assume it is a question of timing...but can they control or even influence the timing, given the number of variables (& uncertainties associated with them) that could trigger $US hyperinflation?

If I'm not mistaken, the case has been made that $US hyperinflation will result when foreign structural support for the dollar is withdrawn - eg. public failure of US Treasury auction, oil refusing payment in $US (or at least preferring payment in non-$US), paper gold market in default, etc.

None of these possible triggers is under US control or influence...which again, surely can't be hidden from those charged with making such decisions...

so why are they waiting & what (sign) are they waiting for?

Michael dV said...

I too have wondered what they are waiting for/ thinking. I am frequently reminded by my friends who are very active in the political arena...most of these guys, in politics, are not that bright!
One can hope, and I do, that there is a room full of bright people who are making plans for the future. All we seem to get however are atrocities like the Patriot Act and other 'solution' which have been hatched years ago just waiting for the right 'problem' to which they can be applied.
Who knows, maybe there is a Bureau of "What To Do in a Freegold Environment"...maybe there really is a group of leaders with brains . Judd Gregg NH seemed to understand what was coming...I'm hopeful there are lots more like him and David Walker who have some influence.

Anand Srivastava said...

On the question of why not now. I think there is not much point in revaluing now for the US at least. For the Euro it makes sense. Even China would like more time.

The US has a huge deficit, and the world has a lot of US Treasuries. Both must come down, before revaluation will have a long term benefit. Once hyperinflation sets in, the external US Treasuries will lose its value, and the govt expenditure has reduced a lot, it will make sense to revalue gold.

Revaluation at that point will allow small amounts of gold to go a long way, so that US will be able to build up its industry again.

Actually the US or any other political entity will not do the revaluation.

Once USD loses favor with the world and USD goes into hyperinflation, the ROW will move to using local currencies and Swapping them. The paper gold market will get destroyed somewhere around this point and the gold will revalue. This all happens automatically. No politician is involved. It is just the market taking decisions.

After the Gold revaluation happens, the USG will realize that they can use the gold to continue their lifestyle. So they will revalue their gold and will fashion their new Currency after Euro.

Infact I think China will also move to the model of Euro. This is why it is collecting so much gold.

So again do not look for politicians to do anything about the coming future. Look at what market will do, given the current state.

Edwardo said...

Thanks, Vic.

I used the wrong terminology, and should have instead specified the debt/equity ratio. It appears that the leverage is not so severe presently.

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