Dylan Grice Deconstructs The "Perpetual Ponzi Machine" Of Global Finance, Sees Gold At $10,000 In A World Of Dishonesty

Tyler Durden's picture

Everyone, especially various textbook "schools" of postmodernist Keynesianism which (in addition to apparently never having actually been in the real world) believe there is such a thing as a free lunch as long as a reserve currency can issue infinite debt, and stubbornly fail to see the creeping currency devaluation which ultimately represents itself in hyperinflation, should read the following note from SocGen's Dylan Grice who explains pretty much... everything, including why in world starved for honesty, gold is the benchmark, and is now worth $10,000.

Key extracts from: The market for honesty: is $10,000 gold fair value? (highlights ours)

Last week, the Swiss National Bank (SNB) pledged to buy ‚unlimited? amounts of foreign exchange to prevent the Swiss franc from further appreciating. In other words, it is willing to print 'unlimited? quantities of Swiss Francs, tolerating an 'unlimited' debasement of its currency. Why would the Swiss of all people, one of the world’s few remaining 'sound money' proponents make such a commitment? Because unlike its main ‘competitors’ in the market for currency (the major central banks), which are either debasing with abandon or looking as though they’re about to, Switzerland had been rewarded for its rectitude with an uncomfortable share of the world’s flight capital and a painful currency overvaluation. So the SNB has given up trying to be honest in a dishonest world.

So let me explain why I believe printing money to be a fundamentally dishonest endeavour. Think about how it works. When the central bank, at zero cost, increases the monetary base by 1%, where does that money go? Answer: into the market for government bonds. Since printing the money to buy government bonds costs nothing, government revenues are obtained ostensibly for free. Of course, it buys those bonds in the secondary market rather than from the government directly, and the pretense of an arm’s length transaction between government and central bank is thus maintained, with all parties claiming a separation of monetary and fiscal policy. But it’s only a pretense.

By issuing bonds to itself the government seems to have miraculously raised revenue without burdening anyone else. This is probably why the mechanism is universally adopted throughout the world’s financial system. Yet free money does not, and cannot, exist. Since there can be no such thing as a government, or anyone else for that matter, raising revenue "at no cost" simple logic tells us that someone, somewhere has to pay.

But who? This is where the subtle dishonesty resides, because the answer is that no-one knows. If the money printing creates inflation in the product market, the consumers in that product market will pay. If the money printing creates inflation in asset markets, the purchaser of the more elevated asset price pays. Of course, if the printed money ends up in asset markets even less is known about who ultimately pays for the government’s ‘free lunch’, because in this case the money printing sets off its own dynamic via the perpetual Ponzi machine that is the global financial system. The ‘free lunch’ providers will be the late entrants into whatever asset-bubble or investment fad the money printing inflates.

The point is we can’t know who will pay, only that someone will pay. Thus the government has raised revenues without even knowing upon whom the burden falls, let alone telling them. Compare this to raising explicit ‘honest’ taxes, which are at least transparent. We know who levied the sales tax or the income tax, when it was levied, when it is payable, and how much has to be paid. The burden of this money printing, in contrast, seeps silently into the  economy, falling indiscriminately but indubitably on unseen, unknowing victims.

The economic hardships this clandestine tax operation imposes are real and keenly felt. But because no one knows from where it comes the enemy is unseen. Thus, during great inflations, societies turn on themselves with each faction blaming another for its malaise: the third century inflation crisis in ancient Rome coincided with Diocletian’s infamous persecution of the Christians; the medieval European debasements coincided with surging witchcraft trials; the extreme Central European hyperinflations following WW1 saw whole societies blaming their Jewish communities. More recently, the aftermath of the historically modest asset inflations in the tech market and the US real estate market have seen society turn on "fat-cat CEOs" and "greedy bankers" respectively.

By now, some of you might feel this all to be irrelevant. Surely, you might be thinking, the plain fact is that there is no inflation. I disagree. To see why, think about what inflation is in the light of the above thinking. I know economists define it as changes in the price of a basket of consumer goods, the CPI. But why should that be the definitive measure, given that it’s only one of the many possible destinations in money’s Brownian journey from the printing presses? Why ignore other destinations, such as asset markets? Isn’t asset price inflation (or bubbles as they are more commonly known) more distortionary and economically inefficient than product price inflation?

I believe economists focus so firmly on product prices in their analysis of inflation not because of any judgment over the relative importance of one type of inflation over the other, but simply because CPI-type measures of inflation are easier to see. In doing so, they resemble the fabled driver who lost his keys one evening and was found looking for them under a streetlamp. When asked by his wife why he was looking there when he’d probably lost them further back, he replied “Because here it’s easier to see.”

We know that revenue cannot be raised for one person without costing someone else. We know that money printing generates revenue for the public sector. So we also know that money printing must be a tax. We know that the magnitude of that tax – the inflation rate – can be reliably measured by the increase in the rate of base money growth. Since we don’t know which markets new money will end up in or even when, we know we can’t reliably count on measures of inflation in those markets to tell us what the ‚inflation rate? is. Thus, the only reliable measure of inflation is the expansion of the monetary base. So to those who say there is no inflation, I give you the following chart.

 By now, the more polite economists among those still reading may be thinking something like: “What utter drivel you are full of Grice! When there is a recession/depression on and the pressure faced by an economy is deflation, which can become self-fulfilling, the only correct thing to do is to create inflation to protect jobs.”

To this I would reply that every right thinking person wants to see job creation. Those advocating the creation of inflation, or fiscal stimulus are doing so because that’s what the system of logic known as ‘theoretical macroeconomics’ teaches. Yet this system of logic with its deeply flawed epistemological foundations is what brought us here in the first place! The macroeconomic body of knowledge represents no such thing – a cacophony of faiths would be more accurate. The instruments and gauges it recommends policy makers rely on – CPI, trend growth, output gaps, NAIRUs, budget deficits, debt/GDP – are subject to such wide conceptual ambiguity, not to mention estimation error, as to render them utterly meaningless. The fact is the captains of our ship have no reliable gauges. They have no understanding of what a yank of this lever, or a push on that button will ultimately achieve. They just think they do. Intoxicated by trumped up notions of what they know and understand, the drunk driving of macroeconomists is what led us to where we are today.

Of course, this begs the question of why we continue to listen to them. I believe it’s for the same reason that Quintus Cicero thought his famous brother was such a successful politician two millennia ago: people prefer a false promise to a flat refusal.

Believe it or not, for all this talk of honesty and dishonesty I’m not actually passing any judgment on the ethics of this state of affairs. The simple fact is that as a species we’re liars. One of the most famous recent experiments was carried out by Robert Feldman who recorded students talking to strangers for ten minutes, and then asked the students to watch the recordings again, making notes of the number of lies they told. Fully 60% owned up to lying at least once, with an average of 2.9 lies (to be precise) told per person. As a species, our capacity for conceptual thought makes us better at it than other animals, but other animals do it too. When a Kildeer’s nest is threatened, it feigns a broken wing to lure its predator away. There are firm evolutionary foundations for the tendency towards untruth. However, societies work on trust too, and there are equally firm evolutionary foundations for honesty. I know honest economists, honest investors, honest journalists, even … deep breath … honest bankers. Indeed, there is a demand for honesty. There is a demand for honest brokers, fund managers, lawyers, dentists, doctors, plumbers etc. And there is a demand for honest currency.

That demand has overwhelmed the Swiss. But their actions merely narrow the universe of honest destinations for flight capital with which gold has historically competed. For gold has no export sector, no pop-economists to be swayed by, and no populists to pander to. Gold might be a mere lump of dense, useless shiny metal, but it’s one which crackpot central bankers can’t print. Indeed, benchmarked against the printing of The Ben Bernak, the price of gold at which the US dollar would be fully gold-backed is now $10,000. You might think such a ‘price target’ is far-fetched (and I might agree with you). But bear in mind that the last time honesty was perceived to be so scarce – in the 1970s gold mania – the dollar was over-backed by gold (see chart below). If it happened then, why not again?

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gojam's picture

'When people stop believing in Gold, they don't believe in nothing -- they believe in anything'

 Almost but not quite - C K Chesterton
  

markmotive's picture

S&P 500 to Gold ratio has a long way to go. To get to past historical peak, gold would need to hit $7275 or the S&P 500 fall to 290. Take your freakin pick!

http://seekingalpha.com/article/288542-s-p-500-to-gold-ratio-has-not-yet-hit-historic-low

X.inf.capt's picture

silver can hit 10,000 and i still woundnt dare sell. ALL I WOULD GET IN EXCHANGE FOR IT IS WORTHLESS PAPER.

no, thank you!

PaperWillBurn's picture

Is there nothing else in this world? Silver and paper

eisley79's picture

there is something else to realize though, Gold doesnt have to "rise" to 10,000 dollars while everything else stays the same.

The banksters would be just fine with gold at 10,000 but only when a loaf of bread is over 100 dollars.....

Can gold reach 10,000 in the system, before the system itself fails and hyperinflation raises all boats....

mkkby's picture

Guys, I can see a bull trend like anyone else.  But are you saying gold is the magical bull market that never ends?

C'mon, get real.  TPTB will never allow a gold standard.  It would make them pay for all their wars and vote buying.  They can't live with that.  The next reserve currency will be something else that can be manipulated.  Probably digitally "backed" in some phoney way.  They know it will break, but so what -- they get to have their world dominance for another 100 years.

I like PM's, but no more than any other commodity.  And mark my words, you better get the fuck out before goldman decides it's time to end the party.  They aren't like JP Morge.  They know how to axe a market.

Crisismode's picture

Gold was around for thousands of years before the squid came in existence.

 

And it will be around for thousands of years after the squid has decayed into dust.

Mr.Sono's picture

yeah and the whole world will just bend over and take? Iam sure Chinese will sell there resources for digital money backed by hugs and kisses.

theMAXILOPEZpsycho's picture

come on thats bullshit

hold the paper for as little time as possible then buy up farmland, guns, brothels etc etc

its just a metal; some people really get carried away...

SheepDog-One's picture

Ooo! I want to own a brothel!

Nah seriously though I'd love to have ranch land....beef critters is where its at!

Half of it to grow corn and barley for feed....chickens, cattle, and plenty of leftovers.

Fuck the New World Order.

LoneStarHog's picture

Your bovine had better not fart or the EPA will shut you down. You are smart to stay away from that EPA-declared pollutant HAY!

SheepDog-One's picture

Well either do that or starve...I have no idea how people figure theyll 'play it safe and under the radar' in FEMA/DHS USA police state. Yea youve got it all figured out Im sure, ust go along and theyll throw a baloney sandwich to your family...all is well.

X.inf.capt's picture

hey, MAX, you gotta point there!

a brothel...hmmmm

LoneStarHog's picture

This is an example of SARCASM, dumbshits! Does no one actually follow contemporary news?

High Plains Drifter's picture

have you gone out there and checked the cesium 137 levels in your pastures lately.  just sayin......

JOYFUL's picture

too true my man! Back in March I got real serious about my indoor barley fodder program, right about the time KANADA 'pulled' it's monitoring systems and banned all episodes of "the Simpsons" featuring Homer and the plant.  (Bet you think I made that up huh: think agin!)

hectare of feed in 300sq feet, with a fraction of the water useage, that's sweet.  I've only let the critters back out to pasture in the last month, and that probably only cause they've lulled me back to sleep.  Gave up trying to figure out the $600 navy surplus detector I bought, specially after finding out it don't even read the real bad stuff -strontium 90 Whatever!

Price of a slice of pastrami is gonna soon make Kobe beef look a Walmart special... but don't go out an trade your hard won gold profits for acreage yet folks...we got a whole lot of bad guys to take down in the vertically integrated Monsanto driven GMO-fertilizer-ethanol-pharmaceutical-feedlot-CME & armaments monopolist gang out there at the DoubleBush Clinton spread, fore a cowboy can get a drive in an make a fair days' wage agin. Like the good ol days!

 

 

Troll Magnet's picture

I would never ever want to own a brothel. But I wouldn't mind a Summer internship at a bunny ranch near Vegas.

Little John's picture

don't forget tools.  PMs store wealth - Guns protect wealth - Tools create wealth.

Mr.Sono's picture

metal will buy you bullets, pay for brothels, and for food when you run out of those things.

GFKjunior's picture

I totally agree but if silver reached 10g's even I would sell a couple oz's to pay off the last of my student loans. 

X.inf.capt's picture

if it gets that high, junior, youll just have sweep money off ground to pay off the loan.....

NO JOKE, in germany circa 1923 they would burn bundles of money to heat a house.

you couldnt BUY firewood with money, it was so worthless

tmosley's picture

Don't bet on that.  Silver has risen ten fold in the last decade, while prices are only up some 33%.  Even Shadowstats numbers show they less than tripled.

Further, there is a unique supply/demand problem for silver.  An industrial panic resulting from revalations of fraud in futures exchanges could easily take silver to those levels, even while gold was only $5000 or so, and keep it there for some months until demand collapsed (ie in a panic, users buy up what they need for the next X years all at once off of the open market rather than buying futures, skyrocketing prices, but once they have filled their needs for the immediate future, they stop buying and prices level off or collapse).

passwordis's picture

 So what are you going to do with your gold? Save it for your kids? Barter with it? Wait for the next new currency to arrive?  Stare at it? Hope the actual physical will be used as money? 

 The whole point to buying gold is to preserve wealth. At this point in the game it's also an investment.  If you want to buy a home, food,a car or some land.. how do you presume to do so without selling?    The paper you need to make transactions will not be worthless.. it (or whatever replaces it) will still buy things.   The point is, if gold is at $10,000.. (or pick a number you like) At that point  Gold did it's job..  At some point you will need to sell in order to see the process through.

 

Gold is just a commodity... Money is just a commodity.  Land is a commodity. Energy is a commodity. You can't buy a new car with land or energy.  You trade the commodity for whatever currency is in circulation.

 The idea that you will be trading Gold for worthless paper is wrong--- unless of coarse the dollar actually goes to zero but I think a new currency or revalued (devalued) dollar will work it's way in before the dollar collapses.  In any event.. the medium of exchange is unlikely to be gold and silver any time soon so if you hope to extract the wealth you preserved (or earned) through the ownership of gold and silver.. you will have to trade it in.

 Example, I've been buying and holding for the last 8 years... I recently ran into a bind and sold some physical in order to buy a vehicle.  The vehicle paid for itself.  This is what I plan to do the rest of my life.   If at some point the price of silver goes to a few hundred. I'll likely sell half of what I have, move out of the country buy some land and build a house.

 

 

Mr.Sono's picture

when dollar goes to 0, you won't be able to trade your digital or paper money for the new medium of exchange since it will be worthless. Mean while you will be able to trade your gold for the next medium of exchange.  gold never goes to 0 unless its the end of the civilization. then where you go you don't need money.

A.W.E.S.O.M.-O 4000's picture

What's that saying? "When you buy commodities you're selling human ingenuity?"

 

Fuck that shit. I'll take Kruggerands any day of the week.

tmosley's picture

When you buy PM's, you are selling current human ingenuity, and buying future human ingenuity.  

LawsofPhysics's picture

Precisely, beside the spot price at my dealer is all that really matters.  All paper is burning, period.

rsi1's picture

If it were convertible, the price would be around $4119 per ounce, Take currency in circulation 1.041 TR / 8133 tonnes of Gold reportedly held by the US

 

http://federalreserve.gov/releases/h41/Current/

http://en.wikipedia.org/wiki/Gold_reserve

Citxmech's picture

I don't see where the author states whether he is using M1, M2, or M3.  Also, you wouldn't divide USDs by world gold stocks - wouldn't it be more accurate to take the US's percentage of world gold stocks as determined by the USD's percentage of world fiat value then derive the amount of gold that would be allocated in USDs?

Bring the Gold's picture

I find it fascinating how he throws out that current anger at Bankers and CEO's (you know powerbrokers and decision makers) is somehow comparable to persecution of Christians in 300 AD or the burning of witches in the Middle Ages.

Hmm, one of these scapegoats is not like the others...

NotApplicable's picture

Well, not all CEOs and bankers are the same. Some are zealots in the cult of Corporatism, while others are just trying to run their businesses, and get caught up in the systemic corruption of others.

Regardless, a lynch mob does not have the resources to differentiate between the two.

Bring the Gold's picture

I agree they are not all the same, but as the author lumped them together so did I. I believe that my generalization was a bit more accurate. That is to say CEO's and Bankers share a wee bit more of the responsibility for current happenings then did witches in 1300's Spain. 

There are CEO's who are doing us all a great service by organizing work to create useful products that enrich civilization. Likewise there are some (rarer) bankers who are trying to loan out capital for productive purposes. That said, no two groups in the privat sector have a greater share of responsbility for current happenings in America than Bankers and CEO's. I would put politicians at the forefront especially the multi-decade career politicians as far as responsibility goes. Tha said, in the private sector it is clearly bankers and CEO's.

Banjo's picture

"Well, not all CEOs and bankers are the same."

 

Not all unionists are the same

Not all communists are the same

Not all republicans are the same

Not all democrats are the same

Not all dictators are the same

Not all rapists are the same

Not all murderers are the same

 

This (boo hoo poor honest CEO and banker just trying to make an honest living) is a straw man agrument. Who's purpose is to give an escape hatch to some CEOs and bankers therby any CEOs. Once any CEO or banker is potentially exempt as a "nice" or "ok" guy just trying to make an "honest" living they will all squeeze through the same hole.

The religion of neverending growth, profits and capitalism that these CEOs and bankers worship is what has to be dismantled. Afterwards these CEOs and bankers can go home re-train and do something useful anything from becoming a doctor, pressing steel to picking up trash.

Mainly capitalism as practised over the past 500 years, with the MASS exploitation of people has to be changed, more along the lines of JW Smiths. Economic Democracy.

I do think that given our vast intelligence, technology and creativity we will end up at war because YOU cannot take your hand out of the capitalist greed monkey trap.

passwordis's picture

 You and Micheal Moore don't understand capitalism. Capitalism is economic freedom.  It puts the power to create into the hands of the people and creates a non-centrally planned free competitive market .

Capitalism is a beautiful thing.  Capitalism is the local dinner and flooring store which are owned by your neighbors.

 Corporations do not practice capitalism. Corporations by definition are fictitious in nature.  Corporation are given legal privilege designed to protect itself and destroy the opposition ( you and me and capitalism)

 

citta vritti's picture

and Monty Python's take on how to know if your banker is a witch:

http://www.youtube.com/watch?v=yp_l5ntikaU

RafterManFMJ's picture

 

 

We believe in nothing, Lebowski. Nothing. And tomorrow we come back and we cut off your chonson.

Jalaluddin's picture

The Fed doesn't believe in gold - it believes in concentrating (real) capital in the hands of its masters to the extent that WWIII can proceed smoothly (yes, "smoothly", from the point view of the psychotics promoting the new world disorder).

From the psychotic's point of view his position is raised by lowering others' position. Since position is very dependent on interaction, the psychotic sabotages interaction by spreading lies, and promoting dysfunctional behavior and a dysfunctional economic system.

The problem for the psychotic is when there is a measure outside of his system of phantasy:

gold vs the amerazoo (not the ben Bernak please!)

the Shariah vs manmade laws

Look at their febrile attempts to scupper gold.

Look at their attempts to paint God and morals out of the scenery - try erecting a Christmas tree even in your own garden in the USA - I am a Muslim living in Malaysia and I reckon I can put one in the front garden without being locked up or harassed (the neighbors, who are Buddhist or Christian might think it a lttle strange). With no clear moral (including monetary) foundation you are slaves.

You need to believe in something solid, and in fact something absolute, then there will be peace.

 

 

JOYFUL's picture

your reference to shariah laws is goin scare the living um, "daylights" out of 99.5% of the population here, but I gotta testify, as a Christian dude living in a world of false opposites and oppositions, with a daily side dish of  mind-wrenching psyops,  I support your right to say WTF you wish, long as you support mine to do the same.  You are absolutely right about the God-Gold & morals connection...and an increasing number of us know exactly who "they" are:  if you commit to put up your Christmas tree in Malaysia, I'll make the right gesture with one of my sheep come November, and God Willing, we'll all jist start to get along again, Christian, Muslim and whatever other persuasion in the equation. 

Junkers to that idea...WE KNOW WHO YOU ARE!

Jalaluddin's picture

Do you mean the guy hiding behind his real name?

The one one who posts under his real name at www.iraq-war.ru ?

The one on Skype with the username jalaluddin_morris ?

The one who used to work at the Malaysian Armed Forces Academy?

All of the above?

The cognitive dissonance arises because you will not admit that the disease is worse than the cure.

 

Jalaluddin's picture

There, there - no need to capitalize.

You should have seen the whole thread on (about)facebook that magically disappeared the last time I received the "know who you are" treatment. Being a neat and tidy guy and anticipating the thread's imminent removal I kept a copy, and I am willing to send you a copy of the thread minus the magic sentence.

Dr. J (the man with all the moves :) )

GeneMarchbanks's picture

Once again same mistake: MEASURING GOLD IN DOLLAR TERMS. Tiss tiss tiss...

IBelieveInMagic's picture

As I see it, the price of PMs rises if the market believes that there is discord between powerful countries (countries that could break ranks and go to a real asset based currency and make it stick unlike Libya) and there is possibility of group of like minded countries continuing to accumulate PMs to ultimately introduce a hard currency. But, if everyone agrees to hold their noses and continue to play along with the fiat games, wouldn't PMs become sidelined?

The fact that even after taking out Libya (and curtailed it's Gold demand), the fact that Gold has continued to climb suggests to me that there is continued scope for breakdown among the powerful countries...

Jalaluddin's picture

More likely powerful countries which would like to join a new Bretton Woods type scam, rather than cease trade in promissory notes.

Cole Younger's picture

There will come a time when measuring dollars against PM's will be a archaic practice. 

JW n FL's picture

 

 

Indeed, benchmarked against the printing of The Ben Bernak, the price of gold at which the US dollar would be fully gold-backed is now $10,000.

You might think such a ‘price target’ is far-fetched (and I might agree with you).

But bear in mind that the last time honesty was perceived to be so scarce – in the 1970s gold mania – the dollar was over-backed by gold (see chart below). If it happened then, why not again?

Don't ask why, ask why NOT!

LawsofPhysics's picture

Precisely, the answer to the question of why the "dollar isn't there a move to revalue the dollar againast gold or some physical asset" is far more sinister.

Caviar Emptor's picture

It could. It's happening in slo mo

espirit's picture

Concur. A loaf of bread may also cost $10,000 fiatsco.