Posts Tagged ‘Gold Standard’
by Dave Brown, Gold Senior Reporter
Thu, Oct 20, 2011
Gold Investing News
Even as spot market gold prices have traded at historical highs over the past few months, central banks are increasing positions and demonstrating support for the precious metal.
Earlier this week, the World Gold Council released an update on its official gold holdings indicating the Bank of Thailand reported an increase for its gold reserves of 9.3 tonnes in August following the net purchases of 28 tonnes during the first half of the year. These purchases combine to represent 4.2 percent of the total foreign reserves and an increase of gold holdings to 136.9 tonnes. This might seem of interest for gold investors as the Bank of Thailand may continue to add to the position during short term fluctuations in gold prices to the downside, given the still relatively modest percentage of foreign reserves in gold that it has. In terms of a monetary policy, Thailand has maintained its interest rate level for the first time this year, terminating the longest consecutive period of increases since 2006. A weakening global economy and the worst floods in five decades are seen as impediments for growth in the South East Asian nation.
Regional peer, Vietnam has recently re-authorized gold trading on foreign accounts in order to narrow the difference between domestic and international gold prices following a recent increase in demand for gold in Vietnam. The State Bank of Vietnam changed its policy following a careful collaboration with its domestic gold jewellery industry and commercial banks.
South American demand
The central bank of Bolivia reported an increase of 7.0 tonnes in gold reserves bringing its total to 42.3 tonnes of gold. The country is holding approximately 21.3 percent of its foreign reserves in gold with its last reported gold acquisition dating to last December when it also reported a 7.0 tonne increase. Bolivia has recently been in the news as a result of strong environmental protests and declining political support for the leader Evo Morales. Mr. Morales’ socialist agenda appears committed to reducing the country’s poverty; however, requisite infrastructural progress, mining activity and gas development which are critical for economic growth are generating protest movements. Although the administration’s second term in office is due to end in early 2015, some observers are uncertain that stability in the South American nation will be maintained until a new election.
Russia adding gold to its reserves
Russia has also increased its gold position to 841.1 tonnes, adding 8.0 tonnes of gold to its reserves during the summer months of July and August. Russia has been consistently adding to its gold reserves for 52 consecutive months.
The central bank of the Philippines recorded a decrease in gold reserves of 10.3 tonnes, bringing its total to 147.8 tonnes of gold. Recently the central bank of the Philippines decided to protect growth by maintaining the benchmark interest rate at 4.5 percent, keeping with the monetary policy demonstrated by South Korea and Indonesia.
Sri Lanka has reduced its gold reserves to 8.1 tonnes as the result of selling 9.3 tonnes of gold. The country has followed other Asian examples in maintaining a cautious monetary policy; however, Mr. Anoop Singh, Director of Asia Pacific Department from the IMF indicates in a press briefing last month, “Sri Lanka has introduced new fiscal reforms to broaden the tax base, to remove exemptions, to bring these in line with international standards, and I think we can be quite confident the government and the central bank remain confident to carry forward these reforms.” Facing such uncertainty in the global economic context, the country is also modestly holding 4.6 percent of its foreign reserves in gold.
Read the entire article HERE.
By Agnese Smith
July 8, 2011, 4:12 a.m. EDT
The initiative is part of “Healthy Currency,” a campaign sponsored by politicians from the right-wing Swiss People’s Party (SVP) — the country’s biggest — that is seeking to capitalize on popular fears about global financial turmoil and inflation to reverse the government’s current policy on gold.
“I can imagine that this will spark some sort of debate about gold and there may be some pressure to accept the parallel currency,” said Dr. Gebhard Kirchgaessner, an economics professor at St. Gallen University. “But it won’t have any real effect on the economy. It seems incredible to imagine that there are people out there willing to buy millions of these things.”
Switzerland, which in 2000 became one of the last countries to decouple its currency from gold, is not the only place to contemplate a change in the precious metal’s role amid controversy over government involvement in the economy. In March, Utah became the first state in the U.S. to legalize gold and silver coins as currency, while similar legislation was considered in Montana, Missouri, Colorado, Idaho and Indiana.
“I want Swiss people to have the freedom to choose a completely different currency,” said Thomas Jacob, the man behind the gold franc concept. ”Today’s monetary system is all backed by debt — all backed by nothing — and I want people to realize this.”
A good part of the enthusiasm for gold, which provokes strong emotion among many who invest in it, has to do with its price: the yellow metal has more than quadrupled during the last decade and now stands at more than $1,500 per ounce.
In the U.S., legislation to allow a gold currency is largely symbolic — a protest against what many consider irresponsible spending by central governments to recharge economies. But according to Jacob, the gold franc has a more practical goal: giving small investors the opportunity to safeguard their investments against global uncertainty.
Modest investors face several hurdles to investing in the precious metal, said the 50 year-old Jacob, a former pilot and currently a sales coach at Zurich Financial Services Group. Collecting coins, bullion and gold certificates typically requires professional advice and even the smallest coin costs around 100 francs. One of the new gold francs, on the other hand, with a gold content of 0.1 grams, could be purchased for just 5 francs (at current prices).
While there is evidence that investing in gold is increasingly popular in Switzerland and other countries, the idea of establishing a gold franc is not foremost on the minds most ordinary Swiss, some of whom still find the subject of gold uncomfortable given the country’s association with precious metals looted in World War II.
“I got rid of my coins a while ago,” said Esther Heusser, a social worker in Jona, Switzerland. “I just didn’t want to think about where they came from.”
The real problem
Very few have even heard of the initiative. The rising Swiss franc, which has jumped 16 percent in two years against the euro and the dollar thanks to its safe haven status, is a much wider concern.
This “is the real problem and it is clear that neither the [Swiss National Bank] nor the government have anything really meaningful against it,” St. Gallen’s Kirchgaessner said. “We might have a real crisis in a couple of years.”
Indeed, the strong franc has clipped corporate earnings of many exporters and has lead to some painful restructuring. Because of the ongoing global financial crisis, investors here and abroad are seeking a safe haven from economic uncertainty and inflation, which Switzerland’s low debt and firm economic footing provides. High gold reserves have also helped.
Jacob doesn’t think the adoption of the gold franc would increase the value of the official currency. “In fact, it would take pressure off,” he speculates.
Like the Swiss franc, gold has jumped for many of the same reasons, even though the Swiss National Bank and other central banks decided to dump the metal after two decades of underperformance against other financial instruments.
Strong demand from China has also helped push gold prices to records. Gold enthusiasts — so-called gold bugs — many of whom see stock markets as no better than gambling casinos and central banks as money printing machines — are rejoicing.
“Buying gold has been the best method for shorting the government,” wrote Shayne McGuire late last year. McGuire, who has predicted that gold could soar to $10,000 an ounce, manages the $500 million GBO Gold Fund for Teacher Retirement System of Texas.
“I strongly believe that present financial conditions are about to transform the investment strategies of the world’s largest investment funds in a way that will cause gold to surge substantially higher,” McGuire wrote in an essay on the metal.
Switzerland still holds a large amount of the precious metal. The alpine country of 7.7 million residents holds 1,040 tons worth about $46 billion, almost as much as China, according to World Gold Council figures. It ranks seventh in its league table, with the US at the top.
In terms of gold reserves per person, it stands at just over $6,000, number one by nearly twice the amount of the next largest hoarder, Lebanon (over $3,000) and nearly six times as much as the US ($1,000), according to The Economist newspaper.
But this is not enough according to the “Healthy Currency” movement.
The SVP, which also wants to limit the autonomy of the Swiss National Bank after it posted big losses trying to tamp down the franc, plans to start collecting signatures for a ballot initiative in mid August, according to Jacob. The party is demanding that the central bank stop any further bank sales, repatriate Swiss gold reserves held abroad, and not allow the proportion of its gold to fall below 20% of its total assets. The campaign is also calling for the country’s withdrawal from the IMF.
Jacob, who claims to have no affiliation with the SVP other than the currency initiative, admits that the success of his gold franc campaign is linked to the amount of publicity the Healthy Currency initiative manages to muster at the end of the summer. “It would definitely put the parallel currency on the agenda,” he said.
And it will be no easy feat. The passage of the legislation will require an amendment to the Swiss constitution and the country is not particularly well known for a reckless pace of change. If rejected, a popular vote — where ordinary Swiss people have their say — is planned, probably in mid 2012, according to Jacob.
If approved, licensed financial institutions can then issue the coins, using their official logo on one side with the other, an easily recognizable Swiss gold franc emblem, Jacob said. The initiative foresees strict regulation by the government to ensure gold content and authenticity.
Even if popularized, the gold coins are unlikely to be in use for commercial reasons as the volatility of gold prices make this unpractical.
Read the entire article HERE.
Chapter 84 – Bond salesmen’s propaganda that “a dollar is a dollar” should be rewritten to say “a dollar is 3¢”
Since most ordinary people, bankers, and company presidents have never studied currency theory, they swallow it hook, line, and sinker when the bond salesmen tell them, “a dollar is a dollar.” That piece of propaganda should be rewritten to say “a dollar is 3¢.” The nominal dollar is officially worth no more than 14¢ of its 1940 value, unofficially only 3¢.
If computed in 1940 constant dollars, not more than $1,380 exists of the US $46,000 per capita gross public and private debt. More than $44,628 has been destroyed by inflation. But sadly, the owners of this debt do not want to hear about it. They do not wish to know that bonds are issued by governments with the sole purpose of debasement.
To my knowledge, no government in history has paid its debts in currency equal to the purchasing power of the currency lent to them. The people always lose their money on bonds.
It angers me. Bond salesmen should be thrown into the East River.
-The above was written in 1985 by Dr. Franz Pick, in the book “The Triumph of Gold” sent to me by one of my readers. The photos are from Time Magazine.
The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life’s necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.
I want to apologize in advance for the length of this post, but I have to be thorough if I want to have any chance of winning Rick Ackerman over to the hyperinflation/Freegold side. And I think there is a chance. While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall Effect:
There is a quote I like that comes from Le Metropole Cafe. It goes, “we will have deflation in everything we own, and inflation in everything we use”. This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. “We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars.”
My latest post on this subject was called Big Gap in Understanding Weakens Deflationist Argument in response to Rick Ackerman’s “Big Gap in Logic Weakens Hyperinflation Argument”. Rick also received responses from Jim Willie and Gonzalo Lira. Last week, with regard to Lira and Willie, Rick reported to his readers in “Rick’s Picks”:
I’ve concluded there is little to gain arguing on the one hand with a guy who turns rabid whenever someone contradicts him, even in a friendly way; and on the other, with a preening narcissist who comes to argumentation in the same state of sexual arousal that Jeffrey Dahmer must have experienced hovering over the fresh corpses of teenage boys. These guys are bad news, as lacking in civility and manners as buzzards in a scrum, and you’d do well to avoid them both. You might try tuning instead to the hyperinflation arguments of Steve Saville, Peter Schiff and a few others who seem less concerned with trouncing, slicing and dicing opponents than with presenting facts that might better prepare you for the financial crisis ahead. The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web.
I would first like to thank Rick Ackerman, and to also acknowledge his perspicacity in this particular regard. And because he has demonstrated such a discerning acumen in his preference for hyperinflationists (among other things), I will try, once again, to help him see the way. As our own Blondie likes to say (and I paraphrase for clarity), “you don’t own your baggage, it owns you.” Here is Rick’s baggage, in his own words:
My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.
Rick repeats what he calls “C.V. Myers’ dictum” quite often in his deflation-oriented posts: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” I’m going to go out on a limb here and say that this dictum is Rick’s baggage, his foundational deflation premise, in a nutshell. And it leads him to his “bottom line” or his analytical conclusion:
Rick’s Picks Commenter SD1: To my knowledge, no bank has ever made provisions in their lending criteria. So to anyone subscribing to the hyperinflation theory, all I can say is there is nothing I, and millions of other North Americans, would love more than to take $250,000 of worthless, hyperinflated money that we worked a few days to make, to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay.
Rick Ackerman:That’s the bottom line, as far as I’m concerned.
In this post I will explain the flaw in Myers’ dictum. I will go into great detail as to why the missing component in the dictum is the essential (and inevitable) one. I will show how this one flaw in Rick’s premise sends his otherwise excellent analysis careening 180 degrees in the wrong direction (with regard to the subject of this post). And I will explain the proper frame of reference from which to view what I am describing. How’s that for a kick-off?
First Myers’ dictum. “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Rick: “Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit.” Me: Yes, someone will pay. But there is a third option that is missing from Myers’ dictum. “The hit” can be socialized:
“Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets…”
“…hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!”
(The quotes are from FOA on Hyperinflation and FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios respectively.)
As many of you know, I came to this debate, with no baggage and no hard opinion, in 2008. And in the “doom and gloom internet community” where I arrived there was definitely an equal helping of both deflation and inflation/hyperinflation talk. Most of it I found less than convincing (on both sides). The “deflation side” is actually bigger than you might think. Most of the peak this or peak that crowd, the majority of the survivalist community, and the Great American Collapse people are all expecting a sort of grand deflation, whether they understand the arguments or not.
If you want to think of a grand deflation as a deflating—or grand contraction—of economic activity that was previously “energized” by massive trade deficits, massive credit expansion, and the massive structural malinvestment that flows from those easy money expansions, well then I too am expecting a sort of grand deflation, in many of the same ways they are. But one thing I have learned from the writer that made the most sense to me, the writer that I found most convincing from within my “past baggage” vacuum, is that “deflationists” as a group still have a big gap in understanding.
Rick became a deflationist in the 1970s by his own account. And he certainly wasn’t alone. I wasn’t even aware of the existence of such a debate in the 1970s let alone 2007, so I can hardly add the wide perspective necessary in this debate from my own personal experience. What I can do, instead, is to share with you this excerpt from the one that spoke convincingly to me, the one that informed my developing view in 2008.
One point I hope you’ll find curious in this excerpt is that deflationists have always fixated on residential real estate. This is one of Rick Ackerman’s, almost obsessive, objections to the hyperinflation case, and it clearly has roots in his kind. This was written in 2001, just as the housing bubble was developing. My notes in [brackets]:
Somewhere in the 1970s era I was exposed to the thinking of several different deflationists. It seemed that all of their conclusions came to the same end: that dollar deflation would rule the day, no matter what. Mind you now,,,,,, most of them were split on the finer points of the issue, but for all of them; [de]flation would have its day even if prices would rise somewhat. Deflation was always the final outcome.
One of the central themes in these thoughts was concerning how this coming deflation would impact plain old residential real estate. You see, most of these guys advocated selling excess residential property because it was, sooner or later, going down for the count. Mostly because the mortgage markets would be destroyed in the deflation and nobody could buy [prices would collapse to the cash price].
– Note: The reader has to understand that these discussions were directed towards people and investors that had plenty of net worth. And I do mean Plenty! The argument wasn’t about how to survive; rather how to balance a truly conservative estate portfolio. –
As time has passed we can see several major flaws in their thinking. Flaws that cost them a bunch of credibility, if not personal money. [I want to jump in here with a quick quote from Gary North written in 2002:
"I remember in 1975 hearing C. V. Myers tell attendees at a gold conference, 'If you get this one wrong, you'll lose everything.' He was predicting deflation. He got it wrong. He didn't lose everything."
And now back to FOA] One point, that I have touched on here several times, was in understanding just how much ourselves and our economic structure would and did evolve into accepting fiat money use. Even though it was, “god forbid”, separated from gold.
In one area alone, the bond markets, investors reacted far differently than deflationists thought they would. Twenty ++ years ago [again, this was written in 2001], it was expected that just gross increases in money printing alone would be enough to crash the bond markets. Not talking about price inflation here, but money inflation and that should have started a deflationary fall in our credit markets. It almost happened, several times, but never followed through. It seemed that the market function had evolved to accept fiat inflation as a prerequisite to modern economic function. In a like comparison to today’s thinking; investors assumed that as long as we had an expanding economic stance [nominal GDP growth, credibility inflation and financial product appreciation], sourced by inflating fiat supply, price inflation would not impact long bond credibility. We saw confirmation of this over many years. We saw that our credit markets, especially long bonds, were used in spite of the price inflation threat. Indeed, there was a ready [highly liquid] market demand for bond purchases.
In hind sight, long term holders of bonds did do very well if their position was part of a balanced holding and they didn’t need to sell at bad times. Even now, dollar bonds have gained as rates are pushed lower.
Back to the thought:
This whole IMF dollar system has always been based on an expanding fiat theory that swells [nominal] GDP over time. Investors that bet on deflation coming along, after each of our bouts of inflation, were badly burned as deflation was overcome. Economic function returned, essentially because price inflation could not rout the overall market for long credit.
The flaw in all of this was in the reserve structure of our Dollar IMF money system. The fact that the world had to walk, lock step, with our money policy meant that their goods production would almost always be cheaper than ours; keeping local US price inflation under control. In other words; local US-based price inflation could not get out of hand as long as the rest of the world was willing to use their economic production to control it by selling [products cheaper than we could produce them] into our expanding fiat system.
In this, the dollar [and its securities, and their derivatives] could be inflated without end while our credit markets functioned in a non-inflationary environment.
But there is an end.
A money system like this has a definite timeline and that point is reached when the world can move away from keeping price inflation low in the US. That point is reached when Another money system comes along to challenge the dollar and, in the process, offer these other goods-producing countries a chance to buy some “lifestyle” for themselves.
At first, the show is dull as investors keep right on buying into the dollar argument above: that an expanding fiat base builds non-inflationary [nominal] growth [in both GDP and securities]. This is one reason traders still buy US long credit, not to mention chasing rising dollar exchange rates; they expect more of the last several decades of economic theory to keep right on going. It won’t.
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. [See (my title): Is the Fed selling Hyperinflation Insurance Backed Only by Hyperinflation?]
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.
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! [Note: The Dow dropped from 11,000 in 2001 down to 7000 and back up to 12,000 in 2011. Again, FOA wrote this ten years ago in 2001]
The same is true for anything perceived as something real: “even silver” (grin).
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 [which is happening right now in 2011 – see this, this, this, this, this and this], 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. [Paying full price for deflating assets? Oh my, would the Fed ever do that? The deflationists never saw it coming!] 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.
[I must insert here the rest of the famous FOA quote from above. I affectionately call it "the front-lawn dump" and it was coined by FOA a full 18 months before Bernanke's famous "Helicopter drop" speech:
"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"
Okay, now back to the original excerpt…] In the meantime, whether or not our economy is growing, stalling or failing, will have little or no impact on price inflation.
You see, living with real serious price inflation goes something like this:
—- “Honey, I talked to Fred again, he can’t sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that’s not so bad, we had to jump ours up three times before selling.” —-
Inflation runs crazy when a money system is forced to “print out”. We will “print out” our dollar, too. Getting there just takes time and an alternative system to cause it.
Now I do realize that it takes a certain talent to distill deep wisdom from a 10-year-old internet forum post. And I can almost hear some of you out there screaming, “but but but… house prices DID collapse… d… d… DEFLATION!” Wrong. Sorry. Residential real estate will ultimately crash to its non-leveraged cash price as credit disappears, just like the deflationists think. But that ultimate cash price, once reached, may actually be higher than today’s leveraged prices and be outrunning the availability of cash needed to clear the market! And all the while real estate will keep crashing in real terms (gold).
There is always a shortage of cash during a full-bore, in-your-face hyperinflation, which is why the printer has to keep adding zeros. His press simply cannot keep up with prices at established denominations. It is also why the first to touch the new cash (the “elite”) have a very valuable advantage. Hyperinflation is a grand competition for lifestyle retention in the face of forced austerity, just like a race! Here, look at this from the excerpt:
“Honey, I talked to Fred again, he can’t sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that’s not so bad, we had to jump ours up three times before selling.”
I’ll bet the deflationists were thinking in terms of deposit+loan=price, rather than cash. Wrong paradigm. Sorry. When the hyperinflation hits in a reference point purely-symbolic fiat currency paradigm, the market will try to clear for the rising symbolic cash price while the hard currency price (denominated in gold) continues to drop like a stone. Deflationists do have one thing right. Real estate is not a very good investment when preparing for what’s coming. That doesn’t mean home loan debt won’t be hyperinflated away though. It most likely will be. And if you are lucky enough to catch the bottom in the reference point gold paradigm during the crisis, bless you. But it’s still a poor investment choice right now, even at 5% down, compared to putting that same cash into physical gold. More on this in a moment.
The point of sharing this FOA excerpt was that deflationists, like other groups that have established encampments cluttered with old baggage, tend to miss what is actually unfolding. And for that, you might want to start with my post The Debtors and the Savers. Understanding the balance necessary to keep the peace between these two groups is fundamental to understanding the political will behind the inevitability of both Freegold and dollar hyperinflation.
Rick seems to have a number of hang-ups when it comes to both gold and hyperinflation. His biggest is obviously real estate and the modern home mortgage. He simply cannot seem to fathom how a system designed and managed by The Power Elites could ever deliver a “windfall” to overleveraged, underwater homeowners or shady, uncouth gold bugs. And, frankly, if you don’t make the effort to understand what is actually unfolding, there’s a good chance it won’t.
To the deflationist, “a dollar is a dollar” just like it is to ordinary people, bankers, company presidents and bond salesmen in the quote at the top. And even though the dollar has already lost almost 99% of its original gold purchasing power, Rick believes The Power Elite will make sure it stays strong until you have worked off every last dollar you owe. Because someone has to pay! (He’s right about that.) And it’s not going to be “them”. (He’s mostly right about that too.)
The dollar has a long, storied past. To believe “a dollar is a dollar” is to simply ignore its history. Of course I’m not implying that deflationists are unaware of this chart:
But I am saying that they think the collapse of the dollar’s financial system will strengthen the dollar itself and make prices fall in the end. This is a funny notion when you take the totality of the dollar’s journey into consideration.
The dollar was once worth 1.555 grams of gold. Then it was reduced to .888 grams of gold. Today it is able to purchase .02 grams of gold, but only at the margin. Notice that I said “able to purchase” instead of “is worth,” and I also added “at the margin.” That’s because the dollar is not worth .02 grams of gold today. Around 60 years into its 100-year life, not unlike the human retirement age, the dollar retired to become a purely symbolic, completely worthless token. And in the big scheme of things, this “retirement from value” is not such a bad thing. Someone emailed me a question the other day and this was my reply:
I don’t see much wrong with your grasp of the subject, other than those worthless tokens are actually a good thing. What sets us apart from those monkeys is our ability to divide labor in a way that resists the second law of thermodynamics and allows us to organize our environment.
This division of labor requires us to use a medium of exchange in order to avoid the double coincidence of wants.
The question then becomes, what is better as a medium of exchange? Should it be something of value? Or is it more beneficial to the anti-entropic process for it to be something purely symbolic and worthless?
If you answered “something of value” I would ask, Why? Is it because you want to hoard that thing in the case that you produce more than you consume? And what is the net effect on man’s battle against entropy if the circulation of that valuable medium slows due to hoarding? Conversely, with a worthless medium, why not just exchange it for that same valuable thing if, in fact, you do produce more than you consume? Seems simple enough to me.
You see, this is where we are today. We are using, as a medium of exchange, a purely symbolic, completely worthless token. The logical action, then, is to exchange surplus worthless tokens for something of value. Yet still today, most everyone hoards up purely symbolic, completely worthless tokens in the form of the debt of more tokens to be worked off and paid by someone else. In fact, globally, this debt far exceeds the ability for it to ever be paid (worked off by future labor), at least not at today’s dollar purchasing power of .02 grams of gold. And yet it will be paid by someone, just as the deflationists promise! So the question then becomes, how can an impossible debt be paid?
Answer: if it cannot be worked off by future labor, it will be worked off by past labor, the net surplus of which was erroneously stored in debt and dollars. The icing on the cake is that it is also the past labor of “someone else,” if the profits can be capitalized and the losses socialized. Precisely the process we have witnessed over the past three years, for those with eyes to see.
Rick Ackerman’s somewhat-myopic focus is on home mortgages as the lynch pin that will keep this worthless, symbolic token valuable while you toil on the chain-gang working off your debt of worthless tokens. So let’s take a look at the larger picture to gauge the strength of this pin and the stress it must endure.
Total US mortgage debt is a little over $14 trillion. That number includes you and your neighbors. Of that $14 trillion, about $6 trillion sits on the balance sheets of banks and $9 trillion has been packaged and sold to savers like pension funds. Of that $9 trillion held by savers, about $5 trillion is guaranteed by the US government.
So here’s Rick’s lynchpin that’s going to keep all of you indebted homeowners honest: $14 trillion – $5 trillion guaranteed = $9 trillion. And that $9 trillion lynchpin is so powerful because it is held by politically connected and powerful banksters and pension funds, or so they say. Now in a minute I’ll tell you why these two groups would rather have all that debt printed and the cash handed to them than to watch even 20% of you default on your mortgages. But first, let’s step back and take a wider look at what might be exerting shear stress on this supposed lynch pin.
Total worthless token debt in the US, both public and private, is around $55 trillion, four times as big as that backed by physical real estate. If we add in the government’s unfunded liabilities (which definitely apply shear stress to the dollar’s lynch pin), that number comes in around $168 trillion. And that is simply the promises to deliver worthless, purely symbolic tokens, at some time in the foreseeable future, emanating from within the United States. Meanwhile the US produces enough “goods and services” (loosely defined) every year to be purchased by 14 trillion of these purely symbolic tokens at their present level of purchasing power. And with a trade deficit of around $500 billion per year, it appears the US is consuming roughly 103.5% of what it produces every year, in real terms.
So in real terms, that is, in terms of the dollar’s purchasing power as it stands today, it would take, let’s see… $168T/($14T produced – $14.5T consumed)= x years… hmm… somehow it’s going to take us negative 34 years to deliver those promised dollars at today’s purchasing power. Remember I said this debt would be “worked off” in the past, without the use of a time machine I might add? Well here you go—past surplus labor foolishly stored in dollars and dollar financial instruments and their derivatives will be tendered. Of course the deflationists want you to know that we will be forced to reduce our consumption to below our production in order to pay those off. And once again, they are correct, though not in the way they think.
Reducing consumption means reducing your standard of living. Some call it austerity. But with forced austerity also comes the competition to avoid reducing your standard of living. And herein lies the inevitability of US dollar hyperinflation.
You see, those Power Elites that Rick thinks are going to support the dollar and its $169 trillion burden (excluding derivatives) simply to make sure you’ll work off your $9 trillion dollar mortgage at today’s purchasing power are the same ones that will resist personal austerity measures the most. And as all good deflationists know, you simply cannot resist the irresistible without breaking something. And what they will ultimately break in their competition to maintain lifestyle is the value of the dollar, which will actually break quite easily due to the mountainous (think: landslide) shear stress applied to it right now.
Now let’s go back to those “banksters” that, along with the politically powerful pension funds, are part of the Power Elite that are going to keep the dollar strong enough so that your mortgage isn’t hyperinflated away. Remember, this is roughly $6 trillion, or 3.5% of the dollar’s debt problem, that is still sitting on the balance sheet of banks, yet gradually being absorbed and/or guaranteed by the Fed and/or the US government.
This is simple logic: Do you think they’d rather offload that debt onto the Fed’s book in exchange for full cash value? Or would they prefer to hold onto those notes while you struggle to pay them off in symbolic tokens over the next 25 years? How about this: Is it better for the health of the bank to take possession of the houses (and then have to sell them) that roughly 20% of the troubled homeowners are walking away from? A 2009 jingle mail study showed that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. That represents roughly a 10% hit to the asset side of the banks’ balance sheets. Yet the banks’ liabilities (deposits created when the loans were originated) remain, fully insured by the FDIC which has no money.
Through the magic of commercial bank double-entry bookkeeping, the banks’ balance sheets are actually not exposed to decreases in the purchasing power, or present value of purely symbolic, completely worthless token dollars. They are, however, exposed to decreases in the value of their assets and to the risk of default that flows from deflation. Deposits are nominal liabilities that remain when assets deflate. So supporting deflation would be, to a bank, like suffering a masochism fetish.
Rick thinks the banks will defend their assets by keeping the dollar strong. But that only keeps their liabilities that much harder to meet while the effects of deflation tend to shrink their assets making it even harder still. Ignoring the dollar for a moment, and the flaw in Myers’ dictum, what happens to a bank’s balance sheet if all of the loans are defaulted at the same time? Or if the asset value of all of their collateral collapsed at the same time? It would have precisely the same impact. So would a mixture of the two. The banks have and are experiencing precisely this type of squeeze. How has their “guardian angel” the Fed responded so far?
Rick Ackerman’s view of the banks’ incentive or preference to prevent (as if they had that control) hyperinflation is exactly bass ackward. A bank’s balance sheet becomes severely damaged in deflation, yet it is made whole through hyperinflation.
As for the pension funds, they hold this debt not for its value to maturity, but for its appreciation in a falling interest-rate environment and its liquidity in trade. Pension funds get in trouble when they cannot perform nominally. They hold nominal assets and make nominal promises (like 8% returns) which simply cannot be met in a deflation. However, as disastrous as hyperinflation is for pensioners (the funds’ clients), it is a Godsend for the politically-connected pension managers who were being crushed by deflation.
So once again, the incentive or preference of those who hold the note on your mortgage to prevent (as if they had that control) hyperinflation is simply not there. In fact, as I will show in a minute, there will be ample incentive for these politically connected Power Elite Giants to actually encourage the kind of printing that will take an Icelandic-style currency collapse into full-blown Zimbabwe-style wheelbarrow hyperinflation. More on this in a moment.
A small-minded ant’s only interaction with Giants may be getting stepped on or sprayed with deadly poison. So from the ant’s limited perspective, this activity of killing ants is what Giants live for, what motivates them, and what they spend their time scheming and planning for. Don’t limit yourself to the ant’s perspective. If you want to find the tasty morsels left by Giants, you’ve got to start thinking like a Giant. You can read more about ants in my post Life in the Ant Farm.
In his latest of several posts on this subject, Rick Ackerman presented two responses that he found “of particular interest.” The second one is so ldo that I won’t spend much time on it. It is a comment that explains the old truism, “you can’t eat your gold.” That’s right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly.
And with a little understanding of how a monetary collapse actually unfolds, flipping the switch on illusions and revealing reality, you’ll find that the actual crisis itself will be relatively short-lived. My best guess is 6 months maximum—for the worst of it—beginning when the normal distribution of food abruptly stops. So transporting your wealth to the other side should be of great importance to those with significant savings. But if you are one of the ants that cannot distinguish between a monetary collapse and the myriad other problems with our civilization (i.e. you think that when the money collapses everything else goes to permanent sh-t as well—it doesn’t by the way, look at history), then you probably think we’ll be in a Mad Max wasteland for a generation or more after the dollar finally goes the way of the peso.
In that case, you should probably buy yourself a Texas ranch, a lot of guns, and a few friends to help you shoot those gunslike the Circle K Cowboys. The way I see it, the monetary collapse is going to reverse and ultimately correct many of those myriad other problems because reality will be uncovered and freed to exert its more balanced supply and demand dynamic.
But that’s enough on the Texas Rancher’s Thunderdome wasteland. The first of the two responses that Rick found “of particular interest” was an email he received from Charles Hugh Smith, the man “Of Two Minds” who is bothered by the “conviction” (or what he perceives as single-mindedness) of others, particularly hyperinflationists. He said as much in the email:
What bothers me is the widespread conviction that hyperinflation is “guaranteed.”
Smith is truly a man of two minds. He likes to stay uncommitted and agile, to trade against the crowd:
I certainly wouldn’t want to debate anyone because my arguments are those of a trader, basically, not an economist. Maybe we will get hyperinflation, I don’t claim to know… This smells like a one-sided trade to me, even if it is more of a meme than a trade.
I am up on a hill with a wide view of the valley. In this post I am attempting to share the framework in which you, too, can see what I see rolling in. It is a tsunami called currency collapse coming in, following a violent financial and economic earthquake, which in our case will end in probably the most devastating hyperinflation the world has ever seen. And the more people that come to see what I see rolling in; the more people that join me safely on higher ground with a view of the valley below, the more the man of two minds likes his contrarian position in the valley below. Did you see that newish video out of Japan? The one I have in mind?
In order to share my view with you, I am going to patiently work my way through Smith’s email, correcting errors and explaining the flaws in his perspective as I go:
As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation?
I think we can safely define Charles Smith’s “Elites” by his own words as the Financial (Wall Street) Elites, the politically powerful (including politically connected corporations and unions/union pension funds), the “banksters robbing us blind” and “CONgress” along with all the politicians running this country into the ground; basically everyone running the Dollar International Monetary and Financial System (the $IMFS). And he asks how do “they” benefit from hyperinflation? Well, they will benefit, in the same way that those closest to the printer benefit tremendously in all hyperinflations. But more importantly, Smith’s core perspective on “the Elites” is wrong. He makes the same mistake Karl Marx made, which I explained in my post The Debtors and the Savers. [I know, this is the second time I've linked this post. It is intentional. I'll probably do it one more time as well.]
What I described in that post last July is the essential foundation to the framework for understanding why US dollar hyperinflation and Freegold are, simply, unavoidable, or to use Smith’s word, “guaranteed.” I have been accused of overconfidence in my views. But I specifically and actively limit the scope of this blog to only these two topics. I’m certainly not a know-it-all. I only describe the things that can be clearly seen, and how to ascend to that perspective.
Was the Japanese guy shooting that video up on a hill overconfident about his view of the tsunami rolling in while those still down in their houses had a more rational, balanced opinion? Perhaps they were of two minds; on the one hand, there had just been a Richter scale 9 earthquake and they lived in a tsunami warning zone. On the other hand, they were not exactly ocean-front properties and it would have to be a pretty big tsunami to bring the ocean over that levee. Surely they would hear it coming giving them plenty of time to escape. It’s all about perspective. With the proper perspective you can see things more clearly.
In The Debtors and the Savers I wrote:
Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.
And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises. But Karl Marx did, and in this we can find the one, key flaw that sent his analysis off in a disastrous direction.
Marx writes, “The history of all hitherto existing society is the history of class struggle.” He got this part right! What he got wrong was his delineation of the classes.
Marx’s classes were:
1. Labour (the proletariat or workers) – anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.
2. Capital (the bourgeoisie or capitalists) – anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.
Simply put, Marx says it’s the rich versus the poor. According to Marx the rich exploit the poor to get themselves a “labor-free income”, which spawns a class struggle.
This is an attractive perspective because it requires only a cursory, superficial judgment to place someone into one of the two camps, the rich or the poor. If someone is driving a Bentley we immediately know which group they are in, right?
As I said, Marx got one thing right. History does bear out the dramatic story of centuries of class struggle. But if we eliminate his one small flawed premise, we can see it all much more clearly.
The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. “The easy money camp” and “the hard money camp”. History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.
1. Debtors – “The easy money camp” likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.
2. Savers – “The hard money camp” likes to live within their means and save any excess for the future. They prefer hard money (or in some cases “harder” money) because it protects their savings and forces the debtors to work off their debts.
1789, the French Revolution, “the hard money camp” had been in power since 1720 when John Law’s easy money collapsed, and starting in 1789 “the easy money camp” killed “the hard money camp” and took back the power. This is the way “the easy money camp”, the Debtors, usually take power… by revolting against the hard repayment of their spending habits…
Obviously I don’t want to reprint the whole article here, which is why I linked it three times. So please go read it.
But here’s the fatal flaw in this Marxian paradigm; many of we, the modern proletariat, are savers who would prefer hard money like gold to protect our savings. It is we, the savers, that are punished by the current easy money system. That’s why I delineated the groups as the Debtors and the Savers, otherwise known as “the easy money camp” and “the hard money camp.”
And with the proper view of who Smith’s Elite CONspirators really represent—the easy money camp, the debtors, the hungry collective—the answer to his question begins to develop. It is the opposing camp, the savers, that will be most-punished by hyperinflation and it is Smith’s Elite that will profit the most during the race to spend.
If you can start to think of the administrators of the $IMFS, the “banksters”, politicians and Western Capitalists in charge of the system as being firmly entrenched in the Debtor camp, you are well on your way to a very rewarding enlightenment. I realize this is counterintuitive, and counter also to much of the baggage that accumulates while reading other “hard money” writers on the Internet, which is why I spend so much time on it. But once it clicks, you’ll be like, “OMG! WTF was I thinking?” I have conversed via email with many extremely intelligent people that have had this momentous “click”, so I am tempted to consider that I may be on to something.
So call me overconfident if that makes you feel better, but I’m not going to be wishy-washy about what I can see. I’m certainly not of two minds on this.
How will “the Elite” profit from hyperinflation? By being the first to spend the bills with new zeros added and thereby outrunning the rest of us in the race to spend and winning the competition to retain standard of living. Hyperinflation is the end result of the dollar-debt timeline, there is no other way it can end. Only the severity is a variable to be considered.
Rick Ackerman and other deflationists agree with me that the unsustainable, unstable mountain of debt must and will collapse. And they view “the Elite” as the capitalist creditors and the rest of us poor working saps as the proletariat debtors. Therefore they believe that when the debt mountain collapses, their version of “the Elite” will not print Zimbabwe-style because, even though they just took a tremendous haircut on their bonds, they want to be sure that the super-saps among us, the proletariat that are still working, will continue to service the remainder with dollars of today’s purchasing power.
This is a bass-ackward view in my opinion. The hungry collective provides ample political backing and sufficient naiveté for “the [Western] Elite” to print the full face value of their bonds and dump that worthless paper on the public’s front lawn. Furthermore, deflationists like Ackerman as well as practically all mainstream economists provide plenty of cover in the form of plausible deniability that hyperinflation would be the inevitable result.
But the story runs deeper still. The reason I have been putting “the Elite” in quotes or referring to them as “Smith’s Elite” is because, not only does he have the delineation wrong, but he is myopically focused on only one quarter of the bigger picture.
Some of you, I know, like to think in terms of grand conspiratorial conflicts, a “Clash of the Titans” (Clash of the Elites if you will), or something like that. Well I can probably help you with that view in this “Debtors v. Savers” paradigm.
We have the West which is roughly only 25% of the world’s population, and then we have the rest of the world. And oh yes, they have their own “Elite”. You’d probably guess that “the West” represents “the debtors” in this paradigm. But you’d be wrong to assume that the rest of the world is taking “the hard money camp” stance.
It is true, we are at the end of one of the longest-running “easy money camp” regimes. And these things usually swing back to the other side. But history has taught the world that while easy money regimes end in financial collapse, hard money regimes usually end in bloodshed. And it’s usually the blood of the hard money campers that is shed. (See: the French Revolution.)
So the rest of the world has taken a different stance this time. It has been “in the works” for several decades.
Q: **Who does BIS really represent?
A: “old world, gold economy, as viewed thru modern eyes” or “way to move from US$ without war”.
Those are the words of ANOTHER from my post “The Gold Man” (not Goldman) at the BIS. The BIS truly represents “the rest of the world” from a monetary perspective. It is the “trade union” of their Central Banks. All is not as it seems on the surface.
So how do you view an “old world gold economy” through modern eyes? And how do you move there peacefully with the easy money camp? It’s quite simple actually. You let nature take its course, you support that natural course however long it takes (rather than pathologically fighting nature like the dollar system does with its obsessive-compulsive drive to control), and you don’t deprive the easy money camp of their precious fiat. It’s Freegold. It is about allowing meritocracy to rise like a Phoenix from the ashes of the dollar’s inevitable collapse. It’s not about a transfer of wealth. It is about a re-born meritocracy. The transfer of wealth that will take place is what blinds most people from seeing its inevitable approach.
More from Charles Hugh Smith via Rick’s Picks:
As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then [who] owns the $160T in financial wealth?
First of all, it is unclear exactly how much gold there is, but it’s probably over $8T by now, and only about 18% of it is owned by central banks, not anywhere near half. That leaves $6.6T in private hands, at today’s price.
Smith exposes his ant-like perspective in this paragraph when he implies the Giants that own the lion’s share of $160T in financial products should have already crashed the value of those financial products and exploded gold in the stampede from one to the other, if a collapse of the dollar was really on the horizon. On the contrary, you have to think like a Giant to see the best way to move your Giant wealth from one system to the next. True Giants do not panic out like ants, nor like ants imagine that Giants would. True Giants know that if they panicked out, with the weight they carry, they would end up transferring much LESS wealth into the new system.
Viewed from the Giant’s perspective, you can see that most all of that dollar value, that $160T will vanish in a flash. And when that happens, the market for paper promises of gold delivery will also collapse and vanish as physical gold gaps up (in my estimation) 40x. That’s right, $160T vanishes, and $6.6T worth of gold—in private hands—gaps up to $264T.
Oooh. Now I’ll bet I’ve got the deflationists screaming! “You can’t turn $160T into $264T in a flash during a deflationary collapse!” Au contraire, mon frère. What you see is the result of the perspective you choose. Reader “Reven” recently asked this same question, to which I replied:
It is a fallacy to compare a snapshot of gold with a snapshot of “global asset values” because it ignores the time dimension in which gold flows. Even if you are correct about everything in the world (other than gold) being worth [$160T] in 2011 constant dollars, the value of all the gold can be multiples of that amount. It is theoretically unlimited, unlike paper wealth which is self-limiting by its own objective metrics and economic ties. Paper wealth is limited to the upside but unlimited to the downside. Gold is the inverse of paper, unlimited to the upside, limited to the downside. It’s not the total stock of gold that matters, but the flow from those that already hold it.
Here are a few snippets from my post How Can We Possibly Calculate the Future Value of Gold?
1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and
2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.
This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much “stored purchasing power” everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.
And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.
Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough “stock” is reassigned to “flow” to meet demand.
Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more “flow gold” is moved into “stock gold”, not the other way around like commodities and paper.
This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.
So, cutting to the chase once again, the biggest fallacy in your model is using “Total above ground gold” as your point of comparison. It’s not the stock that matters, it’s the flow.
Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude.
Back to Smith. Here’s that same paragraph again. Let’s see if we can answer his questions a little more concisely now that we have a new perspective:
As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then owns the $160T in financial wealth?
Yes, they’ve bought the gold and it’s still priced at around $6.6T, at least that portion that is in private ownership. No, there will be no gold-backed currency because we aren’t going back to “hard money” because “your Elites” wouldn’t like that. No, they won’t lose all their wealth; they will gain wealth. Here are the steps as viewed, not by ants, but by Gi-ants:
Step 1: Buy up as much physical gold as you can over a couple decades without running the price and without panicking out of your paper, while the Western investor is caught up in all manner of paper including paper gold.
Step 2: Wait patiently for the inevitable financial collapse. As Rick Ackerman himself wrote, “financial collapse is not just likely, but inevitable.”
Step 3: When the collapse comes, sell that $XXXT in “financial wealth” to the printer for fresh cash at full face value in the name of “saving the system” and “survival of the country and the Western way of life.”
Step 4: Spend the new cash.
Step 5: Adjust your balance sheet from the old paradigm where it used to read $160T paper/$6.6T gold to the new paradigm where it now reads $0 paper/$264T gold. A net gain of $97.4T.
Read the entire blog post HERE.
By JAMES GRANT
New York Times
Published: November 13, 2010
BY disclosing a plan to conjure $600 billion to support the sagging economy, the Federal Reserve affirmed the interesting fact that dollars can be conjured. In the digital age, you don’t even need a printing press.
This was on Nov. 3. A general uproar ensued, with the dollar exchange rate weakening and the price of gold surging. And when, last Monday, the president of the World Bank suggested, almost diffidently, that there might be a place for gold in today’s international monetary arrangements, you could hear a pin drop.
Let the economists gasp: The classical gold standard, the one that was in place from 1880 to 1914, is what the world needs now. In its utility, economy and elegance, there has never been a monetary system like it.
It was simplicity itself. National currencies were backed by gold. If you didn’t like the currency you could exchange it for shiny coins (money was “sound” if it rang when dropped on a counter). Borders were open and money was footloose. It went where it was treated well. In gold-standard countries, government budgets were mainly balanced. Central banks had the single public function of exchanging gold for paper or paper for gold. The public decided which it wanted.
“You can’t go back,” today’s central bankers are wont to protest, before adding, “And you shouldn’t, anyway.” They seem to forget that we are forever going back (and forth, too), because nothing about money is really new. “Quantitative easing,” a k a money-printing, is as old as the hills. Draftsmen of the United States Constitution, well recalling the overproduction of the Continental paper dollar, defined money as “coin.” “To coin money” and “regulate the value thereof” was a Congressional power they joined in the same constitutional phrase with that of fixing “the standard of weights and measures.” For most of the next 200 years, the dollar was, in fact, defined as a weight of metal. The pure paper era did not begin until 1971.
The Federal Reserve was created in 1913 — by coincidence, the final full year of the original gold standard. (Less functional variants followed in the 1920s and ’40s; no longer could just anybody demand gold for paper, or paper for gold.) At the outset, the Fed was a gold standard central bank. It could not have conjured money even if it had wanted to, as the value of the dollar was fixed under law as one 20.67th of an ounce of gold.
Neither was the Fed concerned with managing the national economy. Fast forward 65 years or so, to the late 1970s, and the Fed would have been unrecognizable to the men who voted it into existence. It was now held responsible for ensuring full employment and stable prices alike.
Today, the Fed’s hundreds of Ph.D.’s conduct research at the frontiers of economic science.“The Two-Period Rational Inattention Model: Accelerations and Analyses” is the title of one of the treatises the monetary scholars have recently produced. “Continuous Time Extraction of a Nonstationary Signal with Illustrations in Continuous Low-pass and Band-pass Filtering” is another. You can’t blame the learned authors for preferring the life they lead to the careers they would have under a true-blue gold standard. Rather than writing monographs for each other, they would be standing behind a counter exchanging paper for gold and vice versa.
If only they gave it some thought, though, the economists — nothing if not smart — would fairly jump at the chance for counter duty. For a convertible currency is a sophisticated, self-contained information system. By choosing to hold it, or instead the gold that stands behind it, the people tell the central bank if it has issued too much money or too little. It’s democracy in money, rather than mandarin rule.
Today, it’s the mandarins at the Federal Reserve who decide what interest rate to impose, and what volume of currency to conjure.
The Bank of England once had an unhappy experience with this method of operation. To fight the Napoleonic wars of the early 19th century, Britain traded in its gold pound for a scrip, and the bank had to decide unilaterally how many pounds to print. Lacking the information encased in the gold standard, it printed too many. A great inflation bubbled.
Later, a parliamentary inquest determined that no institution should again be entrusted with such powers as the suspension of gold convertibility had dumped in the lap of those bank directors. They had meant well enough, the parliamentarians concluded, but even the most minute knowledge of the British economy, “combined with the profound science in all the principles of money and circulation,” would not enable anyone to circulate the exact amount of money needed for “the wants of trade.”
Read the entire article HERE.
James Grant, the editor of Grant’s Interest Rate Observer, is the author of “Money of the Mind.”
By Adrian Douglas
Thursday, September 16, 2010
On September 15 former Federal Reserve Chairman Alan Greenspan made a speech to the Council on Foreign Relations. Some very interesting comments he made with respect to gold in response to a question were reported in an editorial in yesterday’s New York Sun, “Greenspan’s Warning on Gold”:
On this occasion Greenspan, who has been famous for gobbledygook that leaves the audience guessing what he meant, did not mince his words. He said, “Fiat money has no place to go but gold.”
He further commented that “if all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.”
Greenspan was a close friend of the writer Ayn Rand and he reportedly read drafts of her novel “Atlas Shrugged” before it was published and even had a letter published by The New York Times in November 1957 in response to the newspaper’s negative review of the book. In 1966 Greenspan wrote an essay published in Rand’s newsletter “The Objectivist” titled “Gold and Economic Freedom”:
In that essay Greenspan declared:
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
“This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”
When one juxtaposes Greenspan’s views from 1966 with those of 2010, it is clear that he has a good understanding of the central role gold plays in the monetary system and that unbacked fiat currency is intrinsically worthless. So one would have to conclude that between these two reference points, when Greenspan was Federal Reserve Chairman for 19 years, he knew he was part of an elaborate charade to continue the “shabby secret” of the welfare statists.
Read the entire article HERE.