• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

Brodsky On "Gold Monetization And The Big Reset"

Tyler Durden's picture




 

Macroeconomic Problems

1) The global banking system is functionally insolvent and will fail without exogenous policy action*

  • There is one, interconnected global banking system linked by global financial markets and coordination among currency boards and central banks
  • In the current banking system model, debts due tomorrow are serviced by newly-incurred debts today (which create deposits)
  • Stagnant or declining nominal global asset prices since 2008 have stressed bank balance sheets
    • Loan book marks remain at substantial premiums to:
      • The present value of their cash flows in real terms
      • Liquidation prices at current or higher interest rates
  • Central bank easing and asset purchases to date have only tempered the rate of asset price declines
  • Current adversity among European banks directly impacts global commerce and finance

*Bank balance sheets can deleverage either via nominal write-downs of assets, (leading to outright failure/insolvency as tangible equity is extinguished), or through nominal increases in system reserves via base money inflation (provided by central banks as they expand their own balance sheets)


2) Governments and private parties are heavily-indebted and this indebtedness is growing exponentially

  • In the aggregate, the public and private sectors have “borrowed money into existence” for decades, as fractionally-reserved banks have created unreserved deposits and extended unreserved credit
  • In the net, private sector borrowing has stagnated and is prone to contraction
  • In response, public sector borrowings have been increased measurably to fill this gap
    • Public sector debts and deficits are increasing
    • The global economy is rapidly approaching the point where neither the public sector nor the private sector can service debts to the degree required to maintain asset prices, which, in turn, removes incentives to borrow further
    • The temporary benefit of growing debt obligations supporting ever-increasing nominal assets prices is now prone to reversal
    • Should global bank balance sheets thus contract, so would the global pool of bank deposits
    • Contracting bank deposits implies contracting money supplies and attendant deflationary pressures

 

3) The global economy is threatened because, in real terms, it continues to misallocate capital

  • The global relative price spectrum does not reflect true value and therefore is contributing to the general economic and financial malaise
    • Wealth and income concentration stemming from the asymmetric rise of asset prices tends to be self-reinforcing, and thus suffocates purchasing power for most economic participants (“the 99%”)
    • The more one pays for productive assets, the less one can pay for labor or other productive inputs
  • The extension of unreserved bank credit has fed the feedback loop of nominal asset price inflation (i.e. bubbles and subsequent busts)
    • Wages and basic input pricing has thus lagged, in relative terms, the robust upward trend of asset pricing
  • Over-priced assets have led to capital over-investment in many industries/projects
    • Unsupportable by labor inputs or unaffordable at current wage levels
  • Most developed economies have morphed into financial economies, which over time have become fragilely dependent on net imports to sustain living standards
  • The current propensity of both public and private sectors to channel ever more income towards debt service is threatening the debt-for-debt feedback loop that has maintained the appearance of stability since 2008
    • European sovereign issues
    • global real estate setbacks
    • declining public participation in equity and other leveraged asset markets

 

The Expedient Solution: Policy-Administered Asset Monetization

1) Re-monetize gold as the asset against which newly-created central bank liabilities (base money) are created

  • Gold purchases would serve to promote deleveraging in two manners:
    • 1) via base money (bank reserve) creation and,
    • 2) by providing the currency proceeds to fiscal agents to retire existing debts
  • The threat of waning confidence in the currency unit in response to expanding central bank balance sheets would be arrested by a gold price peg in the aftermath of the base money expansion
  • Any future operations to expand the base money stock would require additional purchases of gold at, most likely, higher and higher nominal prices or exchange rates
  • A gold peg would thus act both as a deleveraging agent today and a fiscal/monetary policy discipline looking forward

 

The Consequences (Pros & Cons)

1) The global banking system would be deleveraged via base money (bank reserve) inflation

  • Asset monetization is the least painful and most politically expedient option to reverse current conditions in which global bank deposit liabilities are many multiples of reserves (a classic precondition for bank runs)
  • Continued central bank purchases of sovereign debts would merely continue to roll and perpetuate the debts, albeit at attractively low interest rates (starkly negative in real terms)

2) Nominal asset (and bank asset collateral) pricing would be supported and perhaps even inflated

  • As nominal bank reserves grow, the illusion of returning strength to bank balance sheets would be perpetuated
  • The propensity for privileged speculators to place their “risk-on” bets would likely increase

3) Public and private sector debts from the prior extension of unreserved bank credit would, at the margin, be paid down with the base money creation stemming from central bank asset purchases

  • Public debts in particular could be paid down in the event fiscal agents were to sell official gold holdings to their respective central bank (central bank purchases of gold then would be, in the net, debt-extinguishing and thus, deleveraging)

4) Wages and consumables pricing would rise in asset-price terms, which would arrest and begin to reverse the political consequences of several decades of wealth and income redistribution to the top “1%”

  • An easy political posture to take for those who choose to promote it

5) Asset prices would decline relative to current and future expectations of consumption expenses which, in turn, would lead to lower living standards than currently anticipated by those asset holders

  • A necessary evil; however, the loss of future purchasing power as assets are sold to fund future consumption is already “baked in the cake”
  • This loss of perceived value can either be crystallized and recognized today so the real economy can begin to rebalance and establish a foundation for growth, or, in the alternative, be suspended -- a slow and time-consuming “death by a thousand cuts” malaise (e.g. Japan’s lost decade[s])

6) Rising relative and nominal wages would support debt-servicing capacity going forward

  • Would promote debt pay-downs at par, which better ensures banking system solvency
  • Would raise wages relative to debt, a powerful political palliative

7) Banks, being agnostic to measures of consumer-type price inflation, would most likely see the nominal pricing of their current pool of assets rise, which would eventually restore their solvency because the nominal valuations of their liabilities are generally fixed

  • The value of the currency unit is a common denominator to both sides of bank’s balance sheet
    • Real losses/gains on one side of the balance sheet are simultaneously and proportionately offset with real losses/gains on the other side
  • However, this would not hold for nominal losses (insolvency would result if a bank were to go into a negative equity position should the variable nominal valuation of its assets decline as the nominal valuation of its liabilities remains constant)

8) Deleveraged government balance sheets would have less impact on private asset values and marketplace pricing

  • The political dimension could review and renew optimal levels of participation and capital market intervention

9) No overall meaningful impact on the general price level (but, as implied above, there would likely be a migration of value, in real terms, from leveraged assets to unleveraged goods, services and assets)

  • Stable to higher nominal asset prices would require even higher nominal wage and consumable pricing looking forward

Conclusion

Asset monetization (and in, particular, gold monetization) would solve many more problems than it would create. The negatives would merely recognize the balance sheet damage already done and beginning to be manifest (first, in the private sector and now, increasingly in the public sector).

Mechanically, policy-administered asset monetization would be quite simple. Using the US as an example, the Fed would purchase Treasury’s gold at a large and specified premium to its current spot valuation. The higher the price, the more base money would be created and the more public debt would be extinguished. An eight-to-tenfold increase in the gold price via this mechanism would fully-reserve all existing US dollar-denominated bank deposits (a full deleveraging of the banking system). An appropriate multiple of today’s spot price could fully-extinguish the public debt if desired.

In terms of the relative price spectrum, a speculative 50% increase in the US median home price would be most-welcomed to the US banking system (and certainly to mortgage holders). Clearly, such an operation would be a subsidy to leveraged asset holders and banks. Would this be another form of perpetuating moral hazard? Superficially, it would be easy to conclude so; however, we think this conclusion would be incomplete. Such a “subsidy” is already embedded and institutionalized in the system. The key distinction would be that the system will have been reset to promote fairness and efficiency going forward. Given today’s circumstances, that should be a universal, non-partisan goal.

Rolling unfunded debts and debating in the political sphere over the merits and risks of unfunded growth or policy-administered national austerity programs is a futile endeavor. The math suggests strongly neither can work. We are convinced policy-administered asset monetization would stop the global financial system from seizing, restore sorely needed economic balance, and reset commercial incentives so that real growth can once again gain traction.

Lee Quaintance & Paul Brodsky
QB Asset Management Company, LLC
pbrodsky@qbamco.com

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Fri, 06/08/2012 - 13:55 | 2507990 Ahmeexnal
Ahmeexnal's picture

Gold at $66,666 ozt

Fri, 06/08/2012 - 14:02 | 2508010 resurger
resurger's picture

NO!

its going to $65,667 

Fri, 06/08/2012 - 14:19 | 2508095 Rahm
Rahm's picture

The golden toilet gets sold at $55k/oz

Fri, 06/08/2012 - 14:25 | 2508119 MiguelitoRaton
MiguelitoRaton's picture

Off topic, but INFLATION ALERT: my local water company explained the new rates. I did the math, see the following increases: 2010 (10%), 2012 (30%), 2013 (5% for now), 2014 (13%)...oh inflation is surely contained...at 30% in 2012.

Fri, 06/08/2012 - 15:05 | 2508277 Stuck on Zero
Stuck on Zero's picture

It's going to cost you more to flush the toilet than to wipe your butt with twenties.

 

Fri, 06/08/2012 - 17:38 | 2508857 Darth..Putter
Darth..Putter's picture

Bank assets hypothicated, and rehypothicated = inflation.  The only assets not devalued by 100x are the ones in your pocket.

Fri, 06/08/2012 - 18:49 | 2509083 ClassicalLib17
ClassicalLib17's picture

@ miguelito,  Your municipality is increasing water rates so they can borrow the overage to cover other expenses.  They probably have not increased rates in several years and it is easier than telling the people they are out of money and have to increase your property tax to make up for the shortfall.  It's all very legal.  The downside is if your delivery system is old and leaking, the funds to replace that are no longer in that Enterprise Fund necessitating a bond sale to finance the replacement of  aging water infrastructure.

Fri, 06/08/2012 - 22:37 | 2509502 narapoiddyslexia
narapoiddyslexia's picture

Excuse me, but do you work for my municipal water company? Or any utility? I think I know you. Maybe. Generically, anyway.

Fri, 06/08/2012 - 18:53 | 2509095 duo
duo's picture

Was your water company bought by JPM?

Fri, 06/08/2012 - 15:08 | 2508283 A Nanny Moose
A Nanny Moose's picture

216

Fri, 06/08/2012 - 14:05 | 2508024 SilverTree
SilverTree's picture

Silver at >$3,333.33 ozt

Fri, 06/08/2012 - 14:56 | 2508252 debtor of last ...
debtor of last resort's picture

i think i just had an erection? Is that possible?

Fri, 06/08/2012 - 15:27 | 2508351 tmosley
tmosley's picture

Yes, during an industrial panic brought on by stockpile obliteration (such that other prices remain the same for the most part, greatly increasing you purchasing power), or during hyperinflation (where most other prices rise at nearly the same rate, preserving/slightly increasing your purchasing power).

Fri, 06/08/2012 - 15:49 | 2508417 tankster
tankster's picture

With the proper stimulus.

Fri, 06/08/2012 - 15:30 | 2508361 DosZap
DosZap's picture

Gold at $66,666 ozt

LOL, if it got to $10k per ozt, you can bet your sweet Kiester WE would not get to keep it legally.

Fri, 06/08/2012 - 16:23 | 2508579 tarsubil
tarsubil's picture

Just like I'm not allowed to download movies legally? Guess what? Yeah, that's what. Fuck the law. Fuck the government.

Fri, 06/08/2012 - 22:41 | 2509507 narapoiddyslexia
narapoiddyslexia's picture

What about that long, intrusive bit at the beginning of every rented movie that features the fed-ur-all byur-oh uv in-vest-te-gay-shuns?

Oh noes......!! There's a knock at my door......

Sun, 06/10/2012 - 16:37 | 2512725 Western
Western's picture

On Alibaba and Aliexpress you can find 1oz gold coins (fake). Give that to the gov't when they come asking.

 

"Ooops, sorry sirs, I had no idea.. *crying* my investments!!"

Sat, 06/09/2012 - 09:07 | 2509981 RiverRoad
RiverRoad's picture

"The global banking system is functionally insolvent" because the world's money is presently sitting stuffed away in the world's tax havens. It will continue to grow nicely there so long as we keep printing it. 

Sat, 06/09/2012 - 14:00 | 2510492 monad
monad's picture

The machine crashes at 65535. Its like Y2K, the programmers didn't anticipate this happening in the lifetime of their software.

Fri, 06/08/2012 - 13:56 | 2507993 Concentrated po...
Concentrated power has always been the enemy of liberty.'s picture

let it be!

Fri, 06/08/2012 - 13:57 | 2507995 GeneMarchbanks
GeneMarchbanks's picture

The higher the price, the more base money would be created and the more public debt would be extinguished. An eight-to-tenfold increase in the gold price via this mechanism would fully-reserve all existing US dollar-denominated bank deposits (a full deleveraging of the banking system).

Go ahead and transfer all the free floating debt and attach it gold, fine. Then, go ahead and start shipping all that gold to China since the debt still stands.

Brilliant.

Fri, 06/08/2012 - 14:03 | 2508012 Pladizow
Pladizow's picture

Thats not what he said.

 

Fri, 06/08/2012 - 14:22 | 2508108 ParkAveFlasher
ParkAveFlasher's picture

IMO that's what's already happening.

Fri, 06/08/2012 - 14:35 | 2508166 Pladizow
Pladizow's picture

Asia is buying gold, not forcing dollar denominated debt to be redeemed in it!

Fri, 06/08/2012 - 14:52 | 2508237 ParkAveFlasher
ParkAveFlasher's picture

True, and no banker actually presses ctrl-P.

Fri, 06/08/2012 - 14:36 | 2508172 GeneMarchbanks
GeneMarchbanks's picture

Pretty much but in slow motion. This guy just wants to expedite the process.

Fri, 06/08/2012 - 15:10 | 2508284 MachoMan
MachoMan's picture

I'm also at a loss for how revaluing gold could provide stabilization to eroding confidence.  If a lack of trust is the cause of hyperinflation, then how does simply revaluing the gold, in and of itself, do anything to address the outstanding debt as well as lack of prospects for organic future growth?  Do we just get to keep revaluing our little pile of gold in perpetuity to account for our prolifigacy? 

aside from the fact that central control of price mechanisms is in large part what got us here...  I'm not sure how it presents any sort of viable solution. 

Fri, 06/08/2012 - 16:21 | 2508569 XitSam
XitSam's picture

I'm at a loss for how world-wide re-monetization of gold will be accomplished because it won't just happen by itself.  Iran is selling some oil for gold but that is just because they have been locked out of other currencies. They are also selling oil for yuan.  Other than that, Japan-China agreed to trade in their own currencies, not gold. BRICs are looking to trade in local currencies, not gold. Going to gold removes all the ability to manipulate currency for each country's benefit. I know ZHers see that as good, but at the level that this gets decided, it is seen as bad news.

As far as I can tell, "They" have different goals and don't want to fix what we see as the problem. I'm willing to listen to opposing arguments.

Fri, 06/08/2012 - 16:33 | 2508621 tarsubil
tarsubil's picture

I kinda think it will be forced on them. They will want to print but people will revolt and use gold and silver as stores of value with high inflation. Then they can just use gold and silver in barter transactions as they see it as a much better currency than rapidly depreciating fiat. The powers that be will try to avoid this succession to gold and silver and other metals more if they lack metals and less if they don't. The question really is who holds the gold? Is Fort Knox empty? Does the US plan on taking the NY Fed gold? Will Europe demand delivery of their gold? How much has China bought secretly? Gee, this is gonna be really interesting, isn't it?

Fri, 06/08/2012 - 17:03 | 2508737 XitSam
XitSam's picture

OK, definte possibility.  I'm reminded of a PR campain by the government in one of Matthew Bracken's books. "During today's difficult economic times, the only responsible place for America's gold is in Fort Knox. Gold hoarders and speculators are criminals, who only serve to destabilize the global economy.  Gold hoarding leads to exploitive labor practices, and environmental ruin. And if those aren't enough reasons to obey the law, here's another: ten years in prison for illegal gold hoarding."

Fri, 06/08/2012 - 16:52 | 2508680 delacroix
delacroix's picture

somehow selling all the soverign gold to the central banks, for more paper, sounds like the fulfillment, of the original evil plan.                    ONLY GOLD IS MONEY,EVERYTHING ELSE IS DEBT          Isn't trading gold, for debt, what led to this state of affairs?

Sat, 06/09/2012 - 07:15 | 2509887 Sean7k
Sean7k's picture

It is my greatest hope that people finally get what you have just said. 

There is a tremendous debt. It is not capable of having a real value or replaced with ANY asset class. The bankers have build a perpetual debt machine and it can't be turned off (compound interest). You have to destroy the machine.

People will continue to produce, but only for a just reward. Your gold will be worth what it has always been worth: one ounce for one cow. One ounce of silver is one days pay. However, not everyone has gold or silver, so the system of social credit will be re-established in communities that survive a reset. 

The only option that allows for a reasonable transition is to wipe out all debt of every kind. You got what you got and you have the skills you have and hopefully, you can make that work. Debt jubilee of all debt jubilees.

There are no safehavens, there are no safe hideouts. There are parasites and producers. Predators and prey. Grasping at hopes are nothing more than attempts to exert a sense of control in a future that scares the hell out of all of us. Fake confidence of your place in the hierarchy is just that.

Debt is the 800 pound gorilla in every civilzation, regardless of size. How a people deal with it and the means by which it is accumulated have everything to say about the quality and health of said civilization.

Fri, 06/08/2012 - 14:38 | 2508177 Overfed
Overfed's picture

Except right now it's not doing anything to liquidate the debt.

Fri, 06/08/2012 - 14:02 | 2507996 LawsofPhysics
LawsofPhysics's picture

A lot of words to simply say that you can not grow an eCONomy or financing, or debt, or anything, for that matter, exponentially forever in a finite world.

  How do these "educated" people get these jobs?  Big difference between anything paper and anything physical. This applies to more than just gold.

Fri, 06/08/2012 - 14:05 | 2508026 LULZBank
LULZBank's picture

Just play along brother, and think of it as a joke otherwise we'll go nuts thinking about all these common sensical things.

Fri, 06/08/2012 - 13:58 | 2507997 lemonobrien
lemonobrien's picture

If gold was every to be remonetized; the rich people would use the army and police to steal every ounce from the common man beforehand; of course the politicians would be paid off with 30 ounces of silver.

Fri, 06/08/2012 - 14:03 | 2508014 LawsofPhysics
LawsofPhysics's picture

This has been done before, not sure why the sheeple are junking you, oh wait, nevermind.  Baaaahhhh!

Fri, 06/08/2012 - 15:31 | 2508373 dlmaniac
dlmaniac's picture

Exactly.

The only thing debtors do is stealing from those having money. If they cannot steal via paper printing then they will go straight for your gold. 1000% guaranteed.

Fri, 06/08/2012 - 16:45 | 2508665 tarsubil
tarsubil's picture

I don't think the situation is the same as when FDR took zee gold. A lot of the people that are buying gold and silver are anti-government and don't have it stored in a safe deposit box. I really, really doubt that the government will find it as easy to confiscate gold today as it did in the past. If they sent IRS agents to search houses, my guess is that they'd come up empty and perhaps some would turn up missing.

Fri, 06/08/2012 - 14:04 | 2508019 Pladizow
Pladizow's picture

Yeah, for that reason alone, not counting the coutless others, you probably should not buy gold or silver!

Fri, 06/08/2012 - 14:14 | 2508072 lemonobrien
lemonobrien's picture

i'm buying, but i'm leaving.

Fri, 06/08/2012 - 14:20 | 2508098 ThirdWorldDude
ThirdWorldDude's picture

Why such a sour attitude?

Fri, 06/08/2012 - 14:35 | 2508165 lemonobrien
lemonobrien's picture

I'm not free, and I don't want to fight for something that is easily attainable else where. I have kids; civil ware ain't what I want to put my daughter through. I'm southern too; I know it's bullshit. I've also lived overseas; and there is plenty of land around the world where nobody really gives a shit. America is just one be anal cluster fuck; all about work, guns, pussy, and violence.

Fri, 06/08/2012 - 14:57 | 2508255 ThirdWorldDude
ThirdWorldDude's picture

I hear you, but have in mind that the world is fucked overall. It doesn't matter where you are, only what you do with the available resources. I'd recommend you stay put, because it's easier to get around a place and people you're familiar with, in case it gets rough. Find people you can trust to and build a network, it's easier when one gets to share his burden.

As for the PM's, you don't have to hold them at home. Remember Fight Club's rule #1 and get rid of your posessions someplace where even you'll have trouble finding it. 

Fri, 06/08/2012 - 15:11 | 2508293 Harbanger
Harbanger's picture

2nd RULE: You DO NOT talk about FIGHT CLUB

Fri, 06/08/2012 - 14:23 | 2508104 fuu
fuu's picture

Why do you think it will be any safer where you are going?

Fri, 06/08/2012 - 14:28 | 2508132 lemonobrien
lemonobrien's picture

most other countries are not nearly as violent and stupid as america is.

Fri, 06/08/2012 - 14:31 | 2508143 fuu
fuu's picture

Well good luck with that.

Fri, 06/08/2012 - 15:18 | 2508309 lemonobrien
lemonobrien's picture

i'll tell you where i'm going; after i'm sure i'm gonna get there. you're more than welcome.

Do NOT follow this link or you will be banned from the site!