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Brodsky On "Gold Monetization And The Big Reset"
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
- Loan book marks remain at substantial premiums to:
- 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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I have a PERFECT solution to all debt and monetization problems without bothering the Gold and its hoarders.
All we need is to make a Wooden Sacred Goat. The analysts will value this WSG to be about $ 15 Trillion. The experts also forecast that this WSG's value is increasing by 10% per annum.
Citizens will offer this WSG to the Fed who can monetise it and thats US national debt gone.
They can then lease it out, at 10%, to UK who can then have a money good collateral for their national debt for a year and then return it back. The 10% capital gain paying for the 10% leasing charge.
This in turn can then be leased to Japan, EU etc. etc.
I know its bullshit, but so is the article above.
Make it a wooden bull and gold leaf it; a golden calf! I would double as a religion also.
I have a PERFECT solution to all debt and monetization problems without bothering the Gold and its hoarders
I have a better idea,have Congress take back the ability to coin money,and print.Have ONE HUGE coin embossed with the total amount of our debt, and give it to the Fed and say PAID IN FULL.
And Eliminate the leeches.
Clears our balance sheet(with the Global Banksters), and except for foreign obligatiions, we are GTG.
After all, we giveth, and we can taketh away those 1913 powers.
I have a better idea,have Congress take back the ability to coin money,and print.Have ONE HUGE coin embossed with the total amount of our debt, and give it to the Fed and say PAID IN FULL.
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I think we are onto something here.
Can we shape that ONE HUGE coin actually into a ONE HUGE dildo, before giving it to the Fed?
There's one major problem with this proposal: Ideology against gold is so ingrained that it could never be seriously debated in the public sphere.
Now someone will say, "but they'll have to do it, because it's the only thing that will work to allocate capital rationally."
Nonsense. If all that was required to get a program through was a need to allocate capital correctly, then socialism wouldn't exist at all, even for brief periods. But it does.
+1 ... There are at least 30 years worth of college graduates (to my knowledge) who have been specifically instructed that gold is not money, not useful in our financial systems, and is a relic of past empires and archaic economies.
NO FUCKING WAY DOES THE TREASURY SELL AMERICA'S GOLD TO THE PRIVATE FEDERAL RESERVE BANK AT ANY PRICE. HAVE YOU LOST YOUR FUCKING MIND! THE FIRST THING TO DO IS TO GET RID OF THE FED. GOD DAMN IT, AND I'M NOT TALKING LLOYD'S god (Satan), BUT THE REAL GOD.
I know you've done good work before Mr. Brodsky, but you're out of your mind here and well out of your league. I suggest you revisit your conclusions.
"exogenous "
What kind of asshole uses that in a sentence?
exogenous
What kind of asshole uses that in a sentence?
How many kinds of assholes are there???
Those open to the idea of inviting a gerbil inside and those open to the idea of inviting a fire extinguisher inside... and both... or neither.
An aesthete.
The Ben Brenanke.
Anecdotal but the only currency taken as payment for smuggling people out of the USSR was gold, not dollar's, mark's or pounds.
Never packed a few extra pair of jeans before heading over to tour Russia I take it...
- Liquor
- Tobacco
- Jeans
- Nylons
Not that gold wasn't wanted but there were other options.
"Survival kit contents check. In them you'll find: one forty-five caliber automatic; two boxes of ammunition; four days' concentrated emergency rations; one drug issue containing antibiotics, morphine, vitamin pills, pep pills, sleeping pills, tranquilizer pills; one miniature combination Russian phrase book and Bible; one hundred dollars in rubles; one hundred dollars in gold; nine packs of chewing gum; one issue of prophylactics; three lipsticks; three pair of nylon stockings. Shoot, a fella' could have a pretty good weekend in Vegas with all that stuff."
.
What people have to realise is, Gold concentrated in single or few hands will not work, it has to be spread about if meant to be used as currency.
Thats the main trouble with Hard currencies. With fiat the possibilities are endless.
Gold will not be used as currency. It will be used to back a currency. Thus it does not need to be spread out, but in fact concentrated in one or a few places.
See, take this currency because it is backed by all that Gold in those vaults.
See, take this currency because it is backed by all that Gold in those vaults.
Okay then ... Whats wrong with storing my Sacred Wooden Goat (as per my other post) in those vaults, backing all the currency in circulation?
I'm detecting a product of the public "education" system.
Ad hominem Vs an argument, if you can construct one?
What gives a giant chunk of Gold the value that cannot give the same value to my Wooden Sacred Goat, forget 2500 year history for a while and think of it as the moment when the history is changing course. i.e. Today we make history.
Not ad hominem or an argument. Meta-comment on the state of public education.
What gives a giant chunk of Gold the value that cannot give the same value to my Wooden Sacred Goat....?
Maybe the fact that you could make yourself a thousand wooden goats, and nobody would pay even a wooden nickel for them? The value of something is "what you can get for it on ebay" , or what someone else will pay for it. what can you get for your wooden goat on ebay (hint- nothing) Not that I am following your point.
Maybe the fact that you could make yourself a thousand wooden goats, and nobody would pay even a wooden nickel for them? The value of something is "what you can get for it on ebay" , or what someone else will pay for it
Well, I meant that my wooden goat was a "legal tender" and apparently it can even give value to paper, so why not my wooden goat?
Also the "experts" would have valued my wooden goat to about $ 15 Trillion. The same experts who said CDSs will eliminate risk out of the markets.
My point is money and value are subjective and can vary from time and place (or how effectively you can con people). Its all about belief and confidence.
lulz, are you by any chance greek?
No. Why?
"An eight-to-tenfold increase in the gold price via this mechanism would fully-reserve all existing US dollar-denominated bank deposits
You could'nt print "Gold" so you will allocate more fiat to a unit of Gold! SWEET!
Nice workaround the problem of "printing Gold."
Now let me guess... under the Gold backed currency system, every few years (months) we will be having Gold peg debates in Congress, like we have the "debt ceiling" debates?
Fuckers would always know how to fuck.
They'd just keep increasing the gold "peg"...
(and ban average citizens from owning it).
Send all world debt to Burning Man for several years running. They will know what to do with it. Problem solved.
people arguing about whether there will be gold confiscation or not are missing the point. It is not necessary to confiscae gold; the usa or other government only need outlaw the use of gold in transactions, say by tax laws or some other pretext, which means that you would not be able to risk trading the gold for other things of value or other currencies. Therefor you would have your gold but not be able to use it without risk of prosecution. This would be similar to how the prosecuted the criminal Al Capone, on tax charges, and it would be the same for the government as confiscation but without the effort or risk of resistance.
They already do that, and it is meaningless. Much like Obombas campaign promise to get out of Afgan quickly.
Gold is gold through the centuries, from King Tut time, through the Spanish Conquistadores, until today, this very day. Gold doesn't care about nonsense edicts from beaurocrats. .gov trolls can ban it, burn it steal it sell it do whatever they want, gold remains. The smart ones in 1933 didn't turn anything in to the thief Rosenveldt, only the stupid, the sheople, and etc surrendered their precious, Shortly thereafter Rosenveldt killed their sons in overseas wars also. (do our foriegn masters still do that?)
I'll take gold over any government promise.
but prole, what happens if the Fed (banksters) buy all the treasury gold and then tell all of us that we can only buy and sell gold through one of their "official" banking outlets, and then for a price they have manipulated? They could do any number of things to make a persons metals basically obsolete.
That was a very interesting presentation.
So were the comments.
Why all the nonesense about confiscation?
TPTB are imaginative enough to come up with a new idea.
Confiscation would only work in a country like USA and that aint enough.
The Arabs, Jews, Chinese, Russians and Indians wouldn't play ball.
I'm all in. Can any of you geniuses calculate today's money supply vs known oz's of gold?
http://dailyreckoning.com/wp-content/blogs.dir/5/files/2012/07/DRUS07-02...
It's really amazing how all over the internet "experts", investors, and self-educated economists have been pushing everyone to BUY, Buy, buy Gold and Silver!! Tons of Free-Masons all over the internet puhsing this line....Yet, nobody seems to know how it is all going to play out! That's right, none of 'em seem to fucking know anything after-all. Yet, there are Well known people encouraging even those with low incomes to buy metals.
And now we have this article, which purpose seems to be introducing the idea of the Federal Reserve "buying" the nation's gold from the treasury. HOW FUCKING SCARY IS THAT?!
After all that's happened and we are now going to have to sit here and watch the Banksters that created this mess GET ALL THE FUCKING GOLD ON TOP OF IT?????
This could give the "too-big-to-fails" control over the sale and purchase of gold and other metals along with additional powers over any RESET that is taking place. How would this affect local coin shops and other metal sellers (apmex, etc)?
I would be very worried about this if I were anybody.
After all that's happened and we are now going to have to sit here and watch the Banksters that created this mess GET ALL THE FUCKING GOLD ON TOP OF IT?????
I told you my Wooden Sacred Goat was the Perfect solution. We could even make smaller ones, in China, for smaller denominations for the "surplus."
Your argument that in the end all gold is owned by the FED is of great importance. But in my opinion the solution would be to nationalize the Fed prior to the gold purchase. Thus the accumulated gold of the US would stay in the hands of the US government as it is right now.
But it is not necessary to do it right away, because simply put I do not believe, that the US gold is ever leaving Fort Knox. It will always stay there guarded by the army. The only thing what is changing are a few numbers on the paper or electronic files. But the gold stays were it is.
Its one of the oldest book-keepers and auditors tricks. Change the ownership on the paper that it appears really not asailable but do not change the control in reality. Or do you think the joined force of the bookkeepers will manage to overwhelm the guards in Fort Knox?
There won't be a reset.
This man wants the system to "reset" so they can get the ponzi schemes moving forward once again, only this time with the entire U.S. Gold stock in the hands of Ben Bernanke and Friends.
I'm surprised more people are not coming forward with warnings on what this guy is obviously introducing to the tired and dumb public.
Tyler,
inYour opinion, what are the odds that, for the rest of 2012 eur/usd will ramp higher and at the same time gold in eur will go downside?