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Must Read: When Reality Meets Fiction
Submitted by Nic Lenoir of ICAP
Everyone who grew up watching James Bond must have had a kick reading the news last night or this morning, and finding out about secret meetings between China, Russia, Gulf countries, France, and Brazil, plotting to organize the demise of the US dollar. Unlike in Goldfinger, the villains this time weren't planning to plant a bomb in Fort Knox, but rather stop using the greenback, and instead price currencies against a basket of currencies composed of (drums please): the yuan, the ruble, a newly created Arab currency, the euro, the yen, and gold. I don't remember reading the Brazilian real but we could throw it in there so we don't hurt anybody's feelings.
Let's be serious. Russia was inches from begging the IMF for money last fall. The Yuan is not freely tradable and money supply in China is growing at twice the pace at which it is growing in the US, the UK, or Europe. The Chinese government actually believes the acronym GDP stands for printing money to buy commodities. The Euro has shown how using a single currency for a set of different economies is extremely difficult to manage. Spain and Ireland used the euro to fuel (or extend) bubbles before completely collapsing in near-depression. Setting appropriate rates is very difficult and there is little doubt that if more Eastern European countries get integrated the problem will be magnified, as these countries will jump on the opportunity to become centers of production, and this time they will be protected under the same exchange rate regime as the rest of the EU, unlike last fall where many of them almost went bankrupt. Then comes the Yen, it has been used as part of jokes involving gazillions in several Hollywood comedies over the past 20 years but other than that it has mainly fueled every carry trade before the USD joined it.
Honestly people need to think really hard before they start discussing a new world reserve currency or other options of the sort to replace the USD. Every currency needs to be associated with an interest rate regime, which takes you back to the problem discussed before regarding the Euro. All you will achieve with a unique currency is kill any cost of production differences across the countries adopting the new currency, and align everybody on a single living standard benchmark. With different currencies, if producing abroad is cheaper a country will import, and with a negative balance of payments the currencies will adjust to reflect, thereby smoothing out the process. Eliminate foreign exchange as your equalizer and all you will have is the alignment of everybody's living standard on that of Chinese farmers. That's not even discussing bubbles that could be formed by having a standard rate curve for everybody under that new currency. Imagine if Brazilians could borrow at 0% instead of 10%? Would the Bovespa be only up 4 folds since 2000? I think not. The second issue is liquidity management. While recently it seems the method applied has been a ruthless flooding of the markets with liquidity, it remains that overall the Fed has an unmatched expertise when it comes to managing liquidity. It took all that experience and an incredible arsenal of innovative tools to insure there would not be a run on a bank last year. Managing a central bank on a more global level would be almost impossible.
Certainly many countries are concerned about using the USD as the reserve currency, and when the market for funding became tight last year many of them were afraid of going bankrupt... but it was mainly because they were short USD. Let's be very clear, if you borrow a currency and it suddenly appreciates you are in trouble. That will be true even if you used gold or copper as your benchmark. If suddenly the price of copper rose sharply and a country has some debt to refinance in copper or gold, things will be difficult. It's easy for countries whose currency don't inspire any confidence to borrow in dollars and then complain. Maybe managing their finances and currency differently would allow them to sell bonds in their local currency. After all with Turkey's CDS at an all time low, there is risk appetite for emerging anything so that financing in local currencies should be possible.
And if you decided to use a precious metal as your new currency, wouldn't there be a huge political risk with all the producing countries. Maybe it's worth going through the list of gold producing countries and make sure there are no surprises... Having unstable countries control a vital resource is dangerous, this is nothing new, and that has been a problem with oil in the past, a more serious problem than the USD can potentially be I might add. It is ironical to have countries manipulating their currencies turn around and complain about the dollar because our finances are not in order. It is reminiscent of having Lybia or Iran complain about the lack of democracy at the UN. It certainly is a fair attempt at using our politically correctness against us, but it cannot be answered seriously. Our finances are not in order, we know that, but no one is really in a position of giving lessons on the subject right now. We have an imperfect system for world trade, but it took us far and it's the best option for now, so let's not mistake misplaced malicious regional interests for inevitable future consequences, and let's have a proper open reflection on the subject.
Good luck trading,
Nic
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none of this matters. The price of oil not being in dollars won't make a difference as FX markets are open 24/7 and you don't have to hold dollars if you don't want to.
Utter NONSENSE.
+100
Provide a counter argument; otherwise, your statement is useless.
Honestly people need to think really hard before they start discussing a new world reserve currency or other options of the sort to replace the USD.
Umm... that's why their having secret meetings.
Define secret, please and thank you.
"MARK IT ZERO, DUDE"
True, there shouldn´t be any difference. For the purposal of living standards like in china, the wages and thus all costs would need to change in that way worldwide; but as oil not being the only cost factor that doesnt seem to happen. just to a certain degree, maybe a neglectable degree, we will see. The Dollar has some diminishing effects as well. There should be an offsetting of negative effects.
The Question is; how exactly should that "currency" look like? And what is china than doing with all their dollars? Japan and Emirates as well. Maybe their goal is to stabilize the dollar somehow!?
Amazing thing is they say disclosure/audit on the fed will create chaos and a run on the banks..so they lie to the public and uses taxpayer money to bail the bankers out. Yet right now, speculators are having their way with the currency (USD) and the Fed just stand idly by and watch??? WTF...I mean, is there such a thing as a run on a currency??? They have to stop this before it gets way out of hand.
Say what you will, but the Fed is certainly not sitting idly by and doing nothing.
The Fed has done nothing short of providing the largest injection of global liquidity-- ever. We have all been witness to the consequnces of their actions (with moral hazard being at the top, and dollar devaluation being next). And transparency? You can pretty much throw that out of the door, because they probably went into some very gray areas of the law as well.
Today, they are not sitting idly by either. In fact, they are at a pretty important juncture. This month, they will pull out of direct Treasury purchases. In March, the agency MBS buying crap will unwind. Many of the alphabet soup programs are coming to an end in a few months. It's important for the Fed to unwind QE and stay with the program.
If they do, the USD will find its footing in 2010. If they go back into QE, you can pretty much kiss the USD goodbye. I think the Fed is going to be looking to Congress to make the next fiscal move, if one is needed. They really can't afford to be neck deep in QE if inflation rears its ugly head.
I like your take on things...
Despite disagreeing with the policy they are pursuing... they have done an exceptional job using deceit and obfuscation to roll a ball bearing down the edge of a razor blade to date.
Inflation however has not only a very ugly head but also jaggedly sharp teeth.
Increasing interest rates will trigger RE/consumer credit/market collapse/clusterfuck V2.0...
The velocity of money will approach Mach 1
I sure hope these clowns figure this out soon.
velocity has yet to get above the near zero mark its at today. I know its the popular thing to think that we will see an inflationary collapse, but if the dollar goes, it will go in the way of hyperdeflation. An official change in policy towards US debt, by either the debtor or the creditors, will be its undoing.
Inflation, when if it ever seemingly gets out of grasp they can always control by raising rates to usury levels, but hypereflation...well theyre at zero already. If I were a betting man I would bet a big amount of money, with the proper odds of course, that the fed is never changing interest rates again. I could be wrong of course, an it could be more wishful thinking, but if they ever change rates again, without the whole thing collapsing, then were in for much more of this shit.
The necessity is to keep interest rates low.
Deflationary collapse of financed assets is baked in the cake... however I expect certain strategic commodities to surge for a number of reasons.
While the Fed may not wish to change interest rates... interest rates may cause the Feds to change.
It's going to be a hell of a show any way you look at it.
if interest rates go up, which is what youre implying I think, then that spells bankruptcy. Nothing the fed can do about bankruptcy. It can hide insolvency, it has in fact, hid it previously, but it cant hide bankruptcy. Once it becomes obvious that the Us government cannot regain a positive cash flow default is the path. hyderdeflation... hyprrinflation its all semantics at that point.
Ugly semantics... agreed.
Put's on a white icecream salesman suit. Starts crying and sobbing.
But I got no place else to go!!!!!!!
Oh wait. Fuck that. I got gold in the safe.
Hyperinflation is a collapse of confidence in the currency. Once it's lost it is not regained. It's not something that interest rates can fix.
I am Chumbawamba.
Looks like we're in the minority Chummy but I'll be very happy if they are correct.
not arguing with that, I'm just saying that the collapse in confidence would originate because of the inability of the US to pay back its obligations, which is technically deflationary, but really, who the hell is going to mince words at that point.
Ben wants to devalue the dollar, so as far as he's concerned, its all going to plan.
A lot of people have been mentioning that the Fed wants to devalue the dollar but few get into the details of why and what purpose it serves and who benefits and is harmed by it. Why would the Fed want to devalue the dollar when their loans are denominated in $'s? Aren't the ultra wealthy the biggest losers in $ devaluation?
It seems to me that $ valuation/devaluation serves to balance international trade.
Where to start... Do you know what causes depressions? Debt.
Debt to GDP is 365% (very, very sick). Historical average debt to GDP is around 180% (healthy). Debt's are held in nominal dollars. So if you cut the value of the dollar in half, you get rid of the debt problem. If only it were that simple...
Dollar devaluation would help debtors and hurt creditors. So it helps the government and McMansion dwellers, while hurting China and prudent savers, 401k holders, etc.
Dollar devaluation = moral hazard.
Dollar daluation hurts everyone possessing any amount of USD (= not just US residents, but a lot of people around the world, including peolpe in black market). If he keeps doing this, Ben's life would be at risk, literally.
DJ ) 10/06 03:53PM *WSJ: Saudi Central Banker Said Country Negotiating IMF Contribution
DJ ) 10/06 03:53PM *WSJ: Saudi Central Banker Says Oil To Remain Priced In Dollars
Saudi Arabia will always price oil in dollars. We protect them and in turn, they price their oil in dollars. We prop up an oppressive kingdom and get to control their oil. This unfortunately irritates some saudis enough to take flying lessons with no intent of landing.
My guess is this quote was spoken for the benefit of his Arabic and third world clients:
DJ ) 10/06 03:53PM *WSJ: Saudi Central Banker Said Country Negotiating IMF Contribution
While this one was provided to Western clients:
DJ ) 10/06 03:53PM *WSJ: Saudi Central Banker Says Oil To Remain Priced In Dollars
"Our finances are not in order, we know that, but no one is really in a position of giving lessons on the subject right now."
Oh really.
Canada is. Canadian banks are in good order.
For now.
Wait till the $C rises above the $US and watch free trade siphon the remaining manufacturing jobs back south. Worse if oil stays high. That should trigger some domestic nastiness...
(minus 138B bailout...... husshhhhhhhhhhh!)
I saw an advertisement for the CDIC on television the other day. It was the first I had seen an advertisement for it, and the first question that popped into my head was: why am I being reminded of this??
It seems to me like they are preemptively reminding me that my deposits are safe... but what are they preempting?
No, they aren't. Look at their Texas ratios!
TD is probably the safest, followed by maybe CIBC. RBC and BM are, IMO, disasters waiting to happen.
This is just my opinion, and I'm a complete amateur at markets, but you should really look at their books before parroting conventional wisdom, because chances are pretty high that that conventional wisdom didn't go through anyone's books, either.
Actually that's a good idea.
We owe TD shitloads... Too bad it wasn't RBC or we would offer them 50 cents on the dollar... ha ha ha.
Last I checked f--king China was running a goddamn SURPLUS, if "Nic" knows what it means.
China is a house of cards. They are printing more money on a relative basis than any country on the planet. Magically, the government has released growth numbers of all kinds that reflect 8% growth while energy consumption has decreased over the same period. Magic.
8% is a magic number with the ChiComs. A whole host of security scholars will tell you that if Chinese domestic growth falls below 8%, there is a real risk of domestic unrest. More than anything else, a domestic challenge to one-party rule is the PRC's worst nightmare. They will do anything to maintain growth at that level, real or imagined.
define printing money anon....? or at least attempt...
atypical gg comment ...
last time i looked they were printing money 25 times faster than us.
try getting a grip on how china works internally then make an 'informed' comment please.
New Zealand.
Hogwash, he assumes that a global central bank is the only alternative. And the political risk of gold producing countries is minimal. Indeed a compromise agreement of mandatory sales of all new mined gold could easily be reached in a new paradigm. And yes I think having a mutual benchmark for wealth is a good thing. If you disagree then you got entitlement problems.
So now all haters of freedom have to do to bring down the world economy is nuke a gold mine.
Gold bugs, hopeless.
Im sure you thought a lot of it before posting this. Some flawless logic you have here. "We shouldnt have a gold standard because someone CAN NUKE THE GOLD!" ...just brilliant.
- No...really ???
"So now all haters of freedom have to do to bring down the world economy is nuke a gold mine."
rather than an oil pipeline/oil field.........oil bugs........hopeless.
What these dumbasses are forgetting is that OIL doesn't BURN! Hahaha... oh... wait...
"All you will achieve with a unique currency is kill any cost of production differences across the countries adopting the new currency, and align everybody on a single living standard benchmark" HUH?!?
Please, lets not have any more currency commentary from folks who don't know the difference between "nominal" and "real." Differences in productivity, innovation, and working hours are "real" factors that will lead to real differences in living standards, regardless of whether currencies are fixed or floating. The different fx regimes will simply lead to different adjustment processes.
Explain to me please how floating currencies have adjusted the U.S. trade deficit over the years. Oh wait. They haven't!
This was most likely just an unfounded rumor created by some goldbugs. It worked, and I now plan on selling 1/3 of my holdings. Bling f'ing bling.
Your loss.
I am Chumbawamba.
Your moniker is a misnomer.
I wish this site had some way to put them on an ignore list.
As brazilian (and former ICAP) let me say this: Brazil being party to a secret meeting to take over the financial world by storm is a fucking joke. It would discredit even a 007 movie...
Lula is no Vladimir Putin
I wonder if I will get kicked off the range if I rock the earphones Vladimir-style
Vladimir conducts target practice, after secret meetings in Brazil
Is that a Walther PP/K he's got there?
I would hope that the Russians would have given up their 21.5's by now...
I think so, looks like a PP/K to mine eyes... but I thought they used 9x18 makarov over there maybe its a polish p-64
I still can't get past the hearing protection. Maybe it's a hair thing. Maybe he's checking his pocket to see if he brought a comb.
Oh man, Vlad's so cool! He's even got his other hand in his pocket rotating his balls, deciding which country to invade next... Sweeet!!
HAHAHAHAHA
Vlad darling. I know you're ex KGB and all that but you know better than to place your finger on the trigger unless your firing your weapon.
What's that you say? What? Premature something or another?
We all know it's just an excuse to smash the dollar once more and bid up gold. But that's the risk orgy that is on, and I'd rather be a part of it than against it.
"And if you decided to use a precious metal as your new currency, wouldn't there be a huge political risk with all the producing countries."
This is a very short sighted statement.
If you actually produce things that people want to buy, they will voluntarily TRADE their gold for it.
I'm fairly certain the world worked this way for a few millenia if I remember my history correctly.
well, instead of the u.s. attacking the middle east, you can count on us attacking argentina and peru instead...
...are you stupid, do you not understand what trade means?
I think they understand what trade means... but might have been referring to man's inclination to operate on the principle that building a military capability and "taking" something is cheaper & more desirable than acquiring it incrementally via trade.
All the same, whether this inclination is in effect is not dependent on whether there is a gold standard or not, so to imply a connection between the two seemed rather stupid to me. Its always more desirable to take.
"All you will achieve with a unique currency is kill any cost of production differences across the countries adopting the new currency, and align everybody on a single living standard benchmark."
Now that's written from a very ignorant western perspective, and all he is really saying is, this would be bad for me because my labour would be worth the same as a China-man. And we can't have that, because it's my birth-right to be worth more then even 10 China-men. But on the other hand, the China-man, the Arab and the Brazilian might think differently. Any who, my 20 cents is a gold backed special drawing rights, based on a basket of currencies including, yes the US dolllar.
Very lightly backed by gold perhaps.
Maybe just electroplated...
Electro plating is good...It'll shine for a couple of years and everyones a happy camper...for a couple of years.
Unitil the "bling" wears off....
Nice perspective, and one to which we must need become reoriented every now and again.
Wait, didn't Nic repeatedly post about the upcoming 'dollar rally' on this very site? He must be impervious to the screams of agony from his 'clients', as he loses their money with whipsaw rapidity.
Good luck trading Nic. You really need it.
be patient. carefully constructed trades against the crowd will win. 95% USD bearish is dangerous, be careful.
Sure, maybe the USD will go back to where it was in 1913, reversing all its losses. Then I can buy a car for 2k and a house for 15k.
Or Nic will just flush more money down the toilet. Which is more likely?
sigh
A straw man argument is an informal fallacy based on misrepresentation of an opponent's position.[1] To "attack a straw man" is to create the illusion of having refuted a proposition by substituting a superficially similar proposition (the "straw man"), and refuting it, without ever having actually refuted the original position.
Yeah I´m sure Nic uses better risk management than I have been using in trying to go long dollars.
Constructed they are as he is part of the house.
http://www.icap.com/about-the-group/history/year2003.aspx
I agree with pivot. All i hear on this site are people whining and complaining about how fundamentals no longer hold sway over the market. There has always been only one fundamental... the only way to make money is to go against the crowd.
The current bearish USD sentiment is being driven by fear and rumors, as we can see from the Treasury market. There is no way that Russia, China, etc., will make such an abrupt move away from the USD as a reserve currency, as it would bankrupt them overnight. Remind me again how much USD reserve China holds? Why would they do something that would cause the value of their reserves to halve?
A lot of shorts are about to be wiped out by the dollar's rebound, and as we can see the effect on the stock market over the past few days, when it does rebound, expect to see a sharp drop in equities.
Why would they go bankrupt? They're loaded with natural resources and all they would have to do is come up with a new system
China has this figured out...they need to get out of dollars, period....whats cheaper, taking a hit, or going to war with the US...I would argue they would be better off taking the hit....they know they can win that war...military conflict, not so much...
china is the USA circa 1930.....with bigger problems
Bingo.
This analysis is about as trenchant as the military/analysis that we can escort a ship through the straits ergo $ hegemony. The dollar is not a morality play; rather it is suppose to represent a modicum of a store of value.
While you guys were debating frivolities, someone managed to corner the tin market:
http://www.guardian.co.uk/business/2009/oct/06/investor-buys-all-tin
I am Chumbawamba.
market cornerings usually dont end well.
Hunt Brothers are poster boys for this and so was John Gutfreund of Solamon...lol
Hunt brothers were done in by the Fed.
Ask Warren Buffet about cornering a PM market. And no, it does not end well. (Makes me wonder if the myopic oracle from Omaha is up to his old tricks ...)
And I thought I had cornered the foil market. Damnit.
Naw, you cornered the market on bitches. I can't find any anywhere anymore. You bastard!
I am Chumbawamba.
Most large banks, despite conventional wisdom, were FOR the creation of the Federal Reserve in 1913. Why? Because having a Federal Reserve freed them from the market discipline that prevented them from continuously expanding their money... Having a "lender of last resort" meant that there would never be a bank run, and they could inflate with impunity. Also, by restricting more conservative banks from operating (creating a government monopoly), banks protected themselves from competition.
Eventually, of course, the system runs itself out, and you get the same result - collapse. Now, I'm betting there will be a push by all the central banks to unify under one flag - a world FED. A new currency will be created: the Tyrannis. Of course the spin will be "we are doing this for everyone!". Don't believe it! It will be good for the bankers and the bankers alone.
The fed was created in 1913 with the express purpose of monetary stability and full employment. For several hundred years before it's creation the dollar had largely kept it's buying power. Since then, the dollar has depreciated, on a gold buying basis, to less than 1/50th its value.
http://www.youtube.com/watch?v=Ta7q1amDAN4 (23:00)
Not exactly. The Fed was created BY THE LARGE BANKS. The large Banks ARE the Fed, at least they own it. The same people that own & run the Fed own & run the European Central & Big Banks. They were financing the Feds creation, through New York.
The "purpose" of the Fed was an outright lie. It was used to push the legislation through.
The Fed was created to be the world's bank & the US$ to become the world's currency, from the get go. Been that way for almost a century. Won't change easily, unless the Big Money wants it to. Though the US$ has been devalued, the standard of living in America has soared in a remarkable way.
The standard of living in America has improved yes, but how much has been driven by the following factors?
1) Technological advancements
2) Increasing participation of women in the workforce
3) The largest debt bubble in history & pulled forward demand
The fed loves to take credit for improvements in our standard of living. I don't think they're justified.
Exactly. I've had it up to here with the way so many people are putting China on a moral pedastal. State owned capitalism is still socialism. If the Chines government really think they are going to get their people to consume more, then they better revist the depression of the 30's. By that I mean price fixing and deflation. Their state imposed slave market cannot support real capitalism.
You are an IDIOT "Nic", and you just proved it. At least if you keep your mouth shut, nobody will know that you are a moron. BTW, howz that long the dollar trade workin' out for ya?
Nic = prechter part deux (duh)
Classic Gekko!
Simple solution....
Each country should have its own currency....
Why ?
Because each country has its own "people issues"....and cannot make demands on those not responsible for their own plight....
The focus should be on open enterprise and freedom....
...................................
The real problem is the Fed bank system....It should be eliminated....
Currencies should be issued such that they are scarce....
Gold is gold because it is scarce....
I think a lot of the point being made here are well taken. It's always a pleasure to read the thoughts of intelligent, thinking people.
Root out the corruption.
This just seems like an emotional outburst from someone who ordinarily provides astute analysis.
The Chinese government actually believes the acronym GDP stands for printing money to buy commodities.
What should they have been buying? Dollars?
Eliminate foreign exchange as your equalizer and all you will have is the alignment of everybody's living standard on that of Chinese farmers.
Utter horse manure. Living standards are based on productivity, I don't care who or where you are.
Having unstable countries control a vital resource is dangerous...
You mean like global political power? Anyway, America has ample gold still in the soil. Nic has nothing to worry his pretty little mouth over.
Anyway, sounds like someone is long T-bills. Too long, as it were. Sucks being you.
So long.
I am Chumbawamba.
America is the most unstable country on the planet right now with most mentally unstable crop of "leaders" in recent memory to boot. Killing innocent millions including women and children in other countries and killing and torturing it's own citizens - until and unless the present terrorist power structure that is the US Govt. today is completely eliminated, world's safety requires that in fact all critical controls and capabilities including reserve currency function be taken away from it.
ROTFL! So true. Also, looks like someone got trapped short today - a bit too short it seems...
Big 60 lets loose. hehe Back to the wants vs needs discussion eh?
However, I am simply J.A.F.O.
Jews for the Abolition of Firearms Ownership?
Just kidding!
It's a running storyline w/Marla. Just Another Fucking Observer.
re: Blue Thunder, classic. One of our all time favorite lines; "Erase them all!".
Maybe Nic is "on the wrong side of a long". You da man Chump.
Oh, come on, Nic. Let people have their fun.
But I agree with you. The reason that this has been discussed and not actually implemented over the past 40 years is that it's just dumb. Why replace a fiat currency with other fiat currencies that you can't rely on? Holding onto someone else's currency is a promise that what can be exchanged for that currency can and will be when you want to trade them in. If I could print my own currency, I would. And if someone wanted the stuff that I produced and was reasonably certain that I could deliver when they wanted the stuff I make, I would be able to float my own currency. That all ties into the trustworthiness of the local government to protect and enforce property rights. Think you can trust the Chinese government or Indian government? Maybe.
I would never suggest that the US government officials should be cannonized, but there's still a reasonable assurance that you're capable of purchasing things in the US and getting them out. If that were to change, then I put the USD on full death watch.
If you don't trust the government (and I really can't blame you at this point), start loading up on gold and silver. But remember: the dollar will remain money (the reserve currency or otherwise) until people decide it's not.
I have decided it is not.
Gold and silver, baby!
I am Chumbawamba.
Breaking news: Every other country on the country just decided that the dollar is not money.
Mr. Lenoir's thesis, whose central idea is that there is no viable replacement for the greenback, makes the best possible bullish case for gold. Gold, and to a lesser extent silver, are collectively the proverbial one eyed man in the land of the blind. Every currency on the planet, shackeled as they are to punch drunk economies is a cripple, but not PMs. They know this and so they are, by hook and by crook aligning themselves with PMs.
I can understand the basis for this arguement IF it was only about money. It isn't. It's also about control. The US has a lot of international clout due to it being the reserve currency.
Can you blame other countries though? The US is using its reserve currency status to wage wars against countries that are forced to fund those same wars due to transacting in US currency.
In addition,although no single country is stable enough to replace the USD that is why they are looking at "baskets" of currency's so no single currency directly effects the world financial markets the same way in the future.
I don't see us returning fully to gold backed currencies due to the limitations of such but I do believe the "basket" of currency will include gold as a means to hopefully take advantage of some of the stability in gold back currencies without the limitations that come with it as well.
A mixture of gold and fiat currencies is the next natural chapter in world finance.
Thought-provoking piece, even if I disagree with a few relatively minor details. For the record, I've been heavily long gold and oil since 2004, but Nic makes some great points about alternatives. Is anyone going to bet on the Russians? Brazilians? Chinese? I wouldn't want to hold an asset backed by any of their currencies. He also makes a great point about the euro - did anyone not see the Spanish catastrophe coming?
The dollar is a horribly imperfect reserve currency and I'm not sure that gold is the answer, but I have no faith in any of the other currencies as a potential alternative.
No, gold is the answer. Actually, I will blaspheme in the eyes of other gold dorks and say that TANGIBLES are the answer. Anything tangible that anyone else wants. A dollar is tangible only in terms of the paper it is printed on. Maybe in 20-30 years people will trade them on eBay (or whatever will replace eBay in a few years).
That being said, I am a metal maven. I picked up a bucket of columbium powder (you call it niobium) the other day. Sa-weeeeet!!
I am Chumbawamba.
spot on, its not about gold or not gold, its about possession of intrinsic value or not. Gold wont answer all the problems out there. You have to be gullible to think that there is such a simple, one-off solution for everything. We need a system based on labor, intrinsically valuable things and maybe energy. The bankers own all the debt and all the gold, so things woundnt change that much when we switch from one to the other.
BGR - Full circle on topic. Back it out a bit from our last and I am sure you'll get it even more. Cheers.
sorry but I dont quite follow. what topic are you referring to?
Dice - Another discussion that relates. On the S & P thread.
Miles,
I've given your views considerable extra thought and things are becoming clearer. As I mentioned before, I already knew much of what you wrote but thanks to you, I now have a deeper understanding.
Your point about the feedback loop on value stores is a good one, although I believe it's primarily applicable to gold/silver/platinum and less so for oil and industrial metals because there is relative excess in the non-precious commodity markets. In regards to gold, I can see where the "powers" are currently being overwhelmed as the feedback loop drives more cash to these limited areas.
The problem as I see it is that they're either going to have to allow gold to rise or orchestrate another blowoff in the markets - much like they were forced to do last July. Personally, I don't believe they can follow that route again because we'll get bonecrushing deflation if they fail to maintain the myth of an expanding economy.
Which brings me to the more important problem - economic traction. We're not getting economic traction off the stimulus attempts to date - neither here nor in China. This means that attempts to inflate assets such as the S&P500 while experiencing negative cash flow at the corporate level means that their attempt at debt creation is doomed to failure and that failure could lead to massive deflation. This would then create/enforce a feedback loop that would literally crush western economies.
Thanks again, it was your discussion of the feedback loop that allowed me to take this to the second/third derivative.
negative cash flow, in real terms, is a built in function of our monetary system. It was always the inevitable outcome. Now it is just more apparent since it easier to see; instead of the neg-cf coming from peoples savings to finance the inflation tax, it is coming from the corporate top line.
And I agree that they cant allow another deflationary wave, they have hedged their solvency on it not happening. Whether this wave will come or not, that is the question.
Outsourcing to China and other developing countries was another way to hide the negative cash flow because they were able to eliminate the need for re-investing in plant and equipment, while also keeping wages under inflation-trend line. It was a brilliant plan but it effectively hollowed out a once great economy.
Excellent Dice & BGR & so true. No doubts here. Remember to add the change from 1 income to 4, when kids in the basement or combined living arrangements are considered or 5 when collective efforts with 501(c)3 is included. Oft mentioned & forgotten as background even now.
There is also what I call the Chinese pig farmer essentials include industrial metals like copper & nickel and there are folks out there stockpiling as part of this feedback loop. Like I said, it doesn't need to make sense, it just is.
The key to all of this I agree is the negative traction that is being obtained in the "real" economy. The reliance on the fed put has made our economic structure highly suspect and I believe doomed to collapse once the evidence of the corporate top line becomes clear to all. I suspect even when that happens all of the liquidity will be trapped by member institutions in prop trading and similar activities which may well lead to continued equity & bond accumulation while everything else continues to react to reality. Strange brew.
Gold's current value has virtually nothing to do with its utility as a raw material for jewelry and other ancillary applications (electronics, coatings, etc) and has everything to do with its perceived value as an alternative to the dollar. The tangibility of one versus the other is a complete red herring.
Consider this article that states jewelry sales dropped 22% in Q2 and retailers can't increase prices to compensate for the run-up in raw material costs ...
http://www.bloomberg.com/apps/news?pid=20601091&sid=a8tKdCWpg2Y8
The gold bulls today sound a lot like the oil bulls last summer who were convinced that $135/barrel made sense and spouted theories of peak oil to justify their position. Does "death of the USD" = "peak oil"?
Gold's current value has virtually nothing to do with its utility as a raw material for jewelry and other ancillary applications (electronics, coatings, etc) and has everything to do with its perceived value as an alternative to the dollar. The tangibility of one versus the other is a complete red herring.
Consider this article that states jewelry sales dropped 22% in Q2 and retailers can't increase prices to compensate for the run-up in raw material costs ...
http://www.bloomberg.com/apps/news?pid=20601091&sid=a8tKdCWpg2Y8
The gold bulls today sound a lot like the oil bulls last summer who were convinced that $135/barrel made sense and spouted theories of peak oil to justify their position. Does "death of the USD" = "peak oil"?
peak oil is not a theory. it is fact. the debate is whether it already happened or not and if it hasnt then when in the next five or ten years will it happen. I personally believe peak production was in july 2008.
Tumblin - I agree with your timing of peak production - production profiles back it up. But since I believe the demand for oil will drop dramatically once China weakens, I don't believe oil will be a good store of value until the global economy bottoms.
production isnt and wont be the only thing thats falling in terms of oil; the efficiency of oil...that is the amount of energy that is usable per every barrel after you factor in the energy costs associate with harvesting it...is falling rapidly as well. Most people o not appreciate the effect this will have on our energy dynamic. Even if production levels stay the same, the energy we get from oil will go down. This has been happening at a lower rate for a long time, but up until now we have been able to replace the energy lost due to lower efficiency with higher production. If both efficiency and production start falling in tandem, as they are now, then the effects on the supply of energy will be much harder felt.
I consider oil the best long term investment out there, unlike gold which I consider a means to save, not invest, because our modern agriculture infrastructure is based on it. People will have to eat and in order to eat to fee everyone well need oil. Pretty simple. All youre doing when you purchase oil is purchasing a resource that will be crucial for the future survival of humanity, the challenge of which is not grasped by the majority of traders out there.
I agree regarding oil as the best long term value and for precisely the reasons you state - agriculture. Tar sands extraction is the perfect example for energy efficiency, if you need one - 7/10's of a barrel equivalent to get one barrel of oil - not to mention the vast amounts of water.
However, since I'm a true bear on the Chinese economy, as well as the rest of the emerging markets, I believe oil can fall to $20 per barrel before it rises again. Also, I'm long term bearish on US suburban living which presents another potential reduction in oil demand, if I'm right.
I guess we have different meanings of long term. For the next ten years you cant make a better investment that securing a supply of oil (futures or physical) IMO. If you mean for the next year...its much harder to say. I for one dont believe the Chinese will let the smoke and mirrors behiind the USD ruin their economy. Theyre already going into trade agreements with Venezuela and Russia to trade energy in their own currencies and to forgo the dollar. Basically their doing everything possible to detatch themselves from the dollar as quickly as possible; basically theyre doing everything possible to make sure that the us financial system does not take them down.
So the price of oil is largely dependent on the dollar and what goldman sahc and jpm decide to do with their oil tankers, and not so much to do with the supply and demand dynamic. IDK I am bearish on the world economy as a whole, including China, (and btw I dont see how a flight to suburbia is a negative for the demand for oil, no public transportation to get to work) but the pace at which deman falls, considering this liquiity injection, should not be faster than the pace at which energy falls. although they are related of course.
You can wait for 20 dollar oil but I think its a smart idea to start accumulating future right now.
I've still got oil assets, but I started selling in the Spring of 2008 - fortunately. Since the emerging markets were the reason for the big spike in oil demand over the past five years, it would take a major drop in their economies to get oil to $20. I believe China's failure will reach biblical proportions. Other than this extreme expectation, I agree with your thesis.
A lot of their problems would be alleviated by detaching from the dollar. There is a good chance that they come out of this better than the US since they are naturally not as overlevered as the US. Maybe recently they have seen artificial leverage forced upon them by the govt but historically their savings rates have been high and risk appetite low.
On the other hand its a country of 1.6 billion people with a lot of potential for civil unrest in case of any economic disturbance of significant magnitude. So they also play a fine game here, but I feel like theyre well set up.
They actually use more corporate leverage than in the US - everything from working capital up to plant and equipment. Their consumers aren't highly levered in aggregate but they have a large number of nouveau consumers who do employ leverage.
China's banks make our own zombies look strong by comparison - bad debt in the greatest expansion ever witnessed is enormous - has been for years. Also, by virtue of their becoming the manufacturer for the world, they have more operating leverage than anyone else.
If you analyze them using a value chain, they are price takers on the resource side and price takers on the selling side which suggests next to no profit in the middle. The fact that they have to offer vendor financing to the US and other countries attests to their relative lack of value-add/channel leverage.
Finally, most of China's growth has come from fixed plant investment over the past ten years. That works when there is end-demand for your products, but not when demand dries up from a global downturn. If you put it all together, China will be a smoking ruin when this downturn bottoms.
It sounds to me like a lot of these characteristics are similar to those of the US economy circa 1929.
Not trying to be obtuse here, since you seem to be a lot more knowledgeable about the inner workings of Chinese industry than me, but it just seems to me this situation is analogous to the one Europe an US found themselves in before the GD.
And Im not questioning your prediction of economic ruin, just what happens after its onset. But its almost impossible to tell anyways. You could be right, but there might just be a paradigm change that could not possibly be factored in, like the successful/relatively harmless appreciation of the yuan, that might affect the final outcome.
I think its similar to the US pre-GD but made worse by government intervention and a relative lack of profit motivation. I recently read where electricity demand for China's small and medium sized businesses was down 49% in the first six months of this year. These are the businesses that made China an engine to be reckoned with - what's left are the SOE's that are relatively inefficient but more politically malleable.
A rising yuan would destroy them because they lack the middle class to consume. Ask yourself why they threw $1 trillion in new loans at their economy in such a short time? It's because they are ready to implode and decided on a "hail Mary".
The difference is that if they do end up washed out, at least their citizens are buying gold and silver to carry on commerce when their SHTF; whereas here it's every man for himself.
We might escape a greater depression if China does fail, because it could make us competitive again as a manufacturing exporter IF government lets free enterprise rebuild and retool without taxing the fuck out of us or getting in our way. But them's lots of if's and could's and might's.
Or Israel bombs Iran and sparks World War III: The Apocalypse (coming soon to a street corner near you).
I am Chumbawamba.
The electric usage story is a key. It, along with industrial natural gas usage is also being repeated here at a run rate of -20%/-30% last check. I am sure you would agree BGR that looking at hard data points like energy consumption, various levels of tax receipts and port/rail/truck tonnage levels are the places to look in the current environment for reliable information.
Answer = yes. Both are real, unlike the dollar's value.
I think we need to test a new theory. Peak Bullshit. Is this the most amount of bullshit that people can process from our leaders and lawmakers and system builders before they just tear it a new asshole.
but it would be so bloody hard to keep track of.
Hephasteus,
Wow. I just had an epiphany. The MSM has been, in fact, a bullshit extraction technology whereby you create artificial pressures in the system to pull out bullshit you normally could not get to. These technologies cause an unnatural spike (a sharkfin) in bullshit production. What this means is that once you reach peak bullshit, it will not go through a plateau period and gradually tapper off the other end of the curve (like it would have if you had not applied the MSM extraction technology). Instead, the extraction technology will actually make it so that the plateau is unsustainable, and there will be a precipitous drop in the amount of bullshit that can be processed/tolerated.
This theory paradoxically satisfies my need to understand and yet replaces it with newfound horniness. I think it's best if you keep that kind of talk on the internet and adopt a safety word.
MsCreant, you just blew my fucking mind.
I am Chumbawamba.
Spectacular view MsCreant. Indeed the process is being applied in so many places.
We've passed Peak Bullshit - the wells are dry.
"it remains that overall the Fed has an unmatched expertise when it comes to managing liquidity. It took all that experience and an incredible arsenal of innovative tools to insure there would not be a run on a bank last year. Managing a central bank on a more global level would be almost impossible".Dosesn't that also mean that this expertise could also be used to destroy the dollar?. Why some people are still ignoring the signs?BB and TG sole mission in life has become the s&p(so I believe at least). They will do whatever it takes to whip those who dare and short the market(they probably has instructed Fidelity not to sell anything in the interim).They have staked everything on the fixation of the public with the dow.So whether dollar replacement is true or false,it did the trick for today at least,and till the next drop,something else will come up...........
Ya I think their liquidity management involves pissing on the people least likely to do anything about it until it reaches a breaking point and people start plugging thier urethra with rolled up sandpaper sheets.
Thank you, Nic. Seriously. I wanted to comment exactly this earlier today but didn't have time. You nailed it--and did a far better job than I would have.
Really, folks, if you think the renminbi (the constrained, controlled, manipulated and just generally communist-y renmimbi) is ready for prime-time on the world's most important commodity stage, I have an undertaking of great secrecy and importance that I and my banker, Mr. Ompopo of Lagos, would like to discuss with you. This wouldn't be a basket of currencies but a basket-case of currencies.
Nic, it's kind of douchey to log in anonymously and post favorable comments to your own article.
That being said, nobody is making the argument that the renminbi should replace the dollar. Thanks for the strawman. I have a can of kerosene and a book of matches.
I am Chumbawamba.
Nic,
DITTO!
very well put.
a change to sdr as a reserve currency may seem dubious as it is hard to imagine a new national order being formed willingly by 2 groups of nations where 1 groups funds the imf at the expense of the other. that is to say, the group that will benefit from moving away from the dollar (china..opec) must subsidize the groups that will not benefit (america , eu )
.......besides the fact that it will take at least a decade to even set up the semblance of an integrated and robust(yet small) currency system that can be used for settling international currency transactions through a bank of international settlements------------------------
there remains potential for major violence by any one country to upset the establishment of such an agreement.
of course, most people would point fingers at the u.s., but the eu, japan, russia, china, there are a number of countries that could easily be involved in sabotaging such an arrangement, putting it back decades or more.
if the dollar's reserve status was precedented upon a macaruthur agreement resulting from domination over its rivals in a world war, then we may expect the next new world reserve currency to come out of the next empire (perhaps a renewed u.s.?) rather than the current conglomerate of nations. weather or not an outright world war is necessary remains to be seen. perhaps china can take over the world without precipitating a full scale world war.
Nic seems to have ignored the fact that the rest of the worlod is f***ing pissed off with the US and are doing everything they can to disconnect from it. This is classic "inside the box" thinking. Boohoo nobody loves me, I'm taking my ball home.
Don't be afraid of change Nic; embrace it. It's called living.