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Guest Post: Gold Bonds: Averting Financial Armageddon

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Written by and © by Keith Weiner

Gold Bonds: Averting Financial Armageddon

After the near-collapse of the financial system in 2008, a growing number of people have come to realize that our monetary disease is terminal.  It is that group to whom I address this paper.  I sincerely hope that this group includes leaders in business, finance, and government.

I do not believe that my proposal herein is necessarily “realistic” (i.e. pragmatic).  There are many interest groups that may oppose it for various reasons, based on their short-sighted desire to try to continue the status quo yet a while longer.  Nevertheless, I feel that I must write and publish this paper.  To say nothing in the face of the greatest financial calamity would go against everything I believe.

***

It seems self-evident.  The government can debase the currency and thereby be able to pay off its astronomical debt in cheaper dollars.  But as I will explain below, things don’t work that way.  In order to use the debasement of paper currencies to repay the debt more easily, governments will need to issue and use the gold bond.(Wherever I refer to gold, I also mean silver. For the sake of brevity and readability I will only say gold in most cases.

I give credit for the basic idea of using gold bonds to solve the debt problem to Professor Antal Fekete, as proposed in his paper: “Cut the Gordian Knot: Resurrect the Latin Monetary Union” (http://www.professorfekete.com/articles/AEFCutTheGordianKnot.pdf).  My paper covers different ground than Fekete’s, and my proposal is different as well.  I encourage readers to read both papers.

The paper currencies will not survive too much longer.  Most governments now owe as much or more than the annual GDPs of their nations (typically far more, under GAAP accounting).  But the total liabilities in the system are much larger.

Even worse, in the formal and shadow banking system, derivative exposure is estimated to be more than 700 trillion dollars.  Many are quick to insist that this is the “gross” exposure, and the “net” is much smaller as these positions are typically hedged.  But the real exposure is close to the “gross” exposure in a crisis.  While each party may be “hedged” by having a long leg and a balancing short leg, these will not “net out”.  This is because in times of stress the bid (but not the offer) is withdrawn.  To close the long leg of an arbitrage, one must sell on the bid (which could be zero).  To close the short leg, one must buy at the offer (which will still be high).  When the bid-ask spread widens that way, it will be for good reason and it does not do to be an armchair philosopher and argue that it “should not” occur.  Lots of things will occur that should not occur.

For example, gold should not go into backwardation.  This is another big (if not widely appreciated) piece of evidence that confidence in the ability of debtors to pay is waning.  Gold and silver went into backwardation in 2008 and have been flitting in and out of backwardation since then.  Backwardation develops when traders refuse to take a “risk free” profit.  That is, the trade is free from all risks except the risk of default and losing one’s metal in exchange for a defaulted futures contract.  See my paper (http://keithweiner.posterous.com/61392399) for a full treatment of this topic.

The root cause of our monetary disease has its origins in the creation of the Fed and other central banks prior to World War I, and in the insane treaty signed in 1944 at Bretton Woods in which many nations agreed for their central banks to use the US dollar as if it were gold, and this paved the way for President Nixon to pound in the final nail in the coffin.  He repudiated the gold obligations of the US government in 1971, thereby plunging the whole world into the regime of irredeemable paper.

The US dollar game is a check-kiting scheme.  The Fed issues the dollar, which is its liability.  The Fed buys the US Treasury bond, which is the asset to balance the liability.  The only problem is that the bonds are payable only in the central bank’s paper scrip!  Meanwhile, per Bretton Woods, the rest of the world’s central banks use the dollar as if it were gold.  It is their reserve asset, and they pyramid credit in their local currencies on top of it.

It is not a bug, but a feature, that debt in this system must grow exponentially.  There is no ultimate extinguisher of debt.  In my paper on Inflation (http://keithweiner.posterous.com/inflation-an-expansion-of-counterfeit-c...), I define inflation as an expansion of counterfeit credit.  I define deflation as a forcible contraction of counterfeit credit, and the inevitable consequence of inflation.  Well, we have had many decades of rampant expansion of counterfeit credit.  Now we will have deflation, and the harder the central banks try to fight it by forcing yet more expansion of counterfeit credit, the worse the problem becomes.  With leverage everywhere in the system, it would not take many defaults to wipe out every financial institution.  And there will be many defaults.   One default will beget another and once it really begins in earnest there will be no stopping the cascade.

Another key problem is duration mismatch.  Today, every bank and financial institution borrows short to lend long, many corporations borrow short to finance long-term projects, and every government is borrowing short to fund perpetual debts.  Duration mismatch can cause runs on the banks and market crashes, because when depositors demand their money, banks must desperately sell any asset they can into a market that is suddenly “no bid”.  In two papers (http://keithweiner.posterous.com/fractional-reserve-is-not-the-problem and  http://keithweiner.posterous.com/falling-interest-rates-and-duration-mis...), I cover duration mismatch in banks and corporations in more depth.

Most banks and economists have supported a policy of falling interest rates since they began to fall in 1981.  But falling interest rates destroy capital, as I explain in that last paper, linked above.  As the rate of interest falls, the real burden of the debt, incurred at higher rates, increases.

Related to this phenomenon is the fact that the average duration of bonds at every level has been falling for a long time (US Treasury duration began increasing post 2008, but I think this is an artifact of the Fed’s purchases in their so-called “Quantitative Easing”).  Declining duration is an inevitable consequence of the need to constantly “roll” debts.  Debts are never repaid, the debtor merely pays the interest and rolls the principal when due.  As the duration gets shorter and shorter, the noose gets tighter and tighter.  If there is to be a real payback of debt, even in nominal terms, we need to buy more time.  At the US Treasury level, average duration is about 5 years.  I doubt that’s long enough.

And of course the motivation for building this broken system in the first place is the desire by nearly everyone to have a welfare state, without the corresponding crippling taxation.  It has been long believed by most people a central bank is just the right kind of magic to let one have this cake and eat it too, without consequences.  Well, the consequences are now becoming visible.  See my papers (http://keithweiner.posterous.com/the-laffer-curve-and-austrian-economics and http://keithweiner.posterous.com/a-politically-incorrect-look-at-margina...) discussing what raising taxes will do, especially in the bust phase like we have now.

In reality, stripped of the fancy nomenclature and the abstraction of a monetary system, the picture is as simple as it is bleak.  Normally, people produce more than they consume.  They save.  A frontier farmer in the 19th century, for example, would dedicate some work to clearing a new field, or building a smokehouse, or putting a wall around a pasture so he could add to his herd.  But for the past several decades, people have been tricked by distorted price signals (including bond prices, i.e. interest rates) into consuming more than they produce.

In any case, it is not possible to save in an irredeemable paper currency.  Depositing money in a bank will just result in more buying of government bonds.  Capital accumulation has long since turned to capital decumulation.

This would be bad enough, as capital is the leverage on human effort that allows us to have the present standard of living.  We don’t work any harder than early people did 10,000 years ago, and yet we are vastly more productive due to our accumulated capital.

Now much of the capital is gone, and it cannot be brought back.  It will soon be impossible to continue to paper over the losses.  The purpose of this piece is not to propose how to save the dollar or the other paper currencies.  They are past the point where saving them is possible.  This paper is directed to avoiding the collapse of our civilization.

If we stay on the present course, I think the outcome will look more like 472 AD than 1929.  We must solve three problems to avoid that kind of collapse:

  1. Repayment of all debts in nominal terms
  2. Keep bank accounts, pensions, annuities, corporate payrolls, annuities, etc. solvent, in nominal terms
  3. Begin circulation of a proper currency before the collapse of the paper currencies, so that people have something they can use when paper no longer works

I propose a few simple steps first, and then a simple solution.  All of this is designed to get gold to circulate once again as money.  Today, we have gold “souvenir coins”.  They are readily available, and have been for many years, but they do not circulate.

A gold standard is like a living organism.  While having the right elements present and arranged in the right way is necessary, it is not sufficient.  It must also be in constant motion.  Gold, under the gold standard, was always flowing.  Once the motion is stopped, restarting it is not easy.  This applies to a corpse of a man as well as of a gold standard.

The first steps are:

  1. Eliminate all capital “gains” taxes on gold and silver
  2. Repeal all legal tender laws that force creditors to accept paper
  3. Also repeal laws that nullify gold clauses in contracts
  4. Open the mint to the (seigniorage) free coinage of gold and silver; let people bring in their metal and receive back an equal amount in coin form.  These coins should not be denominated in paper currency units, but merely ounces or grams

Each of these items removes one obstacle for gold to circulate as money, along side the paper currencies.  The capital “gains” tax will do its worst damage precisely when people need gold the most.  At that point, the nominal price of gold in the paper currencies will be rising very rapidly.  Any sale of bullion will result in a tax of virtually the entire amount, as the cost basis from even a few weeks prior will be much lower than the current price.  This amounts, in the US, to a 28% confiscation of gold.  This tax will force people to keep gold underground and not bring it to market.  It will contribute to the acceleration of permanent backwardation.

It is important to realize that gold is not “going up”.  Paper is going down.  There is no gain for the holder of gold; he has simply not lost wealth due to the debasement of paper.

Current law forces creditors to accept paper as payment in full for all debts, and there are also laws that nullify gold clauses in contracts.  Repeal them, and let creditors and borrowers negotiate something mutually agreeable.

Finally, the bid-ask spread on gold bullion coins such as the US gold eagle or the South African krugerrand is too wide.  If the mint provided seigniorage-free coinage service, then people would bring in gold bars and other forms of bullion until the bid-ask spread narrowed appropriately.  One of the attributes that gives gold its “moneyness” is its tight spread (even today, it is 10 to 30 cents per $1600 ounce!)  But currently, this tight spread only applies to large bullion bars traded by the bullion banks and other sophisticated traders.  This spread must be available to the average person.

As I said earlier, these steps are necessary.  Gold certainly will not circulate under the current leftover regime from Roosevelt and Nixon.  But it is not sufficient to address the debt problem.

Accordingly, I propose a simple additional step.  The government should sell gold bonds.  By this, I do not mean gold “backed” paper bonds.  I mean bonds denominated in ounces of gold, which pay their coupon in ounces of gold and pay the principal amount in ounces of gold.  Below, I explain how this will solve the three problems I described above.

Mechanically, it is straightforward.  The government should set a rule that, to buy a gold bond, one does not bid dollars.  One bids paper bonds!  So to buy a 100-ounce gold bond, then one could bid for example $160,000 worth of paper bonds (assuming the price of gold is $1600 per ounce).  The government retires the paper bond and in exchange replaces it with a newly-issued gold bond.

The government should start with a small tender, to ensure a high bid to cover ratio.  And a series of small auctions will give the market time to accept the idea.  It will also allow the development of gold bond market makers.

With gold bonds, it would be possible to sell long durations.  With paper, there is no good reason to buy a 30-year bond (except to speculate on the next move by the central bank).  The dollar is expected to fall considerably over a 30-year period.  But with gold, there is no such debasement.  The government could therefore exchange short-duration debt for long-duration debt.

At first, the price of the gold bonds would likely be set as a straight conversion of the gold price, perhaps adjusted for differing durations.  For example, a 100 ounce gold bond of 30 years duration might be bid at $160,000 worth of 30-year paper bond.

But I think that the bid on gold bonds will rise far above “par”, for several reasons I will discuss below.

The nature of the dynamic will become clear to more and more people in due course.  In the present regime, there is a common misconception that the yield on a bond is set by the market’s expectation of how much consumer prices will rise (the crude proxy for the loss of value for the dollar).  But this is not true.  Unlike in a gold standard, in an irredeemable paper standard, people are disenfranchised.  They have no say over the rate of interest.  The dollar system is a closed loop, and if you sell a bond then you either hold cash in a bank, which means the bank will buy a bond.  Or you buy another asset.  In which case the seller of that asset holds cash in a bank or buys a bond.  This is one of the reasons why the rate of interest has been falling for 30 years despite huge debasement.  All dollars eventually go into the Treasury bond.

The price of the paper bond today is set by a combination of central bank buying, and structural distortions in the system.  But it is a self-referential price, in a game between the Treasury and the Fed.  The price of the bond does not really come from the market.  And this impacts every other bond in the universe, which all trade at varying spreads to the Treasury.

An alternative to paper bonds would be very attractive to those who want to save and earn income for the long term, pension funds, annuities, etc.  Not only will the price of gold continue to rise (i.e. the value of the paper currency will continue to fall towards zero), but also a premium for gold bonds would develop and grow.  The quality asset will be recognized to be worth more, and at the least people would price in whatever rate of the price of gold they expect to occur over the duration of the bond.

This dynamic—a rising price of gold, and a rising exchange value of gold bonds for paper bonds—will allow governments and other debtors to use the devaluation of paper as a means to repay their debts in nominal terms, but affordably in real terms.

This is impossible under paper bonds!  This is because the process of debasement is a process of the Treasury borrowing more money.  Debt goes up to debase the dollar.  This path leads not to repayment of the debt cheaply, but to exponentially growing debt until a total default.

So we have solved problem number one.  With a rising gold price, and a rising exchange rate of gold bonds for paper bonds, we have set up a dynamic whereby every paper obligation can be met in nominal terms.  Of course, the value of that paper will be vastly lower than it is today.  This is the only way that the immense amounts of debt outstanding can possibly be honored.

This also solves problem number two.  If every financial institution is repaid every nominal dollar it is owed, then they will remain solvent.  To be sure, pension payments, bank accounts, corporate payroll, and annuities etc. will be of much lower real value.  But there is a critical difference between smoothly losing value vs. abruptly losing everything, along with catastrophic failure of the financial system.

I want to address what could be a misconception at this point.  Does this work only for governments that have gold reserves in the vaults?  No, this is not about gold reserves.  While that may help accelerate a gold bond program, the essential is not gold stocks but gold flows.  The government issuer of gold bonds must have a gold income (or a credible plan to develop one quickly).

And this leads to problem number three.  Gold does not circulate today.  Who has a gold income?  That is where we must look to begin the loop.  There is one kind of participant today who has a gold income: the gold miner.  Beset by environmentalist lawsuits, regulations, permits, impact studies, fees, labor law, confiscatory taxes, and other obstacles created by government, these companies still manage to extract gold out of the ground.

The gold miners are the group to which we must turn to help solve the catch-22 of getting gold to circulate from the current state where it does not.  I think there is a simple win-win proposition to offer them.  In exchange for exemptions from the various taxes, regulations, environmentalism, etc. they have a choice to pay a tax in gold bullion.

There are other kinds of entities to consider taxing, but the problem is that they all would need to buy gold in the open market in order to pay the tax.  As the price begins to rise exponentially, this will be certain bankruptcy for anyone but a gold miner.

And now, look at the progress we’ve made on the problem of getting gold to circulate.  We have gold miners paying tax in gold to governments who are making bond coupon payments in gold to investors who now have a gold income.  We can see how gold bond market makers will enter the scene, and earn a gold income to provide liquidity for bonds that are not “on the run”.  These bond market makers could pay a tax in gold also.

And we have released other creditors from any restriction in lending and demanding repayment in gold.  And anyone else in a position to sign a long-term agreement involving a stream of payments over a long period of time, such as landlords, can incorporate gold clauses in their contracts.  And if the tenant has a gold income, perhaps from owning a gold bond, he can manage his cash flows and confidently sign such a lease.

Note that the lender, unlike the employee, the restaurant, or most other economic actors, is in a position to demand gold.  While everyone else would like to be paid in gold, they haven’t got the pricing power to demand it.  The lender can say: “if you want my capital, you must repay it in gold!”

If enough gold bonds are issued soon enough, we may reverse the one-way flow of gold from the markets into private hiding, that is inexorably leading to inevitable permanent backwardation and the withdrawal of all gold from the system.

One of the key points in my backwardation paper is that the value of the dollar collapses to zero not as a consequence of the quantity of dollars rising to infinity, but because of the desire of some dollar holders to get gold.  If they cannot trade paper for gold, then they will trade paper for commodities without regard to price and trade those commodities for gold.  This will cause the price of the commodities in dollar terms to rise to levels that make the dollar useless in trade (and collapse the price of commodities in gold terms).

If we reverse the flow of gold out of the markets, we may be able to prevent this disaster from occurring.  The dollar will then continue to lose value in a continuous (if accelerating) manner, as people migrate to gold.

This is the best outcome that could possibly be hoped for.  If it occurs along with a reduction in spending so that spending does not exceed (tax) revenues, we will avert Armageddon and be on the path to a proper and real recovery.  To be clear, times will be hard and the average standard of living will decline precipitously.

But this is infinitely preferable to total collapse.

It is now up to farsighted leaders, especially in government, to take the first concrete steps towards saving Western Civilization.

 

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Thu, 01/26/2012 - 22:07 | 2101499 Snidley Whipsnae
Snidley Whipsnae's picture

nwmen... excellent summary. My view as well.

Actually the US Treasury already issued numerous gold bonds and some of them were interest bearing and had tear off cupons on the back. Also, non interest bearing gold bonds were issued at various times.

Here is an excellent little history of various monies the US has used since before the revolutionary war... by Martin Armstrong... with pretty color photos of gold backed currencies and bonds that circulated as money. Hey, the US Gov issued gold bonds at least 150 years ago.

http://www.martinarmstrong.org/files/US%20Dollar%20Evolution/index.htm

Thu, 01/26/2012 - 22:52 | 2101559 nmewn
nmewn's picture

Thats true. In common fiat as well.

Allow me to embarrass myself.

I've always been a collector of varous things that interest me. Back in the day, 20-30yrs ago, I got a ten dollar silver note as change. Knowing I couldn't redeem it as silver, it still had more value to me as a collectible. So, I tucked it into my wallet beside the other folding money and smiled at the clerk.

As fortune would have it (not for me this time) I made another stop...for a six pack of beer...yep, didn't even think about.

I went back too, after I thought about it. The clerk just smiled at me...lol.

But that was another time and another place. Physical gold, converted to a government paper bond, will never suffice for me as a trustworthy investment. My trust in them was broken a long ago.

At least with the last clerk, I had the satisfaction of knowing her life was really improved, even if it was at my own stupidity & expense ;-)

Thu, 01/26/2012 - 19:44 | 2101227 Savonarola
Savonarola's picture

I lost you at the bakery.

Thu, 01/26/2012 - 19:45 | 2101231 xela2200
xela2200's picture

"pay the principal amount in ounces of gold"

Some people never learn. Are they literally going to send you an ounce of gold? No, they will send you the amount in money. Who is going to set the price of gold? This is why I have never invested in TIPS. It is too easy to play games with statistics and paper. The government hasn't been playing fair for a long time. They don't have your best interest at heart.

Thu, 01/26/2012 - 23:54 | 2101648 captain_menace
captain_menace's picture

"The government hasn't been playing fair for a long time."

When has the government ever played fair?  Governments have always been stealing from someone and giving to others.  Old trick.  Pretty sure Native Americans felt a bit short-changed on a few of their "deals" with the American government.  Same deal today, just a new group to conquer.  I wouldn't bet against the government.

Fri, 01/27/2012 - 00:11 | 2101671 xela2200
xela2200's picture

True True. Even the Revolutionary Soldier Vets got screwed on their benefits.

"Revolutionary War veterans, like Martin, found themselves victims of a weak government unable to pay them and of conflicts between American republican ideals and the military institutions veterans represented.   The first veterans pension movement began during the war, when officers lobbied Congress in 1779 for half pay for life. "

http://www.nps.gov/revwar/unfinished_revolution/veteran_entitlements.htm

Thu, 01/26/2012 - 19:46 | 2101233 unky
unky's picture

We dont need government - problem solved.

Thu, 01/26/2012 - 19:55 | 2101251 mick_richfield
mick_richfield's picture

Two hundred and thirty-six years ago, Americans showed the world how there could be a country without a king.  A few years from now, we will show the world how there can be a country without a government.

Thu, 01/26/2012 - 20:42 | 2101359 Schmuck Raker
Schmuck Raker's picture

"Wolverines", F**K YEAH!

Thu, 01/26/2012 - 23:10 | 2101576 Harbanger
Harbanger's picture

Even in it's most basic form there's always a sheriff, a preacher, a jail, and a saloon.

Thu, 01/26/2012 - 23:55 | 2101651 captain_menace
captain_menace's picture

+1

I bet on the guy who's paying the guy with the guns.

Fri, 01/27/2012 - 07:30 | 2101959 Raging Debate
Raging Debate's picture

I posit Unky we don't require authoritarian Rulers any longer but can have Leaders. But for that to happen a better governance model needs to be built. Fortunately, the process has begun.

Thu, 01/26/2012 - 19:50 | 2101240 itsallalie
itsallalie's picture

Ok, let's play devil's advocate--interested in hearing thoughts about this.  Who decided that a debt equal to annual GDP is a bad thing?  After all, a typical consumer will have a mortgage and debt that has historically been several years' worth of their income (or put another way, the family GDP).  Why is 1x, 2x or 3x GDP bad?  I'm not saying that this is right, or that I agree that a lot of debt is good (I don't), but I want to hear a good argument on both sides.   

Thu, 01/26/2012 - 19:57 | 2101256 Dcheeth2
Dcheeth2's picture

Spoken like Robert Peston. 

Thu, 01/26/2012 - 20:00 | 2101265 itsallalie
itsallalie's picture

you've got to do better than that--a bbc reporter??  A lot of snide remarks on here but how about some logic?  Tell me why a specific debt level is bad?

Thu, 01/26/2012 - 20:06 | 2101283 Irene
Irene's picture

It's insulting to have you ask such stupid questions. No debt is good or bad if you can afford it.  The problem is when you can't afford it what do you do?  People who take out mortgages typically have to qualify for a loan.  That means they can afford it without indenturing their children, grandchildren and great grandchildren.  They also don't need to burn down the house and collect the insurance in order to pay back their loan.  Neither do they need to steal from their neighbors to pay back their loan, or print counterfeit currency or shake down businesses either. 

I could go on, but if you don't get it you're just pretty hopeless.  And yes, you totally deserve the sarcasm.

Thu, 01/26/2012 - 20:58 | 2101391 itsallalie
itsallalie's picture

ok, let's assume you might be just a bit wrong about me not knowing anything or not reading ZH and let's take your statement: "No debt is good or bad if you can afford it." 

Gov't is the ultimate creditor, with unlimited powers to tax and spend. Technically, the government can always afford to spend because of the powers to tax.  Second, you say that the gov't is burdening the future generations.  How many people die and leave their estate owing money--whether it is for the funeral expenses, unpaid taxes, inheritance taxes, etc?  To say this doesn't happen is just wrong.  A lot of people assumed mortgages they couldn't afford and then just walked away--is this different from burning down the house today?  In fact if you take the per capita income of $40K in the US, and $53K of debt per person, that would look like a pretty good balance sheet for any corporation.  Again, not addressing the P&L side of the equation I admit, but at any rate your answer still does not address the issue--What IS the appropriate level of debt to GDP?  Continue with the sarcasm, but do try to answer the question. 


Thu, 01/26/2012 - 21:12 | 2101406 lasvegaspersona
lasvegaspersona's picture

Why should the government ever borrow?

I can understand that in building a bridge that money is needed now for a bridge that will be in service for years. That could be done privately. Most of govt debt is spent on the moral equivalent of cigars and hookers. The government should live on current tax revenue with a small rainy day fund allowed.

Thu, 01/26/2012 - 21:27 | 2101434 Irene
Irene's picture

You know, if you just said, "I don't understand why this doesn't work like this," I'd take the time to explain it.  But your obnoxiousness is just too much of a turnoff. 

"Government is the ultimate creditor."  Oh, yeah.  The buck stops there, all right.

Thu, 01/26/2012 - 21:36 | 2101448 itsallalie
itsallalie's picture

The government is the only entity with the power to tax, that is the very definition of the ultimate creditor.  You might want to look up the word ultimate--it doesn't mean ideal or perfect. I'm just referring to the authority to tax. Why do you make this is a personal attack discussion?  Try to be a little more academic here--we read ZH to learn new ideas. 

Thu, 01/26/2012 - 22:00 | 2101484 nmewn
nmewn's picture

"The government is the only entity with the power to tax, that is the very definition of the ultimate creditor."

And where does this "power" derive from? You might want to look up the word consent.

Thu, 01/26/2012 - 22:14 | 2101510 itsallalie
itsallalie's picture

You have the right to elect your leaders, and you have the right to go live in another country--like so many uber rich have.  Why do you live here?  if some of you guys are so completely negative, why wouldn't it make sense for you to pack up and head to Canada or the Isle of Man?  I'm not saying this to be sarcastic, but hey, if you really hate it that much why stay?  Your arguments become a bit whiny: "I hate it here, nothing will change, we'll all go down, so...I'll just stay here"   Really??  I'm pretty down on the gov't and economy but if I felt that negative I would probably pack up and head out.  Mexico probably good--people will always buy or barter for drugs! But I digress...

 

Thu, 01/26/2012 - 23:03 | 2101567 nmewn
nmewn's picture

Unfortunately for you, there was never any doubt that I would leave. None. Sorry to disappoint you or mislead you...lol...you'll just have to get over it.

I'm not wealthy, as your trite Kos-speak suggests.

I was born here, I'll die here. I also have children and nephews and cousins. They too will be a thorn in your side and your childrens side...forever, only worse.

Thu, 01/26/2012 - 23:25 | 2101602 Irene
Irene's picture

You think that because the gov't has the power to tax that it is the ultimate creditor?  Man, oh, man.  That is rich!

And coming from someone who believes that:

In fact if you take the per capita income of $40K in the US, and $53K of debt per person, that would look like a pretty good balance sheet for any corporation.  Again, not addressing the P&L side of the equation

You've obviously never run a real business, and I'll venture a guess that the only thing you know is how to use other people's money, because you throw around concepts like they have no real meaning.  How the hell can anybody claim that that looks like a good balance sheet without addressing what the debt is all about?  Only a fool. $40k income vs. $53k debt? You can spin that a million different ways.

You're sloppy in your statements, your formulations and your questions.  Your assumptions are juvenile and your examples are incomplete.  Go back to your dorm room and hit the books.


Thu, 01/26/2012 - 22:02 | 2101487 proLiberty
proLiberty's picture

"unlimited powers to tax and spend"

This is the flip side of fiat money.  Recall that printing money cannot increase the level of economic resources in the economy.  Likewise there is only a finite amount of resources for government to tax away.   Futher, the Constitution prohibits a "taking", while it allows a tax.  At 100% the tax is a "taking", and thus forbidden.   Having said that, I don't know by what criteria the Federal courts delineate between a tax and a taking.


Thu, 01/26/2012 - 22:19 | 2101520 itsallalie
itsallalie's picture

Financial assets in the US totaled about $130 trillion in 2010.  If the gov't instituted a one-time 13% tax on those assets, our entire debt would be wiped clean.  If it came to that or financial collapse, I'm guessing we'd see a tax.  Billionaires would bear brunt of it, but hey, they already won the uterus lottery as buffett puts it.  13% doesn't sound like taking...

Fri, 01/27/2012 - 07:39 | 2101566 akak
akak's picture

That is an absurd proposition on the face of it.

Do you have ANY idea what a sudden liquidation of 13% of ALL American assets would entail?  Not only would it DEVASTATE the value of EVERY single such asset, necessitating ever MORE liquidation in a potentially ruinous downward spiral in the value of almost every asset, it is farcical to even contemplate such a thing, as it simply could not be done --- there is not remotely enough liquidity in the system to allow even 10% of the necessary conversion of assets to cash.  Or do you imagine that the federal government, and its creditors, are going to accept shares of Netflix and Lululemon, or mortgage-backed securities, or bank CDs, or real estate, or petroleum, or bales of cotton, as payment in kind?

Thu, 01/26/2012 - 20:29 | 2101331 nmewn
nmewn's picture

"Who decided that a debt equal to annual GDP is a bad thing?"

While I hate answering a question with a question and I do appreciate your playing devils advocate, who decided that including government spending in GDP was a good thing? 

Its rather like double counting isn't it?...people go to jail for that sort of thing in the real economy.

http://www.cato-at-liberty.org/american-government-spending-41-of-gdp/

Thu, 01/26/2012 - 21:11 | 2101405 KickIce
KickIce's picture

What specific debt level does our government have?

Thu, 01/26/2012 - 21:43 | 2101457 itsallalie
itsallalie's picture

go to http://www.usdebtclock.org/#

$15.28 trillion bucks.  The estimated population of the United States is 312,112,226
so each citizen's share of this debt is $48,831.07

 

Thu, 01/26/2012 - 22:03 | 2101493 KickIce
KickIce's picture

I'm aware of that, but you said a specific level is acceptable.  What is the acceptable target for our government?

Thu, 01/26/2012 - 22:23 | 2101525 itsallalie
itsallalie's picture

sorry, no...I asked, not answered the question of what people think is an acceptable level of debt...I'm not presupposing that I konw the answer.  See my post above about taxing the financial assets to wipe our debt clean.  What I do think is that citing a debt to GDP figure gets us nowhere in the discussion.

Thu, 01/26/2012 - 22:39 | 2101545 KickIce
KickIce's picture

Banks have used debt to income ratios for years to approve personal loans.  Why would it not work for governments?

Fri, 01/27/2012 - 01:02 | 2101727 robertocarlos
robertocarlos's picture

That's OK. I plan on collecting 360k in SS benefits so just tax me at 15% and consider that my share. 

Fri, 01/27/2012 - 07:36 | 2101966 Raging Debate
Raging Debate's picture

It's All Alie, I'll wear my Paul of Tarsus hat for you. Your question what is or isn't a good or bad debt to GDP ratio perhaps can best be answered by considering purchasing power. As current debt to GDP levels do not factor in purchasing power (at least as currently measured) your question was actually irrelevant.

I indugled, the logic was fun and refreshing ;)

Thu, 01/26/2012 - 20:02 | 2101272 Reese Bobby
Reese Bobby's picture

"...I want..."  Who gives a shit what you want.  ZH has a search function.  Google is a cool internet tool.  Turn off your TV and do some research mutton-head.  Mommy and Daddy will be poor soon.

Thu, 01/26/2012 - 20:05 | 2101278 itsallalie
itsallalie's picture

in other words, you have no idea...next?

Thu, 01/26/2012 - 20:18 | 2101310 Reese Bobby
Reese Bobby's picture

Somebody has no idea new guy.  If you shut your mouth and do some reading ZH will teach you a lot.  A long-shot, I know.

Thu, 01/26/2012 - 20:04 | 2101274 drink or die
drink or die's picture

The GDP is not the governments income, only a small % of it is.

 

Also while you may have a mortgage equal to 4X your annual salary, you aren't still spending more money than you take in every month at the same time unless you are planning on running off to Mexico after you lose your line of credit and the bill colletors come.

Thu, 01/26/2012 - 20:07 | 2101284 itsallalie
itsallalie's picture

Good point about ongoing spending.  So if the clowns stop spending so much and our total debt remains the same, that's ok?

Thu, 01/26/2012 - 20:14 | 2101302 Citxmech
Citxmech's picture

"So if the clowns stop spending so much. . ."

You're kidding right?

Thu, 01/26/2012 - 20:17 | 2101306 drink or die
drink or die's picture

It's not really "the clowns" spending money at this point, its interest and entitlements eating up the budget.  Even if we could stop adding to the debt, we would still be in trouble further down the line as the older generation continues to retire and leaves a smaller number of people to pay for their entitlements.

 

If we stop adding to the debt somehow though, it would be much improved but still hurtful to the average American.  Interest rates would have to remain low (if they go up, we would need to take more debt to pay interest), which causes a continued rise in inflation.

Fri, 01/27/2012 - 07:54 | 2101977 Raging Debate
Raging Debate's picture

Ok Drink or Die. Paul must now flog you for not framing your statements into questions, perhaps like 'how could we deal with this or that?' Failure to ask a question means less info and less choice. Its All Alie made you all look silly. I also don't presume to know all the answers so we had best begin asking instead of presuming. Presumption can be deadly in such times.

Thu, 01/26/2012 - 20:21 | 2101316 xela2200
xela2200's picture

GDP is not government income. GDP is everything that is produced in this country. Taxes are revenue for the government. The more interest and principal that has to be paid, the more money that has to be taken out of the economy from productive endeavors.

When you have a mortgage, you get a physical asset a house that traditionally has kept up with inflation. Part of your payment actually builds equity. You can always sell the house. Good debt or used to be.

National debt is more like consumer debt or credit card debt. The government already spent that money. Do the math take your yearly income x 1.5 and imagine that was your credit card debt. Not really going to be building a lot wealth that way are you? Consumer debt is bad debt. Historically a country with 150% of debt to GDP is past screwed just like the guy with the huge credit card bill.

Keyness believed that during bad times the government should borrow and invest in infrastructure and in good times pay the debt. Kind of like a guy who lost his job and is using the credit card to tie himself up to the next job. In reality what happened was that in good times, not only did we not paid the debt down, but we added to it. Remember, during Clinton we had the money to pay social security liability, but instead Bush used it to go to war. Worst yet, this depression the government borrow, but instead of investing in infrastructure, they gave it to the banks and GMC. Now, some economist say take the credit card out and invest in infrastructure, but that time came and went. The credit card is maxed. That is why I am with the Austrian school of economics, but that one is too painful because it believes in not running the cc in the first place and save until you have the cash.

A little winded on the explanation. I just wanted to paint you the picture as I see it. I hope it helps.

 

 

Thu, 01/26/2012 - 21:13 | 2101407 itsallalie
itsallalie's picture

Now it seems we are getting a good discussion.  GDP and debt are not inherently related.  All that matters is money in and money out. The economy grows over time, incomes grow over time (just not proportionately).  I have used in my examples both income per capita, and total debt per capita.  Those are real numbers that are comparable.  If I ran a corporation and had $40K of income per year and $53K of total debt, chances are I would be considered a very good credit.  So again, a few questions for all you guys out there--I'm asking because I frankly don't think that we're addressing the real crux of the issue by citing commonly used comparisons such as Debt to GDP.  I don't think anyone can rightly say that a certain Debt to GDP is the appropriate one.  The issue is the cost of the debt and income.  Just because the total amount of debt rises does not mean the total cost of debt goes up.  What if the gov't just decided to pay 50 cents on the dollar for all its debt. Well, no one would ever buy US debt again, right?  Well, why do people buy UK debt, Russian debt or mortgage debt, or invest with hedge fund managers who lost money time and time again.  the reaosn is that people invest looking forward, not backward. The fact is that after declaring bankruptcy, many companies become attractive investments because their debt load is low and the "business" is still functioning.  Why can't the gov't do this at some point?  Would suck, but would the financial system collapse? 

Thu, 01/26/2012 - 21:58 | 2101481 Schmuck Raker
Schmuck Raker's picture

Why would anyone compare governments to companies, or individuals?

Thu, 01/26/2012 - 22:34 | 2101539 itsallalie
itsallalie's picture

Because the issue, beyond the emotion, is one of simple money in, money out.  To argue that the government should not borrow is frankly ridiculous.  If you drive on roads, go to hospitals, use drugs developed from grants, kids go to public schools, need someone to put your fire out, arrest the bad guy, etc. then we need a tax and spend system. Building infrastructure wouldn't make sense to do from current income because of the asset life. If that were the case, then no company would ever build anything that requires major capital spend. How and why would I build a very expensive power plant without borrowing?   You might argue that I should build a smaller factory, or one that produces widgets instead of wodgets, but the fact is that I couldn't do that without capital.  Ditto for governments.  Very few companies can run without debt unless they have built up a lot of cash over time.  Look at Apple--company on the brink of collapse, lots of debt, Microsoft actually bailed them out.  Now they are king.  Ditto for IBM, Harley Davidson, Daimler Benz, and on and on. 

Thu, 01/26/2012 - 22:43 | 2101549 Johnny G.
Johnny G.'s picture

Apple had no debt.  They had $10 in cash and the stock traded at $11 (before the split).  Microsoft bought 15% because they didn't want anti-trust (same as Goldman Sachs keeping Morgan Stanley alive in 2009). 

Thu, 01/26/2012 - 23:25 | 2101603 itsallalie
itsallalie's picture

Wrong.  They had $957mn of debt and $1.2bn of equity as of end '97...and that was AFTER the $150mn infusion by Microsoft in Aug '97.

Thu, 01/26/2012 - 23:09 | 2101574 Schmuck Raker
Schmuck Raker's picture

I wasn't aware I was being emotional.

I think(not feel) that you are wrong, "...the issue... is one of simple money in, money out." is not true.

It matters more where/how the income is derived, and what assets are available as collateral or to generate the required income.

Again, why do you insist that governments are comparable to companies, or individuals?

Thu, 01/26/2012 - 23:23 | 2101599 itsallalie
itsallalie's picture

governments are entities created by people, they spend money, they tax.  Money in, money out.   

Thu, 01/26/2012 - 23:45 | 2101635 Schmuck Raker
Schmuck Raker's picture

Nonsense.

Fri, 01/27/2012 - 10:04 | 2102234 Raging Debate
Raging Debate's picture

Schmuck, I like your commentaries in general.

An appropriate question may be has or has not the government operated like a business?

A) The United States operated like a business
B) The United States has not operated like a business

Last, if or if not should it operate like a business?

My own opinion for what it is worth is that the United States looks like a giant hedge fund the last twenty years. Second, the defence department is profit motivated. Your thoughts now?

Sat, 01/28/2012 - 16:24 | 2105886 Schmuck Raker
Schmuck Raker's picture

I think that regardless of appearances, or a desire to emulate companies, government should never be confused with, or be operated as such.

Aside from the fact both issue debt, what else do they have in common?

What do governments produce? Nothing.

Companies are motivated by profit. Governments?

CEOs speak of assets, and capital. What does a government consider it's assets, or capital? I hope the answer doesn't include 'citizens' - I am not here to serve my government.

Thu, 01/26/2012 - 22:25 | 2101529 Johnny G.
Johnny G.'s picture

I don't often log-in, but it seems that ZH has become significantly less sophisticated in the past 12 months.  Just a bunch of arguing about whether gold has value or doesn't.  I do so enjoy the CDS conversations though.

To say " GDP and debt are not inherently related" is true; so long as the "Ultimate Creditor" is not running a deficit.   As soon as the gov borrows to "create" food, jobs, whatever; the Production part is pushed to the next year/decade/generation.

The "Ultimate Creditor" (a name that makes me throw-up in the back of my mouth) borrows to spend - then GDP is fake.  To say our GDP is 15 trillion; but 3.5 trillion is borrowed and that the 1.5 trillion spent on bombs blowing up dirt huts in Afghanistan is GDP is preposterous.  And assume the taxation rate goes to 100% - which, in theory would pay back the National Debt (not including the 50 trillion in unfunded benefits for Medicare, Social Security, Medicaid, FNM, FMH, etc.)  in about 3 years - because remember - government spending accounts for huge percentage of GDP and production "may" go down when tax rates are 100%.  How are we going to eat on  0% of our income.  How many farmers are willing to rotate crops for 36 months for free.  How many days are you willing to work for free (assuming you're not collecting benefits right now)?  We have 50 million people on food stamps.  That's the population of Greece and Ireland combined and multiplied by three.  How are those people going to help pay down the debt (even though their spending counts toward GDP under the "services" number - they eat, they shit - where's the production?).

However, in the past, one could say, "yeah, but you gotta pay back the Chinese for that 3.5 trillion."  So eventually it evens out.  Then logical people scream, "you have to inflate or default".  But now, there's a new paradigm in lending (the Fed buying bonds from the Treasury) has completely invalidated any mathematical argument regarding borrowing/GDP/per capita income, etc.  If I need 3,000 to make my mortgage, can I borrow it from myself?  It's crazy.

This game ends when the rest of the world realizes they are trading oil and flat screen TV's for green rectangles of worthless paper.   I have no idea when that day comes (5 years or 50?).

Thu, 01/26/2012 - 22:43 | 2101548 itsallalie
itsallalie's picture

Great answer, and I completely agree about the ridiculous military spending...but again, if the gov't were to tax financial assets 13% one-time, this would erase the entire deficit.  Tax it at 33% and you wipe out the unfunded liabilities as well. The fact is that the concentration of wealth in this country is such that the rich would probably rather pay a one time enormous tax than see the common man rise and overthrow the aristocracy.  I guess the first test will be Greece.  If the hedgies stick to their guns and force a Greek default, then it's a guarantee that laws will be passed to outlaw just about everything hedge funds do.  Will they go to that level of brinksmanship?  Might be sooner than 50 years...

Thu, 01/26/2012 - 22:48 | 2101557 Johnny G.
Johnny G.'s picture

You can't flat tax financial assets, they're too heavily levered.  It would collapse the system in a day.

Thu, 01/26/2012 - 23:17 | 2101590 itsallalie
itsallalie's picture

sure you could...the gov't could just expropriate the assets-wouldn't even have to sell them.  As is pointed out often on ZH, the gov't could just seize gold.  Well they could seize gold, silver, companies, guns, bonds, anything.  They did it to the Japanese during WWII.  Maybe they say no indivdual is allowed to personally own more than $5mn in assets. They can do whatever the f-ck they want to.

Fri, 01/27/2012 - 07:38 | 2101967 _underscore
_underscore's picture

How do you expropriate/tax any % of a financial  (or most assets in fact, except fungible ones) asset without having to sell it first?  Re-write every financial contract saying the govt. is 1/8 owner, force liquidation (into a by then, rapidly deflating economy with plunging prices because everyone is selling to pay this tax?) of asset.....

The end result would be that those 'assets' would be worth a tiny fraction of what they were & you'd still have most of govt. debt with a broken economy that made the Great Depression look like boom time. Cue Mad Max.

 

 

Fri, 01/27/2012 - 08:02 | 2101985 nmewn
nmewn's picture

You will note, throughout this chimps screeching and rattling of its cage bars...there is only one place the chimp has identified as a place to cut spending.

Which of course, is what has led to the government debts & deficits in the first place.

So, we must take her premise at face value and assume (as she does) that there is no waste/fraud/abuse within government and its bureaucracy...that every department within it is absolutely necessary to our very survival. It just needs more revenue...lol.

Fri, 01/27/2012 - 00:19 | 2101616 xela2200
xela2200's picture

First, If Greece defaults on its bonds, Credit Default Swaps (insurance) Kicks in. Banks from other countries are on the hook. THE EU is asking for at least a 50% hair cut. However, bond holders are saying no way, so it is a game of chicken. Haircut or default....

Second, You are comparing government to a company. A company is a for profit entity that produces something. Governments do not produce anything they just spend. Regardless, of all the investment crap they talk about. Neither, do you want them to be a business. Government is a necessary evil to service its people (security, contractual law, major infrastructure, etc). We have a contract with it delineating our rights and obligations. It is called the constitution. The US is NOT a democracy, it is a constitutional republic. Ron Paul 2012

Third, sure the US can default. Say hey You lent me this money, and I can not pay> Sorry I am declaring bankruptcy. Do you realize the FIAT that you have in your hands is debt? It is nothing more than an IOU which used to be backed by the full faith and credit of the US. The government gets the money it needs to function from taxes or selling treasuries. The rate is what like 3% now? After a default, it would be 15%. Imagine using all the taxes they collect plus issuing more bonds just to pay interest.

Fourth, Taxing the rich really doesn't work either. Been fair as Obama will like you to believe means bringing everybody down. They will destroy incentives for capital creating. Imagine if you risk your life savings into a venture, bust your butt for years and then do well for yourself. Now, you get a 90% tax bill. Like somebody mentioned in a previous post. I would say screw it where do I apply for food stamps.

I hope that addressed some of your issues. I think that you feel too comfortable with debt. We have grown to believe that is just a way to get things that we want or need. People used to save the whole amount before making a purchase.

Debt is equivalent to slavery by the banks. They know that and they have systematically been enslaving us for centuries. The revolutionary war was among other thing a great struggle against the bank of England. The FED is actually the 3rd national bank we've had. My man Andrew Jackson took care of the second one, and I hope Ron Paul takes care of the third one.

These issues don't have a crux any more. Too many connections to figure out by a mere human. That is why I consider Bernake's actions a joke. He just can't predict the repercussions of his market interference.

 

Fri, 01/27/2012 - 01:24 | 2101757 itsallalie
itsallalie's picture

I am not an advocate of debt at all. As I said, I have no debt and I used to argue vehemently how bad it is as people all around were telling me about their great real estate investments and how much money they were making. However, the gov't will do everything and anything to not allow this to happen, including changing the definition of default, just as they would remove shorting, buy stocks with borrowed money, etc.  Do we really think that a Greek default will take down the financial system?  So they default, bondholders get burned (they risked investing in a 3rd world country anyway), the drachma is reintroduced at a 50% discount to the Euro, and all of a sudden europeans clamor to buy seaside villas at half the price they were yesterday.

On the subject of the taxing of the rich...there is a huge difference between someone being super rich and just plain wealthy.  If you told some billionaire or multi-hundred millionaire that he would have to pay a one-time 80% tax on his income or financial assets, he would still be fabuloulsy rich.  Would he give up and take food stamps?  No f-ing way.  Would he be pissed off? absolutely.  So who cares?  20 years ago, the CEO fo a company might make a few hundred thou a year, now they make 10's of millions and they cry poverty-? wtf? That's not taking everyone down, that's taking the super rich down for the greater good of society. You can't fire workers, move your business to a state with no regulations, pay workers a slave wage, not cover health bills, vote against education spending and then expect no consequences. Think of it as a reset button--a nuclear detonation of our debt.

Thu, 01/26/2012 - 22:35 | 2101541 Snidley Whipsnae
Snidley Whipsnae's picture

Itsallalie... "--I'm asking because I frankly don't think that we're addressing the real crux of the issue by citing commonly used comparisons such as Debt to GDP. I don't think anyone can rightly say that a certain Debt to GDP is the appropriate one."

.................................

Rogoff and Reinhart did extensive research prior to writing 'This Time Is Different: Eight Hundred Years of Financial Folly'

Have you read this book? If so you would know that their research shows that when public sector debt reaches the range of 70 - 90% of GDP a soverign default is almost always the result.

But, you seem to believe that soverign default is not such a bad thing...

Then you cite this example... "The fact is that after declaring bk, many companies become attractive investments because their debt load is low and the 'biz' is still functioning"... To me, you are comparing apples and oranges. A company bk is one thing. A world financial collapse another altogether.

We have never experience a world financial collapse and it certainly could not be compared to MF Global or Lehman Bros going tits up.

Interesting to contemplate, though. What do you think would happen if most of the ~$730 Trillon in CDS were triggered and counterparties had to pay up?

Thu, 01/26/2012 - 22:45 | 2101552 Johnny G.
Johnny G.'s picture

"We have never experienced a world financial collapse"

We did.  It was called the Dark Ages after the fall of Rome.  It lasted 1000 years.

Thu, 01/26/2012 - 23:41 | 2101588 akak
akak's picture

Neither Warring States-period China, nor the Gupta Empire in India, among many others, ever seemed to take part in your supposed "worldwide" financial collapse.  As for the Mayans, Chan, Tiwanaku, Toltecs and others in the New World, I dare say they never noticed it in the least.

Thu, 01/26/2012 - 23:21 | 2101598 Snidley Whipsnae
Snidley Whipsnae's picture

Johnny G... "We did. It was called the Dark Ages after the fall of Rome. It lasted 1000 years."

....................................

This statement is untrue on so many levels I would not begin to respond to it. I suggest you devote a lot of time to studying history before making such comments. No offense intended.

Fri, 01/27/2012 - 09:35 | 2102130 Optimusprime
Optimusprime's picture

Indeed.  To take just one line of thought, there is the example of St  Salvian comparing the mildness of Gothic taxation to the authoritarian rapacity of the empire.  Think of the fall of the Western Roman empire as a tremendous tax cut.

Thu, 01/26/2012 - 23:10 | 2101577 itsallalie
itsallalie's picture

Ah, the CDS's...the counterparty risk is so great that governments would do everything they COULD to make sure a default doesn't happen.  Take Europe today.  They have solved, for now, the liquidity problem but not the solvency problem. What if Greece defaults?  Seriously...WHAT HAPPENS?  I have read every article on ZH about this, and from many other sources as well.  The "consensus" seems to be that things will be ok if it's only Greece and maybe Portugal. On ZH it seems to be that this is the end of the world as we know it.  Good arguments on both sides. I had predicted and planned for the housing collapse since '06. I had no debt, no housing assets and was massively short the market heading into mid '08.  In short, I was riding on top of the world the day the market was enetering the abyss.  What happened?  The gov't decided to change the rules and outlawed shorting.  My gains turned to losses, the lottery ticket I had was turned to shit, and I learned one key thing--the game is rigged, the market is rigged, and there is no way the gov't will ever let the bottom fall out.  I agree the risks in the system are much greater today, but so is the liquidity-creating ability of the central banks. Deflation and de-leveraging will kill the economy right?  What about Japan--had a decade plus of that and it made it fine.  Who said GDP has to grow?  Who said that people need to buy more stuff?  Do people need to ski, travel, eat out, drive an expensive car, provide anything more than food and shelter?  Best article I saw in a long time was in the economist talking about how technology is now displacing the white collars, whereas before it was the blue-collars that were getting hit.  We should spend 1000x as much on disease prevention and cures as we do on iphones and ipads. Terrorists kill 3,000, we spend $800bn and kill 50% more of our own people and injure seriously 10x as many. All negative, very negative.  But is history any better?  The Crusades? WWI, WWII?  History does repeat itself, and we are clearly in an era of an empire declining. We may be heading for the dark ages again, but is this going to happen because of Greece? Rather than just saying fuck it I'm buying ammo, we should be shifting the discussion away from who can or can't have an abortion to how do we solve the financial issues globally.  Fact is we can't.  Most people seem to be more concerned about a gov't run by a bunch of jesus look alikes than by a financially savvy group of people.  To me, that's much scarier than the CDS issue.

By the way, regarding the CDS counterparty issue, what happens if all contracts are just ruled null and void? Gov't can do what it wants as long as it has the police and the military...

Thu, 01/26/2012 - 23:34 | 2101615 Snidley Whipsnae
Snidley Whipsnae's picture

itsallalie...

About your response to my comments... It reminds me of a hair ball that my cat occasionally coughs up.

But, I try to look on the bright side. You gave me a good laugh with that circularity and rambling fuzziness. I thought I was rereading a Faulkner novel for a moment...which is the South's version of water boarding. You might be on the right path... The Yankees loved Faulkner because none of them understood a damn one of his two page sentences...and, as critics are want to do, they proclaimed him a literary genius. Us? We were stuck with him.

Pardon me while I go for another J&B and ice. Nice talking with you.

Fri, 01/27/2012 - 00:14 | 2101675 prole
prole's picture

I am amazed you could read his state-worshipping prattle.

"If you drive on roads" ""WE" need a tax and" bla bla.

Hey stop stealing my money bitch. That's all I need: for you to stop stealing my money.

 

Fri, 01/27/2012 - 01:19 | 2101746 DoChenRollingBearing
DoChenRollingBearing's picture

Snidley: " I thought I was rereading a Faulkner novel for a moment...which is the South's version of water boarding."

Hahahahahahahahahaha!

+ 1

Fri, 01/27/2012 - 01:26 | 2101759 itsallalie
itsallalie's picture

making a point about all the negativity--and yes that makes me want a J&B as well..

Thu, 01/26/2012 - 21:28 | 2101437 Whiner
Whiner's picture

Yep! You dbl-max that cc and your security system gets shut off. Before you get evicted, assailant whose cc's were revoked comes through window and beats you nearly to death the day your hospitalization insurance expires. See you shoulda' gone to counterfeiting to pay down that cc. Like Uncle Ben, dat ought to do it.

Thu, 01/26/2012 - 20:42 | 2101357 Kipper und Wipp...
Kipper und Wipperzeit's picture

Even Paul Krugman (admittedly in a different context) explains adequately why this is a bad analogy.

Thu, 01/26/2012 - 22:03 | 2101491 A Lunatic
A Lunatic's picture

The difference is I don't put a fucking gun to my neighbors head and force him to pay off my goddamned debts!

Thu, 01/26/2012 - 19:51 | 2101243 Irene
Irene's picture

"people have been tricked by distorted price signals....into consuming more than they produce."

What a load of crap.  Just like people were "tricked" into voting for a do-nothing, corrupt Chicago politiian.

 

Thu, 01/26/2012 - 20:01 | 2101266 mick_richfield
mick_richfield's picture

Maybe not 'tricked' but indeed manipulated.  Do you remember the guy that they put on the other side of that two-way ballot? 

I wrote in Ron Paul.  He got 40,000 votes, and I was one of them.  I have never been prouder of a vote in my life.

 

Fri, 01/27/2012 - 02:54 | 2101848 Dr.Vannostrand
Dr.Vannostrand's picture

Ditto

Thu, 01/26/2012 - 19:53 | 2101246 Jerry Maguire
Jerry Maguire's picture

Today in Toronto they opened a time-capsule from the Maple Leaf Gardens dating from 1931.  It contained some newspapers.  The issues in the headlines?

The gold standard.  Bank runs.  Currency collapse.

http://strikelawyer.wordpress.com/2012/01/26/the-more-things-change/

Those central bankers sure can drag things out, can't they?

 

Thu, 01/26/2012 - 22:58 | 2101563 Jerry Maguire
Jerry Maguire's picture

My plan is much better than this guy's:

http://strikelawyer.wordpress.com/2011/12/27/saving-the-world-revised-ed...

http://strikelawyer.wordpress.com/2011/12/27/saving-the-world-revised-ed...

http://strikelawyer.wordpress.com/2011/12/31/brief-history-of-jubilees/

http://strikelawyer.wordpress.com/2012/01/03/seigniorage/

Paying off all the debts in "nominal terms" is basically the same as canceling them.  The "money" that would pay them would be worthless. 

Interesting that he brought up "seigniorage", but he's 180 degrees out:  the gold price would be fantastically high, and the government could charge a lot of seigniorage because there would be no place else to go with gold.  Nobody would have enough money to buy it.

Also you can't just do away with "dollars" or "rubles" or "marks".  These define units of account that people use in trade.  Pricing directly in amounts of gold is one step above barter, and would never hold even if it started out that way. One thing a government has to do is adopt a monetary unit of account and define it.  The problem we have now is not that there is a monetary unit of account; it's that the monetary unit of account is not defined.

This is a matter of law and lawyers, not economists.  Specifically, the constitution.

Thu, 01/26/2012 - 19:55 | 2101249 Dcheeth2
Dcheeth2's picture

So, how do I get my pack of cigarettes, during hte switch-over?

Thu, 01/26/2012 - 19:58 | 2101259 mick_richfield
mick_richfield's picture

Cross my palm with a little silver -- a Mercury dime would be about right -- and you'll have your smoke.

Thu, 01/26/2012 - 20:01 | 2101267 The Alarmist
The Alarmist's picture

I used to think the naked-body-scanners were to pick up the packs of Fed Notes people might have taped to their bodies, but your post made me realize they are good for picking up illicitly transported cigarettes,  which may very well be a superior currency in the NWO.

Thu, 01/26/2012 - 20:43 | 2101362 xela2200
xela2200's picture

Sorry, you can get in trouble for illicitly transporting cigarettes, and you don't even need to leave the country. Cigarettes are already a big problem between states. I hear the Chinese mafia is big time into that racket, so talk to your Asian friends.

Thu, 01/26/2012 - 19:56 | 2101254 Shineola
Shineola's picture

2012 will be recognized as the last year in the "age of governments". Individual sovereignty will be the age to come. Government is a criminal enterprise. Murder and theft.

Fri, 01/27/2012 - 00:08 | 2101663 captain_menace
captain_menace's picture

I call BS.  With an increasing global population, individual sovereignty is not in the cards.  Sorry.  Learn to love government and you'll do just fine.

Thu, 01/26/2012 - 19:59 | 2101262 The Alarmist
The Alarmist's picture

There is no coming disaster. You, sir, are nothing more than a doomsayer.  Some might even say "Traitor."  

We, TPTB, have it all under control.  We will issue as many nominal bonds as it takes to muddle through and use a little controlled inflation to pay for it.  

This will only hurt a little bit ... Trust us ... in fact, you will Trust us whether you actually trust us or not.  Now step into the scanner and tell us why you are carrying more than €300 in cash.

</sarc>

Thu, 01/26/2012 - 20:02 | 2101269 mick_richfield
mick_richfield's picture

TPTW

Thu, 01/26/2012 - 19:59 | 2101263 Whatta
Whatta's picture

the gubermint paying me in gold? LOL.

I have a better chance of buying those penis enlarging pills that show up in my emails everyday, and having them work!!!

Thu, 01/26/2012 - 20:04 | 2101275 The Alarmist
The Alarmist's picture

In fact, I have more faith in that special russian lady looking to spend a lifetime with me .... 

Thu, 01/26/2012 - 21:59 | 2101482 A Lunatic
A Lunatic's picture

She probably would be willing to spend the rest of your life with you........

Fri, 01/27/2012 - 03:04 | 2101858 PhattyBuoy
PhattyBuoy's picture

She will stay with you, but ONLY if those penis enlargement pills work ...

Thu, 01/26/2012 - 20:04 | 2101276 I am Jobe
I am Jobe's picture

This just in
Republicans fail to stop debt ceiling increase
http://www.rawstory.com/rs/2012/01/26/republicans-fail-to-stop-debt-ceil...
Where is RP? Only hope I mean it.
F the Dumbo and the Greedy Ole Pigs Fuck em both

Thu, 01/26/2012 - 20:06 | 2101280 mark mchugh
mark mchugh's picture

The $700 Trillion is notional not gross.  If you don't understand the difference, you probably don't need to copyright your stuff.

You also may want to look up Gresham's Law.

Thu, 01/26/2012 - 20:12 | 2101294 akak
akak's picture

I believe he addressed the first point.

As to the second, it is only a "law" under coercive legal tender laws.  In the absence of such legal tender laws, the exact opposite applies --- good money drives out bad.

Fri, 01/27/2012 - 00:41 | 2101704 mark mchugh
mark mchugh's picture

Ummmm No.  He clearly demonstrated he doesn't understand the difference.  If you believe otherwise, maybe you should re-read the post.

Seriously, how many hours do you think FRNs would last without coercive legal tender laws?

Thu, 01/26/2012 - 20:08 | 2101286 Samsonov
Samsonov's picture

Oh, isn't that just a great idea...have the government borrow real money in my name!  The only reason I don't give a shit about the national debt is that they can print their way out of it.  No way I'm going down when those a-holes start borrowing in gold.  You'll see me on House Hunters International first.

Thu, 01/26/2012 - 20:13 | 2101299 carbonmutant
carbonmutant's picture

Ron Paul is your friend...

Thu, 01/26/2012 - 20:16 | 2101305 Big Ben
Big Ben's picture

With fiat-based bonds, the government defaults via inflation.

With gold-based bonds, the government would be forced to default by a hard default, since the government cannot print gold.

Either way, the owner of the bond gets shafted.

The real solution is for the government not to borrow (except perhaps in extreme emergencies such as major wars where the very survival of the nation is at stake).

Any country which cannot learn to live within its means will default eventually. Changing the form of the borrowing only changes the mechanism of default.

Thu, 01/26/2012 - 20:55 | 2101388 S.N.A.F.U.
S.N.A.F.U.'s picture

"except perhaps in extreme emergencies such as major wars where the very survival of the nation is at stake"

Haven't you heard?  Iran is going to wipe us off the face of the Earth!  Emergency!  Emergency!

"Any country which cannot learn to live within its means will default eventually."

Not true.  A country can just live within other's means -- and then steal those means for itself.  At least that's been SOP for the USA for some time now.

Thu, 01/26/2012 - 22:08 | 2101500 Big Ben
Big Ben's picture

Unfortunately, a person or a nation with a deadbeat mentality can always find a pressing reason why they need to borrow more money. Throughout history, wars have been one of the most popular excuses for countries to borrow.

Using my loose definition of defaulting which includes default by inflation as well as the traditional method of simply not paying back the money, the US has been defaulting via inflation since the formation of the Fed in 1913.

And the US has already done at least two hard defaults. The US issued gold and silver certificates which have promises written right on them saying that they can be redeemed for gold or silver from the US gov. You can still buy them on eBay if you want. But try taking them to the goverment to exchange for gold or silver. They will just laugh at you. The government defaulted on the gold certificates in the early 1930's and on the silver certificates in the mid 1960's.

Fri, 01/27/2012 - 00:13 | 2101674 captain_menace
captain_menace's picture

In all fairness, man isn't the only animal that behaves this way.

Thu, 01/26/2012 - 20:18 | 2101312 Silversinner
Silversinner's picture

What if gouvernments just spend what they would collect

and only use it for their prime task,protecting personel

property, body and protection of it´s borders.People

would have a lot more money in their pockets to

decide what they really need.With this buying

power,the market has to compete for their money

and provide for cheaper or better quality goods and services.

Power to the people and not the cooperations and state.

Is freedom just a dream

Thu, 01/26/2012 - 20:18 | 2101313 dogbreath
dogbreath's picture

Mish, Krugman and others have refered to Dr. Fekete's articles and Dr. Fekete has always responded.   Who is this Wiener guy anyway.

Thu, 01/26/2012 - 20:25 | 2101324 jimmyjames
jimmyjames's picture

There is no gain for the holder of gold; he has simply not lost wealth due to the debasement of paper.

***********

Wrong- there  has been a gain for gold holders-you're measuring gold the wrong way-

***************

http://www.marketoracle.co.uk/images/2010/Apr/DOW-JONES-GOLD.png

http://www.marketoracle.co.uk/images/2010/Apr/S-P-GOLD.png

http://www.marketoracle.co.uk/images/2010/Apr/NEW-HOME-SALES-GOLD.png

http://www.marketoracle.co.uk/images/2010/Apr/FOOD-GOLD.png

http://www.marketoracle.co.uk/images/2010/Apr/CAR-GOLD.png



Thu, 01/26/2012 - 21:51 | 2101471 A Lunatic
A Lunatic's picture

I remember my Grandpa telling me how he could walk down to the local butcher and buy a pound of ground beef for a dime. Well guess what..... a silver dime will do the same thing today, ($2.45) perhaps not extra lean, but close enough for illustrative purposes. One silver quarter will still buy a pack of smokes...........you get the idea.

 

Thu, 01/26/2012 - 20:42 | 2101325 nuinut
nuinut's picture

There's lots of sound technical analysis in your thoughts, Keith.

Unfortunately fundamentals trump technicals.

Try a few of these to see what I mean:

The Debtors and the Savers

Credibility Inflation

Big Gap in Understanding Weakens Deflationist Argument

Euro Gold

Moneyness

Once Upon a Time

The Return to Honest Money

Life in the Ant Farm

Synthesis

Focal Point Gold

Greece is The Word

Its the Flow Stupid

Who is Draining Gld

Kicking the Hornet's Nest

Freegold Foundations

Of Currency Wars

The Shoeshine Boy

Metamorphosis

Relativity: What is Physical Gold REALLY Worth?

Living in a Powder Keg and Giving Off Sparks

Shake the Disease

Bondage or Freegold

Money Talk Continued

Confiscation Anatomy - A Different View

The Waterfall Effect

The Value of Gold

"It's the Debt, Stupid"

"Bitcoin Open Forum - Part 3 "

The View: A Classic Bank Run

Gold is Money - Part 1

Gold is Money - Part 2

Gold is Money - Part 3

All the above are of course a selection of posts from FOFOA. There are a multitude more worthy of consideration too, but these are a start.

It is clear to regular FOFOA readers that the contemporary analysis continues to move closer and closer to that which has been consistently described by FOFOA from the first.

Educate yourselves. Thank me later.

Fri, 01/27/2012 - 00:46 | 2101700 Renfield
Renfield's picture

I read FOFOA from time to time. Not a regular, due mostly to time than anything else.

Most of his stuff that I've read I understand when I think it through slowly, and he's given many a thoughtful night thinking through What Is Money.

But his insistence on the Euro as a sort of sound money confuses me. Supposedly it's supported by sovereign gold of various nations?

I do not understand how it's supported at all that way, especially given the recent ECB balance sheet explosion, and if it's a sort of 'fall-back' support then how do they plan on persuading sovereigns to put their gold into the ECB pot at all? Didn't that just fail to work with Germany?

FOFOA's insistence on the Euro as credible money makes his work a little suspect to me, as much as I like it and find it thought-provoking, reading through his essays and thinking about them step-by-step. For someone who seems to understand money as deeply as he does, how can he 'believe' (so to speak) in the Euro, what seems to me to be transparently the worst kind of bankster fiat, which was (allegedly) designed to fail and which doesn't seem destined to last even the rest of this year?

I don't know - then again I don't understand how 'Europeans'/Germans can believe in it or want it either, so what the hell I guess.

Fri, 01/27/2012 - 03:38 | 2101870 Dr. Engali
Dr. Engali's picture

I'm with you on that. I read FOFOA and he has a lot of sound arguments but the insistance on the Euro leads me to suspect he is long Euros.

Fri, 01/27/2012 - 04:48 | 2101899 akak
akak's picture

I have read quite a bit of FOFOA as well (far too much, in fact), and I can only say that I am inherently skeptical of anybody who cannot lay out a concise and coherent argument in less than 165,000 words.  His insistence that gold can NOT ever function as money again, and that we MUST use government-issued, constantly-depreciating fiat currency as our transactional money only further leaves me doubting the soundness and veracity of his entire Freegold hypothesis. 

The quasi-religious nature of the whole subject, and the forum comments, further alienates me, with the (frequently cryptic) quotes from the Book of the Prophet Another, and the Epistle of Friend of Another, being quoted in reverential awe, with all the acolytes nodding their head in automatic agreement.  Frankly, it's just plain creepy, and a little too cultlike for me.

When it comes to FOFOA and Freegold (which does not appear all that very monetarily free to me), color me not just unconvinced, but suspicious.

Fri, 01/27/2012 - 04:49 | 2101902 nuinut
nuinut's picture

Just like Engali above, your comments betray your misunderstanding. It doesn't matter how much of something you read if you never let your preconceptions get out of the way so you can actually understand it.

FOFOA's argument is not that we MUST use govt issued currency, but that it is the most suitable and efficient media for exchanging value.

Likewise FOFOA's argument is that said currency will no longer be constantly depreciating once it is not widely used any longer as a store of value, with physical gold being the store of value instead. And if it does depreciate in value, it's exchange rate in gold will loudly and publicly proclaim so in real time for all to see.

It does not matter where a currency comes from if it is publicly and objectively valued for all to see.

 

Gold and currency need each other for them both to operate honestly and effectively.

Fri, 01/27/2012 - 06:43 | 2101910 akak
akak's picture

You may be correct, Nuinut, and I respect you as a longtime ZH member and poster, but I have to admit that after having spent MANY hours reading the tortured and convoluted posts of FOFOA, and STILL probably not being able to fully (or even halfly) grasp his concepts and arguments (according to those who stand by him, and them), then I begin to mistrust not myself as a hopeless dullard, but the arguments and hypotheses themselves, or at least their presentation. 

I fail to grasp why any government-issued currency would NOT be just as abused and depreciated as they all are today, gold being used as savings or not, and why such a system would not just collapse down into some more recognizable version of a quasi-classical gold standard, with gold coins and/or gold-backed bills being used as money instead of pure fiat ---- nor why EVERYONE would automatically jump to gold and ONLY gold for their savings, utterly ignoring, say, silver or platinum as potential savings vehicles as well.  The whole Freegold concept seems, to me, extremely confined and restrained --- "This IS exactly how monetary matters will be structured in the future, and this IS exactly how you will save", etc. etc.

I must tell you that I was VERY intrigued by mentions of FOFOA and Freegold when I first ran across them several years ago, and went into reading up on it with a totally open mind, but the more I read of him, and it, the more confused and skeptical I became.  I'm sorry, but I finally walked away from it feeling like it was more just the ultimate goldbug's wet dream and wishful thinking than anything else (gold soaring to $55,000+ in today's dollars per ounce --- instant fortune!).  For me, it was enticing, but ultimately disappointing.  And if you believe that I STILL have not read enough of it to fully comprehend the theory, then you need to tell this FOFOA that I (and undoubtedly many others who do not have NEARLY the level of patience that I do, and which was nevertheless quite strained) will do so if, and ONLY if, he manages to boil down his interminably long-winded, multi-multi-part arguments into something simple and straightforward; if he can't do it in something that can be read in half an hour, or maybe an hour tops, then there is something wrong with his theory in the first place.

Fri, 01/27/2012 - 06:44 | 2101933 nuinut
nuinut's picture

Thank you for your considered reply.

You have described your stumbling block with FOFOA's thesis quite precisely:

I fail to grasp why any government-issued currency would NOT be just as abused and depreciated as they all are today, gold being used as savings or not, and why such a system would not just collapse down into some more recognizable version of a quasi-classical gold standard, with gold coins and/or gold-backed bills being used as money instead of pure fiat ---- nor why EVERYONE would automatically jump to gold and ONLY gold for their savings, utterly ignoring, say, silver or platinum as potential savings vehicles as well.

In an environment in which unencumbered physical gold is freely priced (that is to say in which paper gold (claims on gold) and real physical gold, unambiguously owned and possessed, are not lumped together to produce one hybrid price for "gold"), any currency, govt issued or otherwise, is publicly valued via it's exchange rate for said "Freegold". 

If the market suspects currency abuse or similar, this is automatically reflected in the currency's gold price. It buys less.

Through simple triangulation, the relative values of all currencies can be easily found.


For example:


1 Gold gram = 1000 Euro

1 Gold gram = 2000 Yuan

Therefore 1 Euro = 2 Yuan

This is not the case currently because the "goldprice" is discovered by including paper gold in the mix, thus diluting the value by increasing the quantity massively, and I say massively because it only needs to dilute the physical that is actually part of the flow and the lion's share of physical is stock not flow. The paper need only dilute the flow to keep the fiat currency "looking good".

You and I can see quite clearly that sooner or later paper gold is going to blow up, decoupling from physical. Freegold is just what naturally unfolds from there.

I have written a few posts on my own blogs which some have found made Freegold more accessible.

They can be found here: Freegold and here: the flow of value

 

 

Fri, 01/27/2012 - 06:59 | 2101940 akak
akak's picture

Nuinut, thank you for the response, and for the links.  I have not much delved into the whole FOFOA/Freegold thing much in the last year or so, but will examine the links provided.

I understand your argument about the valuation of currencies relative to gold, and agree (which ZHer could not?) that the "paper gold" markets have undoubtedly suppressed the "real", honest price of PHYSICAL gold for many, many years now (as they have done with silver as well).  I have no problem with the explanation you provided in the above post, but my question is simply this:  why should anyone want to use a purely fiat currency, given the choice, under ANY circumstance, Freegold or not?  What is to prevent people from using gold-backed bills as money, or even goid coins if they so desire?  We all know (at least I hope we do) that in the absence of legal tender laws, Gresham's Law actually runs in reverse --- "good money drives out bad money".  So why would not the "better", gold-backed money, or gold itself, not drive out the purely fiat currency, no matter who issued it?

Beyond that, what is to stop parties from freely using silver, or silver-backed currency, or platinum-backed currency, or even farmland-backed currency as well?  Do or would such monies have any possible place in the Freegold scenario?  I kind of gathered that they would not, but perhaps I had simply not read anything dealing with such free-market monies, or perhaps FOFOA has not specifically addressed such possible monies.

Thank you for the intelligent and polite discourse --- so very different from having to deal with the nonsense of certain other posters here during the (North American) day!

Fri, 01/27/2012 - 07:47 | 2101969 nuinut
nuinut's picture

 why should anyone want to use a purely fiat currency, given the choice, under ANY circumstance, Freegold or not? 

Because its value is stable and it acts as a highly efficient medium of exchange enabling them to procure those things they wish. If it does not do all these things they will where possible move to one that does better.

What is to prevent people from using gold-backed bills as money, or even goid coins if they so desire? 

Nothing.

But if your money is able to purchase gold, then it is "backed" by gold is it not?

As is regularly pointed out, gold coins as actual media of exchange are ridiculously inefficient. Paper and digital currency are far more effective as media of exchange. The problem arises from peeople attempting to use the currency as a store of value as well. All our monetary problems spring from this.

what is to stop parties from freely using silver, or silver-backed currency, or platinum-backed currency, or even farmland-backed currency as well?

Nothing.

But if gold is already doing the job, why would we need another metal as well in the same role?

These metals have other uses from which they would then be kept, disadvantaging all who would employ such utility.

It is not a question of quantity for which we need more metal to satisfy... a higher value on the stock that exists functions the same as increasing the qauntity.

 

If silver were just like gold, it would be gold.

But it's not.

The system only requires one. And we both know what the natural choice would be. This is why CBs don't hold reserves of silver or platinum. They don't need to, and neither do we.

It is the middle of the night here in NZ, so I'm off to bed. Nice talking with you.

Fri, 01/27/2012 - 08:12 | 2101970 Motley Fool
Motley Fool's picture

akak

 

"why should anyone want to use a purely fiat currency, given the choice, under ANY circumstance, Freegold or not? What is to prevent people from using gold-backed bills as money, or even goid coins if they so desire? "

 

Do you save your entire paycheck, or only a part of it.  Does it matter if the part that you don't save devalues at say 2% annually?

The fundamental problem is this : once gold-backed bills are used, then structurally more "gold" ( paper gold + physical ) exists than physical. This is the start of a paper scheme, where at some point in the future someone will default ( as the physical gold simply doesn't exist). This leads to society exercising political will to 'cover' the losses of those who held the paper gold, and spawns a whole new fiat regime. This has been the process historically, repeatedly.

 

Outlawing gold-bills is not a solution. But settling international law so that no contract is enforceable to be paid in physical gold sidesteps this problem of paper-gold creation ( which leads inevitably to new fiat regimes).

 

Gresham's law is integral to Freegold by the way. Good money (gold) being hoarded, while bad money( paper ) circulates. Exchangable at a floating rate.

 

"Beyond that, what is to stop parties from freely using silver, or silver-backed currency, or platinum-backed currency, or even farmland-backed currency as well?"

 

Stop them? Nothing...except that those are less efficient. In every trade where silver is used in lieu of gold, one would lose out. There is an inexorable progression to one single good being used ( secondary media - Mises). Perhaps go read up on marginal utility theory as explained by Prof A Fekete.

 

Peace

 

http://foolishperspective.blogspot.com/

Fri, 01/27/2012 - 04:37 | 2101900 nuinut
nuinut's picture

You ain't read much FOFOA then, have you?

While FOFOA makes the point that the euro has been designed to withstand the coming revaluation of unambiguously owned physical gold, he most emphatically stresses that physical gold in your posession is the supreme long.

The euro will be massively devalued against gold just like everything else... it will simply suffer less than the dollar.

In case ZH readers haven't noticed, the mainstream opinion is that the euro is toast. So you're contrarians on pretty much everything else, but in matters of he euro you're unquestioning in your support of the MSM view, the view so clearly fed to the masses by Uncle Sam.

Now why would he want you to believe the euro was doomed?

Who am I kidding.... Uncle Sam has never put you wrong, has he????

Fri, 01/27/2012 - 07:48 | 2101971 Motley Fool
Motley Fool's picture

Lmao. Nicely stated nuinut.

Fri, 01/27/2012 - 09:07 | 2102054 Renfield
Renfield's picture

@nuinut

It seems from your reply to me here, that I should believe the euro will 'suffer less' than the dollar...because...I want to be a contrarian? and b/c Uncle Sam *wants* me to believe it will?

Pardon me, but isn't believing things b/c they are 'contrarian', simply another form of following the herd? To be honest, I don't now or ever do care much (or notice much) what the 'herd' (whoever that is) thinks. If something makes sense, it does with or without a crowd. Sometimes the crowd is right, sometimes it's wrong, either way it's just noise. What 'the crowd' is doing at any time is never much of an argument to me, either pro OR con.

I will think over your & akak's convo above. Lots of good stuff in that for me to think about.

This reply to me, though, I think is just silly. I should believe the euro will "suffer less" because...I don't want to be "mainstream" and I want to do the opposite of whatever "Uncle Sam" says? Instead of blind faith in Uncle Sam/MSM, blind anti-faith in Uncle Sam/MSM. What if I don't give a yank what Uncle Sam/MSM say? My reservations are with what FOFOA says.

This reply of yours, I vote down, because I find it unconvincing and silly.

(I voted the other posts of yours, and of akak, UP because I will be able to go over those later and think them through.)

Further: Of what relevance is how much of FOFOA I've read? Again, to me, something either makes sense, or it doesn't. While I certainly have learned a lot from FOFOA about the concept of money (and you're right, I am certainly no Rothschild and am simply doing my best to learn as I go), I tend to agree with akak. One shouldn't need a lot of words to speak truth and make sense. I still do not understand why he thinks the euro is any kind of good money, OR why it would suffer less, and your reply here doesn't enlighten me at all on that. Maybe I'm just thick, but frankly it looks to me like it's on the verge of collapse, and that's not because of Uncle Sam, that's because of the ongoing save-the-euro drama I see each week coming out of Europe, and the increasing poverty of its various people, both the spenders AND the savers.

In sum: asking how much of FOFOA I've read, and a bit of sarcasm re: believing in "Uncle Sam", answers my original reservations about him not at all. Disappointing. I am sure you have read a lot of FOFOA and should be able, in that case, to give me an educational reply that will represent his thoughts on the subject, more clearly than I have (mis?)understood them. Or if you cannot, simply to tell me "I can't answer you - go read more of FOFOA yourself until you understand what he says about it."

Fri, 01/27/2012 - 09:09 | 2102070 Motley Fool
Motley Fool's picture

Renfield...it wasn't a argument to convince you, it was an observation, pointing out some irony with amusement.

 

In a sentence. The euro will do better because it treats gold differently.

 

In another. The price of gold increasing hurts the dollar, but strenghtens the euro. ( due to the way the euro marks gold to market every quarter)

Fri, 01/27/2012 - 09:23 | 2102082 Renfield
Renfield's picture

Thanks, MF. While I am happy to serve as a foil for someone's observation, I do like my questions answered and taken seriously, even if I am not the expert some here are.

I have the idea, both from my (inexpert) reading of FOFOA and from your answer here, that the euro is supposed to be more connected to gold, by counting it as some sort of backing. But I do not understand how that works.

From what I can see, the ECB is bailing out bad debt with more debt just the same as other currencies are. What does gold have to do with this? Does that mean that the EU says, each quarter, "Our gold is now worth x in [given fiat], whereas last quarter it was worth y in [given fiat]"? How does this in fact back the euro at all? Does the EU or ECB even have any gold of its own? Or is it just "claiming" the gold of its nation membership who, when the chips are down, will simply say, "Nope this is not euro gold, it's [German] gold" anyway? Is this not what happened a few months back with Germany?

I do not understand how valuing the gold they (or their nations) have each quarter, makes the euro any more sound at all. So they don't manipulate the gold price like other central banks do, what of that? The euro isn't really gold-backed, is it? If so, how (and why) can the ECB be carrying on this desperate Fed- and IMF-inspired game every week as they are?

 

Fri, 01/27/2012 - 09:30 | 2102104 Motley Fool
Motley Fool's picture

That unfortunately I cannot explain in a few sentences.

 

A few comments though. The ECB has some of its own gold, about 800 tonnes. The eurosystem consolidates books has over 10,000 tonnes.

 

When the ecb was founded it had 15% of it's reserves in gold. It now has over 60%. So their asset side of their books has grown due to the value of gold going up. ( It should be noted they sold some gold over this period, so it would be an even higher percentage had they not).

 

The soundness of a currency in one sense is backed by the amount of assets it has ( for use in extemis).

 

The dollar has 8000 tonnes of gold, which it cannot revalue from $42,22 due to legal difficulties relating to what happened in 1971 ( a de facto default). So their balance sheet gains nothing from gold's increase in price. In contrast the Fed has 15 trillion ( +++ if counting unfunded) liabilities. They also have a very very small currency position, i think, as reserves ( not dollars).

 

The ECB ( consolidated) has 10,000 tonnes,  and the other 30 odd percent of their reserves is dollars ( from the initial 85%...which just goes to show how much value those dollars have lost in the last 10 years [ they also marginally increased this dollar position]). The ECB as a whole has less debt obligations ( essentially none, since the countries owe most) than the USA.

 

Perhaps these few comments are a start.

 

TF

Fri, 01/27/2012 - 09:47 | 2102141 Renfield
Renfield's picture

<<The ECB has some of its own gold, about 800 tonnes. The eurosystem consolidates books has over 10,000 tonnes.>>

Thank you, MF. So the euro is to some degree "gold-backed", although in diluted more and more with each "bailout". But there is an asset present.

<<So their asset side of their books has grown due to the value of gold going up.>>

So it's 'hard' money to that degree, although that doesn't seem to prevent the ECB from diluting the value of the euro by issuing more debt - that is, more claims on that same gold. Reminds me of what, I suppose, the USD was before Nixon closed the gold window...right?

<<The ECB as a whole has less debt obligations ( essentially none, since the countries owe most) than the USA.>>

You are saying, that the ECB as a whole has less debt than the US, although I am not sure I believe that the EU countries owing the ECB is all that different from the individual states owing the US federal gov. It's "money owed to ourselves", right? But it's still debt. While their balance sheet will not gain from the increase in gold's price - I believe I 'get' that bit - still the more debt they issue on behalf of this or that member state, the more they dilute the euro's value in gold, since the gold itself will be called on to pay that debt. I hope this is correct. (In case it looks any other way, I am trying to rephrase what you say in an effort to understand it.) While the USD is "pure" debt, the EU debt is weighted by an asset, although it looks to me as though that weighting is being diluted in much the same way the USD was up to 1971 until the US gave up the game altogether.

Anyway, I very much appreciate your simply stated replies, and I will be thinking about them beyond this day. I come to understand things only after I've thought about them awhile.

Fri, 01/27/2012 - 09:56 | 2102170 Motley Fool
Motley Fool's picture

No. It is not "gold-backed". Gold backing, in historical use, means you can exchange a fixed amount of currency for a fixed amount of gold. However, it is 'backed' (cringes at the use of that term) in a floating sense, in that you will always be able to swop your euro's for gold, even if the euro declines.

 

It's not hard money no. It is something else. Dilution is part of the politicians game. The euro simply acknowledges that they cannot stop that, by offering gold at a floating rate.

There is a difference between the euro and the usa. The FED is liable for the USG debt, in the practical sense they are forced to print to make up USG shortfalls.

 

The euro is divorced from the nation state. They are not liable to print. Nor do they want too. Who should they print for? Greece? But then that would hurt Germany, and any one country can veto the vote. The euro was set up so that countries would not exploit each other. Though to be fair, it hasn't worked that well, moral hazard having been created.

 

Still. Thusfar the ECB has sticked to it's only mandate. 2% inflation target, for ten years...despite the absolute chaos we have been living through.

 

Will the euro also hyperinflate? Yes. But that flow will be forced into gold to keep the euro stable. The USD has no such escape valve.

 

 

Fri, 01/27/2012 - 09:59 | 2102207 Renfield
Renfield's picture

MF

I am not going to give you a reply beyond saying Thanks, because I just have to go away and think about this. I am at the moment a bit confused, but when I read over for awhile what you've said, and use some of it as key search terms on the FOFOA site, hopefully I will be able to get the picture.

Although I suspect this will soon be a "dead" thread, perhaps a little more conversation here from others later will also help me in thinking. I have done enough talking. Now it is time just to think and do some focused reading.

Thank you very much for taking the time to explain. You have given me a lot to work with. Nuinit's original post links a lot of information, but I need small steps as well.

Best to you.

Fri, 01/27/2012 - 17:16 | 2103875 nuinut
nuinut's picture

@Renfield,

 

That comment was a response to Dr Engali, not you.

I always advocate people think for themselves. My comment was sarcasm.

By following the mainstream thinking on the euro, I see few people thinking for themselves. ZH is strongly populated by those seeking confirmation bias.

If one has thought for themselves, they do not require confirmation bias to bolster their belief in their own position.

 

Sat, 01/28/2012 - 04:53 | 2105160 Renfield
Renfield's picture

Thanks, nuinut - after a few replies, it gets difficult to see when a reply is to a comment next to me, not to me directly.

I have to say, I think ZH would benefit from less moronic quipping and sarcasm. Just makes too many comments to trawl through to get to the good stuff. But that's how it always is on any big forum that isn't heavily moderated.

However, I am grateful for the wealth of information you and some others have provided in these comments. Makes it worth trawling through all the boring quips and me-too posts to find the conversations that actually discuss. Sometimes it is a relief when a thread 'dies' and I can just peruse it later in peace & quiet.

I think ZH is normal for any large gathering of people. None of us is immune to confirmation bias I guess, but I appreciate those who are willing to in fact present a case for a diverging opinion. (Present a case as opposed to simply expressing it.) That's what I can learn from. And I do find the distinction FOFOA makes between money as a store of wealth, vs. money as a transactional medium, very interesting. I have been pondering on this off and on throughout today. Especially trying to work out, how gold works in a purely 'transactional' currency, in the euro. (As opposed to as a store of wealth, which is very clear to see of course). I don't know how easy it would be for this to become a widespread 'educational' concept, since it is not easy to grasp (at least for me) without a lot of thinking, and I am still trying to figure out all the implications for my day-to-day life. But maybe in this distinction lies a 'way out' of our financial mess. As FOFOA did make clear, the genuinely 'rich' seem to have grasped this difference.

Anyway, thanks for the ponder material.

Sat, 01/28/2012 - 07:34 | 2105257 nuinut
nuinut's picture

Renfield said:

how gold works in a purely 'transactional' currency, in the euro.

 

As a floating store of value.

Not fixed/pegged, but physical gold and transactional currency being freely exchangable at a rate established by the market.

Said currency is then "backed" by (exchangeable for) said real gold, not from the reserves of the currency issuer but from the reserves of the market. If the market is not liquid, said currency must simply bid higher, no?

Any currency is always and everywhere "backed" by the goods and services it is exchangeable for. All these notions of currencies backed by debt or backed by commodities or whatever are rubbish. A currency is backed by what it can be exchanged for, period.

The idea that our monetary problems somehow spring from the fact our fiat currencies are issued as debt is completely bogus. Our problems spring from the fact we attempt to use our media of exchange also as our store of value!

It is just as problematic to attempt to use gold in both roles simultaneously, or anything else.

The euro is only attempting to be a medium of exchange. Contrast that with the dollar: the entire current dollar-based system rests upon the dollar also being the store of value... "reserves" are to store value, and the dollar is the international reserve currency.

The euro is simply a widely used transactional currency, and as such can act as a medium of exchange to complement gold as the store of value when the dollar system breaks.

This is the only sense in which I am "euro bullish". Once the euro was operational, there was a safety net for the international system in the (inevitable) event of the dollar system breakdown. Gold would always naturally assume the store of value function. But it needs a functional medium of exchange in order to function properly, one that allows itself to be freely valued in gold (the store of value) by the market. The euro does this, the dollar does not.

The paper gold market supports the dollar, and when it decouples from physical gold, the dollar is done.

 

The situation is actually pretty simple, the problem is in all the misconceptions people bring with them when attempting to see... particularly about what a currency "needs to be" (nothing more than acceptable in exchange for the things one wants is all it really needs to be). This idea that the fact the currency is debt-based is the problem and that this is what gold and silver remedy is incorrect, which is why no one who makes this claim can actually describe how their replacement gold and silver-based monetary system will work... because it won't.

Fri, 01/27/2012 - 09:31 | 2102117 boogey_bank
boogey_bank's picture

Hi, Nuinut

I follow you on fofoa with a different nick. Fofoa's thesis is very suggestive to me. In particular I think that the oil for gold secret deal is unquestionable, but like the mayority of Zh'ers, I'm not able to buy the "euro is strong" argument.

What makes the euro stronger than the usd? The dynamic accounting of the ecb gold stash? And what if the fed should do the same? Further, I'm seeing the euro rate of depreciation vs gold increasing at a fast pace. Several european forex brokers don't allow you  to buy  the eurogold pair . So, if the euro buys less gold, it's euro bullish? I may concede you that this is true and this is a counterintuitive concept, but the euro is tied by swap agreements to the Fed and I think that if the Republicans will tie the hands of the Fed the euro shoud go down the drain. Further I think that the bretton wood system is shaped in a matter that the dollar will remain the last currency standing.

And when the crisis deepens in the euro area I see the eyes of europe politicians turn towards the Fed, not towards gold.

So I would be glad to you if You and or Fofoa could shed some light on this matter. If bennie doesen't or can't print, what is the european plan B? Why all this comedy going on against euro bonds?

Paradoxically, individual euro nations have perhaps more degrees of freedom. Take Italy for example. All the world fear that they are not able to sell their bonds. They could quit the euro, start their currency and sell their bonds partially backed by gold.

100 nominal value backed by 20 (or what the market thinks it's fair) of gold. The chinese would buy them with both hands. Italian governement would sell part of its gold stash at 5x it's current price and all of us will live happily ever after.

Nuinut, why are you so euro bullish? Can Europeans joes6pack sleep at night with euro in their pockets?

Fri, 01/27/2012 - 09:40 | 2102142 Motley Fool
Motley Fool's picture

" Can Europeans joes6pack sleep at night with euro in their pockets?"

 

No, they should buy gold as FOFOA advises.

Fri, 01/27/2012 - 12:09 | 2102645 boogey_bank
boogey_bank's picture

Fofoa says also that the euro was built by the old europe running elites, like Rotschild et similia, in order to banish king dollar and pave the road to return of gold as money in the world. So it should be worth something MORE than dollar. I'm questioning about the truth of this thesis. Going all in in gold involves several issues, in primis, liquidity and cash flow issues. I'm sure the gold will rule the world; but I don't want to become an adventist hebrew, still waiting the 2nd come of God.

Fri, 01/27/2012 - 15:04 | 2103375 Motley Fool
Motley Fool's picture

"Fofoa says also that the euro was built by the old europe running elites, like Rotschild et similia, in order to banish king dollar and pave the road to return of gold as money in the world."

 

Nope. FOFOA makes the case that the euro was designed to catch world trade when the dollar failed. It was noted long long ago that the path the dollar was on was unsustainable and that at some point it would destroy itself.

 

It was also intended to pave the role for teh return of gold as wealth in the world, not money; gold as pure wealth being a vastly older concept that had been destroyed when gold started being used as 'money'.

 

TF

Fri, 01/27/2012 - 15:14 | 2103408 boogey_bank
boogey_bank's picture

So you are saying that the euro will survive to the dollar? European j6p need only to know this in order to sleep at night

Fri, 01/27/2012 - 15:22 | 2103456 boogey_bank
boogey_bank's picture

FOFOA makes the case that the euro was designed to catch world trade when the dollar failed.

 

Further remember that the Usa have weapons in order to force the use of $. Ask Iran about that.

Fri, 01/27/2012 - 16:04 | 2103603 Motley Fool
Motley Fool's picture

The euro will survive yes, though not as a store of value, but as a medium of exchange. J6P won't fin much shelter for his savings if he keeps them in euro...less so in the dollar. but meh. a 99% devaluation versus a 99.9 % devaluation is not much of a difference.

Fri, 01/27/2012 - 20:25 | 2104432 nuinut
nuinut's picture

@ boogey_bank,

I'm not euro bullish, I'm physical gold in your own possession bullish.

I don't own euros. I don't own dollars. I have no use for them. I have no interest in trading them, or anything else. They are not for saving, they are for transacting, and they are no good for transacting around here.

I live in NZ, so I own some NZD, but I don't save in those for any longer than meets my needs for the next few months at most.

I'm simply pointing out that the euro is not about to be abandoned, as the media is relentlessly proposing.

Everybody sleeps well with some gold in their pocket.

 

Q: why would anyone buy a bond with 20% gold backing (a promise that no more than 20% is ever redeemable in gold) when they could just buy actual gold itself, in this day and age of clear and present counter-party risk? surely only because they had been conditioned to have absolute faith in such contractual promises?

 

There is only one way out of our monetary morass, and that is for a revaluation of physical gold to whatever value the market requires, period.

That valuation is obviously much higher than the current one. The market will do this as a matter of necessity. 

 

Sun, 01/29/2012 - 07:13 | 2106955 boogey_bank
boogey_bank's picture

@nuinut

tnx for clarifying your position about gold eur and dollar. About your question on gold backed bonds vs gold itself, how could I not agree with you?. But let's try to see the things in another perspective. I don't know what kind of governement you have in NZ. In Italy we have a 3x Leviathan. Local communities Leviathan, National Gov. Leviathan, European Union Leviathan. The beast is starving and is becoming more aggressive. Personally I'm libertarian slightly shifted to anarchism, BUT I acknowdledge that if the passage from status quo to the new world will happen too fast all hell break lose. In Tuscany there is the tradition to bake bread without salt. This came from the fact that 500 years ago govvy taxed salt to the oblivion. This time I think I will see people hiding under the rocks in order to save themselves from irs.

This is the reason I would welcome a solution which would preserve a fierce and useless government.

Thu, 01/26/2012 - 20:45 | 2101336 peekcrackers
peekcrackers's picture

This the  best  Cnn is live from .. and they cant talk over the crowd chantting  RON PAUL RON PAUL !..Lol...

Thu, 01/26/2012 - 20:37 | 2101347 oddjob
oddjob's picture

Banksters and bankrupt pensions will turn to Gold and Silver when there is nothing else to run with.

Thu, 01/26/2012 - 22:16 | 2101519 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

That's no joke.  Everyone is relient on pensions in some form (SSTF/public or private).  Everyone is relient on some part of the Fiat Ponzi.  When the levy breaks, there will be no place to stay.

Thu, 01/26/2012 - 20:39 | 2101350 bob_dabolina
bob_dabolina's picture

Ron Paul fans going NUTS on CNN

Thu, 01/26/2012 - 21:22 | 2101425 palmereldritch
palmereldritch's picture

Newt's hair helmet rivals the Great Gazoo

Thu, 01/26/2012 - 21:38 | 2101451 Whiner
Whiner's picture

The man Who can't talk can not be bought. But vote for Paul, your gold won't stall. Or will it?

Thu, 01/26/2012 - 20:51 | 2101380 Bastiat
Bastiat's picture

When Money Dies went back into print in 2010 -- you can now get it on Kindle for $8 -- awesome!!

Thu, 01/26/2012 - 21:00 | 2101394 Stu
Stu's picture

why is this not big ?

 

UAE, China sign $35 Billion Yuan swap agreement January 22, 2012 / D.Collins / No comments

The UAE and China have signed several agreements to strengthen their strategic partnership and bilateral trade. These agreements will not only boost the economies of both countries, but also have the potential to change the flow and structure of regional and international trade.

One of the most important agreements is the announcement that the UAE and China have signed a currency swap worth 35 billion yuan. This is part of an ongoing effort by China to make its currency one of the mediums of international trade. Given the continued political and economic mismanagement of the dollar by the US, the strengthening of alternative currencies for international trade is necessary.

http://www.thechinamoneyreport.com/2012/01/22/uae-china-sign-35-billion-...

Thu, 01/26/2012 - 21:15 | 2101413 snblitz
snblitz's picture

The article does not address the trust problem. If I could trust the government to implement such a program I would not need to.

Thu, 01/26/2012 - 21:19 | 2101421 MoneyScraper
MoneyScraper's picture

"The root cause..." section was really good TD.  Better than the Zeitgeist movie!  Spending time on this site is like sharing a secret few others know or want to share.  So luckily positioned for The Bernake this time with CEF as my poor man's PM.  And TLT and NLY, well, just because the world we knew is ending.  Woo!  Hoo!  Hoo!

Thu, 01/26/2012 - 22:20 | 2101521 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

You own banks and real estate because why now?

Thu, 01/26/2012 - 21:23 | 2101426 ilovefreedom
ilovefreedom's picture

Except that is like taking away a heroin addict's supply this strategy will kill the beast.

Perhaps a better example is an alcoholic with cirrhosis of the liver or pancreas who quits cold turkey and the next drink could literally kill them.

For central banks to allow gold/silver to become anything more than a "relic" would accelerate gold/silver reasserting themselves as the only true money.

The capital flight from fiat currency would increase by orders of magnitude per bid on these "gold bonds".

What praytell would China and Japan do?

This will never happen, the dollar would be DONE within weeks or months of this announcement instead of orderly conversion from fiat into money there'd be chaos as the spread and value on Gold/Silver would go up hourly/daily.

Thu, 01/26/2012 - 21:27 | 2101435 PSEUDOLOGOI
PSEUDOLOGOI's picture

Sorry but this doesn't work.  New money enters into the system when it is borrowed into existence.  How do you borrow something into existance that can't be digitally created nor can it be printed (like gold)?

You quickly run out of gold and can't issue anymore bonds.

 

So why bother?  Just use gold/silver as money instead and save on the paperwork.

Another problem:  how do you know the gold used to issue a bond hasn't been leased out/borrowed for the next issuer of these gold bonds?  it's not like this can't happen (leasing), right?

 

Fuck these paper games already... back the currency by gold/silver and be done with it.

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