This page has been archived and commenting is disabled.

Guest Post: Gold, Price Stability & Credit Bubbles

Tyler Durden's picture


Submitted by John Aziz of Azionomics

Gold, Price Stability & Credit Bubbles

John Cochrane thinks that central banks can attain the price-stability of the gold standard without actually having a gold standard:

While many people believe the United States should adopt a gold standard to guard against inflation or deflation, and stabilize the economy, there are several reasons why this reform would not work. However, there is a modern adaptation of the gold standard that could achieve a stable price level and avoid the many disruptions brought upon the economy by monetary instability.


The solution is pretty simple. A gold standard is ultimately a commitment to exchange each dollar for something real. An inflation-indexed bond also has a constant, real value. If the Consumer Price Index (CPI) rises to 120 from 100, the bond pays 20% more, so your real purchasing power is protected. CPI futures work in much the same way. In place of gold, the Fed or the Treasury could freely buy and sell such inflation-linked securities at fixed prices. This policy would protect against deflation as well as inflation, automatically providing more money when there is a true demand for it, as in the financial crisis.

The obvious point is that the CPI is a relatively poor indicator of inflation and bubbles. During Greenspan’s tenure in charge of the Federal Reserve, huge quantities of new liquidity were created, much of which poured into housing and stock bubbles. CPI doesn’t include stock prices, and it doesn’t include housing prices; a monetary policy that is fixed to CPI wouldn’t be able to respond to growing bubbles in either sector. Cochrane is not really advocating for anything like the gold standard, just another form of Greenspanesque (mis)management.

Historically, what the gold standard meant was longer-term price stability, punctuated by frequent and wild short-term swings in purchasing power:

In its simplest form (the gold coin standard), gold constrains the monetary base to the amount of gold above ground. The aim is to prevent bubble-formation (in other words, monetary growth beyond the economy’s inherent productivity) because monetary growth would be limited to the amount of gold dug out of the ground, and the amount of gold dug out of the ground is limited to the amount of productivity society can afford to spend on mining gold.

Unfortunately, although gold levels are fixed, levels of credit creation are potentially infinite (and even where levels of credit creation are fixed by reserve requirements, shadow credit creation can still allow for explosive credit growth as happened after the repeal of Glass-Steagall). For example, the 1920s — a period with a gold standard — experienced huge asset bubble formation via huge levels of credit creation.

In any case, I don’t think that the current monetary regimes (or governments — who love to have the power to monetise debt) will ever change their minds. The overwhelming consensus of academic economists is that the gold standard is bad and dangerous.

In a recent survey of academic economists, 93% disagreed or strongly disagreed with this statement:

If the US replaced its discretionary monetary policy regime with a gold standard, defining a “dollar” as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American.

That question is skewed. A gold standard can also be a discretionary regime; gold can be devalued, it can be supplemented with silver, and it can be multiplied by credit. And the concept of “price-stability” is hugely subjective; the Fed today defines “price stability” as a consistent 2% inflation (which on an infinite timeline correlates to an infinite level of inflation — the only stable thing being the rate of value-destruction).

If anything, the events of 2008 — which I interpret as a predictable and preventable housing, securitisation, and debt bubble stemming very much from central bank mismanagement of the money supply under Greenspan — secured the reputation of central banking among academic economists, because the bailouts, low rates and quantitative easing have prevented the feared debt-deflation that Milton Friedman and Ben Bernanke postulated as the thing that prolonged and worsened the Great Depression.

The Japanese example shows that crashed modern economies with excessive debt loads can remain stagnant for long periods of time. My view is that such nations are in a deleveraging trap; Japan (and more recently the Western nations) hit an excessive level of debt relative to GDP and industry at the peak of the bubble. As debt rises, debt servicing costs rise, leaving less income for investment, consumption, etc.

Throughout Japan’s lost decade, and indeed the years that followed, total debt levels (measured in GDP) have remained consistently high. Simply, the central bank did not devalue by anywhere near enough to decrease the real debt load, but nor have they devalued too little to result in a large-scale liquidation episode. They have just kept the economy in stasis, with enough liquidity to keep the debt serviceable, and not enough to really allow for severe reduction. The main change has been a transfer of debt from the private sector, to the public sector (a phenomenon which is also occurring in the United States and United Kingdom).

Eventually — because the costs of the deleveraging trap makes organicy growth very difficult — the debt will either be forgiven, inflated or defaulted away. Endless rounds of tepid QE (which is debt additive, and so adds to the debt problem) just postpone that difficult decision. The deleveraging trap preserves the value of past debts at the cost of future growth.

Under the harsh discipline of a gold standard, such prevarication is not possible. Without the ability to inflate, overleveraged banks, individuals and governments would default on their debt. Income would rapidly fall, and economies would likely deflate and become severely depressed.

Yet liquidation is not all bad.  The example of 1907 — prior to the era of central banking — illustrates this.

As the WSJ noted:

The largest economic crisis of the 20th century was the Great Depression, but the second most significant economic upheaval was the panic of 1907. It was from beginning to end a banking and financial crisis. With the failure of the Knickerbocker Trust Company, the stock market collapsed, loan supply vanished and a scramble for liquidity ensued. Banks defaulted on their obligations to redeem deposits in currency or gold.


Milton Friedman and Anna Schwartz, in their classic “A Monetary History of the United States,” found “much similarity in its early phases” between the Panic of 1907 and the Great Depression. So traumatic was the crisis that it gave rise to the National Monetary Commission and the recommendations that led to the creation of the Federal Reserve. The May panic triggered a massive recession that saw real gross national product shrink in the second half of 1907 and plummet by an extraordinary 8.2% in 1908. Yet the economy came roaring back and, in two short years, was 7% bigger than when the panic started.

Although liquidation episodes are painful, the clear benefit is that a big crash and depression clears out old debt. Under the present regimes, the weight of old debt remains a burden to the economy.

But Cochrane talking about imposing a CPI-standard (or Greenspan talking about returning to the gold standard) is irrelevant; the bubble has happened, it burst, and now central banks must try to deal with the fallout. Even after trillions of dollars of reflation, economies remain depressed, unemployment remains elevated and total debt (relative to GDP) remains huge. The Fed — almost 100 years old — is in a fight for its life. Trying to balance the competing interests of creditors — particularly those productive foreign nations like China that produce much of America’s consumption and finance her deficits — against future growth is a hugely challenging task. The dangers to Western economies from creditor nations engaging in punitive trade measures as  a retaliatory measure to central bank debasement remain large (and the rhetoric is growing fiercer). Bernanke is walking a tightrope over alligators.

In any case even if a gold standard were to be reimposed in the future, history shows that it is unlikely to be an effective stop against credit bubbles. Credit bubbles happen because value is subjective and humans are excitable, and no regime has proven itself capable of fully guarding against that. Once a credit bubble forms, the possibilities are the same — liquidation, inflation or debt forgiveness. Todaycentral banks must eventually make a choice, or the forces of history will decide instead.


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 08/06/2012 - 14:43 | 2682408 Concentrated po...
Concentrated power has always been the enemy of liberty.'s picture


Mon, 08/06/2012 - 15:00 | 2682463 unununium
unununium's picture

Unless there were something with a more predictable future supply, that could be transmitted electronically without intermediaries.


Mon, 08/06/2012 - 15:15 | 2682495 MillionDollarBonus_
MillionDollarBonus_'s picture

I used to be a libertarian, a long time ago. But then I read history, and economics. I realized that we simply have to have smart and well meaning regulators to ensure that we cannot make bad choices. Government regulators have a consistently good track record of preventing fraud, which is why liberals worry about what would happen in an unregulated economy.  What progressives point out is that we need the government to tax us in order to fund regulations that prevent financial institutions from defrauding us of our property. Libertarianism was keeping me in a bubble of ignorance, and shielded from reality. I feel more free and liberated now that I have rejected libertarianism.

Mon, 08/06/2012 - 15:16 | 2682506 XitSam
XitSam's picture

We simply have to have smart and well meaning dictatorship.

There, fixed it for ya.

Mon, 08/06/2012 - 16:48 | 2682800 engineertheeconomy
engineertheeconomy's picture

CIA Venture Capitalists could get Obama to fund a Virtual Gold Printing Press. We'll all be rich beyond our wildest dreams

/sarc off

Mon, 08/06/2012 - 20:08 | 2683203 engineertheeconomy
engineertheeconomy's picture

We're all waiting on that Hundredth Monkey

He's a little recalcitrant, but he's coming along just fine



Mon, 08/06/2012 - 15:19 | 2682508 nope-1004
nope-1004's picture

Can u learn me some economics too?  Particularly, why lowering rates should/may/is supposed to/will increase borrowing, as theory states?



Mon, 08/06/2012 - 15:39 | 2682575 Seer
Seer's picture

Works for the banks, doesn't it?

It's really about how you can turn around and pass off to the greater sucker...  If the room is so small that you're the only one in it then you've got a problem: but when you're TBTF there's all kinds of room!

Mon, 08/06/2012 - 15:22 | 2682530 tenpanhandle
tenpanhandle's picture

I used to be a human being a long time ago...

Mon, 08/06/2012 - 15:46 | 2682578 engineertheeconomy
engineertheeconomy's picture

We need more Government, it is imperative that we be dependant on Government for everything, any person trying to be self sufficient or live off the grid should be considered a Homeland Terrorist and their Gold should be held for safe keeping. Most importantly, look out for anyone with a garden or solar panels on their roofs. Even selling vegetable seed should be punishable by death. Also, those who own electric hybrids need to trade them in for Hummers

Mon, 08/06/2012 - 15:55 | 2682617 Missiondweller
Missiondweller's picture

Judging by the dow arrrows, I don't think they get your sarcasm.

Mon, 08/06/2012 - 16:52 | 2682821 oddjob
oddjob's picture

Judging by the up arrrows, not his best stuff.

Mon, 08/06/2012 - 16:04 | 2682660 pan
pan's picture

"What progressives point out is that we need the government to tax us in order to fund regulations that prevent financial institutions from defrauding us of our property." 


Given libor, MF global, TARP, and TBTF in general, it's quite obivious that your "smart and well meaning regulators" are on the take.

Mon, 08/06/2012 - 16:18 | 2682711 engineertheeconomy
engineertheeconomy's picture

No Politicians or Bankers are ever dishonest. There must be some kind of a mistake...

Mon, 08/06/2012 - 16:51 | 2682816 Long-John-Silver
Long-John-Silver's picture

How's that Face Book Dollar cost averaging working out for you?

Mon, 08/06/2012 - 16:55 | 2682826 Schmuck Raker
Schmuck Raker's picture

I've begun to collect all of MDB's comments.

Someday I will publish them in one of those little novelty books that people like to keep handy near the commode for the occasional extended visit.

Look for it at a Spencer's Gifts near you.

Mon, 08/06/2012 - 17:15 | 2682894 shovelhead
shovelhead's picture

Excellent post MDB...

I believe you just might have won that Dinner With Obama Sweepstakes.

Don't forget to mention your appreciation of Michelle's big back yard.


Mon, 08/06/2012 - 18:24 | 2683029 DosZap
DosZap's picture

Excellent post MDB...

One of these days you guys will GET MDB's posts..............LOL

Mon, 08/06/2012 - 19:32 | 2683156 LongBalls
LongBalls's picture

Like all entertainers with only one trick; your humor, or lack thereof, has lost it's charm and shock. Time for a new name and a new act. The word stale comes to mind.

Mon, 08/06/2012 - 21:20 | 2683408 WhiteNight123129
WhiteNight123129's picture

MDB is the appointed surrealist poet of ZH...

Tue, 08/07/2012 - 02:28 | 2683928 eaglefalcon
eaglefalcon's picture

You used to be a libertarian, and your screen name used to be million dollar boners

Mon, 08/06/2012 - 15:15 | 2682502 dwayne elizando
dwayne elizando's picture

I wouldn't trust bitcoins anymore than I trust dollars. What would happen to your bitcoins in a blackout.

Mon, 08/06/2012 - 15:40 | 2682577 Seer
Seer's picture

Blackmarket Bitcoins, bitchez!

Mon, 08/06/2012 - 19:42 | 2683170 unununium
unununium's picture

The level of ignorance on ZH about the importance of this electronic currency on is very surprising, and very bullish.

Once large merchants or wallet services sign on, the early adopter discount will be fully priced out and the exchange rates may not move much except as the alternatives (EUR, USD) falter.

Clearly we are nowhere near that point yet.  Total market value of currently mined coins (1/3/ of the eventual total) is still less than $100M.


Mon, 08/06/2012 - 14:43 | 2682409 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Gold bitches! TM

- Chumblz Wumblz

Mon, 08/06/2012 - 14:51 | 2682425 Cognitive Dissonance
Cognitive Dissonance's picture

Gold is not the perfect antidote.

BUT.....when men go mad (clearly what is happening in the modern era) Gold acts to temper the madness.......unless of course the madmen can manipulate the antidote.

Unbridled fiat reacts to Gold as a vampire reacts to garlic.

Got garlic?

Mon, 08/06/2012 - 15:04 | 2682473 CheapBastard
CheapBastard's picture

My GLD is up 236%, my USO (oil) is up 60% and my house is down 38 % and still dropping.


Analyze that !

Mon, 08/06/2012 - 15:11 | 2682493 LawsofPhysics
LawsofPhysics's picture

I have and my conclusion is this; Oil is another "reserve currency", paper promises are made to be broken, and possession is the fucking law.

Others might not "value" your house, but they sure as hell might want to come in after they are homeless.

Mon, 08/06/2012 - 15:25 | 2682529 Cognitive Dissonance
Cognitive Dissonance's picture

".....and possession is the fucking law."

I have been in the middle of a long term discussion with Mrs Cog regarding the coming "crash", the "law" and "rules". When the wheels really do begin to come off my position is that TPTB will change the rules......again and again and again.

We saw this happen when the senior most GM bond holders were dispossessed of their senior position despite rules, the law and custom that was supposed to prevent it from happening. The next great example will be European Sovereign debt losing it's seniority to the ECB and its various debt creations. Granted this is all paper as you cite in your example. But coming real soon will be broken rules and our PMs dispossessed when they "discover" paper Gold (and Silver) has been sold ten times over.

Expect much more of this as the great unwind continues.

Mon, 08/06/2012 - 15:44 | 2682587 Seer
Seer's picture

"But coming real soon will be broken rules"

Yeah, just ask the natives...  First they came for... we thought nothing of the natives being fleeced... then they came for us.

Mon, 08/06/2012 - 16:21 | 2682718 engineertheeconomy
engineertheeconomy's picture

Hopefully the Natives will take it from the Jews and it will come full circle

Mon, 08/06/2012 - 17:47 | 2682959 beachdude
beachdude's picture

If you need/choose to be in paper PM's, Eric Sprotts PHYS and PSLV.

Mon, 08/06/2012 - 14:50 | 2682426 Jim in MN
Jim in MN's picture



This debt.  It is old.  It smells bad.  And it is not in the least bit fashionable.


Take it away.  Now.  I do not want to see it again.


PS The failure of the Knickerbocker Trust Company --see it's always the lousy Knicks' fault. 

Mon, 08/06/2012 - 15:14 | 2682461 bigdumbnugly
bigdumbnugly's picture

that's exactly what the knicks said to patrick ewing on his way out after having had the nba lottery rigged to get him in the first place.    karma.

Mon, 08/06/2012 - 14:49 | 2682428 slaughterer
slaughterer's picture

Goldbugs need the Fed like a parasite needs its host. 

Mon, 08/06/2012 - 14:54 | 2682443 Sam Clemons
Sam Clemons's picture

Why is that?  If the gold bubble denominated in dollars popped due to no Fed, other asset prices would also come down.  Gold's conversion to those real assets would likely not be much different with Fed or without Fed.

Mon, 08/06/2012 - 15:55 | 2682616 engineertheeconomy
engineertheeconomy's picture

You are 100% correct.

I would also keep it in mind that printing money, according to the laws of physics, is stealing money.

 Therefore, to stop printing money would be to stop stealing money.

Name one Politician that does not steal money...

Mon, 08/06/2012 - 14:56 | 2682452 tarsubil
tarsubil's picture

All efficient systems attract parasites. This is because they produce excess wealth which is skimmed by the non-productive parasite. I think you're a little confused to say the least.

Mon, 08/06/2012 - 15:48 | 2682596 NidStyles
NidStyles's picture

Efficient? WTF is efficient about this system? The only efficiency I see is the rate in which it is capable of impoverishing people in general. Sure it's efficient at that. 

Mon, 08/06/2012 - 16:25 | 2682739 engineertheeconomy
engineertheeconomy's picture

They're effecient at rape, pillage, plunder and enslavement. And probably one or two things we should not discuss, in case children read this

Mon, 08/06/2012 - 17:16 | 2682898 NidStyles
NidStyles's picture

If they were efficient at that, they wouldn't need an Army that they paid for with their worthless pieces of paper. These people and this system can not do anything right, because the whole thing is a Human's idea of what something should be, when reality dictates otherwise. The greatest crime against humanity is convincing them that they are incapable of governing themselves. 

Mon, 08/06/2012 - 20:18 | 2683209 engineertheeconomy
engineertheeconomy's picture

You are correct. Also, on top of the "convincing" propaganda, they force us to be dependant or suffer the consequince of being shunned to the periphery, similiar to non human primates

Tue, 08/07/2012 - 10:47 | 2684607 tarsubil
tarsubil's picture

The fairly free market that the Fed attached itself to 100 years ago was efficient. Now, it is withering.

Mon, 08/06/2012 - 15:17 | 2682476 fuu
fuu's picture

I think you mean stawkbugs.

Mon, 08/06/2012 - 15:09 | 2682484 tenpanhandle
tenpanhandle's picture

goldbugs need the fed like a host needs its parasites.

Mon, 08/06/2012 - 14:50 | 2682431 cynicalskeptic
cynicalskeptic's picture

The panic of 1907 was to a large extent 'engineered' - giving Morgan the opportunity to step in and 'save' the situation  (and provide an excuse for the creation of the Federal Reserve - a privately owned central bank that the large banking powers had lusted after for years).  

Many of the past 'panics' during the 1800's were engineered when banks first extended credit, and then withdrew it - allowing them to take possession of the security offered on the loans they had extended.  It is not a surprise then that recovery after such panics was quick.

Mon, 08/06/2012 - 16:03 | 2682624 slewie the pi-rat
slewie the pi-rat's picture


and TPTB do NOT want one right now, which prompted me to postulate the "goldilocks crisis" around the last EU summit and face off against tyler on the "same as last year" and QE stuff

aziz:>  Once a credit bubble forms, the possibilities are the same — liquidation, inflation or debt forgiveness. Todaycentral banks must eventually make a choice, or the forces of history will decide instead. <:

all the ubers have already have their forgiveness or they would not be ubers any more;  and their forgiveness meant a TREMENDOUS debt was/is laid upon thePeople by the banksters and pols as they transferred the wealth to...  themselves?  is that right?  legally too?

now we go to inflation & liquidation which maybe can also be seen in our dodd/frankster bankster slewienomics as inflation/deflation but even that is an illusion and maybe a delusion

if tyler has hammered anything into my mouse-eared brain it is that boilerplate is now the economic engine and that boilerplate economics is just another wealth transfer to the ubers, anyhow

student loans come to mind...  maybe if the indebted new brainiacs re-classified them as "gambling debts" or something? 

simonBlack took a buncha shit here earlier today but this was his point and a heluva lotta zeroHeads missed it, imo:>  boilerplate rules!

also today: tyler's :> Standard Chartered Gets HSBC'ed  is also about "enforcement" of these boilerplate & other esoterica for daBoyz which is still accomplished (against them, not 4 them) primarily in the breach due to NW0 money-laundering/bankstering needs for themselves and clientele, including goobermint cash0ps aka black0ps (iranContra being but the tip of the iceberg even 25 years ago)

how are the crises avoided?  by keeping the checks in the mail for as many as possible for as long as possible, imo at this point

which reminds me:  when do we get that $3000?

Mon, 08/06/2012 - 17:43 | 2682951 shovelhead
shovelhead's picture


There's a reason why the platespinners and jugglers only had a 5 minute set on the Ed Sullivan Show.

Eventually they get tired and add one too many balls and plates in the act and thats when the real entertainment starts.

Them derivatives ain't gonna spin themselves forever and all it takes is to miss once. Again.

I don't think the wee people will buy another AIG but it won't stop em from trying.

Might be horribly fascinating to watch in a tiger eating a human sort of way.

Mon, 08/06/2012 - 14:51 | 2682436 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

Dr. Ben Bumkranke does wear a golden glove when he pushes the print button, however the real purpose: point your toes inward and bend over.

Mon, 08/06/2012 - 14:55 | 2682438 Sam Clemons
Sam Clemons's picture

This is not a rhetorical question, but did they allow fractional reserve banking on top of the gold standard?  This could be a cause for the wild short term fluctuations.  

Easy credit may be necessary for a developing country, and not so necessary for a developed country.  Get rid of fractional reserve banking.  Remove the ability of banks to create credit.


Mon, 08/06/2012 - 15:48 | 2682598 Seer
Seer's picture

This is a highly meaningful question!  It inches closer and closer to questioning the underlying premise, and that's that the system has to be based on growth (I'm thinking, and someone can correct me on this, that interest is really projected growth [and we've gone through pulling growth from the future and now the future is here and it no longer works]).

Mon, 08/06/2012 - 16:34 | 2682766 Skateboarder
Skateboarder's picture

That's because we've forgotten what growth really means. Real growth isn't in the exponential increase in numbers, market-related, GDP related, population-related, or anything countable, but rather in the increase of our collective wisdom. And that, you have to earn, by trial and error or deep introspection. We grow together or we all die, and death doesn't really have anything to do with the physical. Many of the physically living are indeed already dead.

Mon, 08/06/2012 - 20:32 | 2683261 engineertheeconomy
engineertheeconomy's picture

Animal, vegetable, mineral. The latter can not grow, bear interest or replicate. Only Animal and vegetable can. The GNP used to be Gross National Meat and Produce. It was never about accounting fraud. Wisdom is a combination of all classification, and contributes to wealth because you can give it away to all, yet retain 100%

Mon, 08/06/2012 - 14:53 | 2682439 Red Heeler
Red Heeler's picture

"In place of gold, the Fed or the Treasury could freely buy and sell such inflation-linked securities at fixed prices."

The Fed?

Abolish the Fed already!

"Banking establishmnets are more dangerous than standing armies." - Thomas Jefferson 

Mon, 08/06/2012 - 17:22 | 2682912 css1971
css1971's picture

fake quotation.

Mon, 08/06/2012 - 20:36 | 2683276 engineertheeconomy
engineertheeconomy's picture

What if he did actually say that?

Mon, 08/06/2012 - 21:45 | 2683475 Red Heeler
Red Heeler's picture

"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity in the name of funding, is but swindling futurity on a large scale." - Thomas Jefferson in a letter to John Taylor, 1816


There ya go, css1971, you God-damned dumb ass.

Mon, 08/06/2012 - 14:53 | 2682440 diogeneslaertius
diogeneslaertius's picture




Mon, 08/06/2012 - 14:54 | 2682441 q99x2
q99x2's picture

Let the banksters take their debt to prison with them. They've earned it.

Mon, 08/06/2012 - 14:55 | 2682445 FreedomGuy
FreedomGuy's picture

Credit bubbles form because banks are allowed to create fake money and earn interest off of it. Gold and silver are not the only solution but are the most easily practiced and understood. As long as ther is paper, there will be shenanigans. The socialist FDR confiscated gold at $20 and then changed it to $35. Legal government theft. So paper and accounting notations are still a problem with PM's.

Mon, 08/06/2012 - 17:15 | 2682893 Seer
Seer's picture

"The socialist FDR"

Yeah, just as I suspected, it was ONLY ONE GUY who was responsible for this mess.  Thanks for identifying the source!

As though the Federal Reserve Act wasn't the origin of the ills...  Look up the "Aldrich Plan" - hm... Nelson Aldrich was a Republican senator...

The Fascist Aldrich laid the tracks...

Mon, 08/06/2012 - 17:28 | 2682920 FreedomGuy
FreedomGuy's picture

FDR was a progressive elitist socialist. I didn't say the was the only one responsible. It's part of a bigger idea and a bigger problem, but he liked the idea.  He had a lowly position called President of the United States of America. What could he do?

Mon, 08/06/2012 - 14:55 | 2682447 Honey Badger
Honey Badger's picture

"An inflation-indexed bond also has a constant, real value."

Bullshit, CPI is manipulated.....downward.

Mon, 08/06/2012 - 14:57 | 2682453 Northeaster
Northeaster's picture

So what happened to the margin hikes? Did they happen or were they delayed again? This should have created a sell off.

Mon, 08/06/2012 - 15:06 | 2682482 LawsofPhysics
LawsofPhysics's picture

Great question, an update on this would be useful.

Mon, 08/06/2012 - 14:57 | 2682455 madcows
madcows's picture

How is Iceland doing now, compared to the countries that assumed their bankers debts?

Answer, their corrupt bankers are in jail and the people are doing well.  Meanwhile, our bankers are getting golden parachutes and their very own indentured citizen-servants.

Mon, 08/06/2012 - 15:13 | 2682471 tenpanhandle
tenpanhandle's picture

It's a shame that 93% of "academic economists" give such a bad name to the rest.

Mon, 08/06/2012 - 15:59 | 2682625 Missiondweller
Missiondweller's picture

I've always thouhgt an economics degree should include experience in real world markets so those twinks can see how the "real world" works.

Mon, 08/06/2012 - 15:06 | 2682477 LawsofPhysics
LawsofPhysics's picture

That which cannot be sustained, won't.  Everything else is garbage.  Welcome to the post growth era (barring some new technology that allows energy to be abundant and inexpensive again).  Nature always has the last say and provides the ultimate margin call.

Mon, 08/06/2012 - 15:09 | 2682486 Dr. Engali
Dr. Engali's picture

Speaking of price stability. This market's constant ramp up then churning within a few points all day is exhausting. It sure looks like they are churning away at S&P 1399 and Nasdq 2999 trying to break through resistance. It will be interesting to see if they can churn though it, or if the market rolls over. It wouldn't surprise me if they gap through it after the market closes.

Mon, 08/06/2012 - 15:13 | 2682496 Quinvarius
Quinvarius's picture

Credit bubbles come from LEAVING the gold standard via a politicized and corrupted fractional reserve system.  Credit bubbles on the gold standard had nothing to do with gold.  Extending credit in a highly leveraged fractional reserve system, while claiming you are on a gold standard, is by defintion fraud and counterfeiting.  It is not normal banking procedure just because we accept it today.  It has always been wrong.

This guy needs to learn the definition of "credit" and stop confusing it with gold, which is money.  No.  Gold standard does not stop credit bubbles from forming when banks are not regulated or forced to adhere to a gold standard.



Mon, 08/06/2012 - 15:16 | 2682505 LawsofPhysics
LawsofPhysics's picture

Correct, it always comes back to the underlying collateral, now about that "mark to fantasy" accounting...

Mon, 08/06/2012 - 16:43 | 2682779 Skateboarder
Skateboarder's picture

Collateral is the key word. Hell, a giant pile of 2x4s is good enough to be useful collateral. Let the damn pieces of paper stand for something and let there only be as much "money" as there are pieces of paper and thus 2x4s. The concept of collateral needs to be taught right from preschool. It's the only way to move this species forward because everyone needs to believe that resources and raw materails are the only damn wealth we have, and that money =/= wealth but only an abstraction of wealth for ease of transfer of goods other than the collateral itself.


Mon, 08/06/2012 - 15:14 | 2682500 ebworthen
ebworthen's picture

The ultimate correction; parity for tangibles and intangibles.

Dow/Gold ratio parity would be a good start.

Mon, 08/06/2012 - 15:15 | 2682503 jimmyjames
jimmyjames's picture

because monetary growth would be limited to the amount of gold dug out of the ground, and the amount of gold dug out of the ground is limited to the amount of productivity society can afford to spend on mining gold.


The amount of gold dug out of the ground is not how monetary growth occurs under a gold standard-

Monetary growth under gold standard is based on trade balances-

If a country is productive and exports are positive-gold flows into that country (increase in money supply) if a trade balance is negative gold flows out of the country (decrease in money supply)

The only times that mining was inflationary was the California and Klondike gold rushes-but those were freaks/anomalies and so far have never reoccurred-

Mon, 08/06/2012 - 15:17 | 2682512 lasvegaspersona
lasvegaspersona's picture

I suspect that when we look at our current situation in a few years we will realize that our current 'depression with money' will be seen as worse that the great depression. weare only doing 'as well as we seem to be doing' because our depression has been monetized. When we decide to stop believing it will all come crashing down...finally.

Mon, 08/06/2012 - 16:01 | 2682641 Missiondweller
Missiondweller's picture

And because 40 million Americans are off the street and have EBT cards rather than standing in soup lines.


Just imagine the images on TV if those millions of people were visible in the street, standing in lines. Keep it hidden away and you control the masses.

Mon, 08/06/2012 - 15:19 | 2682517 HarryM
HarryM's picture

Looks like Bob the Bear is hitting the nail on the head with his last post  (S&P 1400)

Hoping the rest of his prediction is correct as well

Mon, 08/06/2012 - 15:20 | 2682519 apberusdisvet
apberusdisvet's picture

Without the Rule of Law, no "standard" will work.  Any system can be gamed.

Mon, 08/06/2012 - 15:57 | 2682622 exi1ed0ne
exi1ed0ne's picture

Including the system of Law.

Mon, 08/06/2012 - 15:25 | 2682537 BlackVoid
BlackVoid's picture

"If anything, the events of 2008 — which I interpret as a predictable and preventable housing, securitisation, and debt bubble"


Predictable? Yes. Preventable? I highly doubt it. If money is lent at interest, and energy supply is constraines (as it is now), then it results in inflation.

It would only be preventable with interest free loans. Otherwise, it is a neccessity to create ever more money.

Mon, 08/06/2012 - 15:26 | 2682542 jimmyjames
jimmyjames's picture

For example, the 1920s — a period with a gold standard — experienced huge asset bubble formation via huge levels of credit creation.


The 1920's had no gold standard-

Gold reserves were double counted in 1922 and credit was issued to banks (SDR's) and that is what caused the asset bubble that blew in 1929-

Mon, 08/06/2012 - 16:02 | 2682648 Missiondweller
Missiondweller's picture

Interesting. Got a link for that??

Mon, 08/06/2012 - 17:06 | 2682870 jimmyjames
Mon, 08/06/2012 - 17:05 | 2682864 Dina Strange
Dina Strange's picture

Really. Coz they use 1920's gold standard bubble as a scare.

Mon, 08/06/2012 - 17:15 | 2682892 jimmyjames
jimmyjames's picture

Really. Coz they use 1920's gold standard bubble as a scare.


Yep..and that's what has people like Denninger fucked up with his incessant blabbering that "gold did not prevent the depression"

I suspect him and Bernanke started there studies in 1929 and both should have looked 50 years further back-

Mon, 08/06/2012 - 15:31 | 2682555 Dina Strange
Dina Strange's picture

John, i got a question. Citing your words first: "The aim is to prevent bubble-formation (in other words, monetary growth beyond the economy’s inherent productivity) because monetary growth would be limited to the amount of gold dug out of the ground, and the amount of gold dug out of the ground is limited to the amount of productivity society can afford to spend on mining gold."

Isn't it a fallacy to relate the economy productive growth to how much gold is out there? I understand that gold serves as a peg mechanism, but wouldn't it be contractionary?

Mon, 08/06/2012 - 15:32 | 2682557 jimmyjames
jimmyjames's picture

gold can be devalued, it can be supplemented with silver, and it can be multiplied by credit.


Gold canot be devalued by silver under gold standard unless there is an artificial ratio lock-

The gold price is locked and silver floats against gold by its availability at the market-

Gold cannot be multiplied by credit--ffs

Credit can be issued over and above the gold reserves needed to back it-but how in hell would that devalue the only thing that could settle the credit/debt?

If anything it makes gold more valuable when measured against outstanding debt-

Mon, 08/06/2012 - 17:09 | 2682880 css1971
css1971's picture

Gold cannot be multiplied by credit--ffs

Um, did you miss the last 1000 years history of fractional reserve banking? It was created to multiply gold.

Mon, 08/06/2012 - 17:18 | 2682902 jimmyjames
jimmyjames's picture

Um, did you miss the last 1000 years history of fractional reserve banking? It was created to multiply gold.


What horse shit-

Credit was created to "take the place of gold"

If anyone needs to brush up on history it's likely to be you-

Mon, 08/06/2012 - 17:42 | 2682944 css1971
css1971's picture

The proles, (hell, 99% of the bourgeois too) don't know the difference between gold and credit, or dollars and credit. Only the oligarchy know the difference.

=> Credit multiplies gold.

Mon, 08/06/2012 - 18:01 | 2682981 jimmyjames
jimmyjames's picture

The proles, (hell, 99% of the bourgeois too) don't know the difference between gold and credit, or dollars and credit. Only the oligarchy know the difference.

Credit multiplies gold.


It doesn't matter what anyone thinks or knows-and you have it backwards-

Credit is what is "multiplied" not gold-

Gold just sits there-everything else in a money multiplier driven system is what multiplies-

The US started the credit binge with (supposedly) 8000 tons of gold and has expanded credit to 55 times and today the US sits with 8000 tons of gold--so how do you get credit "multiplies gold" out of that?

Mon, 08/06/2012 - 15:33 | 2682559 JLee2027
JLee2027's picture

Eventually — because the costs of the deleveraging trap makes organicy growth very difficult — the debt will either be forgiven, inflated or defaulted away.


Mon, 08/06/2012 - 16:02 | 2682645 yabyum
yabyum's picture

Jlee for the win

Mon, 08/06/2012 - 16:06 | 2682670 Missiondweller
Missiondweller's picture

The saddest thing about extending this crisis instead of just allowing a quick, painfull collapse is what it does to the unemloyed.

We have social safety nets like unemployment but they are designed for recessions, not extended depressions. The results is long term unemployed who are not even counted anymore and are increasing turing to "disability" to get more government handouts which must be aid for with greater deficits.

We're paying so many people to not work we are going into a downward economic spiral. Depression begets more depression.

Mon, 08/06/2012 - 17:07 | 2682873 css1971
css1971's picture

if a gold standard were to be reimposed

No, never. They would never impose a gold standard. It can only return through the loss of trust in the existing monetary system. The existing system would have to have failed and seen to have failed. The existing high priests of economics seen to have been discredited.

First people will choose gold in preference to the existing system, only then could they attempt to usurp it with a "standard".

It's a long way off.

Mon, 08/06/2012 - 17:13 | 2682886 engineertheeconomy
engineertheeconomy's picture

The entire world will self impose a Gold Standard on December the 21st, 2012

Got Gold?

Mon, 08/06/2012 - 19:01 | 2683100 Ted Baker
Ted Baker's picture

Fact 8:- The current system can only survive under a GOLD standard period and the rest is rubbish economics

Mon, 08/06/2012 - 21:49 | 2683488 earleflorida
earleflorida's picture

with what seems a limitless amount fiat currency floating about with but a finite? amount of gold... what would / could be the fair-market value for an ounce of the yellow metal -- $2.5k/oz __ $5.0k/oz. __ $7.5k/oz. __ $10.0k/oz __ etc., etc.,...

thanks aziz

Mon, 08/06/2012 - 22:47 | 2683607 valkyrie99
valkyrie99's picture

The 1907 bubble - and nearly every other credit bubble and burst before it in US history - did not occur in a system where all currency was redeamable by gold.  They occurred under a system where US notes were claimed to be redeemable (but open for suspension or revaluation at any point) ; a system, where like today, most of the circulating currency was created by private banking consortiums who held just a fraction of the amount lent out in actual gold reserves (or US bonds which were considered good as gold for reserves long before 1907).

Therefor this was a system where private banks could conspire to blow and burst bubbles they would be positioned correctly to profit off the rise and fall of, just like today.  Frequent booms and busts are particularly common in systems where private banks create the majority of the circulating currencies.  Governments have times when they can also be criticized by creating inflation by over-expanding the money supply, but private banks have proven to be the worst possible managers of monetary matters over time. In fact in my research, the phenomenon of the recorded major credit bubble only started very shortly after the Bank of Amsterdam slipped into fractional reserve banking, as seen dramatically in tulip bulb prices, but also in shares of the DEIC and the like.  I would disagree with the authors contention that credit bubbles are part of human nature - I would more say they are the worst part of our nature that in only insented to emerge in mass in the inherently fraudulent fractional reserve system. Gold has shown issues with debt of its' own - largely that the finite supply of gold typically is accumulated by the lending class, leaving shortages among the rest of society. But the cycles of malinvestment largely only emerged after bankers began supplementing and eventually dominating the money supply with currency they created.

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