Saturday, June 27, 2009

Open Forum

"These motherfuckers are SMOKIN' green shoots!" LOL

"If you want to protect your wealth, what matters is not what should be, but what WILL be."

Wednesday, June 24, 2009

The Triumvirate of Wealth

Triumvirate n (1584) 3: a group or association of three

There is a battle under way right now. In this battle there are three things to watch.

The Dollar

What is a dollar?

To different people and groups it is different things.

To the average American the dollar is a unit of measure for trade and the denomination of debt owed. To the Chinese the dollar is a mandatory middleman for international trade and a mandatory store of value for the excess wealth China receives from trading with the West. To bankers the dollar is the denominator of contracts holding others in debt to the bank.

There is a particular meme spreading right now that a very large mountain of contracts denominated in US dollars is somehow SUPPORT for the US dollar. As one example, I quote the latest Prudent Squirrel newsletter:
There is no clear alternative to the USD system at present. China, Russia, Brazil, India are taking steps to diversify their foreign exchange, but the amounts involved are a few tens of $billions, and nothing compared to the USD footprint world wide which I previously estimated at $2200 trillion for all USD stocks, bonds, contracts world wide, not to mention that all important commodities are still priced in USD – sort of like the US having its own private world wide ‘comex’ in everything from money markets to commodity markets to you name it.

That's $2.2 Quadrillion in contracts denominated in US dollars! That is not wealth. That is one entity holding a contract that INDENTURES another entity or individual.

The question I want to ask is does this mountain of contracts lend de facto SUPPORT to a continued dollar regime? Or is it the fatal FLAW of the regime?

Chris Laird seems to think that the usage demand of the dollar as a middleman for international trade must somehow be weighed against contracts of debt held by the banks. And if the debt weighs more than the net usage demand, then the dollar must continue on as the reserve currency.

But as I said, the dollar is different things to different people.

And my thesis is that the dollar's Achilles' heel is that it must perform TOO MANY functions. The dollar's fatal flaw is that if any one function fails, they all fail.

Think about the mountain of contracts held by the banks. Compare this mountain to a bag of groceries. If the price of a bag of groceries goes from $20 to $100, the entire mountain of contracts (derivatives) collapses and the banks go bust.

Now think about global usage demand. This is a funny thing. Intuitively you would think that if the price of oil rises it will hurt the dollar. But in fact the opposite happens. As the price of oil climbs, all the world must buy more dollars to get the same amount of oil!

This creates demand for dollars which keeps the dollar strong. But here's the Catch 22. The rising price of oil also raises the price of a bag of groceries. This puts downward pressure on the value of the dollar. All those banks holding contracts denominated in dollars lose value when the price of a bag of groceries goes up.

So the dollar's interconnectedness in the global marketplace combined with its reliance on performing too many functions creates a very unstable environment for survival (of the dollar).

If all of a sudden dollars were not needed to pay for the rising price of oil, there would not be the usage demand to counterbalance the rising price of everything else. And this is why a few tens of billions in usage by the BRIC countries is a DEADLY threat to the $2.2 Quadrillion in derivative contracts.


What is gold? What functions does it perform?

To different people and groups it is different things.

But not for long. Soon it will perform its one and only function, wealth reserve par excellence!

But for now, to those bankers who sit precariously on a mountain of contracts denominated in dollars, gold is a tool used to lie to the people about wealth. There are a couple problems though. Most of the people being lied to have no wealth to preserve. And those that do are starting to see through the lie.

One more thing. In order to lie through gold, they must have a fractional reserve of gold from which to pay physical gold to those that see through the lie. For the last 10 years that gold has been provided by Gordon Brown and the central bankers. But now things have changed. Now the central bankers are net BUYERS of gold.

The lie is coming to an end.

During the last century many things have come and gone. Wars, nations, leaders, parties, ideas, ideals, blood was shed, promises broken, much chaos. But one thing has been steady. The evolution of gold!

First we had a regime of fixed gold prices ($20, $35, $42) and all the while the dollar printing exploded! Then we had the regime of semi-fixed gold prices from 1971 to 2001, and dollar printing exploded even more! Finally we had a decade of "controlled demolition" or controlled gold price inflation, as gold tripled in value at the same time as oil rose SIX times in price and the US dollar printing EXPLODED like never before!

So what is next in the steady evolution of gold? It is free gold pricing and the recognition of its one and only function, wealth reserve par excellence! This is next!

What to watch for? Watch for when gold starts to outrun oil to the upside. So far over the last 10 years gold is up 3 times and oil is up 6 times. When gold outperforms oil it will mean that the process has shifted into high gear.


What about oil?

Do we have an energy crisis on our hands? Did we have an energy crisis in 1973?

How can we possibly know?

Certainly a monetary crisis and an energy crisis are not mutually exclusive. They can happen at the same time. But what we know for sure is that monetary manipulation distorts free market pricing mechanisms, causes massive malinvestment, and masks the reality of whether or not we are facing a true resource crisis.

In just one year we have seen the WILD fluctuation of the price of oil from $147 to $30. At $147 per barrel the producers and anyone holding oil should have been jumping out of their seats to sell, yet we were told there was a shortage. At $30, we were told that demand was low. Buyers should have been jumping out of their seats to buy! So why all the confusion?

Can we really know the true availability of resources while prices are so distorted by currency fluctuations in our fiat system? No, we can only speculate.

No disrespect to my favorite active Peakist! As I have said before, I am agnostic when it comes to this subject. And yes, Hugo, I did read your post.

The End

So how will we know when the end is near? When Helicopter Ben comes under attack for being too tight with the printing press, the end is near. When helicopter drops are not enough to satisfy the beast, the end is near. When the US borrows more in one week than it did in an entire year seven years prior, the end is near. When scorched earth self-preservation tactics, in-your-face theft of public funds, and outright corruption is done in broad daylight without fear of reprisal, the end is near. This is what to watch for. Please let me know in the comment section if and when you happen to see any of these signs. We all need to be on the lookout!


Glossary of Acronyms

$IMFS - The dollar international monetary and financial system (Wall Street and its global reach + the dollar reserve currency + all $-denominated debt globally)
A/FOA - Another and Friend of Another (see archives linked on the blog)
BB - Bullion Bank
BIS - The Bank for International Settlements (Central bank of central banks)
CB - Central Bank
CBGA - Central Bank Gold Agreement (same as WAG)
CFTC - Commodity Futures Trading Commission
COMEX - Commodities Exchange (US)
ECB - European Central Bank
ECBMB - ECB member banks
ECB-MTM - ECB's mark to market concept for gold reserves (freegold, or free floating gold price)
ECU - European Currency Unit (prior to the euro)
EMU - Economic and Monetary Union of Europe
EU - European Union
IMF - International Monetary Fund (part of the $-faction)
LBMA - London Bullion Market Association (UK)
ME - Middle East
MTM - Mark to Market
ROW - The Rest of the World
RPG - Reference Point Gold
SDR - Special Drawing Rights (IMF super sovereign currency)
USG - United States Government
WAG - Washington Agreement on Gold (same as CBGA)

Wednesday, June 17, 2009

Dead End

There is much talk about the future availability of oil. Or shall we say "cheap oil"? Almost everything we enjoy today is a result of the constant flow of oil over the last century. And it follows that all of the PRICES we pay for everything we enjoy today is a result of the CHEAP flow of oil. But is this "CHEAP flow" a natural phenomenon, or a manmade one?

Oil has been the key to the fantastic success of the West over this period of time. Therefore it follows that the true VALUE of oil is immeasurable! We complain when the cost of a gallon of gas rises to nearly $5, but can we possibly know the true VALUE until we have to do without?

The COST of living without oil is perhaps the greatest burden [PUNISHMENT] that can be placed on a modern nation. For this reason, oil is the MOST POLITICAL TANGIBLE.

In the past, nations have paid a VERY HIGH PRICE for oil when manmade conditions prohibited (rather than ENABLED) the "CHEAP flow" of oil. South Africa under sanctions (1985-1991) is one example.

So what is the TRUE PRICE of oil? What is the TRUE VALUE of oil? Is it $3 per gallon of gasoline? Or is it the VERY DEAR PRICE we would pay if it wasn't flowing our way?

What is a responsible government to do? It must look to the future and SECURE the inflow of oil. Why has the US stopped looking for new oil in the ground? Because long ago it SECURED the "CHEAP flow" of oil! A manmade phenomenon! The future "CHEAP flow" of oil can only be secured three ways. 1.) Own the oil in the ground, 2.) amass wealth reserves desired by those who own the oil in the ground, or 3.) fool (trick) OTHERS into paying the VERY HIGH PRICE (in gold) for the "CHEAP flow" of oil to your shores.

Arabia has oil in the ground. It does not have gold in the ground. But it does VALUE the precious metal very highly. It always has. Even BEFORE oil became WEALTH.

The exploding world dependence on the "CHEAP flow" of oil has brought GREAT WEALTH to Arabia. Up until 1971 the ease of trading oil for dollars was accepted because these "casino chips" could be exchanged at the CASHIER WINDOW (the gold window). Then, in 1971 the "CASHIER" was closed for good.

What followed was "the oil crisis of 1973". From Wikipedia:
End of Bretton Woods

On August 15, 1971, the United States pulled out of the Bretton Woods Accord taking the US off the Gold Exchange Standard (whereby only the value of the US dollar had been pegged to the price of gold and all other currencies were pegged to the US dollar), allowing the dollar to "float". Shortly thereafter, Britain followed, floating the pound sterling. The industrialized nations followed suit with their respective currencies. In anticipation of the fluctuation of currencies as they stabilized against each other, the industrialized nations also increased their reserves (printing money) in amounts far greater than ever before. The result was a depreciation of the value of the US dollar, as well as the other currencies of the world. Because oil was priced in dollars, this meant that oil producers were receiving less real income for the same price. The OPEC cartel issued a joint communique stating that forthwith they would price a barrel of oil against gold. This led to the "Oil Shock" of the mid-seventies... Until the Oil Shock, the price remained fairly stable versus other currencies and commodities, but suddenly became extremely volatile thereafter... The substantial price increases of 1973-74 largely caught up their incomes to Bretton Woods levels in terms of other commodities such as gold.

Then, in the early 1980's, the situation was brought back under control. A leveraged system of paper gold forward sales was set up to keep the price of gold (DOWN) under control, so that OTHER people's PHYSICAL gold could be shipped to Arabia at a low DOLLAR price. This would satisfy "the owners of the oil in the ground" and SECURE the "CHEAP flow" of oil to the US who had the SOLE privilege of creating those dollars out of thin air. From Another:
It's more complicated than this but here is a close explanation. In the beginning the CBs didn't sell their own gold. They ( thru third party ) found someone else who had bullion. That "party" sold to a broker who sold forward for a mine or speculator or government ) . In the end the 3rd party had the backing from the broker that he had backing from the CB to supply physical if needed to put out a fire. The CB held a very private note from the broker as insurance and was paid a small fee. This process mobilized free standing bullion outside the government stockpiles. The world currency gold price was kept down as large existing physical stockpiles were replaced by notes of future delivery from the merchant banks ( and anyone else who wanted to play ) .

This whole game was not lost on some very large buyers WHO WANTED GOLD BUT DIDN'T WANT IT'S MOVEMENT TO BE SEEN! Why not move a little closer to the action by offering cash directly to the broker/bank ( to be lent out ) in return for a future gold note that was indirectly backed by the CBs. That "paper gold" was just like gold in the bank. The CBs liked it because no one had to move gold and it took BIG buying power off the market that would have gunned the price! It also worked well as a vehicle to cycle oil wealth for gold as a complete paper deal.

So, in 1983 Barrick Gold was formed...

And once again physical gold was flowing INTO Arabia and "CHEAP" oil was flowing OUT. But SOMEONE was paying the TRUE PRICE for this oil.

Then, probably sometime in the early 1990's, a group of Europeans that had been planning for a single currency in the "Eurozone" with the ECU that began in 1979 (at the height of the dollar crisis) and later became the EMU and the Euro, came to the realization that the path the dollar (and the entire international monetary and financial system) was on was essentially a DEAD END. It was not sustainable! At some point in the future this system, and its MONETARY FOUNDATION, would (MUST) collapse. This was not a plot to collapse the dollar. It was, instead, a RECOGNITION of the inevitable!

So what is a responsible government to do? "It must look to the future and SECURE the inflow of oil." And given the three choices listed above, ONLY ONE COULD WORK! [2.) amass wealth reserves desired by those who own the oil in the ground.]

So the Euro was founded with the requirement that gold reserves MUST be (PHYSICALLY) held and MUST be marked to the (RISING) market price of gold. What the Euro architects recognized was that this new dollar PAPER gold market would (MUST) at some point transition into a purely PHYSICAL gold market. This was a MATHEMATICAL CERTAINTY.

Back to Another from October, 1997 [emphasis mine]:
Everyone knows where we have been. Let's see where we are going!

It was once said that "gold and oil can never flow in the same direction". If the current price of oil doesn't change soon we will no doubt run out of gold.

This line of thinking is very real in the world today but it is never discussed openly. You see oil flow is the key to gold flow. It is the movement of gold in the hidden background that has kept oil at these low prices. Not military might, not a strong US dollar, not political pressure, no it was real [PHYSICAL] gold. In very large amounts. Oil is the only commodity in the world that was large enough for gold to hide in. No one could make the South African / Asian connection when the question was asked, "how could LBMA do so many gold deals and not impact the price". That's because oil is being partially used to pay for gold! ["CHEAP oil to the West" was the HIDDEN part of the price Arabia was paying for large quantities of PHYSICAL gold. HIDDEN --"gold hiding in oil"-- and did not affect the VISIBLE $demand fundamentals because most Westerners were perfectly happy with PAPER gold] We are going to find out that the price of gold, in terms of real money ( oil ) has gone thru the roof over these last few years. People wondered how the physical gold market could be "cornered" when it's currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up.

(Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises.) Westerners should not be too upset with the CBs actions, they are buying you time!

So why has this played out this way? In the real world some people know that gold is real wealth no matter what currency price is put on it. Around the world it is traded in huge volumes that never show up on bank statements, govt. stats., or trading graph paper.

The Western governments needed to keep the price of gold down so it could flow where they needed it to flow. The key to free up gold was simple. The Western public will not hold an asset that's going nowhere, at least in currency terms. (if one can only see value in paper currency terms then one cannot see value at all) The problem for the CBs was that the third world has kept the gold market "bought up" by working thru South Africa! To avoid a spiking oil price the CBs first freed up the public's gold thru the issuance of various types of "paper future gold". As that selling dried up they did the only thing they could, become primary suppliers! And here we are today. [1997] In the early 1990s oil went to $30++ for reasons we all know. What isn't known is that it's price didn't drop that much. You see the trading medium changed. Oil went from $30++ to $19 + X amount of gold! Today it costs $19 + XXX amount of gold! Yes, gold has gone up and oil has stayed the same in most eyes.

Now all govts don't get gold for oil, just a few. That's all it takes. For now! When everyone that has exchanged gold for paper finds out it's real price, in oil terms they will try to get it back. The great scramble that "Big Trader" understood may be very, very close.

Now my friends you know where we are at and with a little thought , where we are going.

The LOW price of gold (1981-2001) was meant to trick YOU into giving up your PHYSICAL gold, so that the CB's didn't have to. But some non-Westerners knew better! They got on the RECEIVING end! Once YOU gave up all your gold, the CB's had to contribute some of their's to this PHYSICAL FLOW. More from Another:
Well a funny thing happened right after the Gulf war ended. What looked like big money before turned out to be little money as some HK people, I'll call them "Big Trader" for short, moved in and started buying all the notes and physical the market offered. The rub was that they only bought low, and lower and cheaper. They never ran the price and they never ran out of money. Seeing this, some people ( middle east ) started to exchange their existing paper gold for the real stuff. [Today, think about Dubai requesting delivery of its gold from London] From that time, early 1997 LBMA was running full speed just to stay in one spot! In other words paper volume had to increase to the physical volume on a worldwide scale, and that was going to be one hell of a jump. It could not be hidden from the news any longer. [ LBMA daily volume leaks out on January 30, 1997 --> 07:05 AM on Monday July 14, 1997 LBMA goes public with daily volume ]

This was not far from the time that "Big Trader" said that "if gold drops below $370 the world would see trading volume like never before seen". The rest is history. Now the CBs will have to sell 1/3 to 1/2 of their gold just to cover what's out there. [Hello Gordon Brown?] To use the Queens English "it ain't gonna happen dude"! [Apparently Gordon Brown didn't get the memo!]

Everything is now upside down and reversed. The more the CBs sell outright the more the price will rise.

It's not a bearish sign anymore. They will now sell to keep the price rising slowly.

So in early 1997 some serious cracks appeared in the dollar castle walls. Ever since that time, the explanations we hear about "official gold action" in the news media is actually the OPPOSITE of what is really happening behind the scenes. What is happening is a FUNDAMENTAL shift in the FLOW of gold as these GIANTS prepare and SECURE their future flow of oil. No more is it gold for oil. Today it is dollars for gold for FUTURE OIL.

Someone once said, "Pricing power is a very limited freedom." So who is pricing the dollar today? Who is pricing oil? Who is pricing gold? Do ongoing pricing changes reflect a CONTROLLED DEMOLITION? If so, why? Who is controlling?

[This blogger suspects that the dollar system of leveraged paper derivatives has ALREADY lost control of pricing PHYSICAL things! (Think about PHYSICAL oil stored in tankers! For profits you must control the PHYSICAL now.) And it (the dollar system) is receiving a HUGE assist from OTHER FACTIONS. (Think about the sale of 1 million ounces of gold to DB by the ECB - this barely avoided a collapse of the paper gold market) This ASSIST is only temporary to enable some last-minute REBALANCING and EVACUATIONS from the dollar den! Once this ASSIST is terminated...]

More questions. Is it really necessary to keep another man [nation] in debt to you, in order to have wealth?

With so little physical gold metal available, HOW DO these true giants get large quantities?

And ever since we have evolved to virtual, digital, purely symbolic monetary units of credit for trade, does it make ANY sense AT ALL to store these things as savings?

In the future, if the US dollar turns out NOT to be what you thought it was, how will you get what you need?

Does the US dollar fulfill the definition of money? Including the "store of value" part?

Watching the gold market today, are we seeing an evolution of supply and demand principles the same as in all commodities? Or are we witnessing a fundamental shift of THOUGHT as the world rebalances PHYSICAL GOLD POSSESSION?

When the revaluation/devaluation happens it will happen fast. Within 30 days. During that time there will be no more REBALANCING. Possession will be OWNERSHIP, and ownership will be LOCKED. There will be no last minute CONVERSION from paper to physical. Paper will be paid with paper, and physical trading will STOP. When it starts again, the entire gold market as we know it today will be a PHYSICAL GOLD MARKET. And the price of gold will be whatever the world sets it at, WITHOUT the leverage of paper futures contracts to hold it down.

When it is all said and done, we will still have paper money for the ease of daily transactions. We may even have fancy purely digital units of credit. But for the "store of value" part of the system, we will have the PHYSICAL GOLD MARKET. The INEVITABLE, MATHEMATICALLY CERTAIN conclusion of the US dollar financial system's RACE down a DEAD-END STREET.


Thursday, June 11, 2009

What if?

I am sure this is one of my crazier posts. This is a complete "what if" scenario. Pure speculation. I am not trying to start an Internet rumor. I am simply observing dots and trying to connect them into a picture that makes logical sense.

ANOTHER told us more than 10 years ago that large quantities of physical gold were changing hands [SECRETLY] at the highest levels at a value of $6,000 per ounce. This was back when gold was trading on the "free market" at less than $300 an ounce. Dot #1.

China recently announced that it had increased its gold reserves by 454 metric tonnes from 600 tonnes to a total of 1,054 tonnes. Dot #2.

Japan is a tried and true member of the dollar faction. But it is also a geographical and racial member of Asia. So if Japan wanted to follow China and make a move away from the dollar for self-preservation purposes it would need to do so surreptitiously. Dot #3.

The WGC and IMF report that Japan has 765.2 metric tonnes of gold reserves amounting to only 2.2% of its forex reserves. This is less gold as a percentage of reserves than Latvia has! Dot #4.

Two Japanese nationals are arrested in Italy trying to "smuggle" into Switzerland $134.5 BILLION in US Bearer Bonds! Link. Dot #5.

So let's do the math. If super large quantities of physical gold were moving around at $6,000 an ounce ten years ago, what would be happening now? My guess is $10K per ounce. So how many ounces could you get for $134.5 bn? You would get 13.45 million ounces. In tonnes, that is 418 metric tonnes. Add that to Japan's 765 tonnes, and Japan would have a total of 1,183 tonnes, regaining its lead over China by 129 tonnes. Japan's lead over China was 165.2 tonnes before China's recent announcement.

Please let me know what you think about this crazy theory. The way the math worked out surprised the heck out of me. The math is what made this worth posting!


Wednesday, June 10, 2009

Open Forum

"Two Fort Knoxes"?

Fiat Money In Death Throes
By Antal E. Fekete

Sunday, June 7, 2009

The Bermuda Triangle of Currency

Question: How long do they disappear in the Bermuda Triangle? How do they describe the experience?
By candylove Asked Jun 15 2008 3:50PM

Answer 1: By Suzycue
They don't describe it because they are never found again!

Answer 2: By Annon
They go forever. They don't describe it.

I watched a docco though. It said, one of the reasons that planes keep going down in that area is that it is a highly active storm region. You seen the movie, 'The Perfect Storm'? It's a bit like that - different drafts and different temperatures of air bashing around in that particular area, all meeting there for some unknown reason, creating some wicked storms.

But you know, they don't know, because people just disappear when they go there.

Poker and the Stock Market

In some card rooms where people play poker, there are employees called Prop Players. The name is short for Proposition Player, also known as a House Player, a Stake Player or a Shill.
Card rooms sometimes employ house players in order to ensure that there are enough players to start and maintain games or to gain an additional source of revenue from the player's winnings. Many gaming jurisdictions have rules governing whether or not house players are permitted, whether or not they are required to identify themselves, and the purposes for which they may be used. Player attitudes toward house players vary based on the type of house player in use. The use of easily identifiable proposition players is generally accepted on the one hand, while on the other hand the use of shills generates distrust.

In the poker world, these prop players play with their own money. They can win or lose hundreds or thousands in a single day. But normally, they are paid a salary for staying at the table when the paying customers start to thin out.

The main reason card rooms use prop players is to lure in real players with the illusion of a bustling and vibrant game. In the stock market, the prop players are the large market makers that receive rebate money in exchange for "providing liquidity". Keeping the market liquid means that any real participant will always be able to buy or sell, even if the price is not ideal. It gives the illusion of a bustling and vibrant marketplace.

Now imagine a card room where the majority of the people at the tables are shills. Imagine that they are not only being paid to play, but they are actually allowed to play with the casino's unlimited chips, not their own money, yet they get to keep the profits they make. Going even deeper, imagine that the casino allows them to cheat in various ways to maximize profits.

You would not want to play in this card room if you knew what was going on, right? Over time, the entire card room would become a festering snake pit of shills just waiting for an unsuspecting victim to walk through the door. What kind of a game would this be? Would you call this a scam? A swindle? A trap? A fraud? How about a racket?

The difference between Real Money and Play Money

When you first sit down at a table, you must exchange your dollars for plastic chips. This exchange of "real money" for play money is made possible by the faith of the players that at the end of the game they will be able to turn in the plastic chips at the same exchange rate. And also because of the expectation that, with a little luck and skill, the players will be able to gain some chips prior to cashing out.

In the real world, this same exact faith-based system is used to entice people to exchange real, valuable goods for paper notes. The expectation is that later, someone else will take those paper notes from you and give real, valuable goods in exchange. And while you are holding the mere paper, the real world "casino" offers you many games in which, with a little luck and skill, you MAY be able to gain some more paper notes before cashing out.

The big difference between the real world and the casino is that the casino still operates a "Cashier Window" or a "cage". In the real world they permanently closed the "Cashier Window" back in 1971. So today, in "the big game", you can only cash out your chips as long as fresh new players are coming through the door.

So now, imagine that you were lured into playing poker in that festering snake pit of shills. After a few hours of losing, you start to realize where you are. You go to cash out your remaining plastic chips and you are told that the Cashier is closed. You glance at the doors and realize that you haven't seen a new player come in for hours. Without showing your panic, you must now formulate an exit strategy. You must identify the few remaining "real" players and try to sell them your chips. As your panic grows, you may even be willing to take less than full face value for your plastic chips. What a nightmare, huh? Now you know how China feels.

Credit doesn't even matter, Neither does M2 or even M1 really

We all know that prices have collapsed. Since early 2007, the average house price has collapsed about 32% (Case-Shiller). In 2008 through late November, the S&P 500 collapsed 49%. Over the past two years, a "balanced" 401K has collapsed in value about 35%. But does this mean we have "deflation" as so many deflationists have been proclaiming? No, it does not. As Adam Hamilton explains in Big Inflation Coming 2, you must look at the cause of the falling prices:
Deflation is purely a monetary phenomenon. If prices of anything are falling simply for their own intrinsic supply-and-demand reasons, and not as a consequence of monetary contraction, then it is not deflation. In reality, the money supply was skyrocketing in the panic.

To get around this small problem, the deflationists tell us that "the money supply" is different today. They tell us that the money supply includes credit, and since credit has collapsed, so has the modern money supply, ergo, DEFLATION. But as Adam Hamilton explains, credit is simply access to someone else's money!
Only a central bank can directly affect the base money supply. Yes, commercial banks can expand credit through fractional-reserve banking, but credit is not money. Credit is just access to someone else's money. If I offered you a $100k check as a gift, you'd be pretty excited. If I offered you this same $100k as a loan, you wouldn't be. Money and credit are very different beasts, so don't make the mistake of assuming credit contraction automatically means general deflation.

To get around this small problem, the deflationists expand their definition of "the money supply" to include "broad money", which really means "assets" or "derivatives of money" that people generally believe to be "as good as cash". These are the assets where people "park their money". But the money doesn't stay parked. It gets loaned out or reinvested by the banks. And the people that hold these assets hold only a paper promise of the later return of their paper money notes.

To give you a few examples, M3 used to include "large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets." [Wikipedia]
M2 includes smaller CD's, savings accounts and money market accounts. "M2 represents... 'close substitutes' for money." [Wikipedia]

Even M1, which is generally considered "narrow money", is still not money. It includes checking accounts, debit accounts and traveler's checks. While these types of accounts "spend" like money, they are still one step away. They are still a derivative of money because the banks do not hold all the money you think you have in your checking account in a segregated account waiting for you to spend it. They only hold a small portion of it. The rest they loan out or reinvest. So when you empty your checking account in the process of a large purchase, the bank must demand cash from somewhere else in order to pay for your purchase.

This demand for real cash actually affects the supply and demand curve of money itself. If everyone tried to empty their checking accounts at the same time this would create a HUGE demand for real cash, whether or not it is digital credits or physical paper FRN's. This is called a run on the banks. In the 30's, this happened when people took out physical cash to stuff in their mattresses. Today it could also happen if everyone maxed out their debit cards at the same time, spending the money into the market place.

In either case, this massive demand for real cash (whether it be digital or physical) exiting the banking system will create an upward spike in the value of the dollar. As long as you are simply "hoarding" your money in a checking account, you are not affecting the supply and demand of money. You are not affecting "inflation" or "deflation". In fact, you are not holding money. You are holding the promise of "real cash".

This "real cash" is best described as M0, or the Monetary Base. M0 is "currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply. The monetary base is sometimes called M0, but this denomination seems to imply that M0 is part of M1, which is not the case."

The important point here is the part of the Monetary Base that is not included in the M1, M2 or M3 measurements, namely "real cash" reserves (whether digital or physical). These are the reserves from which the banks can pay your vendor when you empty your checking account. And these reserves RELIEVE the upward pressure on the value of the dollar that a modern "bank run" would cause. In other words, they RELIEVE the risk of true deflation, even amidst a wide world of misunderstanding. In fact, they not only relieve one risk, but they become potential energy poised to create the OPPOSITE effect.

So, let us take a look at what the heck is going on with the Monetary Base. For this, we return to Adam Hamilton of Zeal LLC:
M0 growth was trending lower in 2008... But then the stock panic erupted and the Fed panicked, getting swept away in the fear. Bernanke decided to inflate far faster than has ever been witnessed in the Fed’s entire history since 1913.

In October, the scariest month of the panic when the S&P 500 plummeted 27% in less than 4 weeks, the Fed suddenly expanded the monetary base by $224b. This was a 25% surge in a single month, just insane. And it led M0 to rocket to its highest YoY growth rate ever by far, up 36.7%! But the Fed was just getting started in its unprecedented inflationary campaign.

In November it grew M0 by another 27% over the prior month, yielding 73.0% YoY growth. In December it again grew M0 by 15% MoM leading to a mind-boggling 98.9% YoY gain. In 4 short months, the Fed had literally doubled the US monetary base! Something like this has never even come close to happening before, so we are deep into uncharted inflation territory here.

Click on image to enlarge

By late December this information slowly started to leak out and contrarians who have studied monetary history were appalled. Was the Fed mad? Bernanke responded to these growing criticisms in Congressional testimonies, promising that the Fed would remove its “accommodation” (a euphemism for inflation) as soon as possible. Even though the Fed has never shrunk the money supply noticeably, Wall Street curiously took Bernanke at his word.

So every month since the panic ended in mid-December, when the VXO fear gauge fell back out of panic territory, I've been watching M0. In 3 of the 4 months since (May data isn't out yet), the Fed has actually grown M0 further! In January, February, March, and April, the absolute annual M0 growth rates weighed in at 106.0%, 88.5%, 97.9%, and 111.0%! And in April alone M0 surged to a new all-time record high. And by late April the stock markets had already rallied 29%, yet the Fed was still rapidly growing M0.

Friends, this data is flabbergasting!

Friends, this is the perfect setup for hyperinflation, which is similar to "deflation" in that it happens during the WORST economic conditions, similar to "inflation" in name only, and in all practical ways, the same thing as "currency collapse".

Inflation/Deflation is the wrong focus, Currency Stability/Collapse is what we should be watching

Please don't take my illustrations the wrong way. I do not expect that my Thoughts will ever make it into an Econ 101 textbook. I am simply making some broad points for you to think about.

As Albert Einstein said, "everything should be made as simple as possible, but no simpler."

This is part of my problem with the common understanding of economics; it is far, far, far more complex than anyone realizes. And it is far too complex for our simplistic understanding of "inflation" and "deflation". In fact, the discussion of these topics, "the debate", is so horribly flawed by simplicity and misunderstanding that it is simply worthless and pointless.

I find myself to be a "hyperinflationist", yet I agree with the "deflationists" on economic grounds, and with "inflationists" on monetary grounds, and I agree with the "Austrians" that most of the world completely ignores human psychological factors to the point of global catastrophe.

So this is my attempt to shape my own Thought process on our developing situation. Perhaps some of you can help!

Simple minds (and I'm sure you know a few) look at the average price of everything to determine inflation or deflation.

If prices are moving up, we are in "inflation". If they are moving down, it's "deflation". For the most part, this includes the MSM.

There is just one simple dot (prices) that exerts pressure on this ephemeral thing we call 'flation. What could be simpler?

Moving along, we have government minds. They see this same dot exerting pressure in one direction or the other, but they try to control what it is saying to the world by carefully defining a basket of goodies.

When the government's "basket" is getting more expensive, we have inflation. Of course, being the government, they also have "the power of substitution"! So if steaks are getting too expensive, they will substitute ground beef. Or if gas and food is too volatile in price, they will just ignore gas and food. Or if personal computers are remaining stable in price, but the processor speed is growing, they will say that the price of "processor speed" is falling.

Suffice it to say that government minds are a "basket" case when it comes to inflation and deflation.

Also in the one-dot category we have some purist Austrian minds.

I mean no disrespect to the Austrians. Like Richard Maybury, I use the Austrian model. But to many unsophisticated modern followers of the Austrian school of economics, inflation and deflation is simply a one dimensional function of the money supply. Money supply up, inflation. Money supply down, deflation. This view ignores many important variables, like economic growth and contraction relative to the money supply (to name one).

At least the modern Austrians apply a firm definition, which you can't say for the simple minds or the government minds. But by sticking to such a strict definition and model for inflation, in my opinion, you make "inflation" itself irrelevant to the current situation. (More on this in a moment.)

As we get a little more sophisticated, we come to Keynesian minds. These highly educated (read: programmed) minds see two dimensions where simple minds and government minds see only one. The two dimensions are the supply and demand forces of both money and goods.

In this linear model, each dot can exert up or down pressure on the other. You could have money supply growth and a stable supply of goods and you will get demand pull inflation. The demand for goods from the high money supply pulls upward on the price of a limited supply of goods.

Or if you have a shrinking supply of goods in an economic contraction paired with a stable money supply, you will get cost push inflation. Here the cost of a smaller basket of goods pushes up the price relative to a fixed quantity of money.

Of course you can have varying levels of up and down pressure exerted from each side onto the other, causing varying levels of inflation or deflation. The first derivative of this supply and demand pressure is the velocity of price movements. The second derivative is what the Keynesians watch closely. This is the acceleration or deceleration of inflation. This measurement can give you readings like "disinflation", or a slowing of the rate of inflation.

After taking these measurements, the Keynesians adjust the valves, meaning they print money at a slightly different rate. You see the Keynesians believe they can control the economy with one tool, the speed control of the printing press. It is kind of like trying to build a house with only a hammer.

Personally, I believe that this thing we pay so much attention to, this thing we call "inflation", is vastly more complex than any of the models even recognize. I believe it is unimaginably complex like Richard Maybury's ecology of biological organisms (PEOPLE).

But in an effort to follow Einstein's advice, here is my diagram:

While I believe that money and goods exert supply and demand pressure on each other, I believe that the much more important variable is the psychological state of the humans through which the money and goods pass. Human psychology provides the actual demand. Money and goods provide the supply. Human psychology provides the analysis of the supply and, in certain circumstances, fear drives the action.

But because I must compete with a few different (fairly well defined) definitions of inflation and deflation, I will make the bold statement that inflation and deflation are not what we should be worried about in our current situation. Instead, we should be watching to see if our currency is stable (behaving normally) or collapsing (behaving like all fiat currencies eventually do). In other words, is our currency simply having a mid-life crisis, or is it 96 years old and dying?

I think that right now we are in the midst of the Perfect Storm for a currency like the dollar, a purely symbolic fiat currency that has spread itself over the entire globe.

Look at the above diagram. The monetary base has literally exploded parabolically. The economy is contracting which is applying at best, second derivative downward pressure on the supply of goods, and at worst downright shortages are already in the pipeline. Meanwhile the state of global human psychology is very dollar-negative. The demand for necessary goods is high and growing. The fear of inflation is starting to come back. And only God knows how long it will be before the fear of starvation starts to spread.

I know many people who are stocking up on durable food-goods. So these Thoughts are circulating. The trend is established. The second derivative is showing acceleration and we are no where near reversal.

So forget about inflation versus deflation. Think instead about currency stability versus collapse.
Julian Robertson Bets the Farm on Inflation

Simply put, Julian Robertson is the definition of a hedge fund legend. And, his success is noted by the fortune he has amassed as he now graces the Forbes' billionaire list. He has pioneered a successful investment methodology, he has generated outstanding returns at his famous hedge fund Tiger Management, and his influence has sprouted some of the most successful modern day hedge funds in the form of the 'Tiger Cubs.' And, most importantly, he predicted the financial crisis two and a half years ago in an interview with Value Investor Insight. When he talks, you listen...

Julian Robertson is "betting the farm" on inflation. Billions!! Yet he avoids gold, saying, "I've never been particularly comfortable with gold as an investment. Once it's discovered none of it is used up, to the point where they take it out of cadavers' mouths. It's less a supply/demand situation and more a psychological one - better a psychiatrist to invest in gold than me." Adding, "Zinc would also seem to me to be a very good inflation hedge."

The point is that this exemplifies the danger of being right when you are watching the wrong thing. Jim Sinclair is exactly right...
[Julian] Robertson is right, so we are right, as the [interest] rates he looks for come compliments of a currency event that delivers hyperinflation. He just has to be sure the other side or sides of his OTC derivative puts up margin on a daily basis or he could be 100% right and not get paid one penny.

If you are cruising through this crisis with your wealth stored in financial products that derive their value from someone else's promise, or if you are "going to cash" as the deflationists recommend, then you might as well be flying through the Bermuda Triangle in a rickety old airplane, low on fuel, during the perfect storm. And actually, that is a poor analogy, because the dollar faces more dangers than that airplane.

This IS the perfect storm for the dollar. The trend is established. The second derivative is showing acceleration and we are no where near reversal. The Fed is still expanding the monetary base. This man is your pilot. He has mastered (Keynesian) ground school, but he has never flown through a storm like this. But don't worry, he has "theories" on how to make it through.

So do I.


Wednesday, June 3, 2009

Like an Arab Sheikh

A handout picture made available on October 26, 2008 from the media office of Sheikh Mohammad bin Rashed al-Maktoum shows Sheikh Mohammad bin Rashid al-Maktoum, Vice President, Prime Minister and Defense Minister of the United Arab Emirates and Ruler of Dubai, walking through an aisle of the second Emirates Airline A380 superjumbo at Dubai international airport. The rich Gulf Emirate received the second A380 on October 24, 2008. Emirates, which is owned by the government of Dubai, is the largest customer of the A380. It has 58 on order in a deal worth about 18.8 billion dollars based on list prices. (AFP/Getty Images)

Blogger Finem Respice speculates on The Next Bubble.

Whatever it is, he says it is already here, and ready to pop.

He points out that many are speculating it is oil or energy or gold or high-beta stocks or even Treasuries.

He then states his belief that federal government is the next bubble to pop (state governments are already popping).

I will take his prediction one step further. I will take it global and say that the socialist promise of heaven on earth is the next bubble to pop.

In this prediction, I believe I have the agreement of Martin Armstrong, Anonymous, and even Another.

Anonymous asks and answers his own question:
What was the motivation behind freegold !?

Politics,...I mean the (colluding) debt driven political economy,...lives on one single dynamic : We promise the sheeple heaven on earth, and...let themselves pay for it, dearly !

"The promise" is already popping as well as the ability of the sheeple to pay.

The new political class, meanwhile, is acting like children in a candy store, oblivious to deafening "POP".

In just the past week we have watched President Obama jet around the country like an Arab sheikh backed by oil wealth. Obama flies his 747 across the country to party with Harry Reid in Las Vegas. The cost of the trip is estimated at over half a million dollars. Then on to New York City to catch a Broadway show.

Obama has managed to spend more "money" in his first 100 days than all other presidents COMBINED.
(Wall Street Journal | Opinion) Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined.

But who... or what is going to pay for this IN-YOUR-FACE profligacy? The rich? More taxes? China? Future generations?

No, no, no and no!

The answer is EVERYONE will pay. At least everyone who has any dollars, dollar-denominated financial assets, or anyone relying on fixed payments from a pension or even Social Security. They will ALL pay dearly for Obama to globetrot and party down like an Arab sheikh. And they will pay for both parties', virtually everyone in Washington DC's, misunderstanding of economics and money.

Neither side gets it.

We don't determine the value of the dollar.

The dollar right now has two problems.

First it must worry about usage demand. This is the day to day operational demand of the global economy. This demand is fading.

Second, it must worry about financial product demand. This is the demand from savings, storage of value, wealth preservation.

The financial product demand is severely impaired. Dollar-based assets of all kinds can no longer be trusted to retain value. Even Treasuries are extremely risky. When interest rates rise, liquidation value of Treasuries falls, trapping the buyer in the investment, forcing him to ride it out and hope that inflation doesn't eat away his value. And in an environment of rising interest rates, the purchase of bonds is an immediate loser, like buying a new car and driving it off the lot.

So from a supply and demand perspective, just when the supply of fresh dollars and fresh dollar-assets-for-sale (Treasuries) is peaking, demand is plummeting.

Even Master of the Bond Universe (MOBU) Bill Gross is saying run, don't walk...
June 3 (Bloomberg) -- Bill Gross, founder of Pacific Investment Management Co., advised holders of U.S. dollars to diversify before central banks and sovereign wealth funds ultimately do the same amid concern about surging deficits.

The only solution to this deadly conundrum is a massive devaluation of the dollar. Does it really matter WHO devalues the dollar? No, of course not. But as I wrote in The Judgement of Value:
The central banks, the printers of money, the governments, the treasuries, the powers-that-be have no say in the value of a dollar. That judgement of value is reserved for the recipient of those freshly printed dollars.

Even those of us that hold dollars, that hoard them in our mattresses or bank accounts, have no say in the value of those dollars. The people that we offer those dollars to have the power to judge their worth, and to decide how much time, labor or real goods they are willing to part with for a piece of paper.

So when Timmy Geithner tells the Chinese that we still believe in a strong dollar, he is only blowing hot, stinky air into the face of the judge himself.

It is the PRODUCERS of the world that have the power to judge the value of our dollars. The fate of the dollar is in their hands. Our political leaders believe they can control the value of the dollar through various means. They also believe they can control the global stock and bond markets. This disturbing fact is becoming more and more evident as each day passes.

But what is clear to anyone with half a brain is that today's status quo is not sustainable in ANY way. Something's gotta give. The bubble WILL POP! It has already begun.

"So," you ask, "if we are all going to pay dearly for Obama's jetsetting ways and Congress' profligate spending, what will we receive in return?"

The answer is nothing but pain. These final death throes of the socialists' promise of heaven on earth are only the final TWISTING of a knife that was thrust long ago. You will pay dearly in the near future for everything you received in the last thirty-odd years. The bill has now come due. There will be no present-day reward for the complete surrender of your treasure.

There is, however, one small loophole in this tax of doom. There is a very small window of opportunity and only limited seating for the show. "Freegold" is the name of the show, and it is not playing on Broadway. So I doubt the Obamas caught it.