Gold Surges After Japan Says It Is Considering New QE And Geithner Guarantees Currency Wars

Tyler Durden's picture

A quick look at gold price action demonstrates that someone somewhere is actively debasing currencies. An even quicker scan of headlines confirms this to be the case: per Reuters "Bank of Japan Governor Masaaki Shirakawa said on Wednesday the central bank will consider expanding a new scheme for buying assets ranging from government bonds to exchange-traded funds when deemed necessary." Harakiri Shirakawa continued: "We have taken a very bold measure ... If the need arises in the future, making further use of the new fund as part of monetary policy is one of our strongest policy options." Judging by the chart below, either gold has a tent in its pocket or was really happy to hear this announcement.

And just to confirm that the world is going to hell in a depreciating handbasket, Geithner essentially has guaranteed that a currency war is imminent. Also from Reuters:

U.S. Treasury Secretary Timothy Geithner said on Tuesday he sees "no risk" of a global currency war and wants to maximize incentives for China to allow its yuan to rise in value.

He told the Charlie Rose Show in an interview that China would work against its basic development objectives if it kept its currency undervalued.

"I'm very confident over time that this is going to happen," he said of Chinese currency appreciation. "We just want to make sure it's happening at a gradual but still significant rate."

Mm hmm. And for a vivid demonstration of Geithner's top-ticking predictive capacity, we bring you: "Welcome to the Recovery", the SecTres' August 2 OpEd, which appeared days before the massive July NFP miss set off America on its trajectory with fate and QE2.  In other words, stock up on that Costco year-long ration. It will be a long, devalued winter.

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Perseid.Rocks's picture

When the movement into gold+commodities commences, the collapse of paper assets is going to be epic.

El Hosel's picture

"When the movement into gold+commodities commences, the collapse of paper assets is going to be epic"

   The movement started just after the internet bubble, gold was around $300 an ounce and oil $25 a barrel.... Just saying

  The collapse in paper assets has been swept uner the rug for now, the rug ain't big enough.

SheepDog-One's picture

Theyve swept so much under the rug that it looks like an elephant under a postage stamp.

minus dog's picture

Yet the elephant is still under it, for the little people living on the stamp.

H. Perowne's picture

As Trace Mayer says, "the system does not collapse but rather evaporates".

I'm pulling for 1370 by All Hallows Eve.

Mako's picture

The system will collapse and foldup, and then liquidation of the non-performing liabilities will have to occur.  

The amount of liquidation needed to form a solid base from which the lemmings can once again start their march to doom will be historically large.  You have had basically 7 decades of growth, unless you use nukes or something on that scale, you can expect anywhere from 35-70 years of collapse and liquidation.  Of course, Japan has been fighting the collapse for 20 years, they could very well be in this phase for much longer.

All I see is a bunch of unfunded liabilities running around... eventually unfunded lemmings are going to run out of time. 

 

trav7777's picture

there were 7 decades of growth prior to the last Great Wars.

What was the "liquidation"?  Like 1%?

Cut the Chicken Little shit.

Mako's picture

You basically had the great depression before the last great depression which was in the 1872-1892 range, basically the world was in and out of depression then, of course the depressions are getting bigger now as the system gets bigger.  Most of the growth was actually from 1922-1929.   Before the 1872 depression was the 1807 depression. 

Liquidation of the nonperforming liabilities was north of 80-110 million.  Worldwide population was around 2.3 billion.   Somewhere around 4-5% were liquidated, of course the system is magnitudes larger.

No way you feed even close to 7 billion without a functioning credit system.  A billion is going to have to go right away just through starvation and eventually the lemmings will be hacking at one another.  Not only will the raw number go up this time, but the percentages will have to go up as well. 

My guess 1-2 billion with have to go within a decade as soon as the liquidation phase starts,  I would say to have a solid base the number might have to be north of 3 billion.  I don't see how you establish a base with only a few million gone.  You chop down all the trees in the forest, it takes a while for all the trees to growth back.

22-25 million were liquidated in the Soviet Union alone.  Of course, humans are much more efficient than they were then. 

"The Architect - Denial is the most predictable of all human responses. But, rest assured, this will be the sixth time we have destroyed it, and we have become exceedingly efficient at it."

malek's picture

Remember the Club Of Rome "experts" in 1972, dividing countries into "very difficult" and "cannot be saved" categories regarding starvation within a decade from then?

You sound as ridiculous now.

minus dog's picture

Yes, but is an economic Norman Borlaug going to come out of the woodwork and magically unfuck everything for us this time?  In the recorded history of mankind I'm not aware of anyone doing anything remotely like that...  it's not the sort of thing to make you rich, powerful, or popular, so why would there be?

Would even something like a sudden success in cheap fusion save us?

malek's picture

If your main concern is energy, looks like recently improved natural gas extraction can cover us a few decades more.
Take a look at the price chart of the last 24 months.

Weimar Ben Bernanke's picture

Well just like you said Tyler. Its on like Donkey Kong.

wafflehead's picture

i was wondering what was causing the shiney to get all worked up

Mitchman's picture

Also posted on another thread:


Disappearing Stores Of Value

  • http://www.prudentbear.com/templates/NewPrudentBear/images/border-666.gi...); background-attachment: initial; background-origin: initial; background-clip: initial; background-color: initial; display: inline; color: #666666; background-position: 100% 50%; background-repeat: no-repeat no-repeat; margin: 0px; border: 0px initial initial;">by Martin Hutchinson
  •  

  • October 12, 2010

Brazilian minister of finance Guido Mantega last week accused the major economies of starting “currency wars.” To a large extent he was trying to divert attention from his own overspending misdeeds. However this week’s decision by the Bank of Japan to enter more “quantitative easing” and Chinese premier Wen Jiabao’s aggressive response to the EU/US campaign to force up the renminbi suggest that he’s right. Such a currency war will produce two problems. It will reproduce one of the more damaging features of the 1930s’ global depression. Even more important, it will leave the thrifty without an adequate source of value.
 
Competitive currency devaluation has traditionally been thought by economic historians to have been a major cause of the 1930s’ exceptional unpleasantness, yet another major policy error. Actually most of the policies involved were relatively forgivable compared with the rest of that decade’s appalling blunders. In 1925 the British had returned to gold at an overvalued parity, having in 1923 bottled out of introducing a modest Imperial Preference tariff, which would have removed Britain’s long-standing but in post-war circumstances economically suicidal unilateral free trade policy. After this, transatlantic payments balances were structurally out of kilter. Germany’s balance of payments was also destabilized by reparations payments, so its economy was only kept afloat by U.S. loans. Meanwhile France, seeing Britain’s mistake, returned to gold in 1928 at an undervalued parity. 
 
Then after U.S. banks started going bust in late 1930, the Fed kept money too tight, sucking gold across the Atlantic and putting an intolerable strain on the British balance of payments and the German banking system. Britain solved its problem in 1931 by going off the Gold Standard, devaluing by about 25% and sorting its economy out by anti-Keynesian means. Germany failed to solve its problem, after which its electorate chose Nazism over the apparently failed free market. In the U.S. the incoming Roosevelt administration worsened the world’s imbalance problem by devaluing the dollar against gold, invalidating existing property rights by banning Gold Clauses, and refusing to participate usefully in the 1933 London Conference, called to sort out the mess. Finally in 1936 France, whose currency had now become overvalued, went off the Gold Standard and devalued.
 
Most of the “beggar thy neighbor” currency devaluations of the 1930s were thus reasonable reactions to difficult circumstances; only FDR and the German electorate took actions motivated by primitive nationalism. Thus the chances of a repeat performance of this unpleasant farce, which proved hugely damaging to the nascent 1930s economic recovery, seem pretty high – one need not suspect more than normal malice on the part of any of the actors concerned.
 
The nexus of the current problem is China. Between 2005 and 2008 China played a constructive role in world economic arrangements, revaluing its currency by about 20% against the dollar and thereby shrinking its balance of payments surplus. Then at the end of 2008, the Chinese government (one of very few which could properly afford it) undertook a massive “fiscal stimulus” program. This was corruptly managed as always but on the whole sensibly directed towards infrastructure, including the Wuhan-Guangzhou rail line, begun only in 2005 and completed in December 2009, on which trains cover 601 miles in only 3 hours. China’s rapid growth in 2009 brought down its balance of payments surplus, indeed the balance swung briefly into deficit in April 2010. However as U.S. consumer and government spending, artificially stimulated by an excessive budget deficit and over-expansionary monetary policy, sucked in Chinese imports once more, the U.S. payments deficit with China widened again.
 
The case for a massive revaluation of the renminbi is thus a weak one. Premier Wen is further justified in resisting it because China’s rapid growth has brought an explosion of wage rises of 20% or in some cases even 60%. Thus, while the Chinese consumer market is an engine of growth, domestic costs are rising rapidly and its exporters are being horribly squeezed. Wen is happy to reorient Chinese growth towards the domestic market, but naturally doesn’t want his major export industries to go belly-up. He thus wants only a gentle upward path for the renminbi, avoiding extra strain on exporters.
 
China is therefore justified in resisting U.S. and EU demands on the currency front, however obnoxious its foreign policy may be in other respects. The United States and Japan have through exceptionally foolish fiscal and monetary policies tilted their economies into major imbalance, and it’s not clear why this should be regarded as China’s problem. Nevertheless, the rational U.S./Japanese responses, to raise interest rates and slash budget deficits, are unlikely to be forthcoming in the short term. Instead both countries seem determined to pursue the dangerous and counterproductive policies of further quantitative easing and competitive devaluation. 
 
The interesting unknown is the reaction of the European Central Bank. Under heavy German influence, the ECB is less subject than other central banks to the sillier fashions in monetary policy. (It must remembered in this context that Bank of England Governor Mervyn King was one of the 364 economists who signed an angry letter to the Times in 1981 claiming that Margaret Thatcher’s successful deflationary policies were doomed – those people should never subsequently have been allowed near the levers of power.) Left to its own devices, the ECB would be moving gently in the direction of raising its short-term interest rate from the current 1% while attempting to enforce draconian fiscal discipline on the less self-controlled countries of southern Europe or those like Ireland with banking systems similarly lacking in self-control.
 
If the U.S., the Japan and Britain all go in for quantitative easing, the ECB will have a problem. Once the inevitable inflation (which the Fed now regards as a solution rather than a problem) has intensified in its trading partners, Europe’s comparative cost position will improve. However in the short term if its major trading partners all trash their currencies the ECB will find a mass of hot money flooding to the euro, forcing it up and pushing even the well-run but export-dependent Germany back into recession. Thus, however reluctantly, the ECB may be forced into some quantitative easing of its own.
 
The immediate economic effect of all this money sloshing around will be obvious: more inflation and higher gold and commodity prices, as beleaguered savers seek refuge from the mass currency debasement. It probably won’t surprise most people to see the flood of money create new and damaging bubbles, for example in junk bonds, as warned this week by ECB President Jean-Claude Trichet. However the long-term effect is more significant, and more pernicious.
 
Fiat currency was tried on a number of occasions before the twentieth century, most of which ended in hyperinflationary collapse – think of the Continental Congress’s “continentals” or the French Revolutionary “assignats.” Only in the exceptionally stable and well-run society of Song Dynasty China did it provide an adequate store of value for more than two centuries, although even there collapse followed once the Mongols, nearly as aggressive in monetary creation as they were militarily, got control of the printing presses. Through the eighteenth and nineteenth centuries, fiat money was regarded as an unfortunate but temporary expedient for poorly-run countries, to be replaced by a return to the Gold Standard as soon as financially possible.
 
The reversal came after the destruction of World War I, when in a world of rapidly increasing population the Gold Standard was found to be unacceptably deflationary (because gold supplies could not be increased fast enough to keep up.) Maynard Keynes provided spurious rationales for a fiat money system, which is always preferred by governments because they profit from the seignorage of creating money of no intrinsic value. In a world where governments were relied upon for unemployment insurance, old age pensions and increasingly healthcare, it seemed natural to trust them to maintain careful control over the money supply. While huge monetary mistakes were made – notably by the Fed in the Great Depression – the central confidence problem of a fiat money system was overcome. Only in regions such as Latin America where confidence in government remained weak did investor fear of fiat money produce its normal bouts of hyperinflation and dollarization. Even here it appeared by the 1990s that wise advice from the IMF would limit the problem except in countries whose economies were anyway unstable.
 
A global turn towards money creation would reverse this. It would quickly become obvious that none of the world’s major currencies now represented a stable store of value. Moreover, except for marginal exceptions like Switzerland and Canada, it would become clear that governments could no longer be trusted with a fiat currency system. This happened to a certain extent with the Anglo/U.S. inflation of the 1970s, but at that time the Deutschemark, managed by the admirable Bundesbank, remained substantial and available to investors. 
 
This collapse of confidence would not restore the Gold Standard. While global population increase is declining, official opposition to a Gold Standard would undoubtedly remain too strong for it to be restored. Should hyperinflation arrive, the official response would probably be some equivalent of German chancellor Gustav Stresemann’s 1923 rentenmark scheme, following the Weimar hyperinflation, in which the currency was declared to be backed by the value of Germany’s land. With the smoke and mirrors stripped away, that was simply another fiat currency; the German government did not own the country’s land, and no conceivable mechanism existed for land to be delivered in exchange for monetary claims.
 
However the private sector does not necessarily need government in order to act. This week the first “Gold to go” gold-dispensing ATMs in the United States were announced, by which investors will be able to use cash or credit cards to buy gold bars of up to 8 ounces or krugerrands, with the prices updated electronically every 10 minutes. Initially, the market will be one-way; there will be no provision for gold to be sold back to the ATMs. However over the longer term, if inflation becomes a problem, it seems likely that the bugs will be ironed out and that investors will be able to hold their cash reserves directly in gold.
 
The next step would be for them to be able to hold gold denominated bank accounts, accessible primarily by debit card, operated presumably by banks run more conservatively than current U.S. banking regulations prescribe. Since the debit cards would be entirely conventional, a gold account holder would be able to operate in daily life just as does a current Internet-savvy consumer who has liberated himself from physical cash.
 
There is after all no need for a central bank in a free-market economy, but only for a means of storing and dispensing value. With modern electronic technology, a cash-free existence can be managed just as easily on the basis of gold as on the basis of dollars; the currency has no physical existence but is only a means of measuring value. If such a system spread, governments could find their money creation and management functions entirely dispensed with, as consumers and businesses increasingly relied on a private sector system operated by conservatively managed private sector banks. Unless governments physically prohibited the creation of such a system (which FDR did in 1933 but might not be possible in a democracy today) they would find themselves bereft of power or even influence in the monetary sphere.
 
Central bankers enthusiastic for more “quantitative easing” should beware. They may find the move institutionally suicidal.

chopper read's picture

great write-up, but these thugs will not relinquish power quite so easily, not-to-mention the implications for the Welfare State.  

trav7777's picture

Ok, it's critically important to correct some of the misconceptions in this.

First, that of the so-called "gold standard."  During the pre-Fed years, there never really WAS a gold standard, not like people conceive of it.

First off, Real Bills circulated as effective money.  Gold was *merely* used as a restraint to GOVERNMENT issue of bills.  The money supply is NOT tied to the gold standard or to gold in an asset-backed paper doctrine.  Real goods back paper.  Gold is merely ONE type of real good.

So the *government* is restrained by the gold standard to not print paper not backed.  The CB-led notion of "gold standards" was an apocalyptic failure, by which I mean the FORCING of solely gold-backed paper as legal tender or money.  There simply isn't and wasn't enough gold to back *all* money necessary for the world economy's growth rate at the time.

HOWEVER, Real Bills backing production *did* provide sufficient backing and were previously traded as effective money.  This is because no good for production need exist absent a bill that it backs.

Money is a transactional instrument...the notion of money as *wealth* came from bankers who wanted to store it and profit from it and ultimately control it.  Gold was what they had, so they pushed for the "gold standard" in England, which was an infection foisted on the world by the BOE/Rothschild axis.

If we want OUT of inflation/deflation, creditmoney, parasitic compound interest, and have *sound* money, we MUST return to RBD.  At the current spot of 1357 POG, vs 82.xx oil, a bill backed by 1 oz Au could be broken into change of 16+ oil bills, which would themselves be 3 and change silver oz bills.  ALL of them are fungible as money because they are backed by REAL goods; all of them are equally sound "money" and could be traded or even "saved" as wealth until they self-liquidate and mature into the real good itself, which could be re-billed to another if necessary.

The Gold standard meant ONLY gold was money and that gold was controlled by the banks!  Real Bills Doctrine removes control of money from banks and gives it to production.  In fact, you can make a persuasive case that the Gold Standard ITSELF is effectively a FIAT REGIME!  Unless GOLD is denominated in OTHER REAL THINGS, you have a FIAT standard. 

Review the history of the BOE's Sterling Bill and how it was wielded as an imperial tool to create bubbles all over the world (Miss, S. Seas) by inflating and deflating with paper gold via Sterling Bills.  All on an ostensible "gold standard."

Gold cannot exclusively back "money," gold's value exists in terms of ratios with other real goods.

Mitchman's picture

Thanks for the comment.  You are absolutely right.

GoinFawr's picture

Almost, but not quite:

There simply isn't and wasn't enough gold to back *all* money necessary for the world economy's growth rate at the time.

How do you figure that one, Trav?

Popo's picture

There would certainly have been enough gold to match a more responsible growth rate.

AUD's picture

Real bills still mature into gold, I think the two (real bills & gold standard) go together.

RockyRacoon's picture

Gold stops (end point) debt.  Thus the "no counter party risk" aspect.  Real bills as a backing for goods is still a debt.  It's not settled until goods are delivered or gold takes its place.  You are correct in your brief statement.

e_goldstein's picture

only at a 1:1 ratio. 

chopper read's picture

great thoughts.

in the meantime, be your own central bank. keep all long-term non-working capital in physical gold & silver until you need to convert it back to fiat in certain cases where you believe you will achieve inflation-beating positive risk-adjusted rates of returns.  

 

BE YOUR OWN CENTRAL BANK, bitchez. 

snowball777's picture

Excellent info, Trav; sharing like this makes ZH worth refreshing.

http://www.youtube.com/watch?v=gvbqG8EbxW0

A_MacLaren's picture

Uh, Trav...

Review the history of the BOE's Sterling Bill and how it was wielded as an imperial tool to create bubbles all over the world (Miss, S. Seas) by inflating and deflating with paper gold via Sterling Bills.

The Mississippi Bubble was a French product, courtesy of Scotsman John Law, and was not connected with the BOE.

http://mshistory.k12.ms.us/articles/70/john-law-and-the-mississippi-bubb...

http://en.wikipedia.org/wiki/Mississippi_Bubble

http://www.ft.com/cms/s/0/0220b174-eb98-11dc-9493-0000779fd2ac.html

 

ThreeTrees's picture

Interesting post!  Real bills would definitely be preferable to what we have now.  However, gold need not be denominated in anything but itself if you let the market decide what money is.  Case in point:  The chart Tyler posted.

Your critique of the gold standard also assumes that the inflationary model of economic growth accurately describes the phenomenon of capital creation, that printing is necessary for growth.  It isn't, Mises disproved that a long time ago.  The gold-pegged dollar had to go because they'd printed more claims to physical than they actually held.

jkruffin's picture

What you mean?  The very first bankers were none other than "Goldsmiths".

Coldfire's picture

From "Gold, Peace, and Prosperity"

The argument that there's not enough gold ... is false. With a gold dollar, a car might cost $600 instead of $6,000, but the exact amount of the medium of exchange used wouldn't matter.

"In a free market economy," points out Dr. Hans Sennholz, "it is utterly irrelevant what the total stock of money should be. Any given quantity renders the full services and yields the maximum utility of a medium of exchange. No additional utility can be derived from additions to the money quantity. When the stock is relatively large, the purchasing power of the individual units of money will be relatively small. Conversely, when the stock is small, the purchasing power of the individual units will be relatively large. No wealth can be created and no economic growth can be achieved by changing the quantity of the medium of exchange. It is so obvious and yet so obscured by the specious reasoning of special interest spokesmen that the printing of another ton of paper money does not create new wealth."

fiftybagger's picture

"There simply isn't and wasn't enough gold to back *all* money necessary for the world economy's growth rate at the time."

 

Pure nonsense

 

" Unless GOLD is denominated in OTHER REAL THINGS, you have a FIAT standard. "

 

Gold AND Silver are both money, problem solved

 

Bimetallism bitches!

http://en.wikipedia.org/wiki/Bimetallism

 

 

 

trav7777's picture

first reply to the comments:

Gold is NOT MONEY.

Gold is a good just like any other upon which people place value.

A pure gold standard is a fiat regime.  Real Bills are fungible money irrespective of the good that backs the bill.

Too many people have only a superficial understanding of gold's historical function as ultimate liquidator of real bills and came to believe that gold *IS* money in the abstract.

It is not.  There's no persuasive case for gold in lieu of platinum or any of a number of other commodities.  Anything non-perishable sufficies in this regard.

To tie a need for gold to EVERY transaction is a shackle upon commerce.  Let gold serve its function as the last mile, but there is no reason that *all* bills must be gold backed or that there is no room for paper exchange means

Idiot Savant's picture

Will someone please recommend some books on the subject of Real Bills?

A Real Bill, backed by an actual good, sounds like real money to me. I've never bought into gold being real money, as it's based on confidence and perception. After all, gold is nothing more than a chunk of metal. However, a bill backed by production or usuable commodities (food, oil, etc.) sounds like real money to me.

DaveyJones's picture

Money in the real world

"In case it's not obvious, what we've just done is to put together a logical explanation of money, using gold as an example, and using only made-up terms like "collectible" and "levitation" to avoid the trap of defining money in terms of itself.

Now let's apply this theory to the money we use today - dollars, euros, and so on.

Today's official money is an "artificial collectible." Money production is limited by legal violence, not natural rarity. If in our condom example, the condom market was patrolled by a global condom mafia which got medieval with any unauthorized condom producers, it would resemble the market for official currency. No one can print Icelandic kronor in the Ukraine, Australian dollars in Pakistan, or Mexican pesos in Algeria.

It may be distasteful to hardcore libertarians, but this method of controlling the money supply is effective. There is minimal unlicensed production of new money - also known as counterfeiting.

It should also be clear from our discussion of gold that there is nothing, in principle, wrong with artificial paper money. The whole point of money is that its "real value" is irrelevant. In principle, an artificial money supply can be much more stable than a naturally restricted resource such as gold.

In practice, unfortunately, it has not worked out that way.

Artificial money is a political product. Its problems are political problems. It does no one any good to separate economic theory from political reality.

Governments have always had a bad habit of debasing their own monetary systems. Historically, every monetary system in which money creation was a state prerogative has seen debasement. Of course, no one in government is unaware that debasement causes problems, or that it does not create any real value. But it often trades off short-term solutions for long-term problems. The result is an addictive cycle that's hard to escape." - FOFOA

destiny's picture

Excellent comment !!!!!!!!!!!!

destiny's picture

Excellent comment !!!!!!!!!!!!

Boxed Merlot's picture

...Chinese...exporters are being horribly squeezed. Wen is happy to reorient Chinese growth towards the domestic market, but naturally doesn’t want his major export industries to go belly-up. He thus wants only a gentle upward path for the renminbi, avoiding extra strain on exporters...

 

What about the US?  I too would be happy to "re-orient" growth towards the domestic market etc., etc.  But no, we must endure the extra strain on our exporters due to ????

 

Our exporters and wealth generation industries have taken an incredible hit and will require a generation or two to recover, (if our eductational system will allow) and while I doubt China will lose much sleep over our plight, I won't over theirs either.  Regardless of Mr. Diane Feinstein's best efforts to promote China's interests at the expense of US industries.

A Nanny Moose's picture

LOL - It was only a matter of time.

DaisyMae's picture

Why buy gold at 1350 when I can buy a six shooter for less than half that and take all the gold I need?

Minion's picture

I think you can get 2.5 18-shooters for an ounce of gold now (glock .40)............

DaisyMae's picture

When's the gold/gun arb fund start?

Clark_Griswold Hedge Mnger's picture

I'm favoring the Sig 220/ 45, and a modest Sig 239/40 for CC....

 

Minion's picture

I've never seen a concealable .45 that will hold more than 8 rounds.  I guess it's fine if you never face a group of thugs.

Spalding_Smailes's picture

Most people who own gold also own a gun collection. God speed.

Chito Campo's picture

Because it's a hell of a thing, killing a man.  Taking away all he's got, and all he's ever gonna have.

chopper read's picture

i shot a man in reno just to watch him die. 

Fred Hayek's picture

You'll end up in a burning ring of fire.

Or walk the line, or have a son you'll call "Sue" or one of these things.  I forget which.

Hulk's picture

My sister shot someone near a bridge, but I got hunged for it...

-Michelle-'s picture

Was that the night the lights went out in Georgia?

MsCreant's picture

The phrase "well hung" is going to evolve different meanings...