davefairtex
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davisherb – “Argument about “faith” seem more appropriate to some other blog.”
Ash specifically solicited viewpoints on faith and humanity, so I think this thread is appropriate. If you find the subject out of your interest zone (or off-topic for the blog), its a pretty simple matter to just skip this discussion, yes? At least, that’s what I do.
The word “faith” has a number of definitions. Many people have unfortunate reactions to the definitions that are tied to God or religion. I think Ash was using some combination of the following two definitions:
1. confidence or trust in a person or thing
2. belief that is not based on proofAwesome posting. What is your own personal faith, except the lens through which you view the world.
How we all view the future depends on how we imagine the universe is constructed. So here’s what I think:
I think we are here for a reason. Each life we live is a class, and we decide for ourselves before embarking on each class what we want to learn.
On a planetary level, I think humanity is at a turning point here in history. I think we’ve reached the end of one particular road of travel – the Big Oil Big Pharma Big (indebted) Consumer path we’ve been on since (say) 1900.
What comes next? The ones in charge say that the end of their particular road means the end of the world as we know it. Is that so bad?
What do we imagine is outside our current matrix? Our cultural cues give us nothing – its a desert. Either we’ve got Mad Max, or the indebted-consumer happy Status Quo, with nothing in between.
I have the sense based on my world view, that something interesting will turn up once the old paradigm ends for good. Is that faith – “belief that does not rest on logical proof or material evidence?”
You bet. We are not here by accident. And there’s just no point in the wholesale destruction of humanity.
But I don’t think the current world as we know it will survive as is.
But that’s just my world view.
Bailouts are just about hiding bank debt from view. I like that description. I think its dead on.
I also agree that the bond market’s reaction to the latest bank bailout screams failure. Spanish bond yields have hit a new cycle high. Might a Blodget-style bank resolution solve the problem? From my look at Bankia’s balance sheet, the bill for just THAT bank would run perhaps 60 billion euros.
If all the caja debt was made visible and Bankia accurately reflects the other caja’s conditions, my guess is the bill would be on the order of 300 billion euros. Likely less than half that could be borne by the bondholders, so that would leave a recapitalization bill to taxpayers of at least 150 billion euros.
This assumes a retracement of about 50% on property values, along the lines of what happened in Ireland.
Mass liquidation of the caja loans would likely crash the property market in Spain, increasing the losses. Spain would probably use a “bad bank” that would liquidate the bad bets in an orderly way – killing the property market there for years to come.
My sense is, whenever the next intervention is announced, watch those Spanish bond yields. Ignore the news and happy talk and watch the numbers.
https://www.marketwatch.com/investing/bond/10YR_ESP?countrycode=ES
So what he describes may work. Lets leave that aside for the moment.
I’m focused on implementation. How on earth do we get a large percentage of the nations in the world to essentially outlaw gold derivatives, what with all that money to be made in derivatives and gold lending. We can’t even force the banksters to properly reserve for and trade derivatives on exchanges, for heaven’s sake.
What’s the FOFOA roadmap of getting this thing legally implemented? Its natural enemy would seem to be the banksters, who make their very living by making money through loans and originating derivatives…
Karpatok –
I’m not interested in trading Spanish bonds or the Spanish stock market either long, or short. I use the bond yields as a rough market-derived thermometer on how bad “the experts” think trouble their banking system is; the higher the yield, the worse the problem is. I am not planning on buying a home in Spain. I would guess property prices will be lower than they are now once the banking issues get resolved. I have visited the country, but by no means am I an expert.
By using the price of repo-ed homes, and multiplying by the number of loans on the books of a company, you can get a rough estimate of how bad the losses are likely to be when the bad bank eventually gets resolved. So when the Spanish government says “23 billion will fix the problem”, I like to check their math myself. My (very rough) math says they’re probably off by a factor of 3 – it will likely end up costing $60-$70 billion euros.
FT had an article which suggested repossessed homes were selling for 52 cents on the dollar in Spain. I read elsewhere that Spanish banks had written down about 10% of their loan book to date.
24% of Bankia’s origination was to the construction & development industry. From what I understand, these loans are the most toxic and will likely have the highest losses. Given a repossessed property sells for 52 cents on the dollar with a whole lot of shadow inventory yet to be sold, how much do you think you can get for land, and/or unfinished houses today? 15 cents on the buck? Less?
Watch Spanish 10 year bond yields. Above 6.5% is bad news, above 6.8% (the high reached last November, prior to the ECB’s LTRO) is extremely bad news.
https://www.marketwatch.com/investing/bond/10YR_ESP?countrycode=ES
Just for fun I looked up Bankia’s balance sheet. The most recent quarter I could find was March 2011. At that time, they had 190 billion euros in loans outstanding (138B in mortgages, 51B in MBS), against 150 billion euros in depositor money (15B in senior debt) and another 58B in debt securities.
I’m just gonna guess that the 19B in losses is just the down payment. NAMA, the Irish “bad bank” had all in losses for their mortgage portfolio somewhere around 40%, so call the total cost perhaps 76B euros if we assume the losses in Spain will rival that of Ireland.
Bankia has 10% of Spain’s deposits. Rough back of the envelope – there are perhaps 750B in losses yet to be taken in the Spanish banking system assuming Spain = Ireland in terms of bubble expansion (and now contraction). Spanish sovereign debt is 1T.
It would appear that there isn’t enough senior (risk) debt out there to resolve this sucker without immense loss to the depositors. Roughly 60B of depositors are insured. The rest are not.
https://www.bankia.com/Ficheros/CMA/ficheros/Cuentas_definitivas_firmadas_en.PDF
RE –
I don’t think I’d call it passive resistance. I call it actively withdrawing my support for the system. Perhaps you see the two as identical; I feel there is an energetic difference. I’m not resisting anything, I’m simply choosing not to engage any longer. Although I must confess I do take delight in knowing my decision does impact the stability of the system in some small way.
According to my philosophy, we tend to attract things into our experience based on the energy we are putting forth. Combative thinking results in bringing violence into our lives – and it places everything on a win-lose axis. Having done martial arts for many years, I try hard to be non-violent. In looking at my own motivations, I think my goal is to create a new world without fighting.
It will be interesting to see how it all turns out.
Karpatok, RE –
I hear what you guys are both saying. Certainly the system might implode, that’s one of those Possible Outcomes we talked about before. But its not the only likely outcome, at least not in my universe anyway. Loading up on “system implosion” derivatives (i.e. actions that pay off only if the system itself blows up) is not my idea of remaining flexible!
Karpatok – As for being born and bred in the Briar Patch, I wasn’t! So I’m not well equipped to fight the bad guys tooth and nail and make myself judgement proof. I can see how it would work, I understand it, but it probably wouldn’t be my way. Perhaps if I’d been gouged by endless late/overdraft/over-the-limit fees and punitive interest rates that triple my debt, I’d feel differently! There is a lot of awful stuff the banks do to the less well off that just hammer them financially into the ground.
RE – of course if you can get everyone on board to repudiate their debts (or even a sizable fraction of people to do this) then I think you’re right, it would cause a big deflationary kerfuffle exactly as you say. But when I try and game out how such a thing might come to pass, it’s not so clean. I don’t imagine the boys on the other side will play nice with the leadership of such a movement.
Simply positing that such a thing is possible and would be effective is quite a distance from actually engaging in making it happen. Its the old 99% perspiration rule – 1% is blog posting, and 99% is marching, bleeding, and dying.
Ultimately I feel it is better for me to take action on my own and stay focused on creating the world I want to see, rather than engaging with the forces of darkness in an attempt to destroy the world I dislike. I can respect the choices of others who choose a different path.
RE, skip –
Haha ok you got me. You are right, paying down debt is not the MOST revolutionary you can do. I admit it, I’m guilty of hyperbole! It was a moment of weakness!
But I still like it a great deal as a legal and peaceful way to withdraw your support for the current system.
Every time you repay a debt, you are causing deflation, since money disappears from the system, be it a credit card, an auto loan, a home loan, or even a student loan each time a debt is repaid. That is because money was created from thin air every time you borrow it from a bank, and you destroy that credit money when you repay the debt.
Bankers absolutely don’t want you to repay debt. They want you to continue servicing your debt, roll it over, and continue paying the interest – hopefully making the minimum payment.
Not everyone is in a position to repay debt – perhaps only the top 20% can really make this happen. But it wouldn’t take everyone to be effective. And reducing debt at the margins helps too. Buying used cars instead of new ones, stopping credit card use, paying them off, that sort of thing.
I really do think that boycotting the parts of the current system that you don’t like is a personally empowering strategy. So if you don’t like the current banking and monetary system, withdraw your support for it by starving it of revenue (i.e. interest payments and fees).
As for repudiating debt – that’s a different story. Instead of boycotting or withdrawing support, it is attacking the system head on, which tends to draw attention to yourself. The more aggressive the action, the more powerful the backlash. What strategy do you pick – boycotting the bus system, or firebombing a bus!
If you are willing to lose your house, and you find your mortgage odious, I see absolutely nothing wrong with that. Within the four corners of the contract, the bank has their remedy, which is the return of the house through foreclosure. Best of luck with that house, I’m off to rent something nicer, for less. Same thing with bankruptcy; people who are heavily burdened with consumer debt might find legal refuge there as well.
But knowingly gambling that your student debt you enter into willingly will be released in a Jubilee – I have to say, I wouldn’t advocate that plan. There are a lot of ways that could go wrong. You might end up in a banker-created “work camp” (Arbeit macht frei) for defaulting students 5 years from now.
These guys won’t let this money go without a fight. And I don’t like fights. I’d rather put my energy somewhere else. I like withdrawing participation much, much more – and if withdrawing support can have a subversive effect, well now, how much more fun can you have?
But that’s me.
RE –
I like the way you talked about Possible Outcomes. In trading, which I have done from time to time, its generally a bad idea to try and predict the market because everyone has a natural tendency to want to be right, and that right there is an emotional trap. (You tend to only read things that reinforce your biases, you spend so much energy to bash others who challenge your world view, etc).
Rather, it is better to talk about scenarios – Possible Outcomes – and then construct plans that you execute based on whichever Outcome you see appearing on your charts. In some sense, once you’ve set up the Possible Outcomes, you’ve outsmarted the whole “being right” emotional trap because whatever Outcome occurs, you end up being right!
Another way of saying this is, set up your expectations to allow your mind to be nimble. This seems especially appropriate because we have never faced this particular situation before in the history of the world. Flexibility in the face of this big unknown would seem to be appropriate. And to quote from the Tao, “…an army without flexibility never wins a battle. A tree that is unbending is easily broken.”
Of course one might want to have to have a sense of probability for different outcomes, but again, the goal is to remain flexible, and adapt your sense of the probabilities as you receive new information. “Oh wow, rich Greeks are shopping for 1.5M pound properties in London. Which Outcome does that reinforce?”
As for why all of the unnecessary buying –
A dominant paradigm of our world is feeling like we never have enough – because we feel inside that we are not good enough. Advertising is constructed to foster this image deliberately, and most of us sure view enough of that to beat the message in pretty thoroughly. And with the current situation increasing the angst and threatening to take away what we currently have, it pushes that “not having enough” button really hard.
The world is set up in a really evil and destructive pattern right now, in so many ways. The only way I have found to help create new pattern is to first imagine it, and then create it for yourself, and live the way you want the new world to be as best you can. If enough of us do this, it will come about. We can all influence our friends by being an example by doing.
Paying off debt is probably the most revolutionary thing we can do to destroy the existing monetary system. Its not always possible for everyone in society to do, but it is the kind of protest I like best. Quiet, local, and impossible to defend against.
Thanks to the rest of you for your kind words about our discussion!
RE, skip –
I’ve really enjoyed this conversation too. I don’t really consider it a debate, since I’m really just looking to explore the space rather than prove that I’m right (or prove that you’re wrong) about something. Who cares about being right – I’d much rather see the truth instead.
I definitely don’t know Alaskan real estate. What you say about the pipeline sounds unpleasant. How much of Alaska’s economy depends on oil? I certainly have no idea. The idea that land is sitting around simply unused is definitely a bad sign though.
And if you have everything you need, then certainly there’s no urgency for you to buy something else. But I’d say you’re in a very small minority of people who think this way. Other rich people are fine with buying a London house (never know, might need one some day) or an Alaskan Farm, or a Miami Condo, especially if they think their bonds will vanish.
Focusing for a moment on HI, I do think its quite possible for the Fed to print enough money to cancel out deflation. Does the political capital exist for them to do this? It may, if Europe starts to burn for real and the US bankers convince the politicians and the public (who controls the media, again?) that we can avoid this outcome here if only we print.
Assuming the political capital for printing exists, there are several outcomes I see:
1) they can’t/don’t print enough, deflation starts to take hold, and then some event causes virtual overnight systemic failure bringing on that deflationary depression
2) they don’t print enough, deflation starts to take hold, and they change their minds and print more; time passes and another outcome is selected.
3) they print just enough. goldilocks. inflation happens, but its not too horrible. we muddle on through.
4) they print too much. inflation starts to take hold, and some event causes a hyperinflationary run out of bonds into real things.I think outcome #3 is the least likely. As for the others, I don’t have a sense as to their probability. I’ll be reading the tea leaves to see which one happens to be in force at the moment, and given the trend, which unpleasant event could be waiting in the wings.
For instance today it would seem that deflation is the primary trend, with a systemic failure (depression event) possible as a black swan.
However as RE has said, in time this whole discussion gets trumped by the energy issue. All the stuff he wrote, I really can’t argue with. I’m not so certain about the whole “death trap” thing for cities; I’d be more worried about the exurbs, but that’s just picking nits.
Unless we find some clever new concentrated energy source, the power behind civilization will slowly melt away. I’m all for a Deux Ex Machina, but I do dislike the thought of having to wait so far into act 4 for it to appear.
RE –
Hmm, ok that’s convincing. You’re probably right about the Chinese, and likely the Japanese as well. Its tough to place a trillion dollars somewhere useful and at the same time relatively low risk.
But I’m not so sure about the actions of a bunch of rich people. They are seemingly better placed to individually make semi-smart decisions on buying stuff. They have big stashes of treasuries (like you do) and are wondering where they might put them. I wonder that about my small pile of bank deposits!
We are allegedly seeing this in London. Rich Greeks (and perhaps rich other europeans) are taking paper and using it to buy real estate in London. It seems absurd on the surface, but from what I hear, its happening.
I respect what you say when you claim that there’s nothing out there to buy. But try this thought experiment. If I told you that your pile of treasuries would be chopped in actual value by 75% through a default, would you still say “I can’t find anything to buy?” Maybe buying medium-sized chunks of Alaska might look more attractive than a 75% loss.
Would a panic out of bonds usher in a “freegold” world? Who knows. I’m a bit suspicious of claims that something (other than a property of basic physics) is guaranteed to happen. It just reminds me too much of Marx’s assurance that the state would simply wither away. But gold would likely benefit from a flight from paper, likely driven first by default and then by the monetization response – among other things.
Again, if the Fed (and ECB) aren’t allowed to buy up all that bad debt, we get deflationary depression. If they do have enough political capital to both monetize and buy up bad debt, there’s enough excess claims to real wealth floating around out there to really cause a whole bunch of price inflation if even a fraction of it decides it is better off in “real stuff.” Even Alaska properties, Florida condos, little gold bars, or Picasso paintings.
RE –
I don’t take what’s happening in Greece as a model. Greece cannot monetize its own debt, and the US can – and did up until last year. State & Local jobs are being cut here, but Federal jobs are expanding. I’d guess net-net it has resulted in job cuts overall, but our monetized deficit spending (10% of GDP each year) has kept the economy above stall speed to date.
HI happens when a flood of money hits the real economy, just as you say. There are lots of ways for that to happen – including government dropping actual cash via jobs programs. Whether you think those ways are likely, or unlikely, depends on your own personal assessment.
At FOFOA they note there is a wall of USD-denominated bonds sitting offshore on reserve at a bunch of central banks. The number of claims on real wealth vastly outweighs the actual real wealth out there – that’s what I learn from reading Stoneleigh.
So my follow-on to that is, if the US Fed stops deflation from happening by buying up all the trash and pretending there’s nothing wrong, all it takes for HI to take effect is for some subset of paper wealth holders to decide they want to convert their claims into real wealth before its too late, and then the game is up.
Once again, what triggers this move out of paper wealth? What triggers a bank run? Same sort of question – its some straw breaking the back of the camel of confidence. The potential for it is there. The only question is, do the banks (and the Fed, their servant) have the political ability to monetize in order to stave off deflation when push comes to shove? If not, we get a deflationary depression. If they can monetize, then we get moderate inflation (through government deficit spending) until a trigger event is reached and a wall of money hits the real economy.
I believe that the more unrest we seen in europe and the more “austerity” turns into a highly-visible death trap, the more support there will be for Fed money printing as our way out. Whether that’s enough – I don’t know. I think it could go either way.
RE –
Perhaps the CBs will monetize sovereign debt, which will be deficit-spent directly into the economy by the government via social security, medicare, medicaid, defense spending, AFDC, SNAP, and the like.
As long as the banks don’t end up going under and presenting FDIC with a massive resolution bill, cash for trash is a success.
Limping along collecting your salary & bonus beats the hell out of a deflationary depression – especially if you’re a banker with a big house in the hamptons.
Agreed, I feel that military power projection capability has been a critical component to the USD remaining the reserve currency – as was British military power a key for the Pound prior to WW1.
Military power is always ultimately based on economic power, but after the hardware is constructed, it can provide military utility for decades after the economic power that constructed it has peaked and has fallen off. We’re still using B52s first built in 1955.
In some sense, both sides in this debate are talking about a denouement caused by widespread defaults on unpayable debts.
Reading over some FOFOA posts, it does appear that he acknowledges that defaults lead to deflation. But his claim is that the CBs won’t allow that deflation to stand for very long – moments, minutes, hours, or days, and that they’ll quickly react by exchanging money for all the defaulted assets.
Folks here seem to think that the CB won’t be allowed to do this; the Fed will be prevented from wholesale replacement of bank credit with base money.
Likewise, FOFOA also points out that there is a overabundance of dollars in circulation outside the US especially on CB balance sheets, and a collapse of confidence in the dollar would lead to a hyperinflationary rush out of the many forms of the buck into “real things”, of which gold is favored because it is something that’s had long historical significance as a store of value, and it stores better in vaults than Rembrants or barrels of oil.
Each party tries to put forth evidence to support their concept – newly popular “end the fed” campaigns, reading the tea leaves on various Bernanke speeches trying to assess his willingness to print, fading trade surpluses and falling purchases of treasurys by China, and so on.
But at the end of the day, it all boils down to guessing what the Fed (and/or the ECB) will actually be able to do when the debt default crisis arrives. And that seems to ride on one thing: do the banks still have enough political power to make this happen the way they did in 2008? If they do, then we could well have a confidence collapse in the currency. If not, then we get a deflationary depression. No doubt the Fed would try to thread the needle and print just enough to restore the system, but not so much so as to cause a collapse of confidence.
So which is it? Its an interesting question, and not one I have the answer to. And perhaps the answer changes over time. Perhaps the answer is “no” today, but maybe “yes” next week, depending on how events unfold in the world – Greece, Spain, Italy, Japan, etc. If Greek society ends up exploding on TV after a debt default, the Fed and indeed the ECB might well get permission to do practically anything…
FOFOFOA –
Ok, I understand better who your target saver is – not the regular guy, but someone who we would classify probably as top 0.01%. Certainly such a person would have a longer term timeframe, and they would feel less compunction about simply leaving a country or moving money when taxes became onerous. So I can buy them being more insulated from price-of-gold volatility – and relatively unconcerned about meeting debt obligations denominated in local currency with saved wealth.
A funny question emerges though. Do they have enough money to matter? Lets do a back of the envelope calculation.
Top 0.01% – estimate perhaps 60k people in the world, controlling 5% of total world wealth; income of maybe 25M/year; avg net worth 170M. Lets say they slosh 20% into gold, with the rest in real estate, businesses, stocks, and bonds. That’s $2 trillion. Seems like enough to move the needle. At today’s prices, thats about a ton of gold each. And their army of financial functionaries would take care of all the details as necessary.
I have to point out though, the whole thing fizzles if this small group decides not to embrace the concept.
I do get that gold prices currency, and this is much more apparent over the long term, even with the paper gold system we have today. And if you’re top 0.01% the daily (or yearly) fluctuations get lost in your overall portfolio’s value. That’s not at all true for the little guy however, who only seems to become upset when inflation exceeds perhaps 5% p/a.
One more question. What does “trade settlement” have to do with freegold? I thought freegold was primarily about wealth management and storing value via gold.
I must confess that my understanding of freegold is limited to a few readings a few years back and yesterday’s refresher reading of the freegold wiki page. Do you find the wiki page an accurate summary of freegold thinking? Is there a better resource I should look at?
FOFOFOA –
Thanks for the reference about credit suppressing the price of gold. I’ll go look at it a little bit later. What you say about old-style gold standards makes sense. It seems unlikely the price for something could be frozen forever and that this would actually work out well.
Regarding confederate currencies – I think in all the posts you might have lost who said what. It was RE who wrote about conversion from confederate currency to gold and back again, not I.
Now then, to my main question.
Might I ask, did you read my question/statement about gold and stores of value? I’ll summarize here in case you missed it.
I claim that regular people want something relatively stable (with respect to their debts and/or local currency) as a store of value. This is a key assumption of mine.
Gold, with a floating price, is not stable. The simple thought experiment about the uncertainty of outcome were you to borrow money, buy gold, and then try to repay the loan a few years later using that gold reveals that holding gold is a trade with risk, rather than a store of value.
And ultimately, I claim that people don’t really want to execute a trade with risk for the bulk of their savings. 10%, sure. But maybe not much more.
Certainly if their local currency is debased beyond a certain annual rate or if there is the prospect of some dramatic default or devaluation people will accept the gold price volatility, but absent that, I claim gold’s volatility will keep it a small part of normal people’s “stores of value”.
So that’s my statement. And a question too – how do you rationalize the risk trade that free-floating gold is in actuality, with the goal of a stable store of value that (I claim) is what people are really looking for?
RE –
Under a traditional gold standard (fixed price of gold to currency) you can always liquidate gold for currency. That guarantee is provided to you by the national Treasury, who stands ready to run off and print some notes for you in exchange for your gold.
And in an international gold standard, you can always take your gold to another country that is operating on the gold standard, and exchange it there. Stored value is preserved – which is the point of the exercise.
Under the old-style gold standard, conversion of gold into notes is not a taxable event.
Regarding Greece, I’m not so sure official taxation of gold exchanges into currency (certainly something that could happen) would be as effective there as it would be here in the US. I’d guess the black market for gold in Greece would be pretty lively, given how off-the-books so much of the economy is there. But I do agree, taxation is one very good weapon the government can use to maintain their monopoly on currency. At the very least, it will introduce some serious “friction” in the currency exchange.
My point to FOFOFOA had to do with savings, and why people save, and what sort of behavior they expect from their store of value. One thing they expect from a savings vehicle is price stability – and importantly, price stability with respect to their debts in their national currency. This stability WAS present under the old gold standard. Speaking from my own decision making, with a floating price of gold I would be very loath to take on debt, and buy gold, in the expectation I could pay down that debt with gold. (That’s the essence of a gold futures contract, minus some details about counterparties and delivery risk). Even absent any tax consequences, it still feels like holding gold is a speculative position.
I’m the first to admit the Fed over the long term has trashed the USD as a store of value. But people don’t live in the long term, they live month by month. And apparently, a 3% annual devaluation is something people seem to be able to live with – for the past 100 years anyway.
Your comment about national governments being unable to inflate debts away via the standard methods of inflation is quite a good observation I think. Standard inflation comes via debt creation. Direct monetization is still possible, but its the non-standard option.
However, imagine this situation. A nation heavily in debt, with foreigners deciding not to buy any more has the central bank monetize a whole bunch of debt. Then when that plan runs its course and the CB owns a huge chunk of the debt, the government nationalizes the central bank. At that point, all the monetized government debt owned by central bank is now owed by the government! Government debt has thus been “inflated away”. Its a trick that will only work once, of course. Then again, its kind of what Nixon did when he closed the gold window in 1972.
But I think your main point is still valid. Standard inflation doesn’t result in a decreased debt burden!
FOFOFOA –
Looking at the Exeter pyramid, gold is placed at the bottom because (under the old Gold standard, where gold had a fixed price enforced by the US Treasury) it is the ultimate zero risk investment. No interest, but no counterparty risk at all. Borrow $100, buy $100 in gold, and you can ALWAYS liquidate that $100 debt with the gold you own. Gold as a savings vehicle under a gold standard is the safest investment possible. But that safety is based entirely on the US treasury’s enforcement of the price of gold. Lose that enforcement, and gold is no longer the safest savings vehicle.
In the freegold system, the price of gold floats. Therefore, to put your savings into gold means you are taking risk. If you borrow $100, buy $100 in gold, and the gold price drops, you can no longer liquidate that debt.
Under freegold, gold is not “zero-risk savings” – it is a speculation. It no longer belongs at the bottom of the Exeter pyramid. That place now falls to the physical currency note, which will always liquidate an equal amount of debt.
Will gold have all the other effects you claim on trade, money flows, and the like? I haven’t thought that far, so I don’t have an opinion. But I do question regular people’s willingness to rely entirely on freegold as a store of value, solely because the price of gold is a speculation, and many people who want to store value focus primarily on safety – and specifically on the ability to reliably liquidate debt incurred under their national currency.
Anyone who bought gold at $1900 can attest to its imperfections as a store of value, at least recently. And of course those who bought at $300 can say what a good speculation it was for them. Neither things are characteristics of a good “store of value”. High reward is just the other side of the coin from high risk.
At best, I would see a composite system where gold is involved as just one international currency admidst a competing sea of other fiat currencies. I think that’s a fine thing, I’m fully in support, but – I don’t think its the quite the same environment you’re suggesting will arise.
Perhaps its just a matter of degree. I imagine some savings will be in gold, others will be in the national currency. At least, that’s what I’d do, especially since I have obligations in my national currency, and I would want a guarantee I could meet these obligations regardless of what the price of gold did.
The inevitability issue also bothers me. I’ve always wondered why big debtor nations (the US) would want a competing currency that would seem to work against their interests. A huge military power with the ability to self-inflate their debts away would not seem to be a likely candidate for espousing sound money. And other powers, less militarily capable, would not seem to be in a position to make sound money demands.
Please forgive me if these are arguments you’ve heard before, they’re just the first things that come to mind when I read about freegold.
ash – “The possibility of a Greek exit is weighing heavily on the markets as I write this today, as well as for the past few weeks, but have we really seen the full extent of panic that can result when it actually happens?”
First, as best I can tell, the Greeks really don’t want to exit the EU. The Greeks I know all say this, and Greek opinion polls seem to back this up. Perhaps the previous years under the mis-managed Drachma have convinced them their savings are better protected by Germans than by their own corrupt leadership.
Whether they will be allowed to stay in after defaulting on the ECB-owned debt – well that’s another matter entirely. But they don’t seem to WANT to leave.
As for news weighing on the market, I’d agree since May 1 the market (equity, forex, PM) has not been so happy about the situation. Everything was thrown under the bus and US dollar and US long bonds were bought.
But for the past week, it would seem that things have backed off a bit. 10 year rates are off their highs in Italy and Spain, SPX is rallying, PM may have found an interim bottom – and this support is all in the face of some pretty unpleasant headlines coming out of Spain, and a disappointing non-solution coming from the recent EU meeting.
So I guess my point is, when the market rallies on bad news (something seen sometimes at market turning points) I wouldn’t agree that seems like news weighing heavily on the markets.
But I will agree – the full impact of a default is most likely not “priced in.” That can has been kicked so often, traders are most likely expecting it to happen yet again.
Funny thing is, it might actually happen yet again.
From reading the Staniford post, “all liquids” production is definitely rising, while Crude + Condensate is not.
We all know that barrels of oil are not created equal from the EREOI perspective. We don’t have a chart for it, but I believe that Peak Cheap Oil is here now.
Oops, I should probably wait for your article to start commenting!
Illargi –
I would like to know which Stuart Staniford post you were referring to. Do you have a link you could provide?
The stress tests most certainly COULD HAVE included sovereign defaults in them, but didn’t. Yet another triumph of clever test construction, the only casualty being truth.
An MSM article from a few months back makes this point:
https://finance.fortune.cnn.com/2011/12/01/bank-stress-tests-europe/
By next month, 31 banks must show the Federal Reserve plans for how they would withstand some pretty dire economic scenarios. They include: an 8% contraction in GDP, the Dow Jones Industrial Average collapsing to 5,700 points by the middle of next year, and an unemployment rate rising from the current 9.1% to 13% by 2013.
But it seems the test isn’t factoring in one of investors’ biggest worries: Debt defaults in the euro zone.
The ECB’s LTRO was a fine example of money printing – if we assume the 3 year duration can and will be rolled over indefinitely into the future. 700 billion dollars being swapped for crappy bank assets isn’t quite as satisfying as if the ECB ran out and bought them outright, but as long as there is no outright default of the swapped items, the ECB can continue this game forever. And currently the ECB seems to be quite good at avoiding the impact of defaults on its own balance sheet. Houdini would be proud.
The market is a funny beast. We can all make guesses that “gold is saying this or that” – is gold saying today “the Fed can’t print money”? Or is it saying assumptions about imminent Fed money printing were built into 1790 gold, and Bernanke let some air out of that tire? Or did some large player sell a bunch of paper gold at a strategic moment into a modestly overbought gold market? Or had the market bid up gold $250 in the past 2 months expecting a trillion euros of LTRO, and when they only got half a trillion, a bunch of the bids for gold vanished? How about all of it at once?
It is curious that the equity markets (an awesome liquidity detector) gave Bernanke’s testimony a big ho-hum. And oil bounced back handily, as if nothing had happened. These things suggest to me its a complicated environment, not subject to a simple explanation.
But who really knows for sure. Certainly, I think Ash is right that there are serious political limitations on Fed money printing. However I also think that if markets turn south, a great chorus will arise for Papa Fed to wheel out yet another injection to save the markets once again from lower prices.
Since 2010 we haven’t had a real test of these limitations. Things still appear normal. If the equity market corrects 20% and no money printing occurs, then we can say pretty definitively that those political limitations have real teeth. Until then, I believe it is one of those “known unknowns.”
My two cents, for what its worth.
If your choices boil down to deposits in a bank, money market accounts, and Treasury Direct, its pretty clear to me that removing the middle men is likely the safest approach.
* Paper FRNs – safest cash vehicle. Legal tender for all debts public and private. Cash is ultimately safer than debt, since there is no counterparty risk. However, they can always catch fire and burn up, which is not ideal.
* Treasury Direct – safest electronic deposit; can’t be stolen, but could have maturities extended arbitrarily (as will happen in Greece).
* FDIC insured deposits – can’t be stolen, could be impounded “for a while” if your bank goes under, but ultimately are only as good as the FDIC’s ability to borrow from Treasury, which depends on the Fed’s ability to monetize in a serious crisis.
* Treasuries in an account – can be stolen as they were at MF Global
* Money Market accounts – could break the buck, can also be stolen as at MF GlobalTo me, its first cash, and then treasury direct for safer USD storage vehicles. And if I lived in Mexico, I think I’d pick Treasury Direct. I don’t think I’d want a big pile of USD cash lying around my villa…
If you are dead certain that hyperinflation comes next, then of course cash isn’t the right choice.
