# How to Measure Strains Created by the New Financial Architecture

Via Eric Fine of Van Eck Global,

We believe an unsustainable new global financial architecture that arose in response to the US and European financial crises has replaced an older, more sustainable, architecture. The old architecture was crystallized in Washington- and IMF-inspired policy responses to the numerous sovereign defaults, banking system failures, and currency collapses. Most importantly, the previous architecture recognized limits on fiscal and central bank balance sheets. The new architecture attempts to 'back', perhaps unconsciously, the entire liability side of the global financial system. This framing is consistent with a purely political—institutional stylized—fact that it is nearly impossible to penetrate the US political parties if the message is that there are limits to their power…or that their power requires great effort and sacrifice. This is why Keynesians (at least US ones) who argue there are no limits to a fiscal balance sheet are so popular with Democrats, and why monetarists (at least US ones) who argue there are no limits to a central bank balance sheet are popular with (a decreasing number of) Republicans. Party on! Again, nobody chooses hard-currency regimes – they are forced on non-credible policymakers. Let me put it more positively. If politicians want the power of fiat money, let alone the global reserve currency, they need to behave differently than they have.

Implications for Gold:

If the old architecture is maintained, in which only money and demand deposits (M1) are “backed” by gold, the gold price which equates this US central bank liability to gold reserves is roughly $9,000 ($8,612); in Europe, $18,000 ($17,608).

If the new architecture in which guarantees of off-balance sheet derivative liabilities are backed (our M-?), in addition to portions of M2, the gold price that equates this backing is multiples of the $37,000 price—a dangerous harbinger for inflation and/or systemic collapse M-?: How to Measure Strains Created by the New Financial Architecture The analysis below examines how one would look at reserve-currency balance sheets in a “scorched earth” scenario in which confidence in the reserve-currency country becomes questionable. Because it is the reserve currencies themselves being examined as “at-risk”, we use gold prices. None of the prices mentioned herein are actual target prices for gold. The numbers generated are measure of the strains on central bank balance sheets, and of strains that could potentially be put on central bank balance sheets based on future policymaker decisions. Overview • An unsustainable new global financial architecture that arose in response to the US and European financial crises has replaced an older, more sustainable, architecture. ?? Most importantly, the previous architecture recognized limits on fiscal and central bank balance sheets. The new architecture attempts to “back”, perhaps unconsciously, the entire liability side of the global financial system. ?? Under the old architecture, in which only money and deposits (M11) are “backed”, the strain on the central bank balance sheet was much lower than it is under the new architecture. • The old architecture, in which only money and demand deposits (M1) are “backed” (and for our exercise, by gold), the gold price which equates this US central bank liability to gold reserves is roughly$9,000 ($8,612); in Europe, it is roughly$18,000 ($17,608). • If M2 is the monetary aggregate/liability which is ‘backed’ in the US, the dollar price of gold that equalizes this backing is$37,000, and for the EU, $32,000. This is a big increase in the strain on the US central bank’s balance sheet resulting from just one element of the unrecognized new architecture (remembering that parts of M2 were “temporarily” guaranteed by US policy in our recent crisis). • The real problem with the untested and unacknowledged new architecture is that it has created a new Federal Reserve liability, that I will call M-?. At the time, secret lending to global banks was “flash money”, designed to prevent a run on debt and derivative liabilities at US and other banks. • If the new architecture in which guarantees of off-balance sheet derivative liabilities are backed (our M-?), in addition to portions of M2, though, the gold price that equates this backing is multiples of the$37,000 price—a dangerous harbinger for inflation and/or systemic collapse.
• It should be noted that, so far, Europe is avoiding guaranteeing the entire left side of its financial system, so if their conservative policy choice resists international pressures for US-style expansion (the “new architecture”), the strain as measured by this framework will be much less dramatic.
• The potential result of all of this is if you think it is politically and practically sustainable for the Fed to back-stop a $700+ trillion derivatives market, everything is fine; if you think it is not sustainable, everything is not fine. • If this new architecture holds, capital controls would be an almost irresistible response on the part of status quo policymakers, undermining the reserve-currency status of many currencies, and boosting gold as a reserve asset and money. • There is some hope from our framing of this new architecture. Namely, it points to how easily confidence could be restored if M-? is not allowed to become a normal liability of the central bank (or the fiscal authority). • It is important to emphasize that no one chooses hard currency regimes such as gold standards – they are forced on non-credible policymakers. Put more positively, if politicians want the power of fiat money, let alone the global reserve currency, they need to behave differently than they have. I believe an unsustainable new global financial architecture that arose in response to the US and European financial crises has replaced an older, more sustainable, architecture. The old architecture was crystallized in Washington- and International Monetary Fund-inspired policy responses to the numerous sovereign defaults, banking system failures, and currency collapses that characterized Northern Europe and Latin America in the ‘80s, Eastern Europe in the ‘90s, and Asia in the late ‘90s, among others. The Chinese menu of policy responses insisted upon by the IMF (or, in some rare cases, by responsible national-level policymakers themselves) included the items outlined in the subsequent paragraphs. Most importantly, the old architecture put a sovereign default explicitly on the table if there was a “debt overhang” – it was considered senseless to provide liquidity if solvency could never reasonably be achieved. Second, deep structural reforms were required to ensure that growth would eventually arrive to maintain solvency and sustainability. Third, a plan for fiscal balance was required, for self-evident reasons (and by self-evident, I suppose I must exclude US-style Keynesians, for whom fiscal sustainability is not a self-evident requirement). Fourth, independent central banks that would never (and usually it was never again) become the endless lender to the fiscal authority were required, and they would often have to maintain high interest rates to prove their independence and firmly anchor inflation expectations. A final element was open capital markets to lubricate trade and growth and encourage a competitive banking and commercial system. This sounds fairly reasonable, especially since the countries that took advantage of this policy menu are now our creditors, have safer banking systems and more sustainable fiscal positions, and prevented or overcame social meltdown (generally speaking). They also outperformed us during the latest crises and some are experiencing inflows of flight capital and human capital. To the extent that there were deviations from a totally freemarket- determined architecture in which bad decisions were punished by markets and the new last resort liquidity providers, it involved guaranteeing bank deposits to prevent society-wide panic. This was a widely accepted (and perhaps subsequently over-extended) conclusion from Milton Friedman’s study of the US Depression. If a bank had too many non-deposit liabilities to make a deposit guarantee credible, those liabilities would take a hit and equity could go to zero, and senior unsecured debt could take hits (in exchange for equity). After all, if there were no pain to reckless lenders, the reckless lending would return. Off-balance sheet liabilities?... don’t even consider putting them in the way of depositor confidence. It helped that in many of these crisis-toughened countries, the respect for societal equity was such that protecting those wealthy enough to own bank equity or debt, and not a simple depositor, was a non-starter. In any case, all of these hits to bank capital structure were designed to strengthen deposit guarantees —depositors knew there were multiple financing sources available well before we got to the level of deposits. Before describing the biggest departure from this more sustainable orthodoxy, let us first acknowledge that when the US experienced its crisis in 2008, not only did the US not avail itself of a single item from the policy menu I just described, but we created a new entitlement program that was not financed (my point is not about the merits of healthcare, only on its lack of financing). We did nothing on structural reform, and neither party has a long-term fiscal plan comparable to those we insisted on in crisis-stricken countries that came to “us” (a definition in which I incorporate the IMF) for liquidity. Let us similarly acknowledge the fact that Fannie Mae and Freddie Mae’s gross (granted, not net) liabilities are roughly equal to our entire national debt. This is noteworthy, as such off-balance sheet fiscal liabilities were common to crisis-torn countries, and we normally insisted that they be recognized as formal liabilities (and then often defaulted on), which we have not done in our crisis. But, my point is not about these more traditional fiscal issues, as they are ultimately not as big as the US central bank’s potential liabilities, and in any case the superficial fiscal issues at least get discussed even by status-quo economists. The real problem with the untested and unacknowledged new architecture is that it has created a new Federal Reserve liability, that I will call M-?. In the US phase of the crisis, not only were deposit guarantees greatly expanded (by 2.5x), but bank debt was guaranteed by the fiscal authority (in theory, only temporarily). The idea, of course, was that new banking system rules and good fiscal policy would be implemented during the bought time, which has clearly not happened given the greater concentration of too-big-to-fail (TBTF) banks and lack of a fiscal plan. The US banking system (which, post-crisis, generously included speculative entities such as investment banks) has about$15 trillion in liabilities, the largest elements of which are deposits, and their entirety appears to be guaranteed. But wait, there’s more…Bloomberg sued the Fed to clarify the precise amount of theretofore secret loans. Teams of economists are still deciphering the Fed’s dump of thousands of pages (to comply with a Federal judge’s order, after long resistance), and are arriving at numbers up to $16 trillion (roughly equal to US GDP). Huh, that’s strange, secret Fed lending during the crisis might have exceeded the total on-balance sheet liabilities of the US financial system! These additional guarantees from the monetary authority were “flash money” designed to prevent a run on derivative exposures at US and other banks. Perhaps as a result of “over-learning” from the fallout from Lehman’s collapse—that a default on bank debt and off-balance-sheet derivative liabilities means systemic collapse—the monetary and fiscal authorities ensured that any claim on a bank was met. The loans of up to$16 trillion, plus Fed purchases of risk assets such as mortgage-backed securities, and all the other “stuff” we have read about by now, were enough to prevent the run. I should emphasize that this might have been the right decision, if it were conditioned on the isolation of the speculative activities of a bank from these guarantees in the future, the establishment of moral hazard (at least via firing bank boards and managements, given that bond defaults were deemed unacceptable), a long-term fiscal plan, etc. This was not the case.

As a 14-year veteran of a TBTF investment bank, I distinctly recall the day the Fed’s data dump indicated that my former employer received about $2 trillion in loans (all of which occurred after I had left the firm). I, and many of my former colleagues, assumed that this was a typo. But no correction followed. Why, I asked, would the Fed lend my TBTF investment bank so much? At the firm, I ran emerging markets economics research and then the emerging markets proprietary trading desk. However much I respected my colleagues and our work (which is ‘a lot’), I do not think anyone would have made the case that we were doing anything especially socially useful. Nothing evil, of course, but nothing worthy of taxpayer guarantees, and I certainly expected that the firm would be allowed to fail if it merited failure. It was not, and there were no conditions for such a privileged status. The result of all of this is if you think it is politically and practically sustainable for the Fed to back-stop a$700+ trillion derivatives market, everything is fine; if you think it is not sustainable, everything is not fine. M-? is that liability. What’s worse is that recent moves to have the derivative liabilities of TBTF banks placed on their deposit-taking subsidiaries brings this very close to the fiscal authority. Instead of the Fed being on the hook, the FDIC and US Treasury will be. It is no surprise that the Fed supports such moves – who would want to be around the next time investors worry about counterparty risk and more than the previous up-to-$16 trillion in “flash money” required to prevent a run on liabilities? Who would want to explain to depositors that their guarantee is equal to a derivative counterparty’s? Who would want to explain that food stamps are being curtailed due to infusions from the fiscal authority into these bank liability guarantees? Who would want to explain that national defense spending is superseded by bank debt, and that the dollar might not remain the global reserve currency? I pity the academics, policymakers and politicians who will take responsibility for this scenario, though I suppose none will. The refrain will be that policy didn’t do enough borrowing and spending, and/or that the central bank didn’t expand its balance sheet enough. As an aside, many will rightly argue that the net amount of these derivatives is by definition much lower. There is a counterparty on one side, and on the other, which can often be collapsed to zero, assuming the profit/loss is booked properly. The problem with this logic is that it assumes, in the daisy chain of counterparties, no counterparty will go down, and that the books are marked properly. We believe, and argue throughout this article, that the financial system is not sustainable. Even current market guides, as distorted as they are, show high credit spreads for TBTF financial institutions, and these discount rates are not(!) used to reduce the value of a derivative with that institution. As a result, we will have to discover the precise amount of the net liability via recognized insolvencies at financial institutions. By the way, this daisy chain crosses borders, and thus any one country’s financial authority. We argued above that the Fed has so far taken on the job of guaranteeing this daisy chain, which is why so many foreign banks received Fed support, and why the ECB gets swap lines from the Fed despite the Euro being, or pretending to be, a reserve currency in the “new architecture” mold of the US. There is great hope from the preceding framework, namely, it points to how easily confidence could be restored if M-? is not allowed to become a formal liability of the central bank, and gold becomes the reserve asset. We have been talking about unsustainable liabilities…how are we talking about gold as the reserve asset? Let me explain. Gold standards are the functional equivalent of currency boards. Currency boards/hard-money standards come about when trust in the fiscal and monetary authorities has eroded. The most typical cause for the many currency boards/hard-money standards I have experienced is one of the following. Most commonly, a central bank becomes perceived as an endless lender to the fiscal authority. Given that the Fed has bought more than half of all US Treasuries issued in the past 12 months, I think it is safe to say that we can check that box. Another route to a hard-money standard is the discovery or creation of unsustainable guarantees for the financial system on the part of the fiscal and/or monetary authority. Check that box, too. In these scenarios, the fiscal and monetary authorities are conflated. This can be put many ways. In one narrative, citizens lose trust when a central bank asset (Treasuries, for example) becomes viewed as supported/purchased only by a central bank liability (money, deposits…and hopefully nothing else) whose primary purpose is simply to buy that asset. This is one way of describing quantitative easing—printing money to buy Treasuries—and keep the Treasuries paying interest rates that are not market-determined. It could be put another way. Trust is lost when the fiscal authority’s liability (Treasuries) is viewed as unsustainable due to an excess of on- and off-balance sheet guarantees, and whose payment sustainability is only generated by suppressed interest rates on the part of a co-opted (i.e., not independent) monetary authority. The point is whether the Fed has the M-? liability or whether the Treasury eventually assumes it, it doesn’t really matter, as by that stage the fiscal and monetary are conflated and confidence is lost in both government debt (the central bank’s asset) and the country’s money (the central bank’s liability). How can confidence be restored if confidence declines to “scorched earth” levels? Do not ‘back’ anything other than money and maybe deposits and use a reserve asset—for example, gold—that can not be created by a fiscal authority that has lost trust and credibility. Let us get one thing out of the way: the gold standard is very problematic and easy to attack, but proponents usually frame it as less bad than other regimes given the decisions made across the political spectrum in the US and much of Europe, as well as given the decisions made by policymakers throughout history. They also point out that it has a thousands of years old history as a store of value and, intermittently, as a unit of measure and means of exchange. This framing is consistent with a purely political—institutional stylized—fact that it is nearly impossible to penetrate the US political parties if the message is that there are limits to their power…or that their power requires great effort and sacrifice. This is why Keynesians (at least US ones) who argue there are no limits to a fiscal balance sheet are so popular with Democrats, and why monetarists (at least US ones) who argue there are no limits to a central bank balance sheet are popular with (a decreasing number of) Republicans. Party on! Again, nobody chooses hard-currency regimes – they are forced on non-credible policymakers. Let me put it more positively. If politicians want the power of fiat money, let alone the global reserve currency, they need to behave differently than they have. I should emphasize that this is a “scorched earth” scenario in which confidence has been severely undermined. Policymakers in the US and Europe will presumably have many opportunities to respond and avoid such an outcome. Moreover, many reservecurrency status countries have achieved this with decades of credibility that has underlined the resultant confidence. As a result of this confidence, the central bank has never really had to “back” anything, other than with confidence-building measures and a very limited number of formal guarantees (such as those given by the fiscal authority on deposits). But, those promises proliferated during our recent crisis, as confidence declined, so it is important to measure this change. Policymaker decisions, moreover, should be made with an appreciation of the degree to which our new architecture is straining the central bank’s and the sovereign’s balance sheets. So far, this is, in fact, happening more transparently and courageously in Europe where at least defaults on sovereign and bank debt are contemplated as alternative financing methodologies, rather than the monetization path of the US. Europe’s problems, we have argued, are more political and game-theoretic. In any case, these “scorched earth” scenarios in which we divide gold reserves by a monetary aggregate are only proxies to measure the stress created by the new architecture…these are not price targets. Let us start quantifying. If the old architecture is maintained, in which only money and demand deposits (M1) are “backed” by gold, the gold price which equates this US central bank liability to gold reserves is roughly$9,000 ($8,612); in Europe,$18,000 ($17,608). The exhibit below reflects a simple calculation. It divides the central bank liability one chooses to back (here, we’re assuming only physical cash/coins and demand deposits, or M1), by the new “reserve asset” (ounces of gold), and arrives at a price per ounce of gold. The fact that this number is not being obtained in the market is either a sustainable reflection of great confidence in our monetary and fiscal authorities, or an unsustainable one. Also note the US’ strong position relative to other countries. I will not belabor this, as most countries hold dollar-denominated securities as their reserve asset. The calculation for other countries is more complicated than this graph implies. Nonetheless, it highlights the US’ strong position under the old architecture. It also gives policymakers a gauge for the strains on the central bank’s balance sheet under the old architecture. If M2 is the monetary aggregate/liability which is ‘backed’ in the US, the dollar price of gold that equalizes this backing is$37,000, and for the EU, $32,000. This is a big increase in the strain on the US central bank’s balance sheet resulting from just one element of the unrecognized new architecture. This is an important increase. M2 includes savings and money market accounts; the latter was explicitly guaranteed by US policy during our recent crisis. It has been assumed that this was a temporary one-off guarantee, but that does not seem realistic. In any case, one can judge for oneself whether another bout of systemic crisis will be met with a repeat of such guarantees. If the answer is “yes”, then this new number shows a big increase in strain on the central bank’s balance sheet. I should note that Europe so far is avoiding guaranteeing the entire left side of its financial system, so if their conservative policy choice resists international pressures for US-style expansion (the “new architecture”), the upside to gold prices via their policies are less dramatic. If the new architecture in which guarantees of off-balance sheet derivative liabilities are backed (our M-?), in addition to portions of M2, the gold price that equates this backing is multiples of the$37,000 price—a dangerous harbinger for inflation and/or systemic collapse. Remember that the up to $16 trillion in Fed loans was “flash money” designed to prevent a run on off-balance sheet liabilities. It is very unlikely that any future run (and runs are a feature, not a defect, of the way fractional-reserve and leveraged banking systems are designed) will be satisfied with such a small amount of “money in the bank window”. As dollar holders (again, including cash in circulation, demand deposits, savings accounts, money market accounts, as well as derivative contract counterparties) start to doubt the currency’s store of value function, and the financial system’s sustainability, they will run on the central bank’s assets. First, perhaps, claiming Treasuries, but soon selling any dollar-denominated paper for real assets from equities (an ownership claim) to tractors, land and precious metals. In fact, we have long argued that policymakers will be increasingly tempted to use capital controls to prevent an unwind of their status quo, further undermining the reserve-currency status of the reserve currencies. Accepting the framework described herein is very useful from a political-economy perspective, I believe, as it quantifies the so far unconscious choices of policymakers, quantifies potential damage done to savers, and takes partisanship out of a lot of economics. Let me conclude by listing the issues we will be able to transcend in our politics: • Derivatives and banks would no longer be “evil”, only government guarantees of them will be. • Depositors would have confidence that their guarantees are credible, and will not be diluted by massive, equal, competing claims. • The “austerity” versus “stimulus” debate would resolve, reconciled by default becoming a potential financing tool. After all, if austerity is killing an economy, and stimulus is a non-starter due to debt constraints, you most likely have a debt overhang, so default (the earlier the better). • The poor would be protected from inflation (and rising inflation expectations), business will be protected from uncertainty, and investors will no longer worry about the store of value of their wealth. • Guns vs. butter discussions would be forced upon the fiscal authority, as the status quo’s “yes to both” answer will be obviated by debt constraints; voters will have to make more mature trade-offs. • Societal equity would be strengthened by ending subsidies to wealthy lenders to, counterparties of, and employees of financial institutions whose social value (at least those that conduct purely speculative activities) is questionable. • Capital controls and protectionism—which would be very tempting policies for defenders of the status quo—are harder to discuss when we have a price gauge via gold that values the preservation of freedom in trade and capital movement. ## Comment viewing options Select your preferred way to display the comments and click "Save settings" to activate your changes. So now during this time of not being able to judge the value of the physical world, this time of financial chaos that has spread from the banking fraud into the value judgement of the physical world, law and order must be re-established. Eventuality may be near as the time has come where someone or something will take control. Control from those who have lost it to those that will re-establish it. Many of those will not be the ones that cling to the old system to benefit from the purse strings of the new. Just so everyone remaining is assured that the new order is in fact correct those of the old order must be sacrificed. Any politicians or corporate owners should recognize that if they don't stand up for the Constitution now they will likely be sacrificed later. The easy times are over. Seems like the way it will play out. The elite military types will end up stealing the wealth from the financial elites that stole it from the common person and restore law and order although not backed by a constitution of and by the people but rather of and by military rule. M1 is not the right metric to measure, never has been and never will be. If the US dollar was re-pegged to gold it would have to be at a much higher level than an M1 ratio, probably an M2 ratio. The reason is simple. If all the M1 money was declared backed by gold at$x amount, then there is ZERO chance the US could pay for all of its M2 and other liabilities and infinite promises. The financial system would collapse during the next crisis since the Ctrl-P was now taken away...

M2 or probably M3 plus all promises is the right ratio.

M2 or probably M3 plus all promises is the right ratio.

So using 100 trillion as a benchmark, that would do over 400k /oz. IF the Fort Knox was about gold anymore.

Looks like we have another "Andromeda Strain".

"Sir, there is a fire."

And like in Crichton's novel, the atomic option (which in this case is QE$\infty$) instead of neutralizing the problem, will in fact provide the perfect grounds for the strain to flourish and mutate causing eternal devastation.

I am become inflation, the destroyer of worlds.

I do a whole range of calculations to attempt to determine what price gold 'ought' to be.

I get between $10,000 an ounce and$1,000,000 an ounce.

It all depends on a balance of confidence between what a dollar is worth and what gold is worth.

At $1770 an ounce we, on average, believe in dollars more than we believe in gold. All my figures are based on todays purchasing power of dollars. So when we hit$1,000,000 an ounce, I just mean a million dollars worth of stuff at todays prices. As at that moment in time a loaf of bread might a billion dollars.

The "old architecture" wasn't even M1, it was the US government's debt load (currently 16T), hence the legislation to reprice official US gold holdings.

zaphod... I agree.

I believe it will take a very large scare before TPTB in the political arena will go against the bankers. Only if the pols believe they might lose the next election or be recalled will they even think about action.

Then there is the problem of the pols not understanding the financial system so they will not respond effectively. The pols are dependent upon the bankers for advice... and we know how well that works.

Some sort of collapse seems inevitable to me, given the circumstances the central banks of the world have put us in... and, not to overlook the foolish consumers that borrowed and spent against their futures.

Huge amounts of paper debt instruments have been created and they hoover over a very small amount of real assets. There will not be nearly enough chairs to go around when the music stops.

Right on Snidley,

And make that "huge amounts of financially reckless paper debt instruments have been created", that do not deserve to EVER be serviced.  What kind of a stupid Alice in Wonderland world are we living in?

The architecture was changed by Bill Clinton. 1) National Homeownership Strategy, 2) signed Gramm et al deregulation. And Fed enabled everyone. Now the Fed is finishing Clinton's dream - demolition of capitalism.

http://confoundedinterest.wordpress.com/2012/09/20/mortgage-rates-and-risk-fall-fall-after-the-feds-mbs-announcement/

Have to go back a little further, when the Democratic apparatchiks started mainlining GSE profits from "democratizing home ownership"... Maxwell, Johnson, Raines.

monetizing both positive and negative concurrently sounds like doubling an already exponential expansion... without restraint, buy both sides and profit both ways..

sorry, i guess buy both sides of both sides is more apt.

I read the title as "How to measure stains created by the new financial architecture". Been a long week...

No worries, the stains they be acoming.  Hope you haven't greased your undercarriage lately.

Andromeda Strain, now I get it.

Only this one isn't cured by drinking Sterno.

No this one is cured by dousing all the banksters with it and touching it off.

The financial system, it be a changing...

Eric et al,

Not sure why the more appropriate terms for monetarists and Keynesians have not taken hold in our daily discourse.

Monetarists shall, from now on, be called "Moneterrorists" and Keynesians shall be called "Arcanesians".

My psychotherapist advised me to start being more honest and this is my first attempt at doing so. How am I doing so far?

Bernankenstein, you also must recognize the horrible fact that you have sold your unconscious to absolute Evil and wlll end up in a Golem or Hell when you die.

Sorry, you need shock treatment rather than a therapist.

At least my final dwelling place will be filled with all my  co-conspirators co-workers and colleagues. I am happy for that.

Simplest way to measure the strain:

The Bitch-Meter has been pegged for a couple years.

oh strains I thought I read stains as in blood stains

"If politicians want the power of fiat money, let alone the global reserve currency, they need to behave differently than they have - or the consequences for Gold are extraordinary"

Don't forget tungsten!

The author assumes many of the worlds previous 'constraints' will be in place going forward.

I submit a new normal envisioned by the PowersThatBe (these would be the owners of the Fed ..as well as many other huge western corporations (and yes, they go to great lengths to obfuscate their control/ownership):
Wreck the current system and jam a new one down the throats of the dazed,confused, impoverished & unemployed by promoting it as stability in a time of dire straits.

Whether the above seems outlandish to you or not might depend on your world view.
If you think the current state of affairs is an amalgamation of contending forces with no inherent plan then ... party on dude. Enjoy the rising DOW.

On the other hand, if one can entertain that the Powers That Be have a 'plan B' lined up in case their current scheme has reached its end of life, well I would certainly say they have the enforcement mechanisms in place to implement whatever they foresee as the successor system. Gold may have a place in it, but likely it will be on their terms.

Think about it, over in the EU countries sovereignty are about to be relegated to an unaccountable, unelected, unaudited, unchallengeable ESM.  In the USSA, a host of executive orders and a ramping up of the police state have a very big truncheon in place (with EBT cards being fostered as the carrot). Plus there's the 'ol standby of an overwhelming Military Industrial Complex (with Blackwater mercenaries & Drones as a modern new adjunct twist).

I wish it wasn't so, however from my point of view the masses are set to do whatever the PTB wish.
Just as "taxes are for little people",  market & systemic constraints apparently are too.
Meet the new king, same as the old.

Essence, that is a very incitetful thought.  Any restraints placed upon these sociopaths will have no roots in morallity but will be based upon what will grow their power and wealth through stealing everyone elses.  The pattern for this evil plot can be clearly seen by anyone who dares to see, therefore the end result can also be seen, and it ain't pretty. The evil embedded within man will be unleashed, with the approval of most, simply because we have discarded any mooring point that calls evil what it is. The time will come, if not already, when any that calll evil wrong will be considered the evil one. Yes I would call that a 'new normal.'

Essence's hypothesis is ridiculous.  I'm sure the millions of round of hollow point ammunition being purchased by the Administration (DHS, HHS (?) and NOAA (??)) are either for target practice (by weathermen) or for use against foreign combatants.

... then again hollow points are useless for target practice and illegal for use on foreigners (Geneva Convention).

GULP!!!!

Special ops forces targeting "terrorists" and our nation's hired guns in foreign lands use hollow points every day.  Geneva Convention only applies in an old school declared war against enemy combatants that are similarly constrained.  Its a wide open world for creative application of force these days...

Yogi Berra for CFTC Commissioner.

As dollar holders (again, including cash in circulation, demand deposits, savings accounts, money market accounts, as well as derivative contract counterparties) start to doubt the currency’s store of value function, and the financial system’s sustainability, they will run on the central bank’s assets. First, perhaps, claiming Treasuries, but soon selling any dollar-denominated paper for real assets from equities (an ownership claim) to tractors, land and precious metals.

Not to worry - Super Mario & Bubblicious Benny - got our backs !

All failed episodes of history flow into merely soon-to-be failed episodes of history - SV

http://silvervigilante.com

One small problem: the quadrillion in fraudulent debt that the elite demand our greatchildren and all generations of the world between to pay. They are willing to face another Stalin or worse to keep their greedy rat paws on it as if it were a god. So there will be revolution after which a new monetary standard, most likely a form of bitcoin, will arise. Dalio voiced his concerns of another rise of a Hitler incarnate. No shit law and order must be restored and a military elite is going to do it. The easiest and time tested proven way to accomplish the task is to scapegoat his opponents to death. What is so f'n hard to understand. Either the banksters give it up or Cheney or another cyborg is going to do it for them. The military industrial complex is massive and as social order breaks down countless points of opposition will have the opportunity to -- make a difference in the lives of the elite.

Oh what wonderful times we live in. I was worried that since they stopped the draft before I was eligable that I would never see a day of war. Then not too long ago the first dead person that I ever saw in my entire life was like running about ten floors above me in mid air. He ran out of his tenth floor apartment over his balcony and landed right in front of me and just like that I witnessed my first dead man. Poof. Just like that.

Well, the military supports our dollar now; might as well just let them run the country too.  In the process of getting there, there'll be a lot more dead men everywhere.  Sorry for that shock you had though.

Every time the esteemed(cough,cough)J.M.Keynes name comes up,one thought springs to my  mind.

There is a 'new town' called Milton Keynes in the UK .A centrally planned town, named for him.

They left open spaces(fields to us mere mortals)between the satellite communities.

They decided to populate these fields with cows.

CONCRETE cows.

Need I say more.

Yes, you are a bore, to blame an intelligent man for the ills that were committed in his name by other mediocre shills.

The cloth of decency cannot hide the indecency of scam politics disguised behind the hypocritical mantra of "doing God's work"; whether he be religious or economic god he stays a bogus reference.

As there is nothing "perfect" or godly about religion or economics the way humans PRACTICE it, whatever their moral pretentions.

My comment was exactly about the corruption of human beings in PRACTICE.

I'm sure Keynes would roll in his grave about the things done in his name.

Idolatry is as stupid as you.

I don't mind being qualified as being stupid as long as you admit that Keynes is used as a convenient "bogeyman" by all and sundry, an historic trait that does not do him justice for what he DID, not for what he theorised about which is all pseudo science IMO as amply proven over time.

I objected to your pinning that practice on his NAME; thank you for correcting that misconception.

Here is another reminder of the potential misuse of that pseudo science by potential despots, demonstrated by somebody undoubtedly  less stupid than I :

Jesse's Café Américain: Karl Polanyi On Liberal Economics and the Rise of Fascism

AUD living on borrowed time. But FinMin has something to say about the US Republican "crazies"

http://www.straitstimes.com/breaking-news/asia/story/australian-minister...

1°   The new architecture attempts to 'back', perhaps unconsciously, the entire liability side of the global financial system. This framing is consistent with a purely political—institutional stylized—fact that it is nearly impossible to penetrate the US political parties if the message is that there are limits to their power…or that their power requires great effort and sacrifice.

2°  If politicians want the power of fiat money, let alone the global reserve currency, they need to behave differently than they have.

Both symptoms do not identify the cause of why we are here : A long planned scheme of political alignment to Oligarchy rule; aka deregulated supply side economics; now globalised and runaway financialised, as the bubble it created is UNCONTROLABLE cancer to system.

Result ?  : the global heirarchy of 1% percenters; openly, unashamedly proclaimed as de facto rule of financial law.

Obviously once the cause has been established as a premeditated takeover of world power the symptoms are its logical consequences : institutional gridlock, political cacaphonia, as nobody wants to be held responsible for the runaway, blatant pillage of "we the people's wealth" worldwide. And the final conclusion is but the evidence of the crony subservience of the elected to the laws imposed by the economic lords of the world; the global oligarchs.

This is wet hen analysis hype and shadow boxing of the worst type, as it does not say outright this is a SCAM, a blatant organised privatisation of profit and socialisation of debt on tax payer's account.

The system will not change from within, we won't go back to the old ways; it'll either hit the wall like a train wreck it already is for the poor and unprotected, or it will morph into outright dictatorship.

We are beyond "measuring the strain created".

Avé Caesar!

I think you pretty much nailed it. The 'fix' offers too much opportunity to be passed by the PTB.

Ave' Ceaser or Ave' Maria.

The bright side is that we will no longer have to pretend to have a republic. No more massaging the news. The message will be clear and forthright.

Obey or die.

Efficient Govt. at last.

Is that unconsciously or unconscionably?

If you want to play the game with fiat, you better have Glass-Steagall behind it.  In the new architecture these financial cathedrals have no flying buttresses to support them.  Good luck with that.

"New architechture" sounds less threatening than new world order.

Read Crisis by Design by John Truman Wolfe.

The politician will only wake up when their fiat money is eventually worthless and that is the path they now tread through each manipulation.

As for gold (+ silver etc.) in all this. If all the fiat money in the world becomes worthless then all the gold in the world will be worth everything.

Total monetary worth / Total gold supply =

The potential worth of gold per unit measure and is increasing at the rate of all the newly created currency being pumped into economies.

It seems to me that there is a possibility that the dollar could be partially backed by gold as a compromise solution at a more "reasonable" \$/oz figure than some that are being thrown around both in the article and comments above.

But some of the darker musings outlined above remain distinct possibilities unfortunately.

"How to Measure Strains Created by the New Financial Architecture"

there is no financial architecture

it's just a bunch of very crooked scum

OVERDUE CORRECTION LOOMS.

Due to recent central bank intervention and short covering spikes, these daily charts are extremely overextended and significant correction expected very soon:

SPX, DOW, NASDAQ, NZDUSD, GBPUSD, AUDUSD, COPPER, CRUDE, GOLD, SILVER. [USD strength will return]

http://www.zerohedge.com/news/2012-12-24/market-analysis