To QE3 or Not to QE3 and Does it Matter?

Michael Victory's picture

 

There has been a lot of talk about whether the Fed will discontinue Quantitative Easing (QE) and let the economy stand (or fall) on its own legs this summer. As we explore this question, it’s important to keep in mind the Fed will continue reinvesting principal payments from mortgage-backed securities and maturing Treasury holdings to keep the Fed’s balance sheet in excess of $2.5T. Before the 2008 crisis, the Federal Reserve maintained a portfolio of between $700 billion and $800 billion of Treasury securities—an amount largely determined by the volume of dollar currency that was in circulation. The increased size of the Fed’s balance sheet is an attempt to support the ever-growing debt held within both the public and private sectors. If you understand this in the context of the bigger picture, it will help you anticipate future Fed actions.

 

Sustaining our debt based currency requires constant and increasingly higher rates of credit creation. Factors converging right now are the enormous levels of debt in the system, a tapped-out consumer, loss of productive capacity (outsourced manufacturing), and the inability to grow exponentially due to resource scarcity.Cheap energy (oil) that provided the necessary growth over the past century is now becoming more expensive. We are getting less net energy at the same time we need to be increasing energy returns. The Mid-East crisis is only adding to the costs of energy while Japan’s disaster will add Treasury selling at a time we are in dire need of new buyers.

 

Although I have stated and continue to believe the Fed will resume QE in some fashion, we need to understand the consequences of no further QE to best prepare and protect ourselves for various possibilities.

 

Can the Economy Survive without QE?

The main reason the US economy cannot survive without life-support (QE) is that there is no ability to close the gap between available public resources and government spending. Nor is there the political or public will to push forward structural reforms in social welfare or unfunded liabilities, such as Social Security and Medicare. US debt has grown rapidly since the early 1980s when the US had under $1T in national debt. Today the US national debt stands at $14.3T, with annual deficits exceeding $1.5T. This is a pyramid/ponzi scheme that has only one ending, collapse. Following the 2008 insolvency crisis, millions of US citizens were left without a job and are now living on government handouts. Social welfare benefits increased by $514 billion over the last two years (TrimTabs) and now account for 35% of wages and salaries. Over 43 million Americans rely on Food Stamps to purchase groceries and we haven’t even gotten to the increasing population reliant on Social Security. All of this is occurring at the same time prices are rising for all necessities. Any cuts in social welfare or unfunded liabilities will result in massive discontent, populous uprising, and the eventual breakdown of the current system. Hunger is a great motivator.

 

Effects of Deflation

At this stage in a highly leveraged debt-based monetary system, deflation would result in massive defaults. Money (credit) would shrink, while prices, employment, borrowing, and tax revenues would fall. The US is already unable to meet funding requirements (as noted by the $1.5T deficit). Falling growth and declining tax revenue will only exacerbate the deficits, leading to a sovereign default.

 

Point of No Return 

Beyond the social impact, if the Fed stops creating money to support the insolvency crisis (i.e., printing money to fill the funding gap), the sovereign bond market and western banking system will implode. The western (global) banking system is based on the continued functionality of its sovereign bonds markets, the underpinning of the monetary system. A major sovereign default will result in loss of international finance and loans. Borrowing costs in the form of higher interest rates will increase dramatically destroying derivative markets and the underlying currency.

 

Sovereign Debt Restructuring

There are many examples of sovereign defaults to explore that help explain how defaults impact borrowing costs and currency. One recent example is Russia’s 1998 default of $72B. Following the default, Russia’s entire banking system fell into chaos with many banks being closed, while others were taken over by the government. The ruble fell about 70% against the US dollar from August 1998 to July 1999 (84% consumer inflation rate in 1998). From 1992 to 2000, Russia’s annual inflation rate was 38%. Eventually Russia’s debts were restructured. Another example is the Argentinean default of $132B in 2001. Leading up to the default, Argentina suffered through hyperinflation – prices rose 5,000% in 1989. As with Russia, the Argentine debt was restructured.

 

Restructuring is not easy and often does not resolve the problems. For example, sovereign defaults: 1) must be consensual; 2) they pose risk of moral hazard; and 3) they require funding by increased taxation. Another problem is the introduction of hedge funds that hold distressed sovereign debt. The debt holders may sue for full payment, even after a restructuring has been arranged. Elliot Associates exemplified this when they purchased $20M of commercial loans guaranteed by Peru after they announced a Brady Bond restructuring. Elliot Associates sued for full payment and eventually won the case for $58M, which Peru paid in 2000.

 

Hold Your Gold

Much of the public and gold investors alike, are uninformed about the consequences of discontinuing QE and a subsequent sovereign debt default. What we are experiencing today is a global insolvency that has no possible outcome other than a devaluation and/or restructuring of western debt. Left with the choice of debt default through restructuring or monetization, the Fed will choose to delay as long as possible. Delaying the inevitable requires printing money and negative real interest rates to sustain debt financing. Entitlements will have to be cut at some point, taxes will increase, and public assets will be privatized. Unfortunately dragging this out leaves the poor and uninformed in the most vulnerable position. Given the astronomical levels of global debt, hyperinflation will occur if we don’t restructure, which is why you should hold physical gold. And if the Fed does decide to default, you should hold physical gold – currency devaluation, fraud, and corruption coincide with sovereign debt default.

 

Since this is a mental exercise in looking at the end of QE, I’ll touch on timing and sequence of events. The US may be able to keep bond markets functioning in the short-term following cessation of QE. This will result in falling GDP, a liquidity crunch, and temporarily rising US dollar. Timing depends on the willingness of foreign creditors and other external factors, but I do not expect US bond markets will be able to attract the necessary funding beyond 2012, without additional credit creation. If the US is able to prolong the collapse during this period, annual deficits will continue to grow, forcing the US Govt. to introduce new and fancy ways of hiding the growing debt. At that point the US will need to make a choice between default and resuming monetization of debt. In either case, the US dollar will fall and gold will rise. Just as both paths lead to higher gold prices, they eventually connect with a new monetary system. Nothing short of an asset backed currency will be accepted following the catastrophic collapse of the western (world’s) banking and monetary system that awaits.

 

~David Freedom

david@thevictoryreport.org

 

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mediahuset's picture

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Waterfallsparkles's picture

Americans have already felt the effects of Deflation over the last three years.  The devaluation of their Homes, the devaluation of their spending power, the devaluation of their wages, the devaluation of interest on their savings.

The only people that have not felt devaluation is Wall Street and the Bankers.  NOW they are worried about the average American.  Bull.

The Bankers may say how horrible it will be for Americans without more QE but the fact is that most Americans have already felt the pain of devaluation.  Bankers are worried about THEIR situation now.  Americans do not care as they have already been ignored with all of this so called stimulus.

expectplannedevents's picture

In the middle east, debt is a sin...

you loan on Equity in return for a share of something.. I give 10,000 to your start-up and say 80% cut or something. You then get 20% and a shot at the next Facebook you may start.. 

TBT or not TBT's picture

In the Middle East(outside of Israel), everything you might think to do that is not forbidden, is required. Charging interest or borrowing on interest is just one example. Over here, whereas we may have a collapse and SHTF and so forth, the average westerner won't end up poorer or dumber than the average arab CURRENTLY is.

deth's picture

 

Useful essay DF, especially with regard to restructuring. I've always thought any resolution other than continued inflation is likely unworkable due to the massive complexity of interconnections worldwide; budgets, contracts, derivatives... It's also possible that the Fed won't be able to shut down the confetti machine, even for a moment, without risk of chain reaction. Still, as you suggest, I would expect a short, sharp drop - even if it's engineered to a few few specific areas; with the obligatory msm danger, danger, infomercials.

I think you're 'point of no return' is dead on as well. Too often collapse and deflation are used as synonyms. The quantity of money theory will likely breakdown for fiat; less available fiat won't make it more valuable – it will simply end the process. And the process is like an explosion, when it ends, it's over.

The dollar loses value in a hundred year trend and so many assume that it will/can reverse trend; others assume the rate of debasement won't increase exponentially as it flies over the edge, and still others don't see the trend at all – too big I guess.

TheMadNumismatist's picture

I shared this with some fellow conspirators today and wanted to get it out a bit more, I think it is very significant, or am I Mad?

A link from the Financial Times pointed my attention to a blog post on the New York Federal Reserve website;

Historical Echoes: When Are Artists Like Central Bankers?

The post answer the question, the gist of which below:

Answer:....... When they create money........ William Michael Harnett (1848-92) sometimes painted just the money and was arrested for counterfeiting in 1886. ........... Harnett never painted money again.

Read the post in full, because what really piqued my interest was another link to the Wall Street Journal on a 2009 auction of fine art.

If I were cynical, I could believe this was a press release of why one should to buy art and "other" hard assets.

More sinister, is as an open message that the game is up and the Fed is facing prosecution just like any other counterfeiter.

That's just me of course.

Check it out for yourselves.

Original Fed post here and follow Warhol link from there.

Let me know you thoughts back here, and if you do not hear back, it could be the black helicopters.

http://libertystreeteconomics.newyorkfed.org/2011/05/historical-echoes-w...

Ag1761's picture

Interesting post, I've tried working some code against the dates of the artists, and for some reason I came up with 33 days from the 27th May (date of post).

Does 29th June ring any alarm bells?

anony's picture

It doesn't matter because the FED has been making stealth moves without announcing it to the general public.

There has been more 'free money' being handed out under the table than the trilliions that are visible.

If you believe your government agents, about anything, you probably need some training in cynicism, doubt, and lying.

I don't think there has been a true word spoken by a government agent, elected or appointed since the invention of Lobbying. 

Whether these stealth and public moves have been good for the people, the masses, is subject to some serious question, but for the elite, it has been a time of great advances in their accumulated personal, corporate, and Trust fund wealth.

 

 

 

Scoted's picture

Perhaps a little bit sensationlised. I think that governments around the world will do anything they can to prevent a US default in order to keep the people happy.

InconvenientCounterParty's picture

or... certain governments are positioning themselves for the mathematical certainty of a default by the U.S.

While inside the U.S., The comfort with the new normal of "moral hazard" is growing.

The same morally bankrupt idea that the U.S. is exceptional and can take what it wants from the rest of the world will segue nicely into sovereign default.

Scoted's picture

Perhaps then China will step up to bail out the US

nodhannum's picture

Rynak,

You are reading my mind.  I went into the Canadian Dollar about two years ago along with some Aussie dollars and small amount of Swiss Francs.  I was in Argentina just after it blew up and one definitely doesn't want to be in the home grown fiat when the spagetti hits the fan.

shortus cynicus's picture

At this stage in a highly leveraged debt-based monetary system, deflation would result in massive defaults. Money (credit) would shrink, while prices, employment, borrowing, and tax revenues would fall. The US is already unable to meet funding requirements (as noted by the $1.5T deficit). Falling growth and declining tax revenue will only exacerbate the deficits, leading to a sovereign default.

Yes but after short time massive default will cause run away price increase in commodity sector, which feels no deflationary at all. 

Explanation:

Debt is the main asset (going aside with state brutal force) what is backing fiat money.

If debt goes away, so fiat money looses its "value". Most leveraged assets will decrease in price, but it means nothing because they are mostly worthless anyway. Unbaked fiat money start to flee in anything not leveraged, like durable commodities, causing slow secular prices rise, or even run away inflation.

Case study: FED printed fiat money and founded real esatte bubble. We, The People, have got houses, banks have got promises, and Chinese all casch. Since 2006 Massive default wave is eliminating debt by defaulting, so promises are gone, cash is backed in theory by houses.

But Chinese know, that those houses are worthless anyway, so they must panic and spend it for anything else. Marginal Utility Theory clearly explains that there is no sense to Chinese to own all US houses. They must flee to commodities, causing price increases.

If money would be sound money, which is gold and silver, there would be no need to flee to commodities, so commodities would fall down along with leveraged assets, like in Great Depression. But it's different now.

FEDbuster's picture

Hasn't the FED become the largest holder of MBSs?  Fannie and Freddie are the bagholders that end up with the houses to deal with.  Unload at below cost prices and bailed out of losses by the UST.  The debt vaporizes for the former homeowner and is transfered to the UST (or maybe stays on the FEDs books somehow?)  The house ends up in the hands of "cash" buyer or some other debt slave at a lower basis, but the remaining debt that the original homeowner is transfered on to the government balance sheet (or the FEDs).

shortus cynicus's picture

It is technically irrelevant who hold bad debt. Government entities put money in circulation backed by debt (inflationary impulse), with a promise to collect that money back from market (deflationary impulse).

But, surprise, surprise: this promise will not be held. Due to national security and unusual circumstances that no experts could see ahead, debt will be just forgiven and houses sold on free market or just given to all the jobless people as social support (like food stamps). So there will be no use for all that fiat put into existence. Cash holders must suck it in and cope, and flee to commodities.

I am Jobe's picture

How much money can one take out of the country now? I know it used to be USD10K.

Chicken_Little's picture

You may take less than 10K in currency or "financial instruments" (like gold) out without reporting it. Above that there's no restriction as long as you fill out the US Customs form declaring it. You may still fed-wire any amount to a foreign account because that is the same as reporting it. If you have any foreign accounts worth over 10K you have to fill out a treasury dept. form f90221 each year and give them the account number and highest balance for a given year.

Chicken in Thailand  :)

DoChenRollingBearing's picture

My understanding is exactly the same as Chicken's.  Take out over $10,000 in anything liquid (INCLUDES gold, yes it does!) and you fill out the form.  I have told my tale of how the B-Teamer Customs Agent tried to trick me re the gold value (over $10,000 value, but less than $10,000 in Legal Tender value).  I told her the real value.

The lady then said: "Right answer."

Take all you want, but declare it to OUTGOING Customs there at the international airport (in the USA, going out).

Plan on taking AT LEAST 30 minutes to do this, the B-Teamer did not even know what form I was talking about.  She had to make two calls...  And then she tried to trick me...

---

The next time I took gold out, I took less, and split it with my wife so that neither of us had $10,000 worth.

DFreedom's picture

Here’s a good interview SGTReport had with James Turk.  He touches on the increasing govt. handouts and the coming defaults.  Whether through inflation or not repaying, collapse is coming.  It fits nicely with this article. 


http://thevictoryreport.org/2011/05/30/james-turk-8000-gold-and-400-silver/

blindman's picture


Steve Keen: Will there be a double dip in the USA?
http://maxkeiser.com/2011/05/29/steve-keen-will-there-be-a-double-dip-in...
Bev | May 30, 2011 at 3:02 am |

Ask about Byron Dale
http://www.moneyaswealth.blogspot.com/
Don’t let them side-track you by talking economics. It’s about MONETARY POLICY. It’s about how money gets into the economy that matters most.
http://moneyaswealth.blogspot.com/2010/07/focus-on-problem-not-side-issu...?

Best Political Quote in Over 100 years!
?“If men can create electronic bookkeeping entries representing debt and loan them into circulation, men can surely create electronic bookkeeping entries as a payment and spend them into circulation with no debt. Which do you prefer?”?- Gregory K. Soderberg, Rep. Candidate MN. Lt. Gov., 2010

MONETARY POLICY??
How money gets into the economy.??
This is the key to the solution.??
There are only 3 ways money can get into the economy and all 3 have their own set of consequences. Those 3 ways are:??
Gift it in??
Lend it in
??Earn it in
snip

Lend It In??
There is NO money created in this process to pay interest with – only principal is created when a loan is made. So, it’s unworkable from the start. Looks OK at first – easy money! But, it’s a Ponsi scheme. A Bernie Madoff heist. It institutionalises corruption and criminality and leaves the Nation without a permanent money system while guaranteeing its people eventual economic destruction.??

Earn It In??
First, this way, there’s no debt. Government would create the money (same as the banks do now) and enter it on their books as an asset, instead of a debt. Contractors get paid for production that we need (infrastructure) and they pay their workers – who buy stuff. No debt, no borrowing, no bonding, no tax increase, no tolls, good modern roads, safe bridges and a huge debt-free stimulus. That means JOBS!
snip
?
Make One Small Change??

This could be implemented within 72 hours (maybe less) of passage. The bill is TWO PAGES! Congress could actually read it for a change.??
Nothing but an accounting procedure needs to change. Oh, and your mind.
……..

Ellen Brown
http://webofdebt.wordpress.com/
She is building a Public Bank movement, state by state, built on the successful plan of North Dakota.

Bill Still
http://www.secretofoz.com/
Whose video shows that we have won this same battle (Money controlled by government–a Debt Free Monetary system) six times in the past, fought by the likes of George Washington, Abe Lincoln and John F. Kennedy among other Presidents who were then warred against, assassinated, or attempted to be assassinated.
……….

So, we need to win again for the 7th time.

………..

Also, silver and gold are like the Wealth Based Monetary System of Public Banks in that all of these are cash, a persistent wealth which keeps circulating in the system. Though if like the original gold bugs, if gold is loaned as debt into society, we will have the same problems as we do with the current fiat debt based money system.

…….

Have you seen the new 100 dollar bill design
http://www.roadtoroota.com/public/261.cfm
with all the gold symbols and revolutionary language. It seems to me that the US with the biggest gold reserve (perhaps) has already planned to gold back its paper currency and maybe use all that gold ink to make it hard to counterfeit.

What are they waiting for.

And, again, the big difference is whether that gold back currency is part of a DEBT based Monetary System or part of a WEALTH based Monetary System that matters the most.
………..

And, Jim Sinclair has an interesting formula for the top price of gold which he challenged readers to figure out based on the formula that worked in the 1980?s which is:
from:
http://www.jsmineset.com/2011/05/26/the-mathematics-of-gold/print/

Assumption:

Because gold is held by many central banks, once as a reserve currency but now as an inventory currency, it functions as a swing asset to balance the International Balance sheet of the US.

Central banks are sellers of dollars but still hold, by default, large dollar inventories.

China has hedged its dollar position 50% through commitments to long term dollar commercial agreements, pay in, mineral, and energy deals internationally. That is an act of pure genius.

We can assume other central banks still hold 90% of their reported dollar positions, on average unhedged by commercial obligation positions.

In crisis times, the US dollar price of gold ALWAYS seeks to balance the International Balance Sheet of the USA.

Therefore:

Take 90% of international US dollar debt less China and then add 50% of the US debt owned by China. Then divide that number by the ounces supposed to be owned by the US Treasury. The result is where gold wants to go.
……..

So, if the international balance sheet is corrected by increasing the price of gold, and the US has a new gold back currency, then don’t we still need the Public Banks, the Wealth Based Monetary System (which is what silver and gold coins are) to start to improve the economy fast, as a Debt Based Monetary System even if gold backed is still debt and so not solving our debt problems–you cannot get out of debt with debt.

oldman's picture

Blindman,

You seem to have an idea or two about gold, so I will pose a question:

I am curious and ignorant about many things, but one of them is this: what is the effect of all of this buying and holding of pms, doesn't this suck up a lot of bucks? And what else?

I need help----fill an oldman in on this stuff, please.

oldman

blindman's picture


dear oldman,
mind you i am merely a blind man.
but, you might check the links in bev's post
that i transposed from the cited link to this
post.
and consider the fiat creation regime we live under
and its viability, dubious going forward when debt
creation, with interest, is the mechanism to satisfy
unserviceable yet foundational and systemically essential
existing debt, with no apparent allowable extinguishing
mechanism of existing debt ( securitized ) and sacrosanct.
.
what are the options. where can the next essential bubble
be? they could let the system fail and start anew but
that would be accepting defeat and letting of blood
for the elite so that is not an option as true as it might
be.
i expect they will, all fiat currencies, seek to horde
gold and perhaps silver in the fog of this moment of
necessary transition. you may have noticed everywhere
you go the sign "cash for gold"? and at some point, when
all the loose gold and money, savings and retirement accounts,etc.
have been bled out there will be an agreement among central bankers,
fictitious and fraudulent as anything that man has ever proclaimed,
that fiat currencies are now, once again, backed by precious metals.
people will have faith once again based solely on an advertisement
and bald face lie. but that is just life and we will move on.
of course gold will then be much more expensive than it is today so
it probably won't happen till the weak hands can be stripped of their
current holdings.
bucks are given freely to the doomsday machine derivative boys.
they own the government and all its work. bought with
corporate welfare and handouts for treason.
as an analogy i see precious metals as the sacrificial element that
spares the corrosive nature of currency its short life span. fiat
has proved to be highly corrosive in the hands of men. the interest
payments have become problematic. even the principle payments are
not redeemable but the securities based on these are systemically
essential. and worse the viability of the derivative fraud doomsday system
is based on these payments. the system needs a sacrificial metal, a strong
and resilient substance, to absorb the insanity and fraud of man.
something inert and stable and therefore precious and beautiful.
as gerald celente says "beauty overcomes fear". we need that.
.
inflation is the only way out of the debts but you
need bonafide investors with legitimate investment capacity, money,
real money, not alternate fiat, to invest in the currencies.
baseless paper investments are not precious.
so it is quality that is precious. quantity of worthless is useless.
this new investment value will not come from
mars. what is available, where some value? hmmm.
all that needs to be done is revalue an existing economic element
to compensate for the missing value of the deteriorating fiat.
simple solution seems to be........ p.ms. gold and silver etc.
and then we can have the existing system continue into the
future without having to start all over from scratch. ?

but bev makes some good points regarding value base vs debt base.
and love to b. still and s. keen etc......
like i said, i am merely blind and very limited otherwise

oldman's picture

Blindman

Thanks very much for the start towards an answer to my question. I am travelling today so will not have time to get on it, but now I have a trail to sniff, thanks to you.

I'm just b ack from 20 yeears in SA where, until recently, cash was all there was and so being in the US is like a fantasy: no one uses cash or even looks at the price of things. I cannot seem to get my feet on the ground in such a fantastic, artificial, and make-believe world.

Thanks again             oldman

uniman's picture

A blindman

in a dark room

looking for a black cat

that's not there!

Just having some fun here, not flaming you.

DoChenRollingBearing's picture

Hold your gold is right.  Everyone should have the best little diversification in town: gold! 

Silver is OK too.  One of the ZH-ers who reads my blog told me he does not have heirs...  So he is only worried about himself, the long-term future does not matter to him.  He buys silver because it would be more spendable in a TEOTWAWKI.  That is the first time I had run into that situation.  So, YES, even though I am a gold-guy, silver makes more sense for some.

Barron's had a piece on platinum and palladium in their "Commodities Corner" column.  I discussed Pt and Pd in a short article at my blog.  Want to take a look?  Drop me a gmail assuring me that you will be civil.  "90 ZH-ers" can't be wrong!"

Latest article is titled "Which is the Best County in Texas?"

 

Rynak's picture

A few weeks ago, my personal strategy was still shelter, food, equipment, metals.

By now, i no longer consider this a flexible and universal stragegy. As much as people hate fiat here, i will from now on allocate further savings to fiat.... but not dollars and not euros. Instead, i'm currently researching countries and currencies to look for a basket of currencies which have been somewhat stable in the past, and which's economy and finances are not overly dependent on the current crisis zones.

mayhem_korner's picture

Tough call.  A lot of folks - including John Williams - advise to diversify into more 'stable' currencies like the Aussie dollar, Swiss Franc, and Canadian dollar.  I like those ideas better than USD or Euro because there are better austerity measures in place and less debt overhang, but there are some considerations:

1)  You have to be able to access the currency.  In a SHTF scenario, I don't know how easy that would be.

2)  If the Euro and USD collapse, they may bring everything down with them (i.e., no currency is safe).

Just for info, here is what I hold in my '100% liquid' portfolio (i.e., within the 4 walls of my house - not even counting a drive to the local bank branch):

45% gold

30% silver

15% consumables (food, water, emergency supplies & barter goods)

10% fuel & firearms

10% US fiat

lawrence1's picture

You can access the currency, like your US fiat, by holding it physically.  Trusting any financial institution is asking for trouble.  Here in 3rd world Nicaragua I can buy Canadian dollars and Swiss Franks from time to time.

mayhem_korner's picture

Thx.  BTW, what's a Swiss Frank (sic) taste like?

 

TBT or not TBT's picture

Don't tell anyone. In an actual zombie apocalypse it isn't just the zombies after you, its the other non-zombies too. Also, get a good quality NVD and suppressor for your night hunting. They come at night, and you having your lights on tells them there is someone there. Have a dozen barrels of water in there too. That goes fast.

JFK.4PREZ's picture

I like your old strategy better.  You may want to elaborate on what prompted your change.

Rynak's picture

No longer considering metals a guaranteed safe haven, and thus discomfort with betting everything on one sector. I already have enough PMs to get through a crisis, so i now allocate new *additional* savings to fiat currencies which meet the previously described properties.

Or in short: Diversification. I've gone from "food, shelter, tools, metals" to "food, shelter, tools, metals, exotic fiat"

gtb's picture

Why do you no longer consider metals a safe haven?  What changed your thinking?

Rynak's picture

The scale to which i can imagine govs/banks abusing their power has changed.

When people talk about the role of metals in past hyperinflations and crises, it seems to me govs were not as aware about the relationship between fiat currencies and metals, or at least weren't willing to go as far as i think they may nowadays go. We were dealing with rather small individual nations, not with two or three entire economic blocks being in a crisis. I'm not sure i can explain all the details why i think that "this time it *may* (not must) be different", because it's a lot of intuition in the form of heuristics.... lots of little infobits and patterns which make me think that they may go nuts on metals - both in terms of manipulation, as well as in terms of laws and military force. Even if in such a scenario i could keep the metals, but not trade them, it would still strongly limit my agility and ability to adapt.

I do not think that this *must* happen.... i just no longer consider it highly unprobable, and thus want to spread the risk and play whack a mole.

gtb's picture

Interesting perspective.  Thank you for sharing.

JW n FL's picture

you should open and FX account! and own where ever you want to own Bro!

shit I would have said go that way, I thought everyone already had! I shared that way back.. my bad!

FEDbuster's picture

How about "exotic fiat" revenue producing stocks?  Canadian oil and gas trusts come to mind.

Rynak's picture

In theory, stocks would be a wonderful alternative. Unfortunatelly, i trust stocks even less than fiat, in terms of manipulation and volatility (one of the possible issues, is that the probably most lucrative commoodity stocks, are also the first commodities that would be affected by price fixing) - and i cannot easily trade them at any bank or other currency exchange.

Another candidate which i considered was gems, diamonds specifically - but i then discarded them as well because of the effort and unreliability in price-determination, high transaction costs - and in general just too much hassle - plus, it is not certain at all that gems would retain price-stability in case of a financial crisis.

DeadFred's picture

Somewhat off topic but not too far off, I may have a chance to buy a small gold mine and wonder if anyone here has input on how to evaluate the deal. I have a lot of due diligence before I take any steps toward purchase but at first glance it may be a good investment during hyperinflation. Some particulars- 40 acres of accessable land in a good part of the Sierra Nevada, available water supplies, placer deposits and an abandoned, flooded hard rock mine. I haven't seen the geologists report or even the property, it's owned by the friend of a friend. I have seen the 1/10 to 1/4 oz nuggets that came from the placer deposits and have to say they clouded my gold-bug mind. The owner or my friend have no idea i would be interested in or able to purchase it, so I haven't been led on other than normal BS between friends. Asking price is 1.7 million of is high for acreage plus a house near a lake and ski resorts so it has to include gold valuation. No current mining permit.

I know real residential real estate well, but I'm interested in any relevant input concerning it as an inflation hedge and especially possible tax benefits. Sorry for off topic. mic

TheMerryPrankster's picture

Don't get married to the property before you even understand what it is. In any deal, he who can walk away holds the upper hand.

I would recommend reading "Placer Examination - Principles and practice" Technical Bulletin 4 - U.S. Department of the interior - by John H.Wells , mining engineer, Bureau of Land Management. This was originally published by the U.S. govt. printing office with a price of $3.00

It is out of print, but available in used condition on amazon and ebay amongst other sources. I paid less than $20 for my copy, but currently they are going for 70$ on Amazon.

Its 209 pages and it covers everything about placer mining,

Part1 - review of placer theory and geology

Part2- types of placers

Part3- Sampling and Evaluation

Part4 Sample washing equipment

Part5 Panning and Assay Procedures

Part6 - notes on General Practice

Part7 Check list for placer investigations

Part8 Glossary of placer terms

and 6 appendices

http://www.amazon.com/EXAMINATION-PRINCIPLES-PRACTICE-TECHNICAL-BULLETIN...

 

here's a quick google search:

http://www.google.com/search?hl=en&safe=off&client=firefox-a&hs=ONv&rls=...

 

Good luck an may all your dreams be golden

lawrence1's picture

To play the devils advocate... seems that it could be complicated ... black swans everywhere ...

just take the fiat, buy more PMs, store some outside the US and enjoy your life while life as we know it still exists.  Simplify, simplify, simplify. 

nevadan's picture

Having a mining endeavour means having a partner that sets the rules and regulations and really would rather not see you attempt any production, much less have success.  Familiarize yourself with the permitting process and operating requirements.  It is nearly impossible for a small time miner to make a go of it.

Rynak's picture

The first counterargument that comes to my mind is: Big crosshair from the POV of the gov.

If it comes to the worst, do not expect the gov to respect property rights. The question in such a scenario is more what will they target, and will that be the majority of your "savings"?

DeadFred's picture

I'd survive but with most of my assets in RE the cross hairs may be pretty wide. In that respect this investment would not be diversifying.

FEDbuster's picture

"Buy it by the acre, sell it by the oz" sounds good to me, but you better have someone who knows the business of running a mine help you with it (see the show Gold Rush?).  Sounds like a good bug out location when the SHTF, but the price seems high.

DeadFred's picture

Questions about development and price would be addressed before ink hits paper. It would be a group (family) project and several capable people would help with the details and funding. It also sounds like an even better bug-out location before the SHTF. Thanks for the input.