asleeper

Resurgent Dollar Leaves Gold in the Dust

"The irony is that just about every goldbug was also a convinced dollar bear a year ago, and their emotionally charged analysis has proved utterly misconceived in a deleveraging global economy."

HIndsight is always 20/20. If the author was aware in advance that the dollar might be the best investment possible from 10/08 to now, was he advocating dumping all stocks and commodities at the time? I did, even my gold and silver ETFs.

In reality, just about about every goldbug knows that precious metals are volitile, and the "structural" matters in the market that lead to volatility are difficult to understand.

That is why even goldbugs pay particular attention to events that do not fit their conception of where markets and gold price are going. Practically every goldbug I now was all over the structural "deleveraging" idea in short order as the market crashed, gold went down, and the dollar rallied. This is NOT new news.

As a consequence, I got out of gold and silver very quickly, caught the first first bounce and recovered my initial loss, got out again, and waited for the carnage to end.

This business of knocking goldbugs cracks me up. They are like the stock pusher's bogeyman who cannot be mocked enough. Take it all with a grain of salt folks. The person you want to pay attention to is the person who KNOWS what is coming next. Good luck finding him.

Let's Just Say It: Print More Money

The author is badly mistaken in his advice as most commentors have noted by saying that more of the same that got us into this mess will not get us out. That is, given the existing monetary system remains intact. However, I am perpetually amazed at how few commentors are willing to go beyond that realization to say that a wholly new monetary system is needed.

When the banks deny credit, our system falters because our system is based on dollars being created by banks in response to people and organizations being willing to take on debt. If new credit (equal to the debt principle) is not continually added to the system in response to such willingness to take on debt, then paydown of debt by existing debtors extinguishes the money supply causing other debtors to find it even more difficult to earn the funds needed to pay down their debts, principle plus interest.

The author is therefore correct in saying the essence of the problem in a crisis such as this, a credit crunch, is not enough money in the system. He is incorrect in saying that the Government and the Fed are capable of supplying that money in a way that will help, given our debt-based origination mechanism for creating new money.

I understand that this is an investment web site, and very few who post here consider it likely that our monetary system will be redesigned in the next year, so any mention of what is needed to REALLY solve the financial crisis is not likely to help make investment decisions in the next six months. However, if the dollar truly does self-destruct in a hyperinflationary scenario at some point down the road, because of Government and Fed efforts to pump cash into the economy, a rare opportunity to re-design the monetary system might present itself.

We would all be better off if some way could be found to transition to a better monetary system without a collapse of the existing system, but as the existing system is a private, for profit system, the Fed and its supporters are not likely to look favorably on any proposal for a new system. For the present, we remain desperately searching for ways not to be screwed by the financial machinations at the highest levels in Washington and Wall Street.

Gold Breakdown

Anarchist wrote:
"But never the less the majority of the world no longer sees gold as a hedge against anything."

You might want to read Adam Hamilton's piece, "Global Gold 5"
www.321gold.com/editor...

"But to understand how gold really did during late 2008's devastating stock panic, you really need to consider all these currencies concurrently. The takeaway is gold's panic performance ranged from excellent to spectacular in 7/10ths of these currencies which include the very important euro and British pound. Only the US, Japan, and China saw local-currency gold charts that looked weaker than investors hoped during the panic episode."

In much of the world, gold not only held all of its value, it hit all time highs at the end of 2008.

Precious Metals: Some Recent Developments

A few months ago, the premiums were even higher, but currently on Apmex: the bid and ask for palladium are listed as $180 and $185, the premiums are approximately $60/oz for 1 oz bars and $40/oz on 10 oz bars.

Russian palladium 1 oz coins were available a while back too at about a $100/oz premium, but I do not see any now on Apmex.

Ref Apmex, www.apmex.com/Category...

How ETFs Bore Up in 2008

Good information. Personally, I like ETFs and have invested in several of them in recent years, including GLD, SLV, commodities ETFs, and the Dow and S&P500 index ETFs, double index, and inverse ETFs.

A word of caution to newcomers. With every successful new thing, whether it be ETFs or the TV show "Survivor", a host of copycats are sure to follow, hoping to jump on the bandwagon.

One reason the early ETFs may have been successful is that they focused on areas doing well or likely to do well. That does not imply that every ETF that follows will do well. Once ETFs cover every conceivable market segment, then you will be right back to having to decide for yourself what sector to invest in, whether to go long or short, and when to buy or sell.

Measure, Don't Model: The Forest and the Trees

If I read you right, you are referring to the fallacy of following traditional statistical models and the potential of getting slammed by a “Black Swan” event or event(s).

Being a relatively new private boater, I was fascinated by references to “rogue waves” and researched the topic. Basically, for hundreds of years naval architects and marine engineers did not believe sailor’s tales of giant “rogue waves” and relied on statistical models of wave heights based on wave physics and weather conditions to design ships. Yet, every year many more ships were lost than could be explained by the wave models. Sometimes, ships just vanished in apparently fair weather.

Finally, some data came to light that could not be easily ignored and the problem was actually studied scientifically and systematically in the late 70s or early 80s I think it was, including by satellite observation, and it was confirmed that giant waves that can sink huge ships can and do form in the open ocean at a frequency that greatly exceeds what the statistical models predicted. So, the statistical models and physics used did not accurately model the physics of wave formation. The data proved it.

Apparently, the same may be said about statistical models and markets. Within certain limits, all else being equal, the statistical models work pretty good. The problem is the “all else” doesn’t always stay equal. A few obvious reasons are: market manipulation, rules changes, war, and availability of credit.

My analogy is that statistics does a great job of predicting the outcome of a spin of the roulette wheel, until the house decides to clean up and hits the “00” switch three times in a row. The problem is figuring out who the house is at any given time and when they might trip the switch. And, sometimes it is just a massive change in investor psychology that takes place during a major trend reversal with no one in particular pulling strings.

Because there is no defense against every possible Black Swan event, money management is a key element of investing: not putting too many eggs in one basket, cutting losses, taking partial profits, not going “all in”, hedging bets, etc.

Marc Faber on the Economy, Gold, WWIII

Bookmark this video and refer to it frequently in coming months. Lots of good investment advice in it. Market hit an interim bottom in Nov., rallied in December. Rose a little too fast in early Jan., and is now correcting. After correcting in Jan/Feb, market will likely rally in March/April. Sell in May and go away. The market after that will likely be a tough one and hard to predict for many years.

Focus on beaten down issues or market leaders that will emerge unimpaired as Jim Rogers also says. The world will continue to need base metals, food, oil, coal, bulk cargo shippers, semiconductors, etc. Be selective. Pay attention to timing, market psychology, Government and banking actions as well as stock-picking fundamentals. Stay on top of the news. In other words, it's still a battle for investment survival out there as it always has been.

My one word of caution is that although Asian market prices are tempting, beware of individual stocks. Stick with funds, ETFs, and companies with excellent reputations. As corrupt as individual American companies can be, foreign companies can be even worse and even less transparent.

My worst losses in the market have been complete blindsides by individual companies hiding bad news. Intel may be OK, but below that level, due diligence may not be enough.

What Is Going On With Gold?

Oops, correction. Re: backwardation, the price of gold for immediate delivery exceeded future prices.

What Is Going On With Gold?

The “goldbug” club has been advocating an investment with the following track record in nine currencies.

GOLD ANNUAL CHANGE
USD AUD CAD CNY EUR INR JPY CHF GBF
2001 2.5% 11.3% 8.8% 2.5% 8.1% 5.8% 17.4% 5.0% 5.4%
2002 24.7% 13.5% 23.7% 24.8% 5.9% 24.0% 13.0% 3.9% 12.7%
2003 19.6% -10.5% -2.2% 19.5% -0.5% 13.5% 7.9% 7.0% 7.9%
2004 5.2% 1.4% -2.0% 5.2% -2.1% 0.0% 0.9% -3.0% -2.0%
2005 18.2% 25.6% 14.5% 15.2% 35.1% 22.8% 35.7% 36.2% 31.8%
2006 22.8% 14.4% 22.8% 18.8% 10.2% 20.5% 24.0% 13.9% 7.8%
2007 31.4% 18.6% 10.4% 23.0% 17.9% 17.5% 24.7% 21.5% 29.2%
2008 5.8% 32.5% 32.4% -1.1% 11.9% 30.4% -14.9% 0.2% 44.3%
AVG 16.3% 13.3% 13.6% 13.5% 10.8% 16.8% 13.6% 10.6% 17.1%

Any investment still returning an average of 10% – 17% percent after this past eight years is a winner in my book.

Regarding backwardation, it isn’t a theory, it is a fact due to a drawing down of physical inventory. So many people were taking delivery in December that the price of gold for immediate delivery dropped below the future prices.

“If you had told me in December of 2007 that the global stock market would fall 40% in 2008 I would have told you to buy gold and nothing else because of its safe haven characteristics.”

Any investment including gold requires attention be paid to the dynamics of: money, markets, and the economy. Broad trends are one thing; timing is another. The Nasdaq crashed in March, 2000, and the Fed did what it always does. It lowered interest rates and increased the money supply. But, gold did not jump right away. Gold was only up 2.5% in 2001. It takes a while for increases in the base money supply to manifest in broader measures of money supply, price inflation, and the price of gold. Don’t expect immediate results in 2009 until the credit freeze begins to thaw or foreign governments begin to dump dollar reserves.

”[Gold fell, and the dollar rose.] Why did this happen?”

The dollar rose in a counter-trend rally because the banking sector tightened credit and the market crashed. No credit meant businesses, hedge funds, and individual investors had to raise cash to operate and service existing debt. Weak investments were sold first, then stronger investments. Everything fell except cash and 5-10 year bonds. Gold fell as hedge funds sold stocks and futures to raise cash, but it fell less than most stocks. Forced selling led to demand for dollars, raising the value of the dollar. Gold is now still off its peak, but the only thing that outperformed gold year over year in 2008 was 5-10 year bonds.

Gold IS the anti-dollar, but it doesn’t rise on increased Fed Base Money supply alone. There must be evidence that the base money is finding its way into the economy via lending and multiplication due to fractional reserve banking. Currently, there is little evidence the base money increase is going anywhere except to bolster bank reserves, pay executive bonuses, and buy out other banks.

“When you buy gold you're essentially buying a hard asset currency with the hope that one day it will become the world's choice of currency again.”

Sort of, but not really. Gold need not ever become the world currency of choice to protect against several dangers. All that is required is that people remember gold is easily concealed, portable, a store of value and insurance against: inflation, loss of confidence in paper assets, and civil unrest.

So, your basic premise is basically correct, to understand where the price of gold is going, the dollar is important. But where is the dollar is going and when? That is the question. Right now, I would bet all paper currencies will see renewed inflation in the second half of 2009, but nothing in life is certain.

2008 Was Bad - Will 2009 Be Worse?

The Economist: U.S. In Depression, Not Recession
www.prisonplanet.com/t...

Respected mainstream international publication, The Economist, reports that the U.S. is in a Depression now. The PrisonPlanet page posting the Economist article also includes the links to related articles shown below.

Related articles:
1. Britain may need 0% interest rate to avoid a depression, leading economist warns
2. Nobel Prize Winning Economist: Crisis As Bad As Great Depression Or Worse
3. Renowned economist Mikhail Khazin : U.S. will soon face second “Great Depression”
4. Rogers: The Elite Are Turning A Recession Into A Depression
5. IMF warns of Great Depression
6. Top Economist Mishkin: Worse Than the Depression
7. Roubini Sees Worst Recession in 40 Years, Rally’s End
8. Congressman: “If We’re Not Very Lucky Or If We Don’t Do Everything Right, We Could Easily Have A Ten- Or Fifteen-Year Depression”
9. Economy Is ‘Already In Recession’
10. Poll: 60% say depression ‘likely’
11. Former Fed chief says U.S. now in recession
12. Banking crisis: Is Britain heading for the worst recession since the 1930s?

Returning to a Gold Standard Is a Bad Idea

On Jan 03 04:08 AM Jim Myrtle wrote:

> "A borrower from a goldsmith would have signed something akin to
> a “loan document” just like a modern borrower. The borrower would
> have received a gold receipt of some kind and promised to repay it
> with interest just like a modern borrower"
>
> The most important difference being the goldsmith was printing receipts
> for multiples of his gold deposits. Modern banks can only loan their
> deposits less their reserve balance. Because they don't print FRNs.

If the money the bank "loans" is redeposited in the bank, cannot the bank continue to lend until the total loans are a multiple of the original deposit, the original deposit being the "base" the multiples are built on, the same way that multiples of gold receipts are built on the original gold deposit in the goldsmith's bank? And, both multiplying effects cause inflation?


> "Correct. One point to you. I didn’t bother doing looking up the
> formula and doing the math precisely. $900/(1-0.9) = $9,000. Doesn’t
> change the argument"
>
> Your math is still wrong. A $1000 deposit with a 10% reserve allows
> the bank to create exactly $900 in loans, not $9000.

We went over this before. If the $900 is redeposited in the bank, the bank can lend $810 more, and so on, until it can lend a total of $9000 with $10,000 on deposit, including the original $1,000. You agreed to that, even corrected my math on the total credit being $9,000 instead of $10,000.

> "The restaurant, at least in theory functioning as a bank, could
> obtain FRNs ultimately from the Fed which asks the Treasury to print
> them"
>
> If the restaurant wanted to wire money to the Fed, they could get
> FRNs. Not sure what that has to do with your story.

I felt you were quibbling about banks not being able to print FRNs, forcing me to revise my story to stay on point, which was that a handwritten IOU does not increase the money supply because it isn't equivalent to legal tender, and a bank loan does increase the money supply because it is equivalent to legal tender..

> "After which you would continue to owe the restaurant for the meal,
> because the FRNs were a "loan". Meanwhile the FRNs would begin circulating
> in the economy, increasing the money supply, until you pay off the
> loan"
>
> Now you owe the restaurant and the Fed, still not clear where you're
> going with this.
>
> "The salient point is that securitization of IOUs as legal tender
> increases the money supply.."
>
> Borrowing increases the money supply. Are you proving what I've said
> all along?

I've been saying all along that banks create money and increase the money supplying by the process of securitizing loan documents. That the act of securitizing the lenders promise to repay by the bank is the point of money creation by banks, referring to that act as issuing credit. And, I've been under the impression you been denying that. Apparently, there has been a "failure to communicate" all along arising over different assumptions about who meant what kind of money and what-not. And, maybe I've not been using banking industry-consistent jargon.

Sorry, but that cracks me up. One of my favorite sayings is that the strangest thing about communication is the illusion it has been accomplished.

> " If the accounts receivable consist of dollar equivalents such as
> credit card payments in process or checks, they can certainly sell
> the"
>
> They wouldn't sell credit card payments, they'd sell IOUs.
>
> "Restaurants cannot sell an IOU because the IOU hasn’t been securitized
> by a bank"
>
> You can sell an IOU that a bank hasn't touched. Suppliers that need
> cash can sell an IOU from WalMart (just an example) if they need
> the money now, instead of in 60 days (just an example).

Can your local corner restaurant really sell your handwritten IOU? Now, I'm not sure. Can he take it to the bank and use it to borrow money or exchange for FRNs as he could a check? if not, then I would say the IOU cannot increase the money supply.


> Don't confuse the money supply with FRNs. MZM, which includes FRNs,
> is narrow money. M1 is broader money. He can lend all day long and
> increase M1. He can't increase FRNs.

Yes retail banks can increase M1 but not FRNs. Modern money is rather slippery and has several definitions. But I've been referring to broader money measures than just FRNs, measures that banks can increase..

> "I’ve been saying that a bank can turn a promise to pay into legal
> tender"
>
> Legal tender? Like FRNs? A bank can sell your promise to someone
> else, for legal tender but can't turn on the printer in the vault
> to turn it into FRNs.

What I mean by "turn into" is that a bank can take my signed promise and physically hand me FRNs. Since my promise is not legal tender but my bank has given me legal tender for it, as far as I'm concerned, the bank has turned my promise into legal tender.

> "there is a real difference between $1,000 in FRNs and a signed loan
> document on which a debtor promises to pay $1,000 FRN’s plus interest?
>
> Of course there is a difference. One is very liquid, one is less
> liquid.
> One pays interest, one doesn't. One has risk of default, one doesn't.

Also, one is legal tender and the other is not. So, which one is money, the loan document on file at the bank or the credits in the borrowers account?

> "that a bank is able to turn a promise to pay $1,000 FRNs into the
> legal equivalent of $1,000 in FRNs?"
>
> I don't know your definition of "legal equivalent".

Dollar credits in the borrower's account. I say they are legally equivalent to FRNs because I can ask the bank to give me FRNs based on bank account credits and they must do it unless they don't actually have any FRNs on hand that day.


> "that creation of FRNs by the Fed and banks by securitizing promises
> to repay is the source of inflation that caused the FRN to lose approximately
> 95% of its value since 1913? "
>
> I don't dispute that the growth of high powered money and subsequent
> growth of M1, M2, M3 etc over and above the growth of GDP causes
> inflation.

Thank you. We agree on that and probably more if not for the communication gap. I'm curious, are you a banker, a teacher or neither? I'm a math teacher and ex-engineer.

Returning to a Gold Standard Is a Bad Idea

Richard,

The best performing asset class the last year was physical gold. But, similar to what Jim Myrtle said about banks, if you don’t want to invest in gold, don’t do it. I’m not trying to convert you or Jim but simply trying to share what I’ve learned since 2000 investing in precious metals and studying the monetary system.

Take it or leave it as you prefer, but you decide to take some of it and use it as a springboard for further study, one thing you will quickly learn is that prior to the establishment of the Fed, the monetary system and central banking was one of the hottest topics in American history dating all the way back to and before the Revolutionary War.

Sure there are “goldbugs” around who talk blithely about civic unrest, stockpiling food and guns and other unpleasant topics, but I don’t buy into the Armageddon scenario either. Surprisingly, my brother who is VP of a large commercial bank is more inclined to buy into that whole mega-disaster scenario than most “goldbugs”.

I’m not a goldbug (I’m pretty sure), I don’t represent goldbugs (I’m sure), I’m not sure what you think I don’t grasp, and I don’t know what ends you think I advocate, so I’ll continue to try to explain my views better.

I think you believe I don’t understood what Jim’s been saying. BTW, I said the bank may have put up all or none of the original $1,000, and Jim was right about the total loan amount being $9,000, not $10,000.

Of course the bank pays interest on the $10,000 on deposit in the example, but do you understand that if you try to explain to 100 people that the bank need only put up at most, $1,000 of its own money to generate $9,000 in “loans” and then earn $450 per year on their $1,000 investment, a 45% return per year, that 99 of them will think you have gone crazy? Because everyone “knows” that banks lend out their depositors money and how can they generate more than $1,000 in “loans” if they only had $1,000 to begin with?

Jim certainly understands the mechanics of banking and I do too, but most people do not understand where the $9,000 in loans comes from. The first $900 they understand, but after that, most people see it as smoke and mirrors and think that you are lying when you try to explain how a promise to repay $900 can be turned into dollars on deposit, which can be spent, re-deposited in the bank and serve as new reserves for the issuance of more more credit. Economists know it causes monetary inflation, and if the monetary inflation exceeds economic growth, it creates price inflation too.

Were you aware that I already wrote in this thread that I do not advocate a gold standard? The author stated that a return to a gold standard would be disasterous, which cannot really be discussed without discussing our current monetary system. I’ve been trying to get across how our monetary system works, its weaknesses, its unfairness, not extol its virtues obviously. Anyone can read the purpose of the Fed on its own website or out of an Econ 101 book. But they do not advertise its drawbacks.

I know all the same pro-Fed explanations and arguments you do. Do you understand what I’ve been writing or do you just consider it bunk because you do not recall the Econ 101 book saying there were any drawbacks to the current monetary system? There are alternatives to the existing system that are not gold standards, but why even consider them if you do not know how the existing system works or what it might be doing wrong? My goodness, most people do not even believe the Fed represents a cartel of private banks. They think it is a Government Agency.

Econ 101 does say that “Capitalistic systems are built off savings, which are then properly invested in projects that increase a nation’s wealth and productivity.”

But, wait one minute. If I put the $1,000 in the bank, my savings, to kick off the great capitalistic enterprise, why does the bank get $450 per year on $9,000 worth of loans and I get about $5 for my 0.5% interest per year on the capital that started it all? Why does everyone have to start their own bank to get a fair share of the “capitalist” system. Seems like the banks who have the least capital of all but have a corporate franchise to turn debt into money make out like bandits.

And, why are American renowned and reviled worldwide for not saving if saving is such a great part of the capitalistic enterprise? The Government exhorts people to spend, not save. Economists say that if people save instead of spending, the consumer sector of the economy will collapse. If people save instead of borrowing, the money supply will collapse and we will have disastrously high deflation, because debt = money.

Are Americans stupid? I say they are smart or at least they do the best they can with little or no understanding of the monetary system, and the monetary system is stupid. The Fed wants steady inflation and inflation that exceeds what middle and low income people can earn on investments. So, they don’t save and they borrow instead. Economists say that, too. I’m not out on a limb there. Instead of saving, they borrow and leverage the biggest hard asset they own, their house, expecting it to appreciate fast enough due to inflation to make a profit as the money supply expands. It works until banks tighten credit and inflation slows or reverses as just happened recently. People don't understand that what goes by the moniker "business cycle" is really just bank credit expanding and contracting.

Regarding seniors, financial advisors typically advise seniors not to seek aggressive returns but to put savings into “safe, conservative” investments to preserve savings rather than gamble with it. The kinds of investments they recommend, such as fixed income annuities and permanent life insurance typically do not beat inflation.

Middle class and low income people typically keep money in banks, bonds, or CDs. It’s really upper middle class who have any real money to invest in stocks, businesses, commercial real estate and the like, high return investments. Bank savings, bonds, and CDs typically don’t beat inflation over time. Social Security certainly doesn’t keep up with inflation. It’s indexed to the CPI, which consistently understates inflation.

You may be smarter than most seniors, most investors even, but you need not disrespect those less fortunate than you in order to toot your own horn. Would you feel disadvantaged by a monetary system that leveled the playing field a bit?

If you don’t mind, what is your background socioeconomically and education-wise? What has been your average compound rate of return per year of all your liquid assets, after taxes. For most people, even you probably, it is much less than you would estimate off the top of your head. Most people are not fully invested all the time, and they do not take into account funds that are idle. Very likely you haven’t beaten inflation or if you have, you haven’t beaten it by much. Most professional money managers don’t beat it by much. Some years like 2008 are gauged by how little is lost, not how much is gained.

I’m not sure I fully understood your shoe example, but if “everyone else is better off, Mr. Entrepreneur more than anybody”, what is the problem? If Mr. Entrepreneur lowers his prices a little he could lower his prices a little, sell even more shoes, take market share from another shoemaker, and make a bigger profit.

That kind of thing, productivity increases, happens far more rapidly in the semiconductor industry than changes occur in the overall money supply. One of my two brothers works for a semiconductor manufacturer that has almost no debt. They finance capital improvements almost entirely out of profits, and they design or customize much of their production equipment. Productivity increases and price reductions do not result in lower wages at their company, but market share does. People who work for companies that fail must go to work for another or move into a new industry that is starting up. That is capitalist “creative destruction”.

The only other thing I can think of to say is that the state budget crisis in my state might mean a substantial but in my pay before long. However, if deflation continues like it has in recent months, my expenses will drop even faster, except for my mortgage. Debt is the real problem in a deflation. Debt in high deflation = bad, debt in high inflation = good. Unemployment is always bad.

Enough arguing. May all your investments in the New Year beat inflation!

Returning to a Gold Standard Is a Bad Idea

Jan 02 10:40 PM Jim Myrtle wrote:
>Since banks don't print FRNs, they are not like goldsmiths.

A borrower from a goldsmith would have signed something akin to a “loan document” just like a modern borrower. The borrower would have received a gold receipt of some kind and promised to repay it with interest just like a modern borrower. The gold receipt credited to the medieval borrower in exchange for his promise to repay is analogous to the dollars credited to a modern borrowers account, because the borrower may withdraw it at any time from the bank in the form of FRNs. Who printed the FRNs that the bank hands to the borrower is irrelevant. The money credited to the borrowers account by the bank by virtue of “dollarizing” the borrower’s promise to repay is legally equivalent to the creation of FRNs.

What exactly do you object to in the analogy? If it was exactly the same, I wouldn't have said "like".


Jan 02 10:52 PM Jim Myrtle wrote:
>You math is wrong. With a 10% reserve requirement, a $1000 deposit does not allow a >bank to issue $10,000 in credit

Correct. One point to you. I didn’t bother doing looking up the formula and doing the math precisely. $900/(1-0.9) = $9,000. Doesn’t change the argument.

asleeper also wrote,
>"If the restaurant had the same legal rights as the bank, it could print out little dollar >bills and "lend" them to you"

Jim Myrtle wrote:
>Banks don't print dollar bills to lend to you.

Let me revise what I wrote, so you can deal with the concept. “If the restaurant had the same legal rights as a bank, it could take your signed IOU, file it, create an account for you, and credit the account for the same amount as the principle noted on the IOU. The restaurant, at least in theory functioning as a bank, could obtain FRNs ultimately from the Fed which asks the Treasury to print them. To make an unnecessarily long and complex tale short, the restaurant could ultimately hand you fresh crisp new FRNs printed up by the Treasury at the request of the Fed just to handle your account, which you could then use to pay your meal. After which you would continue to owe the restaurant for the meal, because the FRNs were a "loan". Meanwhile the FRNs would begin circulating in the economy, increasing the money supply, until you pay off the loan.

The point which you avoided dealing with is that whole process is conceptually no different than if the restaurant had printed the bills itself as I said, or no different than if a bank had printed the bills itself, even though we both know the Treasury prints FRNs. The effect on the money supply would be the same. The salient point is that securitization of IOUs as legal tender increases the money supply..


Jan 02 11:05 PM Jim Myrtle wrote:
>Retailers can sell their accounts receivable.
>Just as credit card companies can.

Yes, they both can sell their accounts receivable if someone is willing to buy them. If the accounts receivable consist of dollar equivalents such as credit card payments in process or checks, they can certainly sell them. Use of a credit card is bank credit, legally the same as if you took a loan from the bank.

When the restaurant receives a credit card payment the bank securitizes the credit card holders promise to repay the bank and issues it as bank credit to the restaurant. The restaurant doesn’t care if credit card holder repays the bank or not. They have already been paid once the credit card payment clears processing. Repayment of the bank credit is then between the cardholder and the bank that issued the card.

But the example I gave was that you gave the restaurant an IOU. Restaurants cannot sell an IOU because the IOU hasn’t been securitized by a bank into the legal equivalent of an FRN. You would only get away with paying for a meal with an IOU if you were a regular customer and were trusted to make good on it by the restaurant itself. The restaurant would expect you to come back and pay in cash, by check, or credit card at a later date.

The IOU does not increase the money supply. Use of a credit card does, at least temporarily until you pay off the monthly balance..


Jan 02 11:24 PM Jim Myrtle wrote:
>My point was not to discuss interest rates, but to show, again, that banks >cannot lend out multiples of their deposits. Yes, it's terrible that banks can >pay you less than 1% while charging 5% and more. The solution is to >become a bank or buy their stock. Their debt now yields in the double digits.

I don’t think anyone has missed you point about banks not lending out multiple of their deposits. I’m certainly haven’t been disputing that. And your solution is the one my brother took. He is now V.P. of a large commercial bank. Funny, he doesn't dispute that banks create money (FRNs) by lending or cause inflation by loosening credit or cause deflation by tightening credit.

I’ve been saying that a bank can turn a promise to pay into legal tender, such ability creates monetary inflation, price inflation, and leads to an unstable money supply capable of collapse, monetary deflation, and price deflation. Do you dispute that?

Do you dispute the assertions that:
1) there is a real difference between $1,000 in FRNs and a signed loan document on which a debtor promises to pay $1,000 FRN’s plus interest?
2) that a bank is able to turn a promise to pay $1,000 FRNs into the legal equivalent of $1,000 in FRNs?
3) that creation of FRNs by the Fed and banks by securitizing promises to repay is the source of inflation that caused the FRN to lose approximately 95% of its value since 1913? (For the purpose of discussion, I define “creation of FRNs” to mean that the Treasury prints FRNs at the request of the Fed, which the Fed then lends to the U.S. government and others in exchange for T-Bonds, T-Bills and other collateral, and banks create FRN equivalents in checking accounts by fractional reserve banking and securitization of “loans documents”.)?

If you would rather quibble with the way I framed the questions rather than respond to the concepts expressed, I'll give this up at this point. Otherwise, I'm still interested in your reply.

Don't Miss the Coming Gold Bull

I've been in precious metals and commodities since 2000 when the Nasdaq crashed. Study of market crashes led me to the historical fact that the Fed inflates the money supply whenever markets crash. Since then, I've recouped most of my Nasdaq losses. It is harder than it might seem to consistently make profits even in an eight year precious metals bull market, because precious metals are so volatile.

But, history says Fed measures being taken now to inflate the money supply will eventually show up as price inflation and be reflected in the precious metals. That being said, gold could easily dive before rising. If you want into the precious metals markets, never say the price cannot drop when you least expect it.

Right now, commoditities and most precious metals have taken a dive, even silver, platinum, and palladium. Comparatively, gold hasn't taken a significant dive. If you think it has, you haven't been investing in gold for very long or you are only thinking of gold in terms of the USD.

Why hasn't gold dived? Because enough people, including bankers, still think of gold as money, much more so than the other precious metals. And, they study history, they watch the Fed, and they sense monetary inflation coming after the current price deflation abates.

You can believe that people will lose faith in gold and it will drop like all the other commodities. You can believe that the banks will take down gold again if it approaches $1,000 again (many believe the banks, most notably JPMorgan, take gold down periodically by shorting futures and via mysterious unspecified "derivatives"). You can believe that "de-leveraging" is not over and will knock gold down again as hedge funds take profits. Or, you can believe that Fed reflation of the money supply will fail and it is Great Depression II, and everything but cash is a bad idea. Or, the market can just decide to stab you in the eye for no particular reason.

I'm going with the idea that history will repeat itself again and gold and gold stocks will provide outsized gains as they have since 2000. Myself, I'm wary of those sharp unexpected drops, and I think the gold price ratio to the other precious metals is significantly out of whack at the moment. Gold could drop to a price more in line with the other precious metals before it rises again. That's why I'm heavily into silver at the moment, not gold, slightly into palladium, and I'm eying platinum and palladium. The gold/oil ratio is out of whack too, so I'm also now into oil. When the ratios normalize somewhat, I’ll be ready to get back into gold or gold stocks.

But, I'm ready to sell everything and short or double short the S&P500 if the overall market turns ugly again. This is not a buy and hold market.

Don't Miss the Coming Gold Bull

I've been in precious metals and commodities since 2000 when the Nasdaq crashed. Study of market crashes led me to the historical fact that the Fed inflates the money supply whenever markets crash. Since then, I've recouped most of my Nasdaq losses. It is harder than it might seem to consistently make profits even in an eight year precious metals bull market, because precious metals are so volatile.

But, history says Fed measures being taken now to inflate the money supply will eventually show up as price inflation and be reflected in the precious metals. That being said, gold could easily dive before rising. If you want into the precious metals markets, never say the price cannot drop when you least expect it.

Right now, commoditities and most precious metals have taken a dive, even silver, platinum, and palladium. Comparatively, gold hasn't taken a significant dive. If you think it has, you haven't been investing in gold for very long or you are only thinking of gold in terms of the USD.

Why hasn't gold dived? Because enough people, including bankers, still think of gold as money, much more so than the other precious metals. And, they study history, they watch the Fed, and they sense monetary inflation coming after the current price deflation abates.

You can believe that people will lose faith in gold and it will drop like all the other commodities. You can believe that the banks will take down gold again if it approaches $1,000 again (many believe the banks, most notably JPMorgan, take gold down periodically by shorting futures and via mysterious unspecified "derivatives"). You can believe that "de-leveraging" is not over and will knock gold down again as hedge funds take profits. Or, you can believe that Fed reflation of the money supply will fail and it is Great Depression II, and everything but cash is a bad idea. Or, the market can just decide to stab you in the eye for no particular reason.

I'm going with the idea that history will repeat itself again and gold and gold stocks will provide outsized gains as they have since 2000. Myself, I'm wary of those sharp unexpected drops, and I think the gold price ratio to the other precious metals is significantly out of whack at the moment. Gold could drop to a price more in line with the other precious metals before it rises again. That's why I'm heavily into silver at the moment, not gold, slightly into palladium, and I'm eying platinum and palladium. The gold/oil ratio is out of whack too, so I'm also now into oil.

But, I'm ready to sell everything and short or double short the S&P500 if the overall market turns ugly again. This is not a buy and hold market.