December 19th, 2014
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Why Isn’t Gold Higher?

by Rick Ackerman on February 1, 2013 12:01 am GMT · 60 comments

My colleague and erstwhile nemesis Gonzalo Lira posed the question above in a recent essay, and it is indeed a most puzzling one.  Given that the world’s central banks — joined most recently by a shockingly reckless Switzerland — are waging all-out economic war by inflating their currencies, shouldn’t gold be soaring,?  In fact, prices have continued to meander between $1500 and $1700 since September of 2011, when gold topped out at $1945 after a spectacular run-up from $728 in just three years.

What could have caused the bull market to go lifeless since then, even as more and more countries appear hell-bent on devaluing their currencies to keep their exports competitive? The answer that Lira has offered is novel and engaging, but it did not persuade me, perhaps because the underlying conceit seems forced. For he has likened the current gold market to the one for credit default swaps (CDS) prior to the Great Financial Crash of 2008.  Because swaps provided insurance against bond defaults, they rose in value as the crisis mounted. But then, suddenly, they ceased to appreciate, Lira says, because “the markets collectively realized that the counterparties to those CDS contracts might not be able to pay up.”  This, Lira asserts, is exactly what is occurring in gold, as paper certificates have come to greatly exceed the supply of ingots held in vaults. The result, he says, is that “the global precious metals markets are essentially a game of musical chairs, with far fewer seats than players—far less gold than gold holders. And market participants collectively know this. Which is why they don’t trust their counterparties. Which is why gold isn’t rising like a shot.”

I think there’s a more convincing explanation for why gold isn’t rising, and I will get to it in a moment. But first let me say that my intention is not to assail Lira or his ideas. Even though we had a nasty spat on the Web a couple of years ago over the inflation vs. deflation conundrum, I’ve always found his essays insightful, original and well wrought.  Putting aside our differences over whether the inevitable collapse of the financial system will be brought on by hyperinflation or deflation, we probably agree on 90% of the things we write about.

‘Vague’ Insurance

This time, however, his logic would seem to equate apples and oranges. To begin with, the swaps he would compare to gold are a contractual form of insurance against default risks in certain types of financial instruments. As such, it is at least theoretically possible to calculate exactly how much risk is insured, even in a market as large as mortgage securities.  Gold, on the other hand, and relative to inflation, offers only a vague kind of insurance. Moreover, unlike swaps, gold does not give its owner a claim on anything.

Lira’s argument might have been more persuasive if he had simply asserted that an effectively unlimited supply of “paper gold” has been absorbing enough demand to suppress the price of physical. But if, as he evidently believes, ruinous inflation, never mind hyperinflation, were immediately in prospect, then we should have expected to see the demand for bullion soar, pushing up paper gold no matter how large the supply.

Physical vs. Paper Gold

Lira lumps paper and physical together to argue that “the current spot price of gold is reflecting market uncertainty as to who has actual gold, and who has worthless paper certificates of gold.” Again, if this were so, then we should have expected uncertainty itself to have spiked the preference of investors for physical over paper, overwhelming carry-traders and other feather merchants playing gold from the short side. And if investors were indeed worried about whether the insurance they hold is properly matched to the endgame, would they be buying the Treasury paper of a country that owes so much more than it will ever be able to repay?  In fact, the risk of a U.S. default is the last thing on their minds at the moment, and it will likely remain so until the day when events no one can predict cause creditors or debtors – it will have to be one or the other – to get stiffed.

In the meantime, whither gold?  My own theory as to why prices aren’t bounding above $2000 is simply this: the central banks have so far failed to produce any meaningful inflation. The untold trillions worth of stimulus they have shot at this goal have barely kept deflation at bay. Granted, prices for groceries, health care and some other necessities have gone through the roof. But the inflationary impact of all of these things together is inconsequential in comparison to the deflationary down force of a quadrillion dollar financial edifice that remains in a state of incipient collapse.

Hyperinflation Scenario

Under the circumstances, I continue to believe that deflation, rather than hyperinflation, will wreck the global financial system. I did not, by the way, “switch sides” in this argument as Gary North asserted in an essay he wrote for LewRockwell.com.  It was when the debate turned unendurably ugly that I was impelled to take a closer look at what some of the hyperinflationists were saying.  Peter Schiff, for one. In his scenario – which, along with the running debate at FOFOA blogspot is the most persuasive case for hyperinflation that I’ve come across — a run on the dollar would force the Fed to absorb the entire supply of Treasury paper at auction.  An unintended result, says Schiff, is that ostensibly unsupported bond markets such as corporates and municipals would collapse, forcing the Fed to extend open-ended buying to all fixed-income securities.

This would most surely trigger a hyperinflation – would in fact be a hyperinflation.  However, this scenario, and virtually every other hyperinflation scenario of which I am aware, envision hyperinflation occurring as a result of political decisions made, Fed actions taken and markets “rescued.”  My gut feeling, however, is that the collapse of global markets will be so swift as to preclude intervention, let alone rescue.  Pent-up forces will take their course, and the entire financial system will experience an instantaneous collapse for which the May 2010 Flash Crash will seem to have been just a warm-up.

Whatever we might predict about the outcome, one result that seems entirely likely is that banks in the U.S and elsewhere will not open for business the next day. Over the short-run — a few weeks, perhaps — this would be ruinously deflationary, since a hitherto inexhaustible supply of digital money will have become inaccessible via checks, ATMs or charge cards. The fragility of the clearing system that allows such money conduits to function will be tragically obvious by then, as will the distinction between cyber money and the real stuff.  And you had better have some of the “real stuff” stashed away in your home, by the way, since, The Morning After, that’s the only kind of money Safeway cashiers and gas station attendants will understand. Nor should you expect them to be up to speed right away on the junk silver you’ve socked away, since, at the retail level, although perhaps not in barter circles, pre-1964 coins are likely to be treated the same as the pot-metal coins that have driven silver dimes, quarters, halfs and dollars into secure storage.

Gold Hoarders, Beware

A couple of caveats for gold hoarders. Don’t count on exchanging gold at $5000 an ounce for something with high intrinsic value, such as farmland.  For all we know, supply-chain disruptions could be so severe that you’ll pay a Krugerrand just for a loaf of bread. And while it has always been possible in theory for short-squeeze pressures to push gold well above the $5000 level, this is most unlikely for reasons that Lira’s essay implicitly recognizes. Consider who is short all of that paper gold:  carry-traders such as Morgan Stanley, J.P. Morgan, Goldman Sachs and other bullion bankers who have always been able to borrow gold for next to nothing.  The likelihood of regulators forcing them to make good on their paper gold obligations can be dismissed in advance as negligible.

Despite the seeming paradox of intrinsically worthless fiat money gaining traction in a post-apocalyptic economy, there will remain the possibility of a hyperinflationary spike.  It could happen if, say, the Fed were to attempt a lump-sum pension payment to all government workers. For political reasons, this would have to be matched by similar windfall benefits to private-sector workers in the form of Social Security, welfare payments, unemployment compensation and food stamps.  The Catch-22 of this approach is that any benefits in excess of what is needed to keep the economy functioning, if only barely, would touch off an inflationary spiral.  Imagine how the world would react if someone in Congress merely mentioned that The Government was going to cover all of the obligations and liabilities of public and private pensions and health plans.  If and when that day arrives, I will have no argument with Lira and the hyperinflationists about the likely outcome. Click here to sample Rick’s Picks commentary and trading touts free for a week.

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{ 60 comments }

Jill January 30, 2013 at 4:46 am

Hi, Rick. Interesting essay. One part I don’t understand is here: You say that “a hyperinflationary spike…could happen..if, say, the Fed were to attempt a lump-sum pension payment to all government workers.” It’s hard for me to imagine a situation in which they would want to do that. Can you imagine one?

Rick Ackerman January 31, 2013 at 6:39 pm

Easily: When the troops are called in to quell riots after the government workers’ monthly checks are NOT in the mail.

Chris T. January 30, 2013 at 4:49 am

Rick:
” hell-bent on devaluing their currencies to keep their exports competitive? ”

That was yesterday, esp. for countries like the UK and the US.

“…a run on the dollar would force the Fed to absorb the entire supply of Treasury paper at auction. ”

We’re almost there:
The Fed is sucking up 1.1T of gov. debt, so that is about next year’s deficit.
Leaving only the roll-over amount needing refinancing.

It’s interesting that you should go back to this i/d debate!

I still think that Antal Fekete has it right here, and esp. with respect to your “hold real paper money at home” comment, he long ago pointed out, that there will be a time, when physical paper money will actually be in short supply, and thus have value from that.
He picked up on the distinction of electronic vs. paper money long ago.

AS DID our masters:
all over Europe there is a drive on to eliminate “real” money from public use, Sweden is at the forefront (one again, Riksbank anyone).

No different here, you know what happens if one starts eliminating plastic/digits:
at the very minimum, a slant-eyed look, and soon one is on the “must report suspicious activity” list.
DHS even defines cash-only use as a sign of terrorist activity.

As to asset devaluation, vs inflation in consumables, another point touched on by Dr. F. in his “can we have it at the same time” comment.

Finally, and Fekete yet again: any bifurcation of the gold market into real vs. paper gold touches on one of his favorite topics:
the disintegration of the basis….

Mac January 30, 2013 at 6:53 am

Hello,
People want Gold for protection. It is money, unencumbered by the “spin” of the lying actor politicians.
If what Japan is doing is kosher, well, it is , what?, to easy to see why Gold is sought out?
Add in Europe and USA money binge creation out of the air, and, what?, is it too difficult to see what paper is and is not…?
…ok, options expiry over and fed blab today, then the crooks can stop the obvious manipulation…for awhile….

C.C. January 30, 2013 at 7:17 am

I see (2) key fundamentals: Confidence in the host currency and realization/acknowledgement that precious metals, namely gold and silver, are in fact, $money. So far – in the U.S. mainstream anyway, one is of no concern (yet), and the other still brings sarcasm & scorn.

Much of the discussion surrounding gold/silver tends to be U.S.-centric, as if the galaxy itself revolves around our economy. Meanwhile, other countries continue to purchase gold & silver apace, because history is speaking to them – and they are listening. I’m paying attention to what our new-old Cold-War enemies are doing, along with a few others who have some history of debasement, dislocation, chaos and war under their belt. They seem to know what time it is. We don’t.

Cam Fitzgerald February 3, 2013 at 9:15 am

Well, CC, they seem to know to put the physical product in their vaults. The paper traded gold like GLD and SLV meanwhile have sucked the life out of the speculative metal markets by diverting investment dollars away from physical products thus distorting the usual supply/demand fundamentals. The effect depresses real gold demand and thus flattens prices which defeats those investors going long for protection against the risks of devaluation. It appears to me that paper gold is therefore devaluing actual gold.

Jon January 30, 2013 at 8:52 am

Two things everybody needs to look at. In order to make a final conclusion. If you follow the SmartMoney, the bankers, governments the rich are all buying gold and silver.

“Currency wars” by Jim Rickards

The petrodollar system a must read! There is no more important document you can read.
http://ftmdaily.com/preparing-for-the-collapse-of-the-petrodollar-system/

Hans Peter January 30, 2013 at 2:34 pm

Shockingly reckless Switzerland?? What the heck did Switzerland wrong again?

If all investors are buying Swiss Francs with USD, Euro and Yens which are printed out of thin air, should the Swiss National Bank let the Swiss Franc go through the roof? Did you ever think about all the exporting companies of Switzerland? How could they survive if the Swiss Franc goes through the roof and so all other currencies crash to never seen levels???? I always was thinking that Switzerland would be expensive enough…

But sure, the FED is printing the money to buy the bonds/bills from the Treasury. This is way healthier…

And honestly: I agree that we will see rather deflation than hyperinflation. Hyperinflation will never happen in the US Dollar. The system would break down before hyperinflation could set in…

Rick Ackerman January 31, 2013 at 6:44 pm

For starters, the Swiss have blown up their balance sheet so that their exposure to euros, dollars and other currencies now exceeds Switzerland’s GDP. Also, they have purchased, not just currencies and debt paper, but foreign equity shares. And, just a couple of days ago — this is NOT reckless, just desperate — they raised the storage fee on gold to 20% from a previous 0.1%.

Hans Peter February 1, 2013 at 2:44 pm

Dear Mr Ackerman
Don’t know what you would do as a central banker of Switzerland. The forex market of the CHF is just way too small for all the money which looks for safe haven in Switzerland. The Swiss Central Bank HAS to invest abroad. Imaging they would have to invest 400 bln in Switzerland – which is about their own GDP. Other central banks like BoJ invest their liquidity in equities too – since decades.
And concerning the storage fee of Gold: The Swiss banks increased the fee not to 20%. They increased it BY 20% from previous 0.1% – which is still way cheaper than in other countries (incl US as I believe).

&&&&&&

There’s no getting around the fact that the Swiss have made a HUGE bet, and it is quite risky because a positive outcome — i.e., keeping flight capital OUT of Switzerland – is by no means assured.

Thanks for the correction. I’d misread the following in the Financial Times: “Fees vary for different clients, and traders said that the increase had not been uniform but that it was generally in the order of about 20 percent. Vault fees are typically about 0.05-0.1 percent of the value of the gold.”

RA

Andrew Gutterman January 30, 2013 at 2:57 pm

What’s interesting in this ongoing debate is the insistence of the gold bugs that the bull market still has “legs” because the public has not jumped in full force, hence gold will soar to $5000/oz. (Ditto for the stock market as well)

What they forget to account for is the old Black Panther slogan: “All Power to the People!” And the People with Power are broke and downsizing, which is one reason the FED has so far utterly failed to make a dent in growing the economy by cutting rates to zero. The People have all the Power, and they are exercising it by not Spending.

Economics is People and Money, but 99% of economists don’t factor in the People, assuming they will do what they have always done for the last 40 years: Spend money with wild abandon.

My younger brother makes over $100K per year. Wife and a 14 year old daughter. By any reckoning he should be moderately wealthy. He is not. He definitely doesn’t have any extra savings or income to chase the price of gold higher. Neither do tens of millions of other consumers.

Everyone is broke, in one form or another, with the possible exception of the top 10% of income earners, and only those who are free and clear.

I’m really curious to know what is going to happens to all those idiots who have been buying all those guns when the economy finally gives up. I wonder how they will convert guns to food?

The only question that remains unanswered is WHEN? My hope is for another 2-4 years of nothing happening so i can pay down debt and accumulate CASH. If I can do that then I don’t care what happens after. (Unlike many prognosticators I’m not expecting the end of the world as we know it)

Andy

Oregon January 30, 2013 at 5:06 pm

Andy: “I’m really curious to know what is going to happens to all those idiots who have been buying all those guns when the economy finally gives up. I wonder how they will convert guns to food?”

The conversion of guns to food (or anything else) is dynamic and depends on how desperate the person on the trigger side of the gun is in relation to a ratio in which the person on the barrel side of the gun must quickly calculate the value of life vs. possession. This form of exchange can be relatively common in other parts of the world, and probably won’t take long to figure out if it becomes necessary here.

Andrew Gutterman January 30, 2013 at 11:48 pm

I’m thinking more of the lost money that went into the purchase. You cannot eat a gun. Nor is civilization likely to collapse to the point where you need a gun for survival. So the booming sales in guns is just a vast transfer of wealth from the buyer to the seller, whoever that may be.

Andy

gary leibowitz February 1, 2013 at 9:07 pm

Sorry Andy but after 4 years of zero rates and trillions of dollars buying back government securities it has worked. Savings rate has increased, corporate earnings at very high levels, emplyment now at 200K per month, manufacturing levels increasing, wage improvement, and so it goes.

The assumption all these years was it wouldn’t work. My assumption was it will work all too well. There will be a price paid for the massive spending to stimulate. Is debt levels at a point where we can absorb the inflation increases sure to follow? Nope.

I don’ t understand how you can ignore the government data. If it wasn’t true corporations wouldn’t be making money. Watch how this will be turned on its head very soon. Worry over inflation hitting us hard. BTW, corporations hit a brick wall when inflation and government curbed spending hit. This will be a double wammy. Give it time.

Tiburon January 30, 2013 at 4:08 pm

I want to preface by saying that despite over five years of reading and researching, I still feel quite the ‘tyro’ in regards all these macro-issues of the economy and financial system. Sometimes I think I ‘get it’, but then some new bit of information arrives to leave me questioning all my assumptions. But here goes: –

There seems to be a perennial question that centers around the adage that “you can’t eat Gold”, and that in either an hyper-inflationary or hyper-deflationary collapse, the immediate utility of Gold would be very much questionable.

It has come to me that I must agree, though certainly despite constant financial pressures personally, I nonetheless try to avoid ’spending’ my very modest PM holdings, and the ‘why’ of that for me, is I hope clearly explained further on.

I think Rick’s advice, oft repeated by folks who think about these things, to hold substantial ‘cash’ outside of the banking systems, is salutatory. Banks may be closed but businesses will still be open, for the most part – at least for a period of time.

But here in Canada, I try to imagine what steps the government and Bank of Canada would take, to allow the charter banks to re-open their doors following such a catastrophic collapse, of whatever nature.

(I’m not speaking here of a ‘Carrington X-Class Flare type of event’, in which scenario ‘all bets are off’, and ‘prepper’ philosophy the best defence, if any – water, food, and personal defence)

And it came to me, that the international banking and central banking community, perhaps as ‘represented’ by the IMF, would immediately scramble to issue a new World Currency, such as Jim Rickards speaks of in Currency Wars – Special Drawing Rights – SDR’s.

I say this because it’s difficult for me to imagine a financial collapse that would not have as a principal component, a monetary collapse as well, or at minimum a fundamental revaluation of the national currency (though I need to think more about this, I suppose).

Any such “new” international fiat currency would, to me, demand a backing of some real assets, most likely a basket thereof, and I cannot envision Gold not being at the table for this, especially considering its’ “stock-to-flow” ratio – and by implication the ’strong hands’ who are holding the stock, the uber-wealthy and increasingly, central banks.

So while here in Canada, where for reasons inexplicable to me the Government long since divested itself of Gold in Reserve, even though the ‘value’ of a Canadian Dollar would be supported relevant to our ‘in the ground’ possession of a range of valuable commodities, the Government would still need to acquire Gold rapidly to facilitate international transactional activity.

And so, in much the same way that we’ve seen Turkey, today and already, encouraging (successfully, apparently) deposit of physical Gold into the banking system by raising the reserve requirements for gold to some +30%, here in Canada the Government would invite the citizenry to do the same, and would offer reasonable valuations in re-valuated fiat to do so.

Given the admitted Quadrillion $ financial edifice of which Rick speaks, I personally can’t see that valuation as being less than $10,000/oz, and perhaps much more.

In the meantime, I see the PTB in the game, the JPM’s, Scotia-Macotta’s, HSBC’s and the like, grudgingly allowing the spot price to rise over the near term, as it has been doing for well over a decade, between roughly 7% and +20% annually.
So it seems to me a reasonable ‘insurance policy’, with modest purchasing power protection as a side-benefit for savings.
Just as anecdote, I note that the ’splash page’ on my TD-Canada Trust online banking site has mounted an advertising campaign to invite customers to purchase both physical Gold and Silver, and TD-issued certificates (paper, of course). This is New, and is to me either a recognition of a changing investment dynamic, or an ‘educational’ move for more complex reasons (?).

I’m still waiting for Eric Sprott to convert his purchase of the Continental Bank here in Canada, to a ‘deposit-only’ institution accepting physical PM’s, fully convertible into fiat for ATM purposes. I’d certainly be a customer, the very next day – and I suspect (though can’t prove) that I’d hardly be alone.

Chris T. January 30, 2013 at 11:12 pm

two comments:

“you can’t eat gold” is so common, yet focuses on the wrong thing.

If one is oNLY concerned with immediate or near term survival, then, very true.
But anything OTHER than gold, that “money ” is converted into, and that is thought of as being an asset, such as land, artwork, jewelry, etc. is in exactly the same boat, and some is worse (land), because its not transportable.

For the above time-frame, only real prepping (whatever that is) will work.
But if one still has assets left over after having done as much prepping as feasible, then how to protect those extra $$ from a collapse of the extant currency system?

Here, gold really is the best option, for a sizeable portion at least.

In the context of these debates, people love to point to early 20s Weimar Germany, and all we know about that hyperinflation.

But, add 20+ to that, and move the city eastwards a few hundred miles:

ex: Koenigsberg/Kaliningrad.
What other than gold, that MIGHT have been taken along by the refugees from that city would have had any function for them in the future?
Land: gone
Equity ownership: gone (this is even true for most equity in pre-WWII German firms in say Bavaria), and so on…

So, gold is for the time AFTER the collapse, for the rebuilding phase, and the future.
That’s why gold-bugs who think like this are actually optimists: they believe it can and will get better after hour 0.

As to the Sprott / Bank comment:

forgetting the tax on the gain!
In the US, appreciation of gold is treated like other collectibles, the worst rates apply on the “gain”.
They tax the nominal one of course.

In Europe, where they still permit certain types of PMs (certain defined coins) to be bought/sold without taxes, and the gain is not long-term taxable either, they are shrinking that pool more and more.

So, a deposit gold / get daily “cash value” in currency back model wouldn’t work:
treated as a taxable event.

Tiburon February 4, 2013 at 7:17 pm

Well-reasoned, Chris T
My thinking is similar to yours on this question.
Regards cap gains tax – I agree there would need to be a re-thinking of valuation for tax purposes in Sprott’s bank model. Fair-is-fair, though, so if there would be daily calculations of taxable events in using Au and Ag as ‘money for deposit’ for purposes of daily transactions in fiat, then conversion to fiat on a drop in spot price would constitute a tax loss, if I understand it correctly. In Turkey I believe it’s already being considered as ‘cash’ when deposited into bank accounts.
It’s a problem, yes, the taxes – but maybe not so punishing (for Canadians), at least as long as the government preserves it’s present tax handling; this is from Greg McNally at International Man: –

“Commodities, including all metals, are generally treated as capital assets and subject to capital gains tax on sale or deemed disposition. To calculate your taxes payable on a sale you would take 1/2 of the net profit (sale price – cost) and add that amount to your ordinary income and multiply the income at the applicable tax rate in the province you live in.

A few illustrations:

Illustration #1:

You reside in Ontario and your current yearly earned income is approximately $250,000, which puts you in the highest tax bracket at 40.16%.

A few years ago, you bought 100 oz. of gold maple leafs at $1,000/oz for a total of $100,000. You sell all the coins at the end of 2011 at $2,000/oz for $200,000, leaving a $100,000 gain.

Your tax bill on just the capital gain will be half of the gain ($50,000) x 40.16% = $20,080.

Illustration #2:

You reside in Alberta and your current yearly earned income is approximately $70,000.

A few years ago, a relative left you $100,000 in his will after taxes, of which you bought 100 oz. of gold maple leafs at $1,000/oz for a total of $100,000. You sell all the coins at the end of 2011 at $2,000/oz for $200,000, leaving a $100,000 gain.

Your taxes will equal half of the gain ($50,000) plus your $70,000 of ordinary income multiplied by whatever the marginal tax rate is in Alberta for your total income (i.e. $120,000). The portion attributable to just the capital gain will be approximately $17,300.

The sale of a capital asset held in a Canadian corporation is taxed at half the gain multiplied by the top marginal rate in the province where the corporation is resident. There is then a credit given in the corporation (called the capital dividend account) to allow the after tax dollars to flow to the shareholder without additional tax.

Unless there are capital losses in the corporation that you can take advantage of or some other planning considerations beneficial to a corporation, the taxes payable on the gains created by the bullion should not be less in a corporation than you would pay personally.”

No federal tax on purchases, provincial tax varies, none in Ontario anyway.
That said, likely advisable to store a fair bit of one’s’stackables’ in that not-so-seaworthy boat.

John Jay January 30, 2013 at 4:58 pm

Why do the prices of precious metals and Treasury paper always move in exactly the opposite direction that supply and demand should dictate?
Easy.
The oligarchs can rig any market, steal “segregated” funds from brokerage accounts, front run trades, use the same mortgage as collateral in 10 or more MBS issues, you name it.
And they know no matter what they do, they own the government and will face at most a trivial “fine” and continue on their merry way.
I include the Fed in the oligarch camp.

My favorite piece of evidence is the price action in ZB/ZN futures.
Somewhere I have my old hand posted daily charts for ZB from about 12 or 15 years ago.
I can remember tremendous daily volatility where you could make or lose $1,000 as soon as you hit the buy or sell button, it was moving that fast.
That was supply and demand in action before the Fed rigged the auctions and intervened in the day to day markets.
And 5 or 6 percent for a 52 week T bill reflected that fact.
You could make that 5 or 6 percent, and use the T bill for margin in your account.
Those were the days my friend!
Now, the CME margin for ZB is just $3,780, or almost half that depending on the broker you use.
On a contract with a value of $142,000.
And 52 week T bills pay nothing.
Because unless it is big news day, ZB just sits there, unless the Fed sends a puff of liquidity into the market to keep the price levitated.
It’s a rigged market.
In the markets they are concerned with, Treasury paper, the Dow/S+P, PMs, the Fed gets the job done.
In other commodities, the oligarchs are on the job.
A small time inside trader or market rigger gets hauled before Pilate and then crucified once in a while, just to pretend the laws are being enforced.
But that’s the extent of it.
The biggest threat to the Treasury market is if anything ever goes wrong with the orchestration at an “auction” and the issue goes bidless and the players just step aside to see where there is real support.
That will always be the dream anyway.
Dreams of fair markets and a functional Justice system is all we have left to us.
Dreams.

Robert January 30, 2013 at 6:03 pm

I’m sure today’s missive will bring passion (and vitriol) from the responders.

For me, the only sentence worth commenting on is:

“For all we know, supply-chain disruptions could be so severe that you’ll pay a Krugerrand just for a loaf of bread.”

- I guess if such a scenario should come to pass, I should be relieved for holding enough Krugerrands to buy more than one loaf of bread… While I should pity my fellow humans who hold no Krugerrands on that day…

Yes?

You “inflation versus deflation” debaters are all nuts in my opinion – you ALL share the EXACT same viewpoint, and yet you argue over labelling, semantics, and vocabulary.

Who cares WHAT we call the concept?

Time for all of you to go read my August 2010 essay on Rick’s site yet again…

Steadily rising food valuations..? Check
Steadily rising energy valuations…? Check
Steadily declining technology and durable consumer good prices and valuations…? Check
General consumer indifference toward new credit and borrowing to finance non-essentials…? Check

That last point is the reason all of you are lost in the woods.

Some argue that credit is declining because interest rates are falling, while others say that the manipulative suppression of interest rates is the reason people are not depositing savings in order to provide enough financial leverage for new loans.

I say “Who cares why?” What are YOU doing to protect yourself from either scenario?

If I told you that there was a 100% chance that you were going to be murdered by someone tomorrow, somewhere in the city you currently reside in, would you spend your day trying to figure out exactly where? Would you spend your time trying to figure out who?

Or, would you pack up your crap and get the hell out of Dodge?

Now, let’s talk about Gold-

There is only one reason Gold has been consolidating in price the past couple of years: not enough people believe what some of us take for granted: that Gold is the ultimate extinguisher of debt; Gold is the ultimate provider of liquidity, and Gold is the ultimate measure of the real stored value of the supreme form of capital (human labor and effort) over time.

Just give these people time- they will come around eventually.

Markets move through time – they are not linear simply because they swing up and down day to day.

The regularly occurring daily Gold price daily swings whereby the futures market gets hammered in New York around 8:30am, while the LBMA ships more physical bullion over the counter during this same time period, is nothing more than a tradeable market heartbeat.

It is unreasonable to assume that the futures price of Gold will be driven to zero on the same day that the last ounce of London physical gold goes into hiding.

The Physical Gold price can not simultaneously rise to infinity on zero supply, while the Comex futures prices fall to zero on infinite supply.

One of these markets will snap.

Some people think that the Gold bull market is over, and that stocks are the place to be. Bully for them.

Others believe that the economy is set to tank again (this time globally) in the face of accelerating currency wars; and they cringe in fear of what the consequences will be.

Again, I just don’t CARE which option comes to pass. All I care about is making sure that what I work to earn today still has some form of economic exchange value tomorrow…

That’s it.

rickj January 30, 2013 at 7:02 pm

I think the fact that Germany is going to receive only 1% of its total reserves (equates to a bit over 2% of the reserves stored in America) back yearly from the Fed/Treasury between 2013 and 2020 tells us something, just as a reclassification of gold reserves at West Point to “deep storage gold” (think yet to be mined gold), and Greenspan’s famous testimony before Congress regarding the danger of gold blasting off higher (“Central Banks stand ready to lease gold into the market should that occur.”) tells us all we need to know.
We are into a “lesser evil” scenario here, at least from the point of view of the PPTExchange Stablization Fund, in my opinion.
I agree that a hobby farm, far away from the city, well stocked with food, etc. will prove to be of more use than a safety box filled with gold.

Jill January 30, 2013 at 9:07 pm

Interesting article. I don’t completely agree with him, but his ideas are something to ponder, in order to come up with one’s own view of the issues. Some of the hidden parasitic cartels he doesn’t mention are the industries that benefit from the fact that it is illegal to grow hemp in the U.S. Hemp is an amazing plant. Growers of such plants, if allowed to grow it, would compete with cotton, chemical, & oil/plastics industries, just to name a few. It’s likely that such industries are donating to Congress folks to keep hemp illegal. If marijuana itself were legal all over the U.S., at least for medical uses, it would be big time competition for pharmaceutical companies– e.g. in glaucoma & cancer treatment. And it doesn’t kill anyone, unlike pharmaceutical drugs which occasionally do.

http://charleshughsmith.blogspot.com/

America’s Four Socioeconomic Classes
“A titanic political battle is brewing between the parasitic aristocracy, the dependent class and the two classes creating value with their labor.”

Erin January 30, 2013 at 9:30 pm

If the price of gold is to move up, the solution is relatively simple..”Gold” needs to find a way to funnel campaign funds to the Obamination party agendas. The trick these days is to get on the right side of the lawbreakers as evidenced everyday by the continued assault (government picking winners) on business. Gold can be a winner too! Dictators have always loved Gold and skeet shooting!

bc January 30, 2013 at 10:57 pm

“creditors or debtors – it will have to be one or the other”

Aye, that’s the rub, isn’t it? The eternal struggle as it were.
Politically, we have lot’s of both, but if you include pensioners and retirees with the creditors I think it’s no match, the debtors will be expected to pay with real (un-devalued) money. No escape by hyperinflation I’m afraid. Some inflation yes, along with lot’s of default will soften the blow to our weakest debtors, but anyone productive will be saddled with real burdens, be they paying down old debts on non-appreciating assets, paying more taxes, or opening the doors for long lost relatives seeking to crash on the couch. Stop dreaming about getting a free house and realize that your house was a crappy investment path forward, you’re going to have to pay down your debts or lose everything, and there’s no where to hide from what’s coming; hard times.

Rick Ackerman January 31, 2013 at 6:56 pm

This is indeed a crucial concern — one that could determine, more than all other factors, how the deflation/hyperinflation conundrum plays out. The day-to-day expenses incurred by pensioners will be very real, and meeting those expense will require actual cash dollars extracted from the pockets of the few who still hold jobs. In political terms, this situation portends a collision between the irresistible force and the immovable object.

Chris T. January 30, 2013 at 11:16 pm

Had to pass along this quote from Bill Bonner today;

“…[another boom] …And so the middle class is all set. Jobs… housing… stocks — all going up. Rip-Off Alert!

But wait. It’s not another boom that the middle class is headed for. Instead, they’re heading for another big rip-off!

Why?

Because the middle class is still the primary victim of the world’s biggest scam. The feds create more money — more than $1 trillion a year. The money doesn’t go to the middle class. It goes to zombies. Bad companies with good lobbyists. People on food stamps. Government employees.”

Gary, sound familiar?
That’s how it’s been forever…

gary leibowitz January 31, 2013 at 12:11 am

Her comes the simpleton again, me!

Gold has had an absolute fabulous run and perhaps it’s nothing more than consolidation. This metal, like silver seems to run up in spurts. If the landscape changes, like an economic crash, deflation, or even accelerated inflation due to a heating economy, the metal will once again move in spurts. This last year was kind of dull in the sense that the economy has been on a slow recovery with world government’s nursing it along.

nonplused January 31, 2013 at 1:31 am

Actually if you plot gold on a logarithmic it is now stuck right on the bottom of a trend line that goes back to at least 2004. If viewed from that angle the price is coiling to spring over the $1945 high and never revisit it.

Actually, the logarithmic chart kind of frightens me because it’s so straight. It’s like the price is being carefully managed upward but with a large amount of noise.

nonplused January 31, 2013 at 1:50 am
Phil C January 31, 2013 at 5:30 am

The 2008 breakdown was let to happen and they will avoid another one like this and keep rolling with the money needed so it doesn’t implode.
The 2008 meltdown allowed a bunch of people to be scared since then of such a repeat and will keep their money in treasury bonds, thinking it will be the only thing standing like then. Brilliant move.
Meanwhile, the money is getting destroyed slowly while the economy implode and hence, the govt will lose income and spend more, driving them into more money printing and more inflation. At some point, an event will trigger the coup de grace that will trigger the total lost of confidence on the dollar and hyperinflation will start.

Rick Ackerman February 1, 2013 at 6:49 pm

Shouldn’t you have capitalized ‘They,’ Phil? I mean, all-seeing, all-powerful men such as we have in Government are…Gods, right?

Ed Hoarse January 31, 2013 at 7:03 am

Hmmm…I think I will stick with your recommendation of shoebox of fiat change and anything extra will have to go towards a few bags of rice, bottles of water and a rocket stove and few boxes of shotgun shells. When the JIT system locks up, basic survival is more important than pm’s, digital stocks and bonds.

Chemical January 31, 2013 at 8:48 am

I will briefly share two experiences with you … you can draw your own conclusions …

I tried to withdraw 15k in cash from a B of A branch. They almost had me arrested. “you need to call us the day before you want that much cash” …. “we can only give you 5k” … “go to another branch” …. so I went to another branch and they said the same things “all we can give you is 5k” … and I’m not in a small city. I’m in L.A. … they don’t want you me or anyone having physical cash. that’s my new buzz phrase “physical cash”. they want you to have digital cash. that’s my other new buzz phrase “digital cash” …

Next, back when silver dipped in the disaster of 2008, i tried to buy physical when it was 8 or 10 bucks an oz. the lady at my coin store rudely told me “we don’t have any silver, we’re not getting any silver, don’t call back” … thank you. there is a Wall Street price and then there’s a real-life price. The real-life price for gold and silver are way higher than what you see on the kitco ticker. way higher. as soon as the divergence between what’s TRULY available and what’s supposedly is realized, you will see a whole new ballgame.

mario cavolo January 31, 2013 at 11:25 am

I was afraid there was a story like yours out there regarding cash and banks in America. I was also watching a “Good Wife” episode covering how a police officer may take your $10,000 cash you are carrying in your car simply because it can be suspected as illegally gotten money from selling drugs..unbelievable but true.

This is very scary stuff. I could see starting 20 years ago in the states that the entire system wants everyone on plastic, I believe more than anything, so they can track every dollar and collect every possible tax and keep an eye on the details of your life, all of which is what happens when you live on plastic. The world of marketing chimes in by offering you all kinds of incentives to use plastic, so becoming complicit to have every cent you earn and spend be clearly identifiable in the system. Great for the system, not good for you the individual.

Here in China, on the other hand, we’ve got ourselves a massive cash economy….trillions of cash floating around off the books across every sector from poor to rich, in private and govt hands. And guess what? The Chinese govt collects a far lower level of taxes than western countries, of course that’s primarily because they can’t easily collect taxes on cash transactions. As China continues to modernize, use of plastic is rising substantially and more and more tax revenues are being collected.

Meanwhile, Chinese take longer to through customs than any other traveller..why? Because they have declare the typical 20-30-40-50k of cash they carry with them when they go on holiday, to spend or invest it!!

Even in America, I believe you’re required to report the value of barter exchanges to the IRS? Geez…

Cheers, Mario

Dave January 31, 2013 at 12:43 pm

In NYC, if you need a bank open late on Saturday or on Sunday, only Chinatown has branches open of many big banks. It’s been a long known tale here of Chinese coming to house closings with bags of cash supposedly kept in mattresses. The free fortune cookie now costs $0.25 with your takeout order.

Oregon January 31, 2013 at 5:46 pm

Maybe someone here can clarify a news blip I heard on NPR yesterday. I think I heard that the House is voting on a tax evasion bill that will enable the IRS to remove as much money from an individuals account as they deem necessary to cover ALLEGED taxes owed even before an official judgement. If final judgement reveals the taxes were not owed the IRS will refund the money.

I wouldn’t usually give this kind of story much weight, but hearing it on NPR made me think this thing must have a chance.

I relate this to the possession of physical gold and the possibility that the IRS is going to put the microscope on dealers as citizens decide to sell back at some point in the future. At that point the IRS can CLAIM tax evasion, collect what they see fit and make the citizen prove otherwise.

I know this would not be bucking any trend, but I guess I still find it amazing that these kinds of things are blips and not major stories that are all over the press.

More taxes.
Guilty until proven innocent.
And just the quiet sound of a low flush toilet from the media.

redwilldanaher January 31, 2013 at 7:16 pm

NPR – The Statist’s State Radio…

Oregon February 1, 2013 at 2:33 am

That’s my point Red… If NPR is playing that story it must have a chance. But why am I not hearing it elsewhere?

gary leibowitz January 31, 2013 at 11:12 pm

Everyone here knows the market crashed yesterday but waits for this government to tell the truth. With a mind-set like that it is no wonder total chaos and anarchy is expected. I will state with confidence that you will be disappointed. Can anyone tell me when in our brief history we did have such chaos? In the mean time savings has once again been rising as wages are coming back to above inflation levels. Not bad.

If you remember I did state that the next crash will come at a time when we have “feel good” economic indicators. It is certainly warming up.

Gold will not hit its stride while we have “feel good” numbers, unless it is combined with much higher inflation expectations, or a nasty reversal of economic fortune.

Oregon February 1, 2013 at 2:39 am

Events leading to and including the American Revolution seemed chaotic. The Civil War seemed a little chaotic. But I guess it’s all relative?

gary leibowitz February 1, 2013 at 7:34 pm

Are you comparing war to what is going to happen with a deprerssion era? Lets say the great depression as an example. Will it be worse?

Oregon February 2, 2013 at 6:25 pm

Are you saying the two are not related?

Bigtom February 1, 2013 at 12:49 am

Gonzalo Lire seems to have embarked upon a self serving dose of pedantry along with a plentitude of esoteric contortionist logic to perhaps showcase his ‘conceit’ as you pointed out Rick. Your statement ‘Lira’s argument might have been more persuasive if he had simply asserted that an effectively unlimited supply of “paper gold” has been absorbing enough demand to suppress the price of physical,’ would seem most obvious and sufficient to sum up the issue in quick time. But is he even intending that? He seems to me to be looking upon a daylight with a clear blue sky and injecting a heavy dose of fog upon the horizon. Self serving wordage in my opinion. Why all the complex wordage. Paper vs. physical baked with ladedadeda….real vs. make believe!
Hyperinflation/deflation arguments are interesting but in the end does it matter if one is shot in the head with a .44 cal or .45 cal pistol as Robert above essentially asserts in his comment. Either way it is tangible assets that become valuable no matter what the exchange rate is. However I have also envisioned a possibility of sometime in the future of having few assets of exchange available to even swap out the physical metals if that is ones choice of insurance. There could be the possibility of a dangerous blockage of commerce in this world as credit dries up. Credit is the lubrication that for a long time has greased the worlds commercial process. And, in my opinion collapsing credit, or trustworthiness, is the dangerous 800 lb gorilla in the room…..

Rick Ackerman February 1, 2013 at 6:54 pm

The hyperinflation/deflation question matters because debtors would be freed by the former but enslaved by the latter. Concerning Gonzalo, let’s please tread gently. His theory was novel and provocative, and that’s never a bad thing if it stimulates thought and argument.

gary leibowitz February 1, 2013 at 7:53 pm

There goes gold prices in step with an accelerated economy. Looks like wages, ISM and employment of 200k seems to now be the new norm. Kicking myself for not sticking to my technical approach. Got out way too early. I suspect 1550 on the SPX will cause a pause that refreshes. With data like this, and earnings keeping up, there is no way we crash before the half-way point in 2013. No economy, or earnings will reverse so suddenly. If anything, my suggestion that we see a heated economy, with rates rising, will most probably cause the next steep drop.

Even with the death knoll of higher payroll tax we are seeing pent up demand come to the forefront. Why would you not think that this government, given a long enough time frame, will not see an improved economy? The problem is not whether we have accelerated activity, it is how we deal with the debt crisis. We will be entering the Catch-22 scenario by the second half of this year. Rising rates, reduced government payroll and spending, and corporate earnings getting squeezed due to higher costs and higher salaries.

Today it is more likely that a heated economy will cause the next crash as opposed to deflationary forces. I still expect deflation to hit hard, but not before we see increased rates hit a wall. What the actual rates are that will cause the next crash is up for grabs.

Spooky that my long term scenario is playing out.

Erin February 1, 2013 at 8:33 pm

Gary,
You just said.. “Today it is more likely that a heated economy will cause the next crash as opposed to deflationary forces.”

You must be kidding, right? The Fed is flooding our economy with phony money at a pace never seen before trying to create the wealth effect (not real wealth from production and savings). Wages stagnant and declining for years now, unemployment and underemployed much higher than reported, house and asset prices being propped up, debt levels that are unsustainable and the real inflation rate that effects the average person close to double digits and going higher as we speak and the economy is going to overheat? You are confusing the rising stock market from phony money (transfer of wealth) with the real world. That is an absurd statement.

gary leibowitz February 1, 2013 at 9:37 pm

Really?

Why not actually look at the data before you say such things. Real wealth from production and savings. ISM much higher, savings at a 5 year high, wage component improved over last quarter. Real house price increases as well as a shortage of homes. You can complain how its being done, but it is being done.
I have absolute proof this is happening today. Condo next door to me is still being gutted, yet 3 of 4 apartments already sold at 900K for 2 bedrooms. This is real prices. Once again you can complain it was done thru government rule changes and warehousing, but the FACTS remain the same.
Watch the nes media switch from unsustainable growth to worrying about keeping inflation at bay.

Your real inflation rates are what people can borrow at. Guess what, it is very low. This government has orchestrated this, but the real question is will they get a soft-landing where debt can be paid off, government spending slowed, economy humming along, without any adverse affect? Odds are against them.

Erin February 1, 2013 at 11:00 pm

Gary,
I believe you are in the most liberal, blood sucking, parasitic city in the country, correct? NYC has nothing to do with the real world. Boots on the ground across the country, small and big business is seeing no benefit to any of this flow of monopoly money. But they are feeling the effects of inflation and quite painfully I might add. Get out of your apartment, condo, co-op or whatever you live in and talk to people in the rest of the country. Things are not going so good. Middle and poor classes are being crushed by tax increases and inflation and if the savings rate is rising, then consumer spending will suffer. With ACA coming down the pike and millions more takers granted legal status then you have the makings of a disaster of epic proportions which will only cause more money to be printed for welfare.

To have an overheated economy, you need wealth. Where is the extraction of the wealth or pretend wealth (borrowed money) from the people going to come from that will make this economy boom and overheat? From the flippers next door to you?

gary leibowitz February 2, 2013 at 10:53 am

Erin,
You confuse human suffering against american purchasing power. Sorry but they both can coexist. The divide in social classes is extending, like it always does right before a collapse. The breaking point is when? 4 years ago? Clearly we are on a recovery. Is it really surprising given the amount of ammo this government has? I never stated it would last, or even that it is a panacea for our problems. According to your “justice barameter” we should all suffer because the number of poor and those slipping out of the middle class is increasing. Life doesn’t work that way. The excesses always gets re-balanced. The tipping point might be near but I still see another 4 or so months of spikes before it concludes.

You argue with facts. We are hitting new highs and the government data is improving. Just because you don’t think it’s fair doesn’t change these things. Middle america is not crushed. They have become conservative with their money after they saw the huge loss from the stock market. It provided real savings. Much needed savings. Do not doubt that this government could drop sacks of money on peoples laps. Yes it is real money to the masses. There is a consequence for doing so. That we all agree upon. What most ignore is the power this government has to prolong the status quo. The rise in the stock market is because joe the plumber is back in. Inflow of money into equities has been strong this whole year. A reversal from the last few years. Do you look at consumer borrowing numbers? Do you really think this artifical low rates has no affect on spending? Does anyone here still think the market is crashing in the next few weeks?

There is no global scale in the sky that automatically adjusts based on justice. You want to pretend the world is already a failed place to live because you determined it is too corrupt?

This is not a discussion on moral grounds. I only view the economies of the world by what is reported by corporations, private and government data. I keep hearing that these numbers are faked. If so, than the past 4 years exemplifies a world power that has absolute control. I tend to disagree with this extreme view. I believe all artificial actions will always be balanced by nature. You can’t give up on life just because you know our sun will eventually explode. Use the best tools available to determine the when.

Have patience while we see, what I believe, is the last big spike.

Erin February 2, 2013 at 8:31 pm

Gary,
Your blathering on and on about a real recovery is ridiculous. Massive printing of money, propping up asset prices and piling up of debt is your idea of a real recovery…Good for you. Now stop evading my question and tell us all how the economy is going to overheat? Where is the phony wealth or real wealth from devalued savings gonna come from? People can barely pay their bills…I’m waiting…

Erin February 2, 2013 at 9:55 pm

Gary,
While I am waiting for your answer to my question on how the economy will overheat which I am sure will never come because it is not possible unless the fed directly injected money into the consumers bank account which will never happen because their interest is only to protect the banks…How about another question…What would happen to the “real” economy if the fed stopped printing money?

Sorry for the double post…missed the reply buttom

gary leibowitz February 3, 2013 at 1:52 am

Erin, I don’t make up the data. Why you insist that the FED can’t cause the economy to heat up is beyond me. We already had the worse world economic crisis ever, less than 4 years ago, and you still insist the concerted efforts of these governments haven’t worked? I would give them an A+ on preventing a cascading collapse, a B on stabilizing housing, and a B+ on preventing inflation.

Here are facts that can’t be denied. The US economy has been steadily improving on every front. Housing, employment, wages, borrowing costs, savings, the wealth affect.

Just because you don’t like their meddling doesn’t mean these things I mentioned are any less true. I never stated it can spark a long lasting stronger economy. I have stated they can allow the healing to occur, given enough time and the right circumstance.
Do you deny that the economy is better off today then last year and the year before that? I don’t care how they do it. I don’t care if you think its unfair or illegal, or improper.

You argue with facts as if they never happened. Just look at the economic numbers and tell me you don’t see an improvement on all fronts. I have already stated I think it will never work simply becuase the saturation of debt is beyond repair. To orchestrate bond yields and inflation while the economy mends is an impossible task.

I guess as the next few months progress we will either see more economic improvement or not. Employment has steadily improved where 200K is considered the new norm. Consumer savings has also had a great positive affect after the crash. Before that event we practically had no savings. The amount of inflow into the stock market is astonishing this year given the absense the last 4. Manufacturing is steadily going higher, as is wage growth (finally). these are governement and private numbers.

Your argument is that the trillions of dollars spent should have no affect on the economy? Really? My concern is the end-game. If history is any guide we should have a spiked blowoff phase to end this rally. I anticipated this event and concluded it should happen because of a percieved improved economy. The “feel good” period of investing. I do believe we have entered that period.

Just listen to the pundits and newscasters. I am not the one bringing up concern for higher rates do to an improved economy. I am not calling the continued improved employment numbers a sign of economic health. I am not announcing better corporate earnings. I am not showing a huge inflow of money into this market. Give Me A Break!

Robert February 1, 2013 at 7:54 pm

I like reading Gonzalo…

Almost as much as I enjoy reading Rick :-)

Don’t even get me started on Jim Willie- now THAT character is a GOD, if thought-fuel is your primary objective.

bigtom February 1, 2013 at 9:41 pm

Rick – thanks for your quick/easy answer to my above comment on the inflation/deflation thing. Makes sense and I do stand corrected here, the caliber of choice will make a difference. As for the Gonzalo thing, did not think I was too hard on him with all the bludgeoning I’ve read going on between people posting financial articles and those making comments…but if I was a bit ‘difficult’ will take a step back, take a deep breath and count to ten. Have done that before and it works! Will freely admit ‘financials’ are not my first line of knowledge and that is why I read your web site. Perhaps most frustrating though and it must have showed up is the political ideal issues playing out here, boiling over and frothing in the financial world while the devil incarnate here mostly goes unnoticed. Most all the focus, attention and finger pointing is in the wrong direction, IMHO, and so I see a lot of much wasted effort on 2000+ word tomes tilting at windmills…. Thanks for your brevity….

Chris T. February 1, 2013 at 10:03 pm

Hans Peter writes:
“Don’t know what you would do as a central banker of Switzerland. The forex market of the CHF is just way too small for all the money which looks for safe haven in Switzerland.”

So, the solution is to destroy Switzerlands credibility and actual status as a safe haven, thereby keeping the money from pouring in and causing the “problems” you describe

HAHAHA!

BTW:
NO country has ever inflated its way to prosperity.
Because you can NOT create wealth by destroying it.

And guess what?
While your argument seems so logically intuitive, and is made ALL the time, it forgets:

a) IMPORTS get cheaper, meaning the inputs used to produce the exports get cheaper with a stronger currency

b) the more valuable currency easily outbids the less valuable one for all those global inputs, thus RAISING the price to the competitors, who you are afraid can undercut the Swiss exporter with their devaluted currency
(This is why we kicked the Chinese out of Libya: we couldn’t compete with our economic bids for the Libyan resource, so we used our military might instead!)

c) Japan and USA prove that the notion doesn’t work:
just look at the central banks actions, espciall the BoJ and the Japanese ledgers, and compare that to the trade surpluses/deficits of both countries, and the relative level of their currencies now vs. then

Chris T. February 1, 2013 at 10:10 pm

Gary L.
“I don’ t understand how you can ignore the government data. ”

OH LORD! and I must shout here?

How can you ignore it? Because its all BULLS**T!
[Rick please delete if inappropriate, but an asterisk is too mild here]

The BLS needs to have the “L” removed from its acronym.

See this, though I think nothing can ever change your statist thinking:

Chris T. February 1, 2013 at 10:11 pm
Erin February 2, 2013 at 9:47 pm

Gary,
While I am waiting for your answer to my question on how the economy will overheat which I am sure will never come because it is not possible unless the fed directly injected money into the consumers bank account which will never happen because their interest is only to protect the banks …How about another question…What would happen to the “real” economy if the fed stopped printing money?

gary leibowitz February 3, 2013 at 2:01 am

Not overheat, but an improved, say GDP of 2.5 or higher is going to cause rates to rise. The FED orchestrated low interest that helps EVERYONE, not just banks. Corporate earnings on low borrowing costs, consumers on low mortgage payments etc… Are you really arguing this point?

The question on the FED printing press is a moot one. Thats like asking what will happen if the sun explodes today.

Why am I arguing this point 4 years FTER the crisis if it hadn’t already worked? I never stated it will work to get us over this debt crisis. It has worked so far and is still doing so with continued improved economic numbers. My bet is it fails in the end due to rising rates, via an improved economy.

gary leibowitz February 3, 2013 at 2:16 am

Please stop arguing with me on known facts. A recent article explains the state of this economy as of today. If you want to call these things inconsequential, go ahead. I call it an improved economy that is stating to heat up. What the economy actually does in the future is up for grabs. My theory is that rate hikes will thwart any recovery.

=======================================
Individual investors rushed into stocks and bonds in January, setting the stage for the biggest month on record for deposits into U.S. mutual funds.

“When we got beyond the fiscal cliff it unlocked a lot of money,” David Kelly, chief global strategist for New York-based JPMorgan Funds, said in a telephone interview.

Hiring climbed in January after accelerating more than previously estimated at the end of 2012, evidence the U.S. labor market was making progress. Payrolls rose 157,000 after a revised 196,000 advance in the prior month and a 247,000 surge in November.

Manufacturing in the U.S. expanded more than forecast in January, reaching a nine-month high and showing the industry is starting to perk up.

mava February 3, 2013 at 9:02 pm

You are definitely right about Lira’s explanations not making so much sense. He would be better off stating the obvious, – that the supply of paper gold is unlimited, and thus can keep the POG at any level desired, to the extent that all of the demand for gold is concentrated in the paper gold market.

This now should make clear what determines the price dynamic of the bullion. If the overall condition in the market is inflationary, i.e. more and more claims are made on goods, and the number of claims is increasing faster than the number of goods, then the rate of rise of POGB ( bullion ) is then determined by a relative proportions of number of market participants that belong to the following groups:
1) those who do not yet know that dollar is not money, 2) those who do not understand why the dollar is not money, and therefore tend to believe that paper gold is the same as gold bullion,
3) those who do understand that only gold bullion is money, and
4) those that know nothing but trust the scariest stories, the truth being the scariest these days, and therefore they buy and sell gold physical for any sensational reasons but true understanding.

These proportions, I would assume, do change depending on economic statistics, news items, and geopolitical events, because some of the members of the group 2, have a tendency to dab into the bullion for the irrational belief that they could time the exact moment of the collapse even though they couldn’t even time the exact moment of anything else with much less significance. They do not understand that the reasons that the paper gold is not the same as physical, are the exact same reasons that dictate that the exact moment of collapse can not be predicted. Thus, they wander a bit.

Same is with group number 4, which can get all over the place, depending on the evening news. I suspect this group to be the most numerous one, which is why the gold bullion price behaves so disconnected from the fiat inflation.

As this crisis progresses, if I am correct, we should see gradual rise in bullion, because more and more people become aware of the situation, do their own research and join group 3, who needs no paper gold. I expect this process to reach a “critical mass” sometime, and then the POG of bullion should really start rising noticeably.

I think that the market for gold will eventually separate and so will the quoted prices (not my idea though, but I agree with it). I.e. while the paper gold could still be quoted and had at say, $5000, the physical will only be available at $95000. And, this should not be very much noticed, until it is, because at first, the authorities will believe this development is in their favor, while later on they will not have enough guts to quote the spread, until it just becomes widely known.

Very bright comment on inflation, RA!
If I remember correctly, what Bennie said was :

“…By increasing the number of dollars in circulation, or [b][i]even credibly threatening to do so[/i][/b], the U.S. government can also reduce the value of a dollar in terms of goods and services, which is the equivalent to raising the prices in dollars of those goods and services.

We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation”

So, in effect, he was saying “I don’t even need to create inflation, all I need to do is to say “boo!”, and the markets will recover as if I actually did printed some extra money! But, because I didn’t, there will be no inflation, in reality, therefore the recovery will essentially have no cost that the markets would have to bear, spare some mis-allocations by the fringe scared crowd.”

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