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Can The Petrodollar Survive Low Interest Rates?
Submitted by Luke Gromen via Sprott Global,
Where does capital really come from?
Most US policymakers believe that capital comes from debt issued by the Fed and its member banks; most other big debtor countries agree (i.e. Japan). On the other hand, policymakers of the world’s biggest creditor nations (led by China) believe that real capital is the surplus produced from production and trade (which has been mainly accumulated in US dollars and ultimately backs the US dollar as the primary reserve currency).
For the past 7-12 years the two conflicting ideas about capital have begun to have noticeable effects in certain global asset markets. The chart below, showing gold, oil, and Fed Funds rates, illustrates what has occurred. For most of the three decades from 1973-2002, these asset classes traded closely together; in the last decade, they have been diverging dramatically. We’ll explain why this happened and the critical implications it holds for the USD prices of oil and gold.
Under the “Petrodollar arrangement,” key oil exporters promised to only price oil in USD and US interest rates were then managed so that oil exporters were indifferent to whether they stored currency reserves earned from oil exports in US Treasuries or in gold (which had always settled oil prior to 1971 via a gold-backed USD and, prior to that, gold-backed sterling).
At the time, the US was the world’s largest trading nation and oil producer. The Fed consistently managed the Fed Funds rates to keep oil prices steady, even when it required mid-teens interest rates and back-to-back recessions in 1980-1982. Since US Fed Funds rates were managed to preserve US creditors’ and oil exporters’ purchasing power in oil terms, the system proved acceptable to most nations.
While the Petrodollar arrangement worked well for nearly thirty years, the arrangement began to wobble beginning around 2002-04, due to a unique combination of factors:
- The US economy had become increasingly ‘financialized’ from 1981-2000 – the percentage of US GDP derived from sectors such as finance and real estate had risen significantly. This was driven by steadily falling interest rates from the early 1980’s onwards and financial innovations such as securitization of consumer and commercial loans. This meant that cheap credit became more important to the US economy than cheap oil. This led to both a significant increase in US aggregate indebtedness and a rise in employment levels for jobs in origination, servicing, and managing credit products in the US.
- Rapid economic expansion and oil consumption growth in Emerging Markets, combined with stagnant supplies from global oil fields, drove the price of oil higher. Emerging Markets were on their way to becoming the biggest consumers of oil (and share of global GDP) for the first time ever.
Oil prices began steadily rising in 2002 and 2003 while Fed Funds rates remained low to mitigate the fallout from the 2001 US recession/Tech Bubble. As a result, the number of barrels of oil that could be purchased for a face-value US Treasury bond declined sharply.
In the chart below, you can see that in 2004, face value US Treasuries “broke support” to new 20-year lows versus oil. The dollar was collapsing against oil, likely to the chagrin of oil exporters (and US creditors like China that needed oil imports) holding US Treasuries from years of exports to the US.
After maintaining a range of 55-60 barrels of oil per US Treasury from 1986-1999, a $1,000 face value US Treasury went from buying 60 barrels of oil in 1999 to under 30 by early 2004.
This threatened the Petrodollar system. Since US Treasuries were collapsing versus oil prices oil exporters might eventually be better off leaving oil in the ground. This forced US policymakers into an important decision:
- Raise US Fed Funds rates to strengthen the dollar relative to oil, thereby supporting the Petrodollar system, or;
- Allow the Petrodollar system to fall apart.
The US decided to go with the first option; in June 2004 the Fed began raising rates slowly. This was bad for the US housing market, which had become dependent on a variety of highly-levered mortgage products that were often tied to Fed Funds rates. The housing market began to weaken as rates rose and after only 12 months and a 4.25% rise in interest rates the housing market peaked in 3Q05 and then began to weaken notably.
It was a critical but little-appreciated moment in US economic history. The US economy had now become too ‘financialized’ to withstand anything more than token interest rate hikes.
The US economy limped along in 2006 and early 2007 until collateral damage from falling home prices began to spread into the broader financial system, first through subprime loan defaults, then into more traditional lending markets. It wasn’t long before the global banking system was affected, along with other levered institutions like AIG. To prevent big banks and financial institutions from going under, the US Fed first slashed rates to near 0% and then expanded its balance sheet 5 times in 5 years to an unprecedented $4.5 trillion. While these moves “saved the system” from systemic collapse, they came at a significant cost:
US policymakers and pundits took 2007-08 to mean that the US could never default on its debt because the Fed could always print money to pay back debts that are denominated in US dollars.
Oil exporters (and other US creditors) took a very different lesson from the crisis: The US economy had now become so dependent on low interest rates that it could never again manage its interest rates to keep oil prices steady without blowing up the global financial system. The Petrodollar system, which had allowed the US dollar to supplant gold as the backing for the oil trade from 1973-2002, was irrevocably broken.
Understandably, creditor nation policymakers did not find lending money to the US at near 0% to buy real goods and, most importantly, oil from creditor nations particularly attractive. That arrangement would be akin to a land lord lending to her renters cash at 0% interest to pay their rent.
So as the Fed expanded its balance sheet 5.5 times from 2009 to 2013, creditor nations deployed significant amounts of capital into a variety of real assets including physical gold. Why physical gold and not gold futures?
Another lesson that the creditor nations learned from 2007-08 was that any highly-levered US financial market (like gold futures markets) is ultimately a general obligation of the US government and US Fed and will, if necessary, be paid out in cash.
After concluding that US policymakers could never again manage the relationship of Fed Funds rates to oil prices, creditor nation policymakers began reverting to the oil settlement asset that had been used for decades before the Petrodollar - physical gold. Physical gold collateral was removed from the western bullion banking system, leading to the sharp drop in gold futures prices seen in 2013.
What does this mean for gold and oil prices going forward? It’s likely quite bullish for both. Gold could be returning to the global financial system as a means of settlement, which could ultimately drive physical gold prices significantly higher through higher demand. The price of US oil imports would likely increase if the dollar loses its 41-year monopoly in settling oil trades. This would provide an incentive for increased North American oil production and benefit companies involved in the domestic energy services sector and related manufacturing industries.
The rollout of yuan-denominated physical gold trading in the Shanghai Free Trade Zone is set to begin September 291, followed by the rollout of yuan-denominated oil (and other commodities) expected before year end. The pricing of oil in yuan and ability to settle that trade in physical gold also priced in yuan may prove to be a critical milestone for the return of physical gold for settling international trade.
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BRAVO, BRAVO, BRAVO, BRAVO, BRAVO
This is a REAL, REAL, REAL, REAL, REAL short and sweat and to the point article.
KUDOS.
Uber fantastic, uber, uber, uber fantastic article.
Congrats Luke - clearly stated and revealing. This is going to be very well received.
From an Austrian where low interest rates = unleashing the printing press and 'financialization' of the US economy occurred because gold was rigged and rates forced down.
Huge kudos. Don't know for sure how correct it is, but certainly a coherent provocative read.
This article makes everything seem obvious. Gives a very nice, systematic approach to what most of use have felt intuitively for some time, 2007 in my case.
Starts off stellar then falls on his ass.
If petro dollar ends global oil trade collapses and global economy collapses.
To go to gold backed means everything would trade at gold value. That means everything, all of world trade would instantly be 10X more expensive = total economic collapse.
Pipe dreams of a gold bug.
Gold and silver proably will skyrocket again but it will be just befor the whole cookie crumbles.
Excellent assessment and write up of the US financial system without the usual superfluous historical bile regurgitated to obfuscate economist's total lack of predictive accuracy. An example of true understanding described with poignant brevity. BRAVO!
Fuck Obama!
Really, really, really sweaty. That's the way I am after I work out.
one of the better ones in a while for sure. but i sort of diagree with the statement that the US could never default simply by printing more money. But, this technically is a default. other than this - excellent piece.
do yall think the CFR and trilateral comm and the US military complex will just allow this to happen and not throw a temper tantrum. say hello to WW3 and at a time they have only 30 percent of youngsters to pool from. we are FUCKEd get ready
When the military becomes the only source of leverage they have left, it will definitely be levered.
"The US economy had now become so dependent on low interest rates that it could never again manage its interest rates to keep oil prices steady without blowing up the global financial system. "
The thing that is missing from this article is that the US is far from alone in this interest rate/liquidity trap.
The world is simply too over leveraged.
The UK can't survive at meaningful positive interest rates.
Japan and the EU are NIRPing and QE/LTROing because they have no other choice than default and political chaos.
Even China bailed out banks today in it's own half-witted way.
I also fail to see what is keeping Treasury from quietly accumulating Gold.
Everyone keeps saying that the East is accumulating. What if this is only as true as the copper warehouse inventories were?
IF Fort Knox is actually brim full of physical when the paper markets finally puke all the easier for Treasury to get it's way. All Treasury would have to do is revalue on the ledger.
It would be the same as re-pegging a currency...
If oil is the lube of war, then the fiat financed MIC is backing the petro dollar via force, hence where we are droping bombs. So above article stops short of where this goes. Putin clearly sees the outcome and knows the only way to stop this is to undermine the reserve currency and stop the madness of US imperialism. But, it will happen irregardless at 20-25 T of debt. Simple math. War is only outcome as a desperate empire falls...
I'm afraid you are correct. The military has been the only thing "backing" the USD for a while now.
Easy - the Treasury no longer operates on your behalf. The Treasury makes gold available to those who could not care less about you.
Be your own Treasury...
This is exactly the reason Obummer needs a big war...and soon.
Weirdest thing happened to me earlier today. I was out with my little 22LR (Remington Viper, not a Ruger 10-22, as is the more popular choice) taking down groundhogs in the South 40. My wife, out of the blue, says "I don't know what it is, but I LOVE watching you shoot groundhogs."
"Really?" I said. "Why?"
She had no answer. Just repeated that there was "something about" me shooting groundhogs that she just loved watching.
To which I replied "Lock and load, baby" and then I got laid for the first time in months.
Oh, and by the way, the Petrodollar can survive low interest rates. Uh, maybe. Frankly, I don't give a shit right now.
Holding USD is no longer considered 100% to be the same as holding oil,
World is avoiding trade in USD faster and faster.
The System needs at least $10 trillion to be extinguished
Closer to $40T by my calculations, but perhaps you missed the part where I got laid. May not be a big deal to you young bucks, but when you've been married half as long as you've been alive, as I have, this is a noteworthy accomplishment. You don't just "whatever" this kind of thing like it's another an average Tuesday.
LOLOLOLOLOLOLOLOL
There you go. Now you got it. I think you kinda blew past it the first time, but that's how shit goes for me. You celebrate your wins when they are presented to you. The rest of the bullshit.... only during business hours or if the mood strikes.
Slaying a dragon - > 'gina tingle - > lay.
A similar situation was my hammering a rock in the front yard while SO watched.
Took you long enough to figure out why there are 90 million gun owners out there! Seriously, lethality is sexy!
I didn't miss the part about you getting laid, but truth be told I was much more jealous of the fact that you actually have a south 40.
To get laid is a means to the end of procreation, i.e. the family. But what is the point of having a family if you cannot leave them an inheritance? Therefore property is ontologically prior to procreation and is a necessay prequisite to merely pounding the Va-JayJay.
You're a fortunate man.
He is also fortunate to have .22 ammo to shoot groundhogs.
It appears there is more available now and the shortage is ending slowly in some places.
Months? I'm ready to pull nails out of the drywall with my teeth if its been a few days/ maybe that'll change when I hit 70 ...
Married, kids.... it takes it's toll. Most days you look at you wife and think more about whether you could get away with killing her than nailing her again for the 25,000th time.
Get married, get past the 20 year mark without cheating, then judge me. It's a matter of perspective tempered by experience, mostly.
lol.....clap clap
You the man! Congrats!
Not judging you/ just different metabolisms I guess. Maybe miffed can weigh in here, lol. Married 24 yrs/ 3 kids/ 1st and only woman. Yeah, we nearly killed each other at the 10 to 15 yr mark. Still trying to learn patience.
Good job.
Well hats off to you for that. Most would you know. You're a good man.
Maybe she'll get even hornier if you let her shoot some next time.
Outside stuff is my domain. She's welcome to shoot, and is capable (I taught her myself), but it's just not her bag for whatever reason.
Congrats on getting it up without the splint. After 36 years I asked if I could borrow my dad's. He asked for it back after a week.
"This meant that cheap credit became more important to the US economy than cheap oil."
as far as I can tell, that is the crux of the matter
Western countries are living on borrowed time, if you'll excuse the pun
(but falling EROI rates are bad for everyone)
cheap credit
to buy cheap oil...
wait till the game rolls over..
expensive credit
to buy expensive oil..
happy fun good times
Someone water and freshen, John Kohn, I've some decison making to do!
The "creditor nations", read China, have been accumulating Gold in expectation of the PetroDollar demise for quite a bit longer than indicated here. In fact, China's under the radar accumulation has been driving the demise of the PetroDollar.
Also, the Saudis have had a backdoor into the physical Gold market in trade for their Oil from Day 1. The PetroDollar is not money. It is irredemable Debt backed ultimately by force alone. Gold on the other hand, is money.
Fiat, of whatever ilk, is simply an intermediary. As AG said, "...a claim on future production..." These arrangements have been a matter of keeping a relative purchasing power parity for the swap of things for things. Fiat facilitiates the swap but is not in and of itself intrinsicly of value other than utility of facilitating the swap. That said, if the issuer of fiat can't maintain the ability of that fiat to continue to function as an effecient means, then (eventually) it will end up not being used.
wow, recession was based on oil. sry, i'm just a college student. go hard wheat.
/ everything
Start using the lens of ratios PriceOfThingA/PriceOfThingB to develop understanding of the relative values of things while dropping the fiat denominator ... you will find many interesting relationships.
the u.s can use its influence to control the global oil market, but only for so long and then? london's days of gold manip are numbered. do the chinese still have the physical silver market cornered? i believe they will soon have the physical gold market cornered, and i think there will be a very open price war. the global bonds sold over the last half decade, you might as well write off 30 percent right off the top. when bonds are created with the inate ability to absorb loses the only real asset in the end is again gold.
the new black gold???...................................................... anyone? beuhler? anyone? beuhler? beuhler? beuhler?
Great common sense Article. The implicit/indirect backing of the RMB by Gold is important but market forces alone would be enough. China is now Saudi's largest customer, and when your largest customer asks to pay in his owm currency, the supplier is not in a strong bargaining position. Implicit Gold backing is just the iceing on the cake. And China is perfectly capable of providing defence guarantess whilst investing in Saudi infrastructure (Refineries etc.)
Speaking of oil....
Interesting conversation I had about the break-up of Standard Oil. It went something like this:
Me: Rockefeller was awesome in how efficient he was bringing oil to market.
someone else: He had a monopoly. That wasn't good for competition.
Me: So what? He was able to bring oil to market in the most efficient way possible. The consumer benefited from that.
someone else: No the consumer didn't benefit because there was no competition for product. He could have charged anything he wanted.
Me: But if he was the most efficient at bringing it to market he could sell it at a lower price and he did. When the US government broke up Standard Oil the price for petrol products went up and that negatively impacted the consumer.
...........
After Standard Oil was broken up things got a bit complicated (this trust, that trust, this subsidiary, that subsidiary, etc etc etc). Most American's purchase gas from a spin-off of the break up of the Standard Oil company (whether or not they know it).
What is the opinion of zerohedge readers -
If Standard Oil was NOT broken up do you believe the price of oil for American's would be higher or lower than it is today?
*It is of my belief that the price of oil would be significantly lower had Standard Oil not been broken up*
Standard oil as the benevolent dictator? Hmmm. Maybe just trying to grow the host and never kill it?
Carnegie gave it all away too at the end. His heirs are raising sheep last I heard.
The problem with benevolent dictators is that they all die and some one else rules/ right Mr. Fred meijer?
If we're talking about the Dollar and the Dollar being the world's reserve currency tied to oil it's definately worth a thought.
There are actual dictators in muslim countries that have a lot of power because of oil.
Is it better that Saudi Arabia has as much power as it does?
Would you rather Standard Oil call the shots or Saudi Arabia?
Why am I paying $3 a gallon when the Saudi's (and others) give their oil away to their citizens for nothing? To boot they are funding the extremists who are targeting the Western way of life.
.....so I miss Rockefeller.
Peter Thiel commented on this very subject a couple of days ago http://online.wsj.com/articles/peter-thiel-competition-is-for-losers-141...
If the monopoly can make prices affordable for the consumer, then they should exist. If monopolies can charge "any price they want" competition will come in to undercut them, so that problem will solve itself.
For me personally, Verizon has a monopoly for cell phone coverage in my area, because the "competition" does not provide service at all where I live. My bill is $65 a month. I don't mind the monopoly. Good service, affordable price.
Another thing to consider is that a lot of competition in America is false competition. Government Motors versus Government Chrysler is not competition. WalMart versus Target is not competition. Heck the current CEO Of Walmart is a former Target executive! Costco versus Sams Club is false competition because Blackstone own majority shares in both companies.
A monopoly is starting to look more attractive than false competition nowadays.
Rockefeller had a different kind of monopoly though. He owned EVERYTHING...the oil, the wells, the refining, the distribution, the re-distribution to the end consumer. If you wanted Kerosine/heating oil/oil/gas there was no choice....it was Standard Oil.
If Thiel wanted to...he could definitely get a Satellite phone. Thiel has so much money he could probably get any carrier to build a cell tower in his neighborhood just so that he can get service for an alternate.
With Rockefeller...that was it. You wanted energy - he owned it (all of it).
If Standard Oil hadn't been broken up, at some point it would have directed the US government to invade Saudi Arabia to protect Standard Oil's interests there. Saudi Arabia would have a US military base and likely a more pluralistic society. There would be more Arab women for dating I suspect.
Who could want a woman that must hide her face?
The time to buy gold is when there is panic selling. There is no blood in the market right now. We might get a little pop in gold prices but that would just be a suckers trap. Wait for a blowout drop in price, then start buying real gold and silver. We are not at the bottom just yet.
$15 in ag I'm treating myself to a monster box. But still buying even now/.
10 oz bars make pretty paperweights.
Same here. :)
My 1999 $4 silver is still sitting in it's box. Really wished I'd bought the $300 gold instead. I think that the gold will outpace silver once all this bullshit is over.
gold is God
with 50 in the middle
L=50....
OldPhart, -- mabe not. But neither Gold nor Silver will ever be used as fuel to heat the pot.
I'm a late starter. Started in Feburary 2002 ($4.65) in a coin shop on Irving PK. & the Ravenswood tracks. 60613
No, don't wait for a better price - buy PMs now.
When the feces hits the rotating air screw, it won't matter how good of a deal you got on PMs. That amounts to only a few hundred or a few thousand dollars in savings on your purchases. What will matter is having stacks. Because when PMs assume their true value, bigger stacks will assume bigger true values. Little stacks will pay only small dividends then.
Google the name :
Elias Jackson "Lucky" Baldwin (April 3, 1828 – March 1, 1909)
A great story of a man that could not sell his silver mining shares because he was in Europe at the time and his lawyer didn't know how to open his safe where all the stock market deeds were. He made a fortune not being able to sell in those darkest days.
So you may have a point. The point I am trying to make is to wait and don't sell at a loss no matter what.
Whatever.
The last couple years have been blood in the streets. There won't be any physical available when the futures market defaults. Do you really think that you are going to show up at a bullion bank and pick up an ounce of gold for $600 ?
Read the docs they get to set final price and cash if needed
30 day delivery within 150 miles of New York and only to certified locations
CME has pdf on site
If you run Fixed game as many here claim dont you think they would fix the settlement delivery too
$1,000 an ounce for gold has been the absolute floor in this 2010s decade. What do mean by "blowout drop in price"?
Bloomberg news article investors board with gold dont see inflation as a problem.
German bonds have gone sub 0 ( higher rates equal inflation )
When paper players leave the game you will see a blow out in price
Why do you expect another bottom? If I may ask...
Exactly! It costs about an average of $1200 an ounce to get it out of the ground. Gold is already priced at cost. I don't think it can go much lower.
I worked in the aluminum industry for 38 years and yes for extended periods commodity producers sell below cost.
Its done to keep customers, they wait it out cutting cost everywhere they can and make it back on high price cycles. Or build new smelters to operate at profit on low price.
Have you seen the consolidated gold volume levels on netdania in the last month? Panic or blow outs don't have to involve "massive" price moves. And they probably won't in the most desired market on earth. Something happened to make the volume go insane. Hard to say what it was because I don't know what that volume represents. But it was way bigger than the top in 2011.
The reason the U.S. and European economies can't tolerate real interest rates above zero is not because GDP has become "financialized".
A more direct answer is that GDP inordinately depends upon artificially created serial asset bubbles. Such bubbles can only be grown in negative real interest rate environments. As soon as interest rates climb, the asset bubbles implode.
The over-developed economies of the West can never increase interest rates because financial/economic Armageddon will result. Thus the petrodollar can never be defended. Thus it is already dead - they just haven't laid out the body yet.
I think they are going to try though JT, starting with a 25bps increase accompanied by propanganda 'everything is booming' to bullshit the masses and their way through this.
Someone must step up and claim the corpse. But it won't be me.
It may be all of us especially if your left holding dollars when the music stops.
I'll also add;
https://www.youtube.com/watch?v=eNr0WXQ3Ho4
Oil and gas trade 2015 will be 3.7 trillion USD
Total gold available world wide 7 trillion USD
ALL the worlds gold would move to oil states in 2 years
Once China sends all her gold out to get oil then what?
The Arabs would have to buy 3 trillion dollars worth of China plastic crap every year to cycle the gold back.
They are not ones for Mao-Mart shopping
what if an ounce was worth $50,000 ?
While oil remains $100/barrel? That would be the equivalent of oil exporters slashing the prices to a 40th of its today's value in terms of gold. Why would they want to do it? If gold climbs to USD 50,000 per ounce, oil will be trading at USD 4,000 a barrel i.e one ounce of gold will be purchasing 12 barrels of oil, just like today.
http://stockcharts.com/h-sc/ui
Type $gold:$wtic for ratio
Change BAR to 1 from 5 for longer term
Either Oil is replaced as the de-facto energy source of industry or the arrangement is perpetuated/recycled with a new fiat regime.
The day that all the Gold is accumulated in one set of hands is the day that Gold becomes practivcally worthless.
Personally, I think the Saudis are just about done. ME is getting too hot for such long bearded dictatorships, dynasty or no. The Petro-Dollar is the best thing that ever happened to the House of Saud -it probably serves them better than it does the US citizenry..
You make a good case for how undervalued physical gold is.
Good point. An excellent reason why there won't be any settlement of trade differences in gold, contrary to what many at ZH would like to believe. Valuing gold much higher (relative to oil) than it is today, may "solve" the problem, but not sure why the oil-exporters would be interested in doing that.
The one running a trade surplus will accumulate something. China cannot convince oil exporters to accumulate CNY because then they would be falling into the same trap they did when they started accumulating USD. Gold is not viable because there is not enough of it. However, if a new international currency were to come about and China (a net exporter herself) chose to accumulate in this currency and the currency had wide acceptance for payments, the oil exporters can easily be convinced to accumulate that currency. This is where the BRICS bank come into picture. IMF SDRs after an IMF reform too would serve the purpose, but that would mean the US deliberately surrendering the exorbitant privilege of the reserve currency with all the implications for the value of the USD and can't see any US government wanting to claim it as one of its achievements.
the return of King Gold is a possibility, contingent to one global player adopting it, that's all
the oil exporters would be interest since many of them already have lots of gold, the one asset that is typical in the portfolio of very rich families taking a multi-generational outlook
the "there is not enough of it" argument is not an argument. it's all a question of price, as Spitzer noted above
meanwhile your argument about China "convincing" others to adopt CNY as reserve currency contrasts the Chinese demands for an IMF reform and the wider use of SDRs, though there you have an excellent argument with "IMF SDRs after an IMF reform too would serve the purpose, but that would mean the US deliberately surrendering the exorbitant privilege of the reserve currency with all the implications for the value of the USD and can't see any US government wanting to claim it as one of its achievements"
The price will shoot up only if it becomes a monetary metal and it will become so only when net-exporters demand settlement in it. By demanding payment in gold for their exports, net-exporters will push the price of gold up and the value of their own exports down. They have to be idiots to do that. I don't think they are idiots. So they will not be demanding trade settlement in gold.
I didn't argue China would attempt that. I argued such an attempt by China wouldn't get off the ground.
Global trade will continue to be settled in fiat, although it will be settled in a multilateral currency (either the BRICS bank currency or IMF SDR or both) instead of national/regional currencies. Gold will have to wait a very long time to become monetary metal again.
"Global trade will continue to be settled in fiat"
the key word is settled. ultimately, this means that you gave me as much wares and services as I gave to you.
a fiat global reserve currency on the other side is an exercise in postponement of settlement
The person receiving fiat money accepts the transaction as complete and settled. There is no future obligation on the part of the party making the payment in fiat. Global trade today is settled in the fiat US dollars. It will be settled in a different fiat currency soon, but fiat nevertheless.
There is always *enough gold*. ALWAYS. It just depends on the price, or rather, the fiat currency conversion rate.
So basically all those selling commodities, goods and services should price them so low (in terms of gold) as to allow the available gold to be sufficient for commerce. Now why would they want to do that?
The only ones who benefit in that are those who are hoarding gold, not those extracting/producing and selling commodities, producing goods or offering services. Why do you think all the productive people in the world are idiots desperate to enrich gold hoarders?
I have highlghted the 50k gold oz would produce a 50k good suit as bugs say 1 oz equals a good suit
I am always left in wonder when they say Dollar going to zero so gold should be $5000.
Global Observer,
In theory, a perpetual surplus nation doesn't need an ounce of gold. If the US lost its reserve status, she would have to reduce entitlements and wages to balance trades with the surplus nation or give up its gold from the reserve. Basically, gold would be cheap in the surplus nations and expensive in the indebted nations.
Gold is not needed if world trades are balanced. It'd be needed only for emergency or natural disaster.
Why settled in physical?
You can't wire a ton to Bejing.
No, gold will be kept out of the day to day monetary world. It will be held in physical form on balance sheets, a tool to manage currencies.
Currencies will float freely against one another. They can refer to gold as a measure of value and find their value relative to one another in this way.
In 1983 Ron Paul and Charles Partee debated this possibility. ... https://www.youtube.com/watch?v=kcm8VvBcUdE ...I still don't think Dr. Paul understands the advantages the Partee discussed. This is unfortunate as he is clearly a leader amongst US monetary thinkers.
Using gold as an officially valued medium of exchange just ties the price of gold up and it can't float upward in price against overprinted currencies. The gold standard is the very worst thing that can happen to the holder of physical gold.
"Using gold as an officially valued medium of exchange just ties the price of gold up and it can't float upward in price against overprinted currencies. The gold standard is the very worst thing that can happen to the holder of physical gold."
I suspect that this is probably true.
I still believe that the proper backing for a currency is an increment of energy. NOT Oil. Calorie. How to implement it is the question.
IF labor and/or time was tied to currency then productivity would always be valuable. Work is money. Production is money. Calories are money. ...& time is money.
But at least the value of your labor isn't devalued on a daily basis the way it is now with paper. Saving gold is saving real money, saving paper is shooting the value of yesterday in the head.
I think you'll find most stackers don't want a government imposed Gold standard. They want a free market for money. The market will settle however it bloody well wants to settle. Fascists get no say. End of discussion.
What you want and what you get can be entirely different things. Governments are not going away anytime soon and they will impose their will on what is used as a payment instrument in commerce.
Global Observer,
That is why we need to elect officials who understand and respect the constituion.
Pro tip -- such officials will never exist in positions of power. Don't hold your breath.
Bravo, short and sweet, you took the words right out of my mouth.
I'm partial to it because when this financial bullshit ends, and the USD is valued more for toilet paper...gold/silver will be convertable into whatever comes next. And I suspect having gold/silver will be a distinct bonus to having a shitpile of USD.
For sure. Ask anyone who held Confederate dollars at the end of the US civil war, or German marks in WWI, or Zimbabwe notes just a few years back. Paper is paper. Actually, the dollar may be worth a bit more as toilet paper than actual toilet paper, because it can be laundered (in the literal sense of washing and re-using). I can't think of a currency that deserves it more, except perhaps the pound.
oldphart,
I don't think dollar will collapse to the equivalence of toilet paper. However, it will lose a big chunk of its buying power in the future when it'd be just another ordinary regional currency.
If gold were allowed to float freely in the FX like a stateless currency, physical holders would be able to perserve their wealth in the transition. If a fixed gold standard were adopted, physical holders would perserve their wealth partially depending on the fix. If the USA were transformed to a socialist state, the only one who can perserve their wealth is the one with connection. Connection will be gold in the new transformed America.
The title is wrong, should have been " Can a ponzi scheme survive tapering?"
Interesting article. So the bankers are going to bleed China into default and I'm buying some gold. But what happens to everybody else in the West.
7.1 earthquake on Guam due to coronal hole stream. low cance of fatalities and damage.
god almighty what claptrap. this:
Since US Treasuries were collapsing versus oil prices oil exporters might eventually be better off leaving oil in the ground...
means that oil is MORE EXPENSIVE. why the fuck would that induce producers to leave it in the ground? it would cause poor people to use less but it sure the hell didn't cause LESS PRODUCTION. the dakotas look like a pin cushion. deep water platforms are all the rage. the premise is ridiculous and unsupported by any evidence whatsoever.
Internal trade/production and external trade/production are different things - the valuation perspective shifts - direct vs indirect
As the Hunt brothers found out in 1979-1980; as we found out recently in the Libor fraud; and what you should always be cognizant of is this: never underestimate the ability of those in power [and control] to change the rules for their own self interest and your loss. We are, in some shape or form. all muppets.
www.traderzoo.mobi
Been reading about this stuff for 6 years now, knew about selling oil for dollars of course, but I never read about the importance of controlling the "price" of oil with respect to Treasuries and interest rates.
How deep does the rabbit hole go...
"importance of controlling the "price" of oil with respect to Treasuries and interest rates."
In anotehr words, the aforementioned means manipulation of the FX market. It's funny that I used to believe China was the only one whom manipulate their currency to their advantage. I know now that we are the master manipulators while the Chinese are just graduating from kindergarden level.
What is cheap to buy for big players that hold the real stuff (OIL)
http://goldenopportunitytrading.blogspot.co.uk/2014/09/i-have-found-oil-...
This forced US policymakers into an important decision:
Wow!
Some important lessons in the "choices" here...
Ok,
Riddle me this batman...if the globe is heading toward Yuan...why has the USD rallied 6.5% since Q4 2013? Regardless of how much you like this treatise..the US is still the least shittiest currency for some time to come
The globe is not heading toward yuan, it's heading toward Special Drawing Right. The fact that China has done another stealth QE is indicative that all fiat currencies are buying time/waitng for the global currency reset.
I always thought the new world order is a crazy conspiracy theory but I'm beginning to think that maybe that's where we are going. If that happened, faceless bankers will rule the world and the world leaders will be their puupets.
In between the petro dollar yin-yang....the red-necks around the globe will probably come unglued and defer the puppet masters their rights to the universe for a decade