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"Central Banks Cannot Create Wealth, Only Liquidity"

Tyler Durden's picture





 

In many Western industrialized nations, debt has overwhelmed or is about to overwhelm the economy's debt-servicing capacity. In the run-up to a debt crisis, bad debt tends to move to the next higher level and may ultimately accumulate in the central bank's balance sheet, provided the economy has its own currency. The process whereby government or quasi-government debt is taken over by the central bank is
called quantitative easing. Many observers assume that, once bad debt is purchased by the central bank, the debt crisis is solved for good; that central banks have unlimited wealth at their disposal, or can print unlimited wealth into existence.

However, central banks can only create liquidity, not wealth. If printing money were equivalent to creating wealth, then mankind would not have to get up early on Monday morning. QE just transfers losses from the previous holders of the asset to the
central bank itself. Up to a certain amount, the central bank absorbs these losses by sacrificing its equity and accumulated profits. Losses exceeding the central bank's loss-absorption capacity necessarily lead to inflation. If the central bank's net worth turns significantly negative (as Bernanke discussed and dismissed today), hyperinflation may ensue and a vicious circle may be set in motion.

Only a solvent central bank can halt hyperinflation.

The longer governments run large deficits, the longer central banks continue to monetize them, and the longer their balance sheets grow, the higher the potential for enormous losses and thus hyperinflation.

Necessary preconditions for hyperinflation are a quasi-bankrupt government whose debt is monetized by a central bank with insufficient assets. One way or another, owning physical gold is the safest and most effective way of insuring against hyperinflation.

 

Authored by Caesar Lack of UBS,

Gold - The Ultimate Balance Sheet Equalizer

In many Western industrialized nations, debt has overwhelmed or is about to overwhelm the economy's debt-servicing capacity. In principle, debt is not a negative if incurred to finance sustainable investment, the profits of which can then be used to extinguish the debt. However, borrowed money has increasingly been mal-invested or spent on consumption in recent decades. Mal-investment impairs the productive capital stock, and the growing debt burden strangles economic growth even more. When financial markets realize that the emperor has no clothes and interest rates rise, the economy is exposed as insolvent, and a debt crisis follows.

Bad debt ends up at the central bank

In the run-up to a debt crisis, bad debt tends to move to the next higher level and may ultimately accumulate in the central bank's balance sheet, provided the economy has its own currency. Excessive debt incurred by consumers, homeowners and businesses first moves to the banking system and corrupts its balance sheet. If (rightly or wrongly) the banking system isn't allowed to fail, bad debt is then transferred to the government via bailouts or implicit / explicit guarantees. When exacerbated by the burden of unfavorable demographics and several decades of proliferating welfare spending, it may overwhelm the government's debt-carrying capacity. Should financial markets become unwilling to refinance the government debt at rates acceptable to the government, central banks step in. They monetize government debt in the name of propping up the economy, creating jobs, or weakening the currency to keep government borrowing rates low. The process whereby government or quasi-government debt is taken over by the central bank is called quantitative and qualitative easing: "quantitative" easing denotes the lengthening of the central bank balance sheet while "qualitative" easing denotes the deterioration of it.

Central banks cannot create wealth, only liquidity

Many observers assume that, once bad debt is purchased by the central bank, the debt crisis is solved for good. The implicit assumption is that central banks have unlimited wealth at their disposal, or can print unlimited wealth into existence. However, central banks can only create liquidity, not wealth. If printing money were equivalent to creating wealth, then mankind would not have to get up early on Monday morning. Quantitative easing just transfers losses from the previous holders of the assets purchased by the central bank to the central bank itself. Up to a certain amount, the central bank absorbs these losses by sacrificing its equity and accumulated profits. Losses exceeding the central bank's loss-absorption capacity necessarily lead to inflation.

What is the loss-absorption capacity of central banks?

The non-inflationary loss-absorption capacity of a central bank is limited. European central banks, with the exception of the Bank of England (BoE), regularly retained a share of their profits in the past. The Eurosystem currently discloses capital and provisions of EUR 493bn, equivalent to 17% of its balance sheet total and 5% of Eurozone GDP. The Swiss National Bank (SNB) discloses capital and provisions of CHF 62bn, equivalent to 12% of its balance sheet and 10% of Swiss GDP. The Bank of Japan (BoJ), the BoE and the US Fed, on the other hand, used to distribute most of their profits to their Treasuries. The BoJ discloses equity of just JPY 3.2trn, which is equivalent to only 2% of its balance sheet and less than 1% of GDP. And, finally, the US Fed and the BoE have no noteworthy equity or provisions at all.

It has been argued that the central bank loss-absorption capacity consists not only of present equity and provisions but the discounted value of all future expected profits, and therefore central banks have a non-inflationary loss-absorption capacity much larger than their current equity and provisions. However, we think that incurring losses significantly beyond the banks' current equity and provisions may be dangerous and even pave the way to hyperinflation, as we will argue below.

To be more precise, we think that the loss-absorption capacity of a central bank is the sum of the central bank's equity and provisions plus the monetary base – not the inflated monetary base of today, but the "normal" monetary base before the crisis. Why do we include the monetary base in the loss-absorption capacity? The returns on assets purchased or held in exchange for the monetary base constitute "seigniorage," i.e. central bank profits. Up to a negative equity equivalent to the monetary base, central banks turn structural profits. Only when negative equity exceeds the monetary base do central banks turn structural losses. In Western industrialized countries before the financial crisis, the monetary base usually amounted to 5%-10% of GDP.

What if bad debt exceeds the loss-absorption capacity?

What happens when losses transferred to the central bank exceed its loss-absorption capacity? They make it impossible for the central bank to withdraw all excess liquidity, and they ultimately cause inflation. Why? When engaging in quantitative easing, i.e. when purchasing assets, central banks create money. Over the long term, a loss in the purchasing power of the currency will occur if the new money is not disposed of in due time. Should a central bank suffer outsized losses, it may be unable to withdraw all of the excess liquidity it created during its asset-purchase programs. The amount it cannot withdraw due to a lack of assets determines the amount of inflation that will follow.

There are basically three ways to withdraw excess liquidity. First, the central bank can sell assets and thus reduce the money supply for good. But if the central bank suffered large losses, it may not have enough assets to do so. Note also that the wholesale selling of assets will depress their price. Second, the central bank can immobilize excess liquidity by issuing bills, engaging in reverse repo operations or offering fixed-term deposits. However, such immobilizing requires the central bank to pay a sufficiently high interest rate to induce banks to park funds at it and not chase asset prices higher. If the central bank has considerable negative equity, interest payments on the funds deposited with it may exceed the returns its assets generate. The central bank may be faced then with structural losses that grow ever larger. Third, the central bank can raise minimum reserve requirements, i.e. require the banking system to hold more reserves. However, holding reserves is costly, and if the banking system is close to insolvency it cannot afford to do so, particularly if large amounts are involved.

Only a solvent central bank can halt hyperinflation

If the central bank's net worth turns significantly negative, hyperinflation may ensue. A vicious circle may be set in motion. Rising inflation and inflation expectations lead to an economic downturn, which creates growing government deficits and greater pressure to monetize them, which in turn results in higher costs to immobilize excess liquidity due to soaring interest rates, plus a fall in the value of the assets of the central bank, an increase in its losses and even larger negative net worth. If this death spiral is not halted in time, confidence in the currency may fail and accelerate a flight out of money into real assets, at which point the purchasing power of the currency may plunge toward zero.

This vicious circle can in principle be halted by tightening monetary policy, i.e. by halting government debt monetization and reining in the money supply. However, once the downward spiral has started, halting debt monetization can precipitate a government default, which would inflict large additional losses on the central bank. A government default may also crash the financial system, forcing the central bank to recapitalize it to avoid a general financial collapse. Recapitalizing the financial system means printing even more money, which the central bank will have to withdraw later on so as not to fan hyperinflation. Thus, a central bank can avert the onset of hyperinflation only if it has the assets to withdraw excess liquidity after accounting for losses from a government default and after recapitalizing the financial system. Without sufficient assets, it may not be able to stop printing money once the death spiral of rising interest rates and rising debt monetization has begun. Its hands may be tied by the government or, even if it is free to choose its course, it may keep the presses rolling to prevent an immediate collapse of the financial system and a general liquidation, which might be even less desirable than continuing to print.

How large is the hyperinflation risk?

Debt levels (household, corporate, financial and government debt combined) in many Western industrialized nations are a multiple of GDP, while the non-inflationary loss-absorption capacity of their central banks is probably in the single digits if expressed as a percentage of GDP. The potential for losses significantly exceeding the central bank loss-absorption capacity thus certainly exists. The longer governments run large deficits, the longer central banks continue to monetize them, and the longer their balance sheets grow, the higher the potential for enormous losses and thus hyperinflation. Hyperinflation may be triggered by a rise in government borrowing costs, either because financial markets start to question the sustainability of the current arrangement or simply because of rising inflation and inflation expectations.

Hitherto, no major central bank has experienced significant losses on the assets it purchased in the framework of its quantitative easing programs, and all major central banks exhibit positive net worth. However, these facts should not alleviate concerns about hyperinflation. Central bank assets, mostly government bonds, are priced to perfection. Their value may fall drastically once inflation expectations and interest rates rise and general economic conditions deteriorate.

Gold – the ultimate balance sheet equalizer

Necessary preconditions for hyperinflation are a quasi-bankrupt government whose debt is monetized by a central bank with insufficient assets. A central bank with large net wealth could in principle halt hyperinflation, as we have argued above. A central bank with insufficient assets cannot. Only by recapitalizing an insolvent central bank can the choice between hyperinflation on the one hand and a general liquidation on the other be avoided. However, if the government is broke as well, it cannot recapitalize the central bank. Is there another way to create new wealth to balance the central bank's assets and liabilities and avoid that dreadful choice?

It turns out that there is – by revaluing gold. Both the US and Europe own significant gold reserves (US: 8,134t, Germany: 3,391t, Italy: 2,452t, France: 2,435t). Contrary to that of all other commodities, the price of gold is primarily determined not by industrial demand or mining costs but by investors. Gold is worth as much as investors believe it is. If central banks can succeed in convincing investors that the value of gold is greater than today's prices, then it is, and new net wealth has been created.

Can central banks indeed do that? It turns out they can. One can always weaken one's own currency against another currency, and gold can be considered a currency. The SNB proved that last year when it weakened the Swiss franc by declaring its intention to sell unlimited amounts of Swiss francs. To revalue gold, a central bank needs to set a minimum price for it and declare that it will buy unlimited amounts of it at that minimum price. Since central banks can print money at will, they will never run out of their own currency. Therefore, the threat to buy unlimited amounts of gold at a minimum price is credible. If the public does not believe in the sustainability of the new price and sells its gold, the central bank purchases all gold offered at the minimum price by printing money, until it has weakened its currency to such a degree that the gold price rises above the minimum threshold.

Initially, buying gold by printing new money will be inflationary and weaken the currency further. However, once the new equilibrium gold price is exceeded, the currency can be stabilized. The central bank is solvent again and can stabilize its currency by reducing excess liquidity and raising rates. Note that only central banks of large currency areas, such as the ECB or the US Fed, can revalue gold. If a small central bank tried to do so, it would devalue its own currency rather than revalue gold, and thus inflame inflation in its currency area.

How much could gold be revalued by?

The new minimum gold price must be set such that the revaluation gains balance the combined assets and liabilities of the government, the financial system, and the central bank. The US owns 8,134t of gold currently worth around USD 440bn, or 3% of GDP (although US gold is currently valued at only USD 42/oz). The Eurosystem discloses 10,783t of gold reserves worth USD 440bn, or 5% of GDP. Assume that a currency area owns gold reserves equivalent to 4% of GDP, and that the combined balance sheet of the government, financial system and central bank has a negative net worth of 100% of GDP, a not unreasonable assumption given that total debt amounts to 200%-400% of GDP in many industrialized countries. To bring the balance sheet into balance, the gold price would then have to rise by a factor of 25.

What would prevent governments from over-borrowing and revaluing gold again and again? If gold were indeed revalued enormously, it would represent a significant fraction of all assets and would thus regain an important role as a store of value. The gold price would then discipline monetary policy and become the main anchor for fiat currencies. This would significantly hamper the build-up of large imbalances in the future.

Even if central banks do not revalue their gold reserves, gold prices would still rise in a period of hyperinflation. Therefore, the balance sheet gap in those currency areas that own gold may close at some point in time and stabilize their currency. However, by then the currency may have lost most of its purchasing power. By revaluing gold, hyperinflation may be stopped in its tracks or avoided altogether. One way or another, owning physical gold is the safest and most effective way of insuring against hyperinflation.

 


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Tue, 02/26/2013 - 17:56 | Link to Comment bad craziness
bad craziness's picture

Nice work Tyler.  Here is the endgame summary exactly as Jim Sinclair said it would be.

Tue, 02/26/2013 - 18:00 | Link to Comment Ahmeexnal
Ahmeexnal's picture

Got phyzz?

Tue, 02/26/2013 - 18:05 | Link to Comment DJ Happy Ending
DJ Happy Ending's picture

Steel and lead are also an important part of any precious metals portfolio.

Tue, 02/26/2013 - 18:06 | Link to Comment Stackers
Stackers's picture

This is ecxactly what they should have fucking done in 1971 !!!!!!

Tue, 02/26/2013 - 18:09 | Link to Comment Ahmeexnal
Ahmeexnal's picture

They HAVE been doing it since 1971...unless you still believe the price of gold to be $35/ozt. Hey, tell you what...I'll buy all your gold at $40 per ozt.

Tue, 02/26/2013 - 20:49 | Link to Comment Muppet of the U...
Muppet of the Universe's picture

dude all these phs tards are in for a bad surprise. hey guess what?  ur buuying the top bro! XD 

 

but on the more important tpic, central banks make liquidity, but hardwork, innovation, and technology create wealth.  Unfortuntely, tht paradigm is ending, both due to... general intelligence constraints, but also due to a lack of willingnes by those in power to share their power with those who are not willing to be as inteliigent hardworking, and ruthless.  things which muppets entirely lack.

Tue, 02/26/2013 - 21:58 | Link to Comment smlbizman
smlbizman's picture

keiser has an interview with antal fekete......very interesting

Tue, 02/26/2013 - 18:04 | Link to Comment McMolotov
McMolotov's picture

Necessary preconditions for hyperinflation are a quasi-bankrupt government whose debt is monetized by a central bank with insufficient assets.

"Luckily, this doesn't apply to the United States." —Paul Krugman, Nobel Laureate economist and all-around asshole

Tue, 02/26/2013 - 18:23 | Link to Comment smacker
smacker's picture

 

 

Krugman is a mindless socialist with scary staring eyes, and when he refers to the "United States", he means the collective "United States", ie "the people". Expect to see a savings confiscation program to pay off federal debt ...

Tue, 02/26/2013 - 19:26 | Link to Comment klockwerks
klockwerks's picture

Correct Smacker, that "saving" is called a 401K

Tue, 02/26/2013 - 20:18 | Link to Comment smacker
smacker's picture

Well, in the UK 1997 when Mr Blair's Labour Govt came into office, his Chancellor - one Gordon Brown - took £5-6 billion pa out of private pension funds (our approx equiv to 401k) by additional taxation to pay for his spending. That had the effect of semi-wrecking private pension fund values. Not satisfied with that, after Gordon Brown's inspired financial crash of 2008 which further wrecked pension fund investments, before he left office in 2010 Gordon Brown introduced Zirp and QE, which pushed annuity rates for private pensions down to derisory levels, where they remain today. Gordon Brown made a grab for the job of IMF boss when DSK was ousted, presumably so he could wreck the rest of the world ...before he gets taken out by some kind soul.

Tue, 02/26/2013 - 20:28 | Link to Comment akak
akak's picture

+1

And another +1 for "derisory".

Tue, 02/26/2013 - 20:33 | Link to Comment knukles
knukles's picture

+1 for "and all around asshole"

Wed, 02/27/2013 - 01:48 | Link to Comment G-R-U-N-T
G-R-U-N-T's picture

What kind of mind would con the naive and ignorant into believing that fiat currency is worth nothing?

http://www.martinarmstrong.org/files/Fiat%20Solution/index.htm

"We must realize that there are always two sides to every issue. Paper currency is NOT the problem. The problem has always been the fiscal mismanagement. There are plenty of examples from history that illustrate that a paper currency that is maintain with fiscal management has produced a stable monetary system without chronic inflation. But to assume that merely returning to tangible coinage will solve all the problems is simply childish. There is 6,000 years of history to draw from and you cannot find a single empire or nation no less a city state that has ever not debased its currency or borrowed without fiscal

 

  restraint and collapsed.
Wed, 02/27/2013 - 01:48 | Link to Comment G-R-U-N-T
G-R-U-N-T's picture

sorry, fell off my chair...

Tue, 02/26/2013 - 17:58 | Link to Comment davidsmith
davidsmith's picture

central banks can only create liquidity, not wealth

 

 

Obviously this depends on who you are.  Next article?

 

 

Tue, 02/26/2013 - 18:21 | Link to Comment Bunga Bunga
Bunga Bunga's picture

For the average Joe central bank liquidity is like vaseline.

Tue, 02/26/2013 - 18:57 | Link to Comment Rainman
Rainman's picture

Jamie, Lord Blank , BM et al bonus themselves into wealth one quarter at a time....paydays from the massive fraud. And, by god, the Oblameo/Bernank/timmay trio  was the best thing they could ever have hoped for in 2009. And now they got a replacement idiot at Treasury even more corrupt and stupid as Timmay. I think they're winning..for now...but this is a hard con to keep going...way too many playerz. They can't stay lucky forever. Somebody will fuck up in spectacular fashion and bring it all down.

Tue, 02/26/2013 - 20:47 | Link to Comment Raynja
Raynja's picture

10/31/11?

ya, luck....

Tue, 02/26/2013 - 18:00 | Link to Comment yogibear
yogibear's picture

Nice job, Bernanke, Evans, Dudley and Yellen. You'll be the first group of PhD knuckleheads to trigger hyperinflation when your scheme doesn't work.

When it all unravels and US dollars come flooding back. At the currency crisis point.

Tue, 02/26/2013 - 18:00 | Link to Comment slightlyskeptical
slightlyskeptical's picture

So instead of central bankers making decisions as to currency valuation you propose to let gold traders do it?

Yep that would work.  "Rolls eyes"

Only meaningful way to value a currency is to link it to production.

 

Tue, 02/26/2013 - 18:06 | Link to Comment bad craziness
bad craziness's picture

Fool - nobody suggested gold traders price currencies.  Currencies are the common share of a nation and should trade freely based on fundamental supply and demand.

Tue, 02/26/2013 - 18:08 | Link to Comment Ahmeexnal
Ahmeexnal's picture

you should seriously consider renaming yourself from "slightlyskeptical" to "highlymentallyretarded"

Tue, 02/26/2013 - 18:16 | Link to Comment BlackChicken
BlackChicken's picture

I don't care who you are, that right there was funny.

Tue, 02/26/2013 - 18:25 | Link to Comment Pure Evil
Pure Evil's picture

The only truely meaningful way of valuing a currency is to give it the soft/strong test.

Soft enough not to rub your anus raw, while strong enough not to let your finger poke through to the point that you end up tickling your uvula.

Tue, 02/26/2013 - 18:01 | Link to Comment Debtless
Debtless's picture

Rothchilds = creating money = vast, unimagineable wealth.

Unless I'm missing something here.

Tue, 02/26/2013 - 18:30 | Link to Comment Pseudo Anonym
Pseudo Anonym's picture

your are missing something.  what's your point?

Tue, 02/26/2013 - 18:10 | Link to Comment khakuda
khakuda's picture

Bernanke thinks he is reducing the deficit and creating jobs.  From his perspective, any minimal downside pales in comparison to his wealth generating ability.

Scary to watch how adamant he was today in this belief.  He makes, drinks and passes out the Kool Aid.

Tue, 02/26/2013 - 19:10 | Link to Comment John Law Lives
John Law Lives's picture

I have heard Chairsatan lackeys crow that the equity markets have restored some ~$8 Trillion in "wealth" since the lows in early 2009.  It is remarkable that the Federal debt has surged by ~$6 Triilion and the Fed added some ~$2 Trillion to its balance sheet over the past ~4+ years.

Gee, is that analagous to someone living off their own credit card without paying the bills?  That always ends well...

FUBAR.

Tue, 02/26/2013 - 19:38 | Link to Comment Mark123
Mark123's picture

The other problem with this is that the "wealth" only exists as long as NOBODY tries to monetize their stocks (think pension funds).  Once that happens all that supposed wealth will vaprize far faster than they have engineered today's price.

Tue, 02/26/2013 - 18:15 | Link to Comment john milton
john milton's picture

you still remember the time of green shoots, what have happened to them.. did he smoked them or what.. or was it typo meaning green shots, oh boy, seen them a lot..

Tue, 02/26/2013 - 18:16 | Link to Comment Praetorian Guard
Praetorian Guard's picture

Gold and PM's are a pipe dream if the system comes crashing down. So tired of these obtuse articles. Do these authors realize that ALL trade, I mean ALL trade, and jiT distribution ceases to exist? No more commods, and the truck that restocks Walmart, ET AL? In what sense does PM's serve a purpose in these scenario? Absolutely NONE! This is not Rome, or some obscure Zimbabwe village that at the moment has a collapsed currency but STILL GETS GOODS VIA THE GLOBAL MARKET... we are talking about the global market collapsing... where, pray-tell will these magic goods come from, Mars?

In a true SHTF scenario, that so many are dreaming about, your PM's won't mean dick. It will be total chaos, and you'll be lucky to see the other side...

Governments and central banks will not be able to switch over in a short period of time, it will be a very ugly period, and NOT a smooth transition. People will be starving to death and nothing will be produced...

You would be better off investing in tangibles that can be used for trade, commods that can be used for the moment for continued survival... only until the basics of survival have been met, do humans look at wealth creation/accumulation... which is much, much, later...

Tue, 02/26/2013 - 18:26 | Link to Comment Ahmeexnal
Ahmeexnal's picture

you are about to wake up to the real world, pal.
The past few years where you could order a pizza on the phone, buy your beer by the click of a mouse....has been a sad illusion.
Time for you to get off your fat ass and start producing your own food....or starve to death.

Tue, 02/26/2013 - 18:48 | Link to Comment Praetorian Guard
Praetorian Guard's picture

The real world is we no longer produce anything in this country. MOST ALL FOOD is shipped in as it is cheaper, or massively subsidized. Most major conglomerates produce what you eat, and energy is at a premium. Very few produce their own, and given the price of corn and meal, hay, etc. many farmers are going bust - I know several close friends that are giving away livestock, etc. as they cannot afford to keep them with todays feed prices. If you think your small plot in the back of your yard is going to cut it, you are DEAD wrong. Weather, pests, people, etc. all can change the destiny of your security...

Tue, 02/26/2013 - 19:00 | Link to Comment Acidtest Dummy
Acidtest Dummy's picture

Thus it is said, "Anyone who can afford to farm can afford to retire."

Tue, 02/26/2013 - 19:57 | Link to Comment Solon the Destroyer
Solon the Destroyer's picture

88.5% of all products consumed in the USA are produced in the USA.

Tue, 02/26/2013 - 20:03 | Link to Comment akak
akak's picture

It's one thing to talk out of your ass, but quite another to blow smoke out of it as well.

Tue, 02/26/2013 - 18:28 | Link to Comment bad craziness
bad craziness's picture

So you are banking on total collapse then?  The most likely outcome at this stage is exactly as described - the gold price rises to make good the balance sheets of the central banks - exactly as described by Jim Sinclair years ago.  Sure you can plan for the worst but the likely outcome is as the note suggests.

Tue, 02/26/2013 - 18:49 | Link to Comment Praetorian Guard
Praetorian Guard's picture

...and you actually believe that you will have a seat at the table if this comes to pass, wherein you will be invited to partake and cash in your chips? Sure thing buddy...

Tue, 02/26/2013 - 18:58 | Link to Comment Praetorian Guard
Praetorian Guard's picture

Ok, so the banks do an inter/intra-trade debt swap/balancing, BEFORE they cut off PM holders at the knees, and then allowing the metal to drop drastically AFTER the correction, now what? How exactly did you benefit?

Tue, 02/26/2013 - 19:07 | Link to Comment bad craziness
bad craziness's picture

There will be no confiscation and once gold has balanced the balance sheets of the Central Banks (effectively inflated away the debt) gold will re-enter the monetary system as an anchor to the SDR of some 10 -15%.  There is absolutely no need nor any reason for gold to collapse in price as none of the liquidity injected can be withdrawn - this inflation is permenant.  I can promise you I will be happier and wealthier with my bullion than sitting on 5 years years worth of dried food and ammunition.  See you on the other side.

Tue, 02/26/2013 - 19:15 | Link to Comment Praetorian Guard
Praetorian Guard's picture

I disagree. They do not have to confiscate, they simply limit or deny you your entrance to the game. They allow PM's to rise, balance the books, decouple from currency, and your hosed. Ban its use, tax the hell out of it, whatever they can dream of... its all in the NDAA... 

Do you really think they would even allow exponential increase to happen (ie Weimar)? No, they would not. It would mean that they lose control of the populace. Never going to happen on a global level, and if it does, you have bigger issues to worry about...

In the end, you are attempting to play their game, not going to happen. Whatever comes will affect everyone, including those that hold PM's...

Tue, 02/26/2013 - 20:03 | Link to Comment bad craziness
bad craziness's picture

I don't live in the most hypocritical country on earth where the constitution is nothing more than shit paper.  They can NDAA all the way up your arsehole to disarm you and relieve you of your gold as much as they like for all I care. Secondly in one breath you are preaching collapse and guns and hard assets and now you say they they will never lose control of the populace.  Can't have it both ways PG.  Lastly the rules of the 'game' are subject to change according to ones understanding of history and how money works - I am happy with the rules that apply to me as they are constructed from my understanding - your rules and your understanding of the game restrict your thinking.

Lets agree to disagree

Tue, 02/26/2013 - 22:17 | Link to Comment otto skorzeny
otto skorzeny's picture

right-govts never lose control of a populace-that's why your Praetorian Guard is still putting forward the leaders of rome they so desire

Tue, 02/26/2013 - 19:46 | Link to Comment orez65
orez65's picture

Latin America has survived hyperinflation on a regular basis.

So has the US, ever hear: "Not worth a Continental".

Yes, the transition will be painful but it will not be the end of the world.

Basically, those with dollar denominated assets, like cash and bonds will get financially wiped out.

World trade will take place by using gold, silver or a currency backed by gold.

That's why the Chinese keep buying gold while the fools in the west keep selling it.

Tue, 02/26/2013 - 18:21 | Link to Comment tony bonn
tony bonn's picture

"Hitherto, no major central bank has experienced significant losses on the assets it purchased in the framework of its quantitative easing programs"

horse shit - see james turk's latest analysis of the fed's balance sheet which makes it insolvent using generous projections about inflation and interest rate's in the fed's favor....it's on king world news...

your analysis based upon official gold holdings is naive at best....the point you make - borrowed from antal fekete - about gold as the ultimate extinquisher of debt is quite right but the central banks do not have nearly the amount of gold they claim....so that part of your analysis is a huge gigantic toilet flush.

Tue, 02/26/2013 - 20:27 | Link to Comment bad craziness
bad craziness's picture

I repeat that you will never know for sure if they what they say or not.  That fact will truly be the last thing on earth let go.  If they don't have it they will spend the next decade aquiring it but you will never know.  The UBS report is as close to a roadmap as you will ever be given.

Tue, 02/26/2013 - 18:28 | Link to Comment Pseudo Anonym
Pseudo Anonym's picture

i kinda doubt that the term "official gold holdings"  is the same as "actual gold holdings"

Tue, 02/26/2013 - 18:29 | Link to Comment bad craziness
bad craziness's picture

And I can promise you that you will never know for sure there is any difference.

Tue, 02/26/2013 - 18:37 | Link to Comment magpie
magpie's picture

.

Tue, 02/26/2013 - 19:11 | Link to Comment medium giraffe
medium giraffe's picture

Ben Bukakke spunk bubble

Tue, 02/26/2013 - 18:53 | Link to Comment socalbeach
socalbeach's picture

I would have liked the following option to have been addressed.  He does talk about the Fed issuing bills, but not the Treasury.  From the paper,

The Causes of Price Inflation & Deflation by Laura F. Davidson

"Some commentators have worried that if price inflation takes hold and market interest rates rise, the Fed would have to offer increasingly higher rates of return to stay competitive. Since the interest is paid with newly created money, which adds to the reserves, this by itself increases the money supply. The concern is that as the money supply grows, interest rates have to increase further, and the Fed could be boxed into a corner, where rising interest rates and additions to reserves chase each other upwards in a reinforcing spiral.

However, what these authors overlook is that the Federal Reserve can always reduce the level of bank reserves, at any time of its choosing, through the sale of its assets. What if it ran out of assets to sell? This is unlikely. Any institution that is permitted to create money out of thin air, can, in conjunction with the government, create assets. The government simply issues new treasury bonds, which it then “sells” to the Federal Reserve. The Fed “pays” for them with newly created money, but the money does not enter circulation; rather it is held dormant in a special account. Meanwhile, the treasury bonds can be sold by the Fed to the public through its open market operations. In September 2008, at the Fed’s request, the Treasury created the Supplementary Financing Account, specifically for this purpose."

Tue, 02/26/2013 - 19:46 | Link to Comment Solon the Destroyer
Solon the Destroyer's picture

If the bonds were priced at a rate the government could handle, the CB would take huge losses by re-selling into the secondary market which would demand a higher interest rate, or if the bonds were priced at market rate, the government would be driven into insolvency.  Also, this example is essentially direct monetization and I believe illegal (at present day).

Tue, 02/26/2013 - 18:57 | Link to Comment Stuck on Zero
Stuck on Zero's picture

If the Feds really wanted to drive liquidity into the system they would simply buy gold.  That would move cash into the economy and at the same time give the newly issued currency backing.  Our Fed is simply handing out trillions to banksters.  A clever form of theft.

 

Tue, 02/26/2013 - 19:50 | Link to Comment Solon the Destroyer
Solon the Destroyer's picture

If the Fed wanted to "properly" drive liquidity into the system, they should do what Greece should do (after leaving the Euro) and that is issue 10 yr Gold Bonds.

Tue, 02/26/2013 - 19:04 | Link to Comment Acidtest Dummy
Acidtest Dummy's picture

tl;dr USB advocates freegold. (And fails to credit FOFOA.)

Tue, 02/26/2013 - 19:33 | Link to Comment Mark123
Mark123's picture

The thing I keep asking myself is...why can't the Fed just keep financing government spending forever?  It seems that nobody cares.

 

Of course, who knows what conversations are going on behind closed doors (with Chinese who are providing us with all that stuff with vendor financing).

 

Everytime Bernanke says he will keep on pumping, it probably gives the Chinese a sick feeling.

Tue, 02/26/2013 - 19:56 | Link to Comment orez65
orez65's picture

The Fed will keep monetizing the debt (printing) until the US dollar loses all value (hyperinflation).

It has no other choice as long as Congress keeps deficit spending and not paying the debt.

Which is not going to happen as long as the American people demand "... money for nothing and chicks for free ..."

Tue, 02/26/2013 - 19:37 | Link to Comment q99x2
q99x2's picture

The reason they print is to take the money from the workers and give it to the Federal politicians and banksters. Its a gangster thing. Uncertainty exists as to how much the military will take before they make their move against these gangsters. The military really could make a big difference if they take action soon. Many of the people serving have more developed personalities and are intensely aware of what has taken place in D.C.

Tue, 02/26/2013 - 19:50 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

Bad news:  Switzerland's gold is re-hypothecated umpteen times over.  Portugal's will be leased (Corzined).  All others are crewed, as they don't have much, if any. 

Good News:  Countries with sizable gold deposits underground (Australia, Canada) are in better shape than having it in their vaults, where it's being Corzined by their own CB's, or stolen by the US Fed.  The US is the world-champion at leveraging (stealing) anything:  The Fed can/will confiscate other people's gold -- i.e. the part they haven't already been 'Corzined'.

Tue, 02/26/2013 - 20:17 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

Listened to several speakers at Florida gold convention.  You can hear them here:

     http://www.kitco.com/KitcoNewsVideo/index.html?v=13-02-25_James_Rickards_1

Consensus:  NOT bullish.  Do not expect AU to rise against USD in the short term (2013-2014).  Indebted countries with fiat currencies will take turns lowering against the USD, thus keeping down PM prices -- and allowing the strong USD to keep its Reserve status.  And allow the MIC show to continue.

Message:  Expect PM prices to go lower (in 2013).  That's a shame... was hoping for it go a 'tad' higher, to swap GLD for self-store bullion.   Sorry guys, but... "That's the way it is, this Tuesday, Feb. 26, 2013.  This is Wall E Krankheit, good night".

My take:  If it goes lower, then please to $1000, so I can use modern alchemy and "turn paper into gold".

Tue, 02/26/2013 - 20:23 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

p.s. Like many/most of the (smart & rich) speakers, I expect this whole thing to end at some point, but -- ZH friends - I do NOT expect the sky to fall every other day and 2x on Sunday.  At some point "Skyfall" fatigue does set in.  Now shoot the messenger, if it makes you feel better.  I'm still going out to dinner and "Wang Chung tonight."  Long Happy Ending.

Tue, 02/26/2013 - 21:27 | Link to Comment the misanthrope
the misanthrope's picture

I listened to the 3 latest. Will try to listen to more, but I don't see where you get consensus not bullish?

Only the CEO of Franco Nevada said he thought this year would be a consolidation, before moving higher. I'm not sure I follow his idea. Gold has been consolidating since Oct.2011, not just recently.

Rickards did not say anything about gold decreasing this year, and any others all indicated QE would continue, which it must. Nadler, is that you?

Tue, 02/26/2013 - 22:35 | Link to Comment Doctor Who
Doctor Who's picture

Note that only central banks of large currency areas, such as the ECB or the US Fed, can revalue gold. If a small central bank tried to do so, it would devalue its own currency

So how does gold being leased, gold that can't be audited, and gold moving from west to east play out for the large central banks?

Tue, 02/26/2013 - 23:38 | Link to Comment steve from virginia
steve from virginia's picture

 

 

 

A Swiss banking economist? I dunno ...

 

"However, central banks can only create liquidity, not wealth."

 

Central banks create credit, they are banks not Santa Claus. Banks make loans (or not make them), central banks make secured loans always taking on collateral.

 

"If printing money were equivalent to creating wealth, then mankind would not have to get up early on Monday morning."

 

Central banks do not print money. The offer credit in exchange for collateral. During money panics, the central bank accepts collateral as issued instead of a market-discounted price. After all, there is a money panic!

 

"QE just transfers losses from the previous holders of the asset to the central bank itself."

 

QE just transfers ASSETS from the previous holders to the central bank itself. Because QE is not an asset swap, it offers credit to the offering bank's reserve account. The central bank does not recognize market losses because the central bank is trying to quell a market panic not feed one.

 

"Up to a certain amount, the central bank absorbs these losses by sacrificing its equity and accumulated profits."

 

The central bank is a reserve bank not a depository institution, it has no capital structure or equity to speak of, it does not have to earn a profit and can lose money indefinitely.

 


"Losses exceeding the central bank's loss-absorption capacity necessarily lead to inflation."

 

What is a 'loss absorption capacity? A pipe in the basement? Good grief! If the central bank offers loans in excess of collateral it is instantly insolvent because it has no capital structure ... ! A leveraged central bank becomes another leveraged depository institution with non-performing assets ... just like all the other leveraged depository institutions with non-performing assets. Isn't that bad enough?

 

When the central bank is perceived to be insolvent there is no lender of last resort, the only system collateral is currency on deposit in (overleveraged) banks, there are bank runs ... as are underway in various parts of the world right now. This is because the central banks (ECB, PBoC and BoJ) are PERCEIVED to be making unsecured loans.

 

If there was inflation there would be little in the way of bank deposits as there would be demand for credit and higher interest rates as a result. There is a long road between administrators wanting inflation and the public actually experiencing it. Anyone old enough to remember 2002 - 2005 should remember hyper-inflation ... in real estate.

 


Tue, 02/26/2013 - 23:36 | Link to Comment YHC-FTSE
YHC-FTSE's picture

No bank can ever create value, only money.

Money is equivalent to debt, ipso facto, banks are worthless.

Tue, 02/26/2013 - 23:40 | Link to Comment steve from virginia
steve from virginia's picture

 

 

 

Thank you! You 'get it'. Too many people don't.

 

Next time, you should write the article.

Wed, 02/27/2013 - 02:51 | Link to Comment YHC-FTSE
YHC-FTSE's picture

Cheers mate. I actually only came to this article to read your comment.

 

I'm one of those crazy people who believes we can cope perfectly well without banks. The arguments that nothing will be funded, built, invented and sold without the almighty banks lending money to people and organizations at exhorbitant interest rates (Then selling the loan agreement to somebody else packed with subprimes) is so WRONG, I don't know why other people cannot see how utterly criminalized the system is. 

Banks actually stifle small enterprises, innovation, and creative projects by funding large multinationals to gobble up everything with even a remote chance of making a profit. I dare anyone who thinks we need banks for new projects to go to this site:

http://www.kickstarter.com 

This is the way everything should be funded - not by banks, hedge funds, or government quangos but by people like us. This is the epitome of a democratic meritocracy, and I have personally contributed to successful projects here that are on their way to becoming household names. Over $450 million have been pledged for new projects - everything from art to engineering products - and they are all real people with real dreams - some with high potential.

We have been so brain-washed by certain sections of our society that loaning money and charging compound interest is beneficial and respectable, when in my view, it is degrading, fraudulent, utterly vile scam to enslave people whilst pretending to help. 

It may seem like a crazy thing indeed to write, but we don't need fantasy money based on debt and we don't need banks to live well, prosper, develop, and grow.

Wed, 02/27/2013 - 03:26 | Link to Comment smacker
smacker's picture

 

 

Crowd Funding is certainly becoming more popular and it's a great way of funding small start-ups and SMEs which the banks have little interest in these days, if ever.

But I do wonder how difficult it is to filter out the inevitable criminal scammers who will be attracted to this source of easy money. They can be very ingenious. When I resolve that issue, I'll support it myself.

Wed, 02/27/2013 - 01:50 | Link to Comment polo007
polo007's picture

http://online.wsj.com/article/SB120424639824701397.html

The Bernanke Reflation

Naturally, the Fed and its most vocal constituencies -- Wall Street and politicians -- see nothing much to worry about. Wall Street sees a reflation as a way to ease its credit problems, as price increases ease debt burdens and perhaps reflate housing values. Congress and the White House see a way to perhaps avoid a near-term recession, which might get them past the election.

As for the Fed, its Governors are dusting off their favorite intellectual justifications. We are told that inflation isn't as bad as it seems because "core inflation" -- which excludes food and energy prices -- isn't rising as fast as the consumer price index. However, food and energy are what most Americans are having to spend ever more of their paycheck to buy. Thus the Bernanke reflation is in part self-refuting even as a short-term recession antidote, because it robs consumers of some of their discretionary income just when the economy needs it.

Wed, 02/27/2013 - 02:38 | Link to Comment resurger
resurger's picture

Von Havenstein sends his reagards ... He blames teh speculators.

This is a very very important read, thank you so much +5

Wed, 02/27/2013 - 09:35 | Link to Comment Black Markets
Black Markets's picture

But the velocity of the monetary base can trend towards zero.

You can put 10,000% more money ito the system without causing inflation IF the velocity of the monetary base also falls to 1% of the orginal figure.

 

You cannot talk about the money supply and inflation without talking about the velocity of money.

 

Monetary velocity is the missing variable and it is absolutely equal and as powerful as monetary supply.

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