asleeper's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/256872/comments http://seekingalpha.com/article/124723-resurgent-dollar-leaves-gold-in-the-dust?source=feed#comment-418380 418380
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.]]> Sun, 08 Mar 2009 16:59:39 -0400
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.]]> http://seekingalpha.com/article/116115-let-s-just-say-it-print-more-money?source=feed#comment-364383 364383
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.
]]> Fri, 23 Jan 2009 14:14:42 -0500
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.
]]> http://seekingalpha.com/article/114928-gold-breakdown?source=feed#comment-356594 356594 "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.
]]> Thu, 15 Jan 2009 11:17:14 -0500 "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.
]]> http://seekingalpha.com/article/114660-precious-metals-some-recent-developments?source=feed#comment-356122 356122
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...]]> Wed, 14 Jan 2009 21:17:07 -0500
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...]]> http://seekingalpha.com/article/114072-how-etfs-bore-up-in-2008?source=feed#comment-351998 351998
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.]]> Sat, 10 Jan 2009 21:04:31 -0500
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.]]> http://seekingalpha.com/article/114023-measure-don-t-model-the-forest-and-the-trees?source=feed#comment-351993 351993
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.]]> Sat, 10 Jan 2009 20:51:31 -0500
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.]]> http://seekingalpha.com/article/113588-marc-faber-on-the-economy-gold-wwiii?source=feed#comment-351933 351933
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.]]> Sat, 10 Jan 2009 18:32:06 -0500
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.]]> http://seekingalpha.com/article/113817-what-is-going-on-with-gold?source=feed#comment-350227 350227 Thu, 08 Jan 2009 18:53:39 -0500 http://seekingalpha.com/article/113817-what-is-going-on-with-gold?source=feed#comment-350225 350225
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.]]> Thu, 08 Jan 2009 18:51:29 -0500
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.]]> http://seekingalpha.com/article/112960-2008-was-bad-will-2009-be-worse?source=feed#comment-345662 345662 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?
]]> Sun, 04 Jan 2009 15:12:36 -0500 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?
]]> http://seekingalpha.com/article/112625-returning-to-a-gold-standard-is-a-bad-idea?source=feed#comment-344761 344761
> "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.]]> Sat, 03 Jan 2009 07:52:21 -0500
> "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.]]> http://seekingalpha.com/article/112625-returning-to-a-gold-standard-is-a-bad-idea?source=feed#comment-344751 344751
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!


]]> Sat, 03 Jan 2009 06:54:54 -0500
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!


]]> http://seekingalpha.com/article/112625-returning-to-a-gold-standard-is-a-bad-idea?source=feed#comment-344729 344729 >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.]]> Sat, 03 Jan 2009 03:29:59 -0500 >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.]]> http://seekingalpha.com/article/112785-don-t-miss-the-coming-gold-bull?source=feed#comment-344697 344697
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.
]]> Sat, 03 Jan 2009 00:46:47 -0500
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.
]]> http://seekingalpha.com/article/112785-don-t-miss-the-coming-gold-bull?source=feed#comment-344696 344696
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.
]]> Sat, 03 Jan 2009 00:35:19 -0500
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.
]]> http://seekingalpha.com/article/112450-2009-expecting-a-massive-rally?source=feed#comment-344678 344678
If this market is similar, you could ride the current rally up and sell in say March. But, it is not clear if the road ahead is deflationary as it was in 1929-1932 or the Fed will succeed in a relatively rapid reflation of the money supply. The Fed, the banks, and the money supply appear to be the key just as in 1929-1932, but no one knows for sure how their actions will play out.

The Fed Monetary Base has spiked dramatically but the credit freeze has not thawed yet. Look for evidence that the credit freeze is thawing before bettting on any sustained rally. We are more likely to get a sucker's rally until it does. It might be tradeable if timed right and with trailing stops, but this is not a buy and hold market or unless volatility continues to drop, it is not even a good trader's market.

FWIW, my gut feeling is we will see a rally in Jan-Feb, maybe longer, but my gut also says to sell in March-April or whenever the rally falters, and the market will topple again another 20% below its recent lows.

On Dec 29 02:43 PM mkreisel wrote:

> The Fed didn't do anything between 1929 and 1933, and the market
> managed to pull together 5 sucker rallies 20% or more before finally
> hitting the bottom.
>
> These 5 sucker rallies were:
> 11/13/1929 - 04/17/1930, 198.69 -> 294.07, 48%
> 12/29/1930 - 02/24/1931, 160.16 -> 194.36, 21%
> 06/02/1931 - 07/03/1931, 121.17 -> 155.26, 28%
> 10/05/1931 - 11/09/1931, 86.48 -> 116.79, 35%
> 01/05/1932 - 03/08/1932, 71.24 -> 88.78, 25%]]> Fri, 02 Jan 2009 23:32:36 -0500
If this market is similar, you could ride the current rally up and sell in say March. But, it is not clear if the road ahead is deflationary as it was in 1929-1932 or the Fed will succeed in a relatively rapid reflation of the money supply. The Fed, the banks, and the money supply appear to be the key just as in 1929-1932, but no one knows for sure how their actions will play out.

The Fed Monetary Base has spiked dramatically but the credit freeze has not thawed yet. Look for evidence that the credit freeze is thawing before bettting on any sustained rally. We are more likely to get a sucker's rally until it does. It might be tradeable if timed right and with trailing stops, but this is not a buy and hold market or unless volatility continues to drop, it is not even a good trader's market.

FWIW, my gut feeling is we will see a rally in Jan-Feb, maybe longer, but my gut also says to sell in March-April or whenever the rally falters, and the market will topple again another 20% below its recent lows.

On Dec 29 02:43 PM mkreisel wrote:

> The Fed didn't do anything between 1929 and 1933, and the market
> managed to pull together 5 sucker rallies 20% or more before finally
> hitting the bottom.
>
> These 5 sucker rallies were:
> 11/13/1929 - 04/17/1930, 198.69 -> 294.07, 48%
> 12/29/1930 - 02/24/1931, 160.16 -> 194.36, 21%
> 06/02/1931 - 07/03/1931, 121.17 -> 155.26, 28%
> 10/05/1931 - 11/09/1931, 86.48 -> 116.79, 35%
> 01/05/1932 - 03/08/1932, 71.24 -> 88.78, 25%]]> http://seekingalpha.com/article/112625-returning-to-a-gold-standard-is-a-bad-idea?source=feed#comment-344652 344652
> "Otherwise, modern banks make “money
> from thin air” the same way that medieval goldsmiths did, when they
> issued more warehouse receipts for gold than they had gold"
>
> False.

Really? In the goldsmith's day, you could distinguish between gold and paper warehouse receipts. Gold was money and paper a representation of money, easier to handle, but money only by virture of representing gold. If a bank issued more paper as "credit" than it had corresponding gold on deposit, it not only inflated the money supply and caused inflation, it risked a bank run. With no way to distinguish between the original receipts of actual gold depositors and the receipts created as "credit" by the bank, depositors who had actually put gold into the bank could be cheated out of their gold in the event of a bank run by debtors rushing to obtain gold for their receipts.

Fast forward to modern banking and consider that each of the original $1,000 deposited at the bank is analogous to gold. Say, you sign each bill with a metallic gold flake pen to emphasize the idea. By the time the bank finishes issuing credit, there is 10,000 dollars circulating in the economy, going to and from the bank as people make payments and deposits by check or electronically, even if the gold pen marked bills never move. The modern bank inflates the money supply by issuing credit not all of which is backed by the original $1,000, just as the goldsmith did with paper receipts and gold.

The modern day equivalent of the medieval goldsmith's bank run on the depositor's gold would be the news that the bank intends to shut its doors. As people rush to the bank to withdraw their money in cash before the doors close, the only cash available is the gold pen marked $1,000. Yet depositors demand to withdraw $10,000. The original depositor of the marked $1,000 is just as much at risk of losing his money to debtors as the gold depositor was in the first example.

If everyone demanded cash for their deposits at every bank, the Treasury could print bills for 100 years and probably still not be able to produce the cash reserves for depositors. At a typical branch bank, I know from personal experience that you would be lucky to be able to withdraw $5,000 on any given day without advance notice.

So, conceptually they are the same racket. $10,000 worth of IOUs backed by $1,000 cash is not the same thing as $1,000 cash. Just as $10,000 worth of warehouse receipts for gold backed by $1,000 worth of gold is not the same thing as $1,000 worth of gold.


> "Going back to the $1,000 deposit idea. Suppose a person deposits
> one thousand dollars in the bank. The bank then does not “loan” any
> of the $1,000. Assuming a 10% reserve, it creates credit of $900
> and calls it a “loan”."
>
> Why wouldn't you call a loan a loan?

Why wouldn't you call a left hook and a right cross both punches? Because they are not the same and left hook and right cross are more accurate. "Credit" is a more accurate term than loan that does not obscure the money creation aspect of circulating bank created IOUs as legal tender. "Monetized debt" would be be an even better term, but then everyone would know that the only thing backing it was an IOU.

If I want to lend you $10 to buy lunch, I must give you $10 from my wallet. You have ten more, I have ten less, and no new money has been created. That's a traditional loan, like loaning a lawnmower. If you choose not to borrow from me and manage to convince the restaurant to accept an IOU from you, that is credit. You can call it a loan if you want, but most people call it credit. It is not bank credit though, because it cannot be circulated or spent like legal tender, so just like a real loan, it does not increase the money supply or cause inflation.

Bank credit is even stranger. It ought to have its own special name, but it doesn't. Bankers prefer that people believe they are actually lending depositor's money, which they most certainly are not. Banks are allowed to "lend" to a borrower the borrower's very own promise to repay and once the bank has done that, the borrower can spend his promise to repay. In effect, the bank waves a magic wand over the borrower's promise to repay and converts it into legal tender. Banks are given the legal franchise to do this, create credit that is legal tender backed only by the borrower's promise to repay. The debt instrument is very much like the restaurant IOU, except the bank is allowed to convert it into legal tender. It becomes money by fiat, that is by law.

If the restaurant had the same legal rights as the bank, it could print out little dollar bills and "lend" them to you. You could pay your $10 bill with it, but that would be a transaction separate from the loan. After paying your bill, you would still owe the restaurant $10, plus interest. Meanwhile the restaurant could spend the $10 you paid for your meal and wait to collect your repayment of the loan principal, plus interest.

Of course restaurants cannot do this, only banks can. If a restaurant did this, it would be prosecuted for counterfeiting. Banks do it legally. But no matter who does it, when credit circulates as money, it inflates the money supply, the amount of legal tender chasing goods and services.


> " The “borrower” withdraws the $900 and spends
> it. The recipient of the $900 deposits it back into the bank, where
> it serves as a reserve for $810 of new bank credit"
>
> Excellent! You have 2 deposits, one for $1000 and one for $900. Total
> $1900. This supports 2 loans, one for $900 and one for $810. And
> no one counterfeited or created anything out of thin air. You'll
> notice that each loan is smaller than the deposit it comes from.

Critics of this process refer to it as counterfeiting for two reasons:
1) A promise to repay is not equivalent to payment, and
2) It is legally not considered counterfeiting by legal fiat.
Anyone who tries to do what a bank does without legal charter as a bank is guilty of counterfeiting, and legal protection does not alter the effect of the practice on the economy.


> "There are several problems inherent in this scheme. First, the bank
> put up no money of its own, but now collects interest on $10,000"
>
> If the bank is collecting interest on $9,000 in loans and holds $1000
> in reserves,it must be paying interest on $10,000 on deposits.

Have you checked that recently? Interest paid on deposits is almost zero and interest collected on bank "loans" probably averages 5% or better. Let's say the bankers put up the original $1,000 dollars themselves. Their return on the $1,000 then is the interest on $9,000, or $450 per year. Forty five percent per year is not bad. And, that is assuming the bankers put up the entire reserve. Not bad at all. If depositors put up all the reserves, the returns are infinite.]]> Fri, 02 Jan 2009 22:07:39 -0500
> "Otherwise, modern banks make “money
> from thin air” the same way that medieval goldsmiths did, when they
> issued more warehouse receipts for gold than they had gold"
>
> False.

Really? In the goldsmith's day, you could distinguish between gold and paper warehouse receipts. Gold was money and paper a representation of money, easier to handle, but money only by virture of representing gold. If a bank issued more paper as "credit" than it had corresponding gold on deposit, it not only inflated the money supply and caused inflation, it risked a bank run. With no way to distinguish between the original receipts of actual gold depositors and the receipts created as "credit" by the bank, depositors who had actually put gold into the bank could be cheated out of their gold in the event of a bank run by debtors rushing to obtain gold for their receipts.

Fast forward to modern banking and consider that each of the original $1,000 deposited at the bank is analogous to gold. Say, you sign each bill with a metallic gold flake pen to emphasize the idea. By the time the bank finishes issuing credit, there is 10,000 dollars circulating in the economy, going to and from the bank as people make payments and deposits by check or electronically, even if the gold pen marked bills never move. The modern bank inflates the money supply by issuing credit not all of which is backed by the original $1,000, just as the goldsmith did with paper receipts and gold.

The modern day equivalent of the medieval goldsmith's bank run on the depositor's gold would be the news that the bank intends to shut its doors. As people rush to the bank to withdraw their money in cash before the doors close, the only cash available is the gold pen marked $1,000. Yet depositors demand to withdraw $10,000. The original depositor of the marked $1,000 is just as much at risk of losing his money to debtors as the gold depositor was in the first example.

If everyone demanded cash for their deposits at every bank, the Treasury could print bills for 100 years and probably still not be able to produce the cash reserves for depositors. At a typical branch bank, I know from personal experience that you would be lucky to be able to withdraw $5,000 on any given day without advance notice.

So, conceptually they are the same racket. $10,000 worth of IOUs backed by $1,000 cash is not the same thing as $1,000 cash. Just as $10,000 worth of warehouse receipts for gold backed by $1,000 worth of gold is not the same thing as $1,000 worth of gold.


> "Going back to the $1,000 deposit idea. Suppose a person deposits
> one thousand dollars in the bank. The bank then does not “loan” any
> of the $1,000. Assuming a 10% reserve, it creates credit of $900
> and calls it a “loan”."
>
> Why wouldn't you call a loan a loan?

Why wouldn't you call a left hook and a right cross both punches? Because they are not the same and left hook and right cross are more accurate. "Credit" is a more accurate term than loan that does not obscure the money creation aspect of circulating bank created IOUs as legal tender. "Monetized debt" would be be an even better term, but then everyone would know that the only thing backing it was an IOU.

If I want to lend you $10 to buy lunch, I must give you $10 from my wallet. You have ten more, I have ten less, and no new money has been created. That's a traditional loan, like loaning a lawnmower. If you choose not to borrow from me and manage to convince the restaurant to accept an IOU from you, that is credit. You can call it a loan if you want, but most people call it credit. It is not bank credit though, because it cannot be circulated or spent like legal tender, so just like a real loan, it does not increase the money supply or cause inflation.

Bank credit is even stranger. It ought to have its own special name, but it doesn't. Bankers prefer that people believe they are actually lending depositor's money, which they most certainly are not. Banks are allowed to "lend" to a borrower the borrower's very own promise to repay and once the bank has done that, the borrower can spend his promise to repay. In effect, the bank waves a magic wand over the borrower's promise to repay and converts it into legal tender. Banks are given the legal franchise to do this, create credit that is legal tender backed only by the borrower's promise to repay. The debt instrument is very much like the restaurant IOU, except the bank is allowed to convert it into legal tender. It becomes money by fiat, that is by law.

If the restaurant had the same legal rights as the bank, it could print out little dollar bills and "lend" them to you. You could pay your $10 bill with it, but that would be a transaction separate from the loan. After paying your bill, you would still owe the restaurant $10, plus interest. Meanwhile the restaurant could spend the $10 you paid for your meal and wait to collect your repayment of the loan principal, plus interest.

Of course restaurants cannot do this, only banks can. If a restaurant did this, it would be prosecuted for counterfeiting. Banks do it legally. But no matter who does it, when credit circulates as money, it inflates the money supply, the amount of legal tender chasing goods and services.


> " The “borrower” withdraws the $900 and spends
> it. The recipient of the $900 deposits it back into the bank, where
> it serves as a reserve for $810 of new bank credit"
>
> Excellent! You have 2 deposits, one for $1000 and one for $900. Total
> $1900. This supports 2 loans, one for $900 and one for $810. And
> no one counterfeited or created anything out of thin air. You'll
> notice that each loan is smaller than the deposit it comes from.

Critics of this process refer to it as counterfeiting for two reasons:
1) A promise to repay is not equivalent to payment, and
2) It is legally not considered counterfeiting by legal fiat.
Anyone who tries to do what a bank does without legal charter as a bank is guilty of counterfeiting, and legal protection does not alter the effect of the practice on the economy.


> "There are several problems inherent in this scheme. First, the bank
> put up no money of its own, but now collects interest on $10,000"
>
> If the bank is collecting interest on $9,000 in loans and holds $1000
> in reserves,it must be paying interest on $10,000 on deposits.

Have you checked that recently? Interest paid on deposits is almost zero and interest collected on bank "loans" probably averages 5% or better. Let's say the bankers put up the original $1,000 dollars themselves. Their return on the $1,000 then is the interest on $9,000, or $450 per year. Forty five percent per year is not bad. And, that is assuming the bankers put up the entire reserve. Not bad at all. If depositors put up all the reserves, the returns are infinite.]]> http://seekingalpha.com/article/112963-nine-ways-to-profit-in-2009?source=feed#comment-344613 344613

On Jan 02 07:28 PM aitvaras wrote:

> It is /was a really great day, the dollar went up, oil went up gold
> went down.
>
> I've pick a great day to enter my triple shorts, Good prices for
> them.
>
> Maybe oil goes to $50 next week, hope so. Gives me a chance to take
> a serious profit on DXO in my real time portfolio. Remember when
> oil spiked earlier, this is another spike to savage the shorts.

>
>
> IMO]]> Fri, 02 Jan 2009 20:05:01 -0500

On Jan 02 07:28 PM aitvaras wrote:

> It is /was a really great day, the dollar went up, oil went up gold
> went down.
>
> I've pick a great day to enter my triple shorts, Good prices for
> them.
>
> Maybe oil goes to $50 next week, hope so. Gives me a chance to take
> a serious profit on DXO in my real time portfolio. Remember when
> oil spiked earlier, this is another spike to savage the shorts.

>
>
> IMO]]> http://seekingalpha.com/article/112963-nine-ways-to-profit-in-2009?source=feed#comment-344606 344606
Oil could go as low as you said. The charts suggest it is possible. But, I'm betting the low is in or close to it for two reasons. Even if some people think oil could go as low as you say, $20-$30, I think most people expect it to rebound in 2009, just as you said. If they expect it to rebound to $45-$85 by the end of the year, why risk missing the opportunity to buy at $30-$35 and chasing the price up should it head back up early? Why not buy in at $30-$35 and add more if the price weakens. I think most people would see it that way and such an attitude will prevent the price from dropping all the way down to $20.

Also, historically the price has already dropped as much percentage-wise as it did after the 1970's oil crisis. To fall all the way to $20 would mean a much larger drop percentage-wise. It could happen, but if it does, it would confirm that that this recession/depression is as bad as you think.

To me, the opportunity to buy oil at $30-$35 now and probably double the investment in a year or two years at most seems like a very good bet. I bought USO at very close to $31 with about half the money I wished to dedicate to oil before Christmas. I'll hold the other half and see how it goes 1Q '09. If the price drops to $20, I'll buy more. If the price goes up and the future looks as bleak then as it does now, I'll sell and bet on a second big decline in the market to buy back in.

Thanks again for your predictions.]]> Fri, 02 Jan 2009 19:53:15 -0500
Oil could go as low as you said. The charts suggest it is possible. But, I'm betting the low is in or close to it for two reasons. Even if some people think oil could go as low as you say, $20-$30, I think most people expect it to rebound in 2009, just as you said. If they expect it to rebound to $45-$85 by the end of the year, why risk missing the opportunity to buy at $30-$35 and chasing the price up should it head back up early? Why not buy in at $30-$35 and add more if the price weakens. I think most people would see it that way and such an attitude will prevent the price from dropping all the way down to $20.

Also, historically the price has already dropped as much percentage-wise as it did after the 1970's oil crisis. To fall all the way to $20 would mean a much larger drop percentage-wise. It could happen, but if it does, it would confirm that that this recession/depression is as bad as you think.

To me, the opportunity to buy oil at $30-$35 now and probably double the investment in a year or two years at most seems like a very good bet. I bought USO at very close to $31 with about half the money I wished to dedicate to oil before Christmas. I'll hold the other half and see how it goes 1Q '09. If the price drops to $20, I'll buy more. If the price goes up and the future looks as bleak then as it does now, I'll sell and bet on a second big decline in the market to buy back in.

Thanks again for your predictions.]]> http://seekingalpha.com/article/112625-returning-to-a-gold-standard-is-a-bad-idea?source=feed#comment-344498 344498 “GDP didn't fall further during those panics? How much did GDP shrink after the Panic of 1873? How long did that Depression last?”

Are you an economist? Can you cite enough sources on both sides of the issue to prove a consensus? Have you compared the metrics of 1873 with the metrics of the Depression. Because there are scholarly papers taking both sides of the issue. You made the assertion. Now prove it, if you can.

asleeper wrote, "And no matter if there was a consensus, it would have to be qualified by noting that there has never been a pure gold standard or bimetallic standard in the U.S. "

Jim Myrtle wrote, “Don't tell the goldbugs. LOL!”

LOL all you want, and tell them yourself. If all you intend is to play cat and mouse with supposed “goldbugs”, then by all means keep fooling around. The larger issue addressed by the article is the monetary system.

Although I do not advocate a return to any of the past "gold standards", I did begin reading several websites published by those I suppose you would call goldbugs after the Nasdaq crash. As a result, learned enough about the monetary system to earn a lot of money back that was lost and to know that the Fed and private fractional reserve banking is a very bad system for most of society.]]> Fri, 02 Jan 2009 16:29:00 -0500 “GDP didn't fall further during those panics? How much did GDP shrink after the Panic of 1873? How long did that Depression last?”

Are you an economist? Can you cite enough sources on both sides of the issue to prove a consensus? Have you compared the metrics of 1873 with the metrics of the Depression. Because there are scholarly papers taking both sides of the issue. You made the assertion. Now prove it, if you can.

asleeper wrote, "And no matter if there was a consensus, it would have to be qualified by noting that there has never been a pure gold standard or bimetallic standard in the U.S. "

Jim Myrtle wrote, “Don't tell the goldbugs. LOL!”

LOL all you want, and tell them yourself. If all you intend is to play cat and mouse with supposed “goldbugs”, then by all means keep fooling around. The larger issue addressed by the article is the monetary system.

Although I do not advocate a return to any of the past "gold standards", I did begin reading several websites published by those I suppose you would call goldbugs after the Nasdaq crash. As a result, learned enough about the monetary system to earn a lot of money back that was lost and to know that the Fed and private fractional reserve banking is a very bad system for most of society.]]> http://seekingalpha.com/article/112625-returning-to-a-gold-standard-is-a-bad-idea?source=feed#comment-344485 344485
“Thanks for the link. The only thing is, modern banks don't issue warehouse receipts for gold. I agree, that would be "money from thin air", but since that no longer occurs, I don't think it's relevent to our discussion.”


The difference between Rothbard’s warehouse receipts for gold and modern fractional reserve banking is that modern banks use deposits of paper assets such as Federal Reserve Notes, T-bonds, and T-bills as reserves instead of gold. Otherwise, modern banks make “money from thin air” the same way that medieval goldsmiths did, when they issued more warehouse receipts for gold than they had gold.

Going back to the $1,000 deposit idea. Suppose a person deposits one thousand dollars in the bank. The bank then does not “loan” any of the $1,000. Assuming a 10% reserve, it creates credit of $900 and calls it a “loan”. The “borrower” withdraws the $900 and spends it. The recipient of the $900 deposits it back into the bank, where it serves as a reserve for $810 of new bank credit. The new “borrower” spends it and the new recipient deposits it back into the bank, where it serves as a reserve for more credit to be issued by the bank. This process continues in a decreasing geometric series until the bank has issued $10,000 in credit. The original $1,000 may still be sitting in the bank, but the amount of dollars chasing goods in the economy was $10,000 in this example. More dollars implies monetary inflation and monetary inflation implies price inflation.

There are several problems inherent in this scheme. First, the bank put up no money of its own, but now collects interest on $10,000.

Second, the increased money supply causes inflation which penalizes savers and retired people on fixed incomes. That is why Americans traditionally have saved so little since the establishment of the Fed. In a use it or lose it situation, t doesn’t pay to save.

Third, “Borrowers” who have first access to new loans can buy goods before others, such as wage earners, have access to the new money and before inflation caused by the new money manifests in the general economy. That is why wage increases always lag inflation and that is where stealing from wage earners comes in.

Fourth, if all loans are to be repaid, some borrowers must necessarily go bankrupt because the bank created the principle when it issued the credit, but it did not increase the money supply by an amount equal to the interest. So, if most of the loans are paid back with interest, not enough money remains to pay interest on the others. That is why our Government cannot pay off the national debt. If it did, the money supply would shrink dramatically causing terrible deflation. When money = debt, you cannot extinguish debt without extinguishing the money supply too. This problem is ameliorated to some extent by spending of bank profits back into the general economy, but for the most part, compensation is accomplished by the issuance of new loans and the accompanying incessant inflation.

Fifth, in a centralized system, such as the Fed, leaders of the member banks can profit from what is essentially insider trading, from the knowledge of future credit terms. That is why the bailout money authorized by Congress did not go to buy toxic assets as Paulson said it would, but is being used to shore up balance sheets and buy out competitors for pennies on the dollar, because the Fed member banks knew full well that credit would not loosen up anytime soon.

Here is a good link to a video on how banking evolved: video.google.com/video...

I recommend skipping the first 1:50 - it is mostly well-known quotes about the banking industry – and skipping the part about an alternate money system at the end. The middle is a very explanation of how fractional reserve banking actually works.]]> Fri, 02 Jan 2009 16:15:47 -0500
“Thanks for the link. The only thing is, modern banks don't issue warehouse receipts for gold. I agree, that would be "money from thin air", but since that no longer occurs, I don't think it's relevent to our discussion.”


The difference between Rothbard’s warehouse receipts for gold and modern fractional reserve banking is that modern banks use deposits of paper assets such as Federal Reserve Notes, T-bonds, and T-bills as reserves instead of gold. Otherwise, modern banks make “money from thin air” the same way that medieval goldsmiths did, when they issued more warehouse receipts for gold than they had gold.

Going back to the $1,000 deposit idea. Suppose a person deposits one thousand dollars in the bank. The bank then does not “loan” any of the $1,000. Assuming a 10% reserve, it creates credit of $900 and calls it a “loan”. The “borrower” withdraws the $900 and spends it. The recipient of the $900 deposits it back into the bank, where it serves as a reserve for $810 of new bank credit. The new “borrower” spends it and the new recipient deposits it back into the bank, where it serves as a reserve for more credit to be issued by the bank. This process continues in a decreasing geometric series until the bank has issued $10,000 in credit. The original $1,000 may still be sitting in the bank, but the amount of dollars chasing goods in the economy was $10,000 in this example. More dollars implies monetary inflation and monetary inflation implies price inflation.

There are several problems inherent in this scheme. First, the bank put up no money of its own, but now collects interest on $10,000.

Second, the increased money supply causes inflation which penalizes savers and retired people on fixed incomes. That is why Americans traditionally have saved so little since the establishment of the Fed. In a use it or lose it situation, t doesn’t pay to save.

Third, “Borrowers” who have first access to new loans can buy goods before others, such as wage earners, have access to the new money and before inflation caused by the new money manifests in the general economy. That is why wage increases always lag inflation and that is where stealing from wage earners comes in.

Fourth, if all loans are to be repaid, some borrowers must necessarily go bankrupt because the bank created the principle when it issued the credit, but it did not increase the money supply by an amount equal to the interest. So, if most of the loans are paid back with interest, not enough money remains to pay interest on the others. That is why our Government cannot pay off the national debt. If it did, the money supply would shrink dramatically causing terrible deflation. When money = debt, you cannot extinguish debt without extinguishing the money supply too. This problem is ameliorated to some extent by spending of bank profits back into the general economy, but for the most part, compensation is accomplished by the issuance of new loans and the accompanying incessant inflation.

Fifth, in a centralized system, such as the Fed, leaders of the member banks can profit from what is essentially insider trading, from the knowledge of future credit terms. That is why the bailout money authorized by Congress did not go to buy toxic assets as Paulson said it would, but is being used to shore up balance sheets and buy out competitors for pennies on the dollar, because the Fed member banks knew full well that credit would not loosen up anytime soon.

Here is a good link to a video on how banking evolved: video.google.com/video...

I recommend skipping the first 1:50 - it is mostly well-known quotes about the banking industry – and skipping the part about an alternate money system at the end. The middle is a very explanation of how fractional reserve banking actually works.]]> http://seekingalpha.com/article/112625-returning-to-a-gold-standard-is-a-bad-idea?source=feed#comment-344469 344469 “I refer to price deflation because that is all that people care about. The money supply could grow 1% while GDP grows 3%, causing prices to drop 2%.

You could be "technical" and say we were "suffering" 1% inflation, but all people care about is the impact that 1% "inflation" has on prices, in this case it causes them to fall 2% a year.

And you can pretend that there was no inflation or deflation (in prices)while we were on the gold standard, before the Federal Reserve was created, but you'd be wrong.”

You needn’t suppose what I might say or not say or try to imply that I “pretend” anything.. That is a false way of arguing. Not to go by the same tack, I’ll stick to what you have just written.

Price deflation is not all that people care about as is evident in this thread and in other blogs where people are discussing the economy. People also care about the possibility of high inflation and even hyperinflation, because the Fed has massively increased the base money supply. Just because we are suffering price deflation at the moment does not mean we will not suffer high inflation should the banks loosen credit again.

You implied (I think) that I am a “gold standard” advocate who “pretends” there was no inflation or deflation on the gold standard before the Fed was created. You are wrong on both supposed points. A little history on the “gold standard” is in order.

The U.S. has never been on a pure gold or even a pure bimetallic money system. The US was on a bimetallic “standard” during the 1800s, mainly gold and very little silver, but, banks could and did issue paper money on a fractional reserve system against metals on deposit at the same time.

A true Federal Government Gold Standard was only in effect from 1900-1933 with the Gold Standard Act, but this law did not prohibit fractional reserve banking which continued unabated. The Gold Standard Act came to an end in 1933 when President Roosevelt outlawed private gold ownership except for jewelry.

Bretton Woods, enacted by the US in 1946 created a system of fixed exchange rates that allowed governments to sell their gold to the US at $35/ounce. Nixon ended Bretton Woods in 1971.

From 1946 to 1971, US citizens could not redeem dollars in gold, only foreign Governments could, and no one could redeem dollars for silver. U.S. citizens could not legally own gold again until Jan.1, 1975.

So, as far as US citizens are concerned, gold has not been money and we have not been on a gold standard since 1946, at the latest, even earlier if you go by the right of citizens to own gold. Silver has not been money since 1900. No gold standard of any kind has been used in any major economy since 1971. And, still we have “business cycles”, financial panics, bank failures, recessions, and what now looks like a depression looming.
The gold standard in effect from 1900-1933 was not a stable money system and did not prevent over-expansion of the money supply due to fractional reserve banking during credit booms or over-contraction during credit busts, because banks could create too much credit-money by loosening credit or too little by tightening credit.

When banks and brokerages tightened credit in 1929 after a period of loose credit, the stock market crashed, the money supply began to contract, and the Great Depression was on. Gentle price deflation due to stable money and productivity increases was not the problem. Credit tightening by member banks of the Fed, most notably JP Morgan, was the problem. A dramatic drop in the money supply resulted, made possible by the fractional reserve banking, fiat money regime. The drop in the money supply caused the drop in prices which you claimed is all that people care about.

I do not advocate a “gold standard”; I advocate a near-stable money supply that can be expanded approximately 0-5% per year by the Government and cannot be deflated. That would mean no Fed, no fractional reserve banking, and a loan would actually be a loan, not credit. I leave it to the economists to design the system.]]> Fri, 02 Jan 2009 15:45:29 -0500 “I refer to price deflation because that is all that people care about. The money supply could grow 1% while GDP grows 3%, causing prices to drop 2%.

You could be "technical" and say we were "suffering" 1% inflation, but all people care about is the impact that 1% "inflation" has on prices, in this case it causes them to fall 2% a year.

And you can pretend that there was no inflation or deflation (in prices)while we were on the gold standard, before the Federal Reserve was created, but you'd be wrong.”

You needn’t suppose what I might say or not say or try to imply that I “pretend” anything.. That is a false way of arguing. Not to go by the same tack, I’ll stick to what you have just written.

Price deflation is not all that people care about as is evident in this thread and in other blogs where people are discussing the economy. People also care about the possibility of high inflation and even hyperinflation, because the Fed has massively increased the base money supply. Just because we are suffering price deflation at the moment does not mean we will not suffer high inflation should the banks loosen credit again.

You implied (I think) that I am a “gold standard” advocate who “pretends” there was no inflation or deflation on the gold standard before the Fed was created. You are wrong on both supposed points. A little history on the “gold standard” is in order.

The U.S. has never been on a pure gold or even a pure bimetallic money system. The US was on a bimetallic “standard” during the 1800s, mainly gold and very little silver, but, banks could and did issue paper money on a fractional reserve system against metals on deposit at the same time.

A true Federal Government Gold Standard was only in effect from 1900-1933 with the Gold Standard Act, but this law did not prohibit fractional reserve banking which continued unabated. The Gold Standard Act came to an end in 1933 when President Roosevelt outlawed private gold ownership except for jewelry.

Bretton Woods, enacted by the US in 1946 created a system of fixed exchange rates that allowed governments to sell their gold to the US at $35/ounce. Nixon ended Bretton Woods in 1971.

From 1946 to 1971, US citizens could not redeem dollars in gold, only foreign Governments could, and no one could redeem dollars for silver. U.S. citizens could not legally own gold again until Jan.1, 1975.

So, as far as US citizens are concerned, gold has not been money and we have not been on a gold standard since 1946, at the latest, even earlier if you go by the right of citizens to own gold. Silver has not been money since 1900. No gold standard of any kind has been used in any major economy since 1971. And, still we have “business cycles”, financial panics, bank failures, recessions, and what now looks like a depression looming.
The gold standard in effect from 1900-1933 was not a stable money system and did not prevent over-expansion of the money supply due to fractional reserve banking during credit booms or over-contraction during credit busts, because banks could create too much credit-money by loosening credit or too little by tightening credit.

When banks and brokerages tightened credit in 1929 after a period of loose credit, the stock market crashed, the money supply began to contract, and the Great Depression was on. Gentle price deflation due to stable money and productivity increases was not the problem. Credit tightening by member banks of the Fed, most notably JP Morgan, was the problem. A dramatic drop in the money supply resulted, made possible by the fractional reserve banking, fiat money regime. The drop in the money supply caused the drop in prices which you claimed is all that people care about.

I do not advocate a “gold standard”; I advocate a near-stable money supply that can be expanded approximately 0-5% per year by the Government and cannot be deflated. That would mean no Fed, no fractional reserve banking, and a loan would actually be a loan, not credit. I leave it to the economists to design the system.]]> http://seekingalpha.com/article/112625-returning-to-a-gold-standard-is-a-bad-idea?source=feed#comment-344447 344447 “You might have a point, if bubbles and panics weren't more severe when we were on the gold standard.”

There is no consensus among economists supporting the assertion that bubble and panics were more severe on the gold standard. One study after another has gone either way. And no matter if there was a consensus, it would have to be qualified by noting that there has never been a pure gold standard or bimetallic standard in the U.S. The only true Federal Government Gold Standard n the U.S. was in effect at the same time as the fractional reserve banking system. Fractional reserve banking existed before, during, and after the Gold Standard Act of 1900-1933. So, it is not really possible to separate analysis of monetary systems in modern times into gold standard vs fractional reserve banking and fiat money. We have always had both in modern times.]]> Fri, 02 Jan 2009 15:20:27 -0500 “You might have a point, if bubbles and panics weren't more severe when we were on the gold standard.”

There is no consensus among economists supporting the assertion that bubble and panics were more severe on the gold standard. One study after another has gone either way. And no matter if there was a consensus, it would have to be qualified by noting that there has never been a pure gold standard or bimetallic standard in the U.S. The only true Federal Government Gold Standard n the U.S. was in effect at the same time as the fractional reserve banking system. Fractional reserve banking existed before, during, and after the Gold Standard Act of 1900-1933. So, it is not really possible to separate analysis of monetary systems in modern times into gold standard vs fractional reserve banking and fiat money. We have always had both in modern times.]]> http://seekingalpha.com/article/112675-preventing-the-depression-of-2009?source=feed#comment-342186 342186 Wed, 31 Dec 2008 01:37:59 -0500 http://seekingalpha.com/article/112625-returning-to-a-gold-standard-is-a-bad-idea?source=feed#comment-342178 342178
Smarty_Pants understands and uses both definitions and is referring to a potentially stable alternative money supply, while Jim Myrtle is referring to price deflation only and is using the example of the Great Depression which took place in the setting of an unstable money supply managed by the Fed and its fractional reserve banking system. The problem is that Jim Myrtle is using the example of the terrible deflation of the Great Depression as an example of what would go wrong with Smarty_Pants potentially stable alternative money supply, when it is very possible that a stable money supply would have prevented the rampant speculation that led to the stock market bubble, subsequent crash, and disastrous deflation.

In 1929, due to the immense amount of credit created under the Fed’s fractional reserve system, it was possible for a self-reinforcing deflationary spiral in the money supply to occur. When money = credit = debt, and credit is tightened, that is exactly what occurs, and it has occurred repeatedly since the establishment of the Fed, despite the Fed being established precisely to prevent such “business cycles”. It happened in 1929 and it is at risk of happening again in 2008/2009.

The Great Depression was certainly bad, but characterizing all price deflation as bad because of it is as wrong-headed as characterizing all price inflation as bad, because of the example of hyperinflation in Germany. Modest price deflation, due to productivity increases in an economy with a stable money supply is no more problematic than modest inflation and has nothing in common with the sharp monetary deflation that led to the Great Depression.

To give a realistic example of benign deflation in today’s world is very difficult, because we are all just so conditioned by perpetual inflation to think that prices always go up. But, to make it as simple as possible, just imagine a society that just farms and mines in the country and manufactures in the cities. If farm and mine productivity go up, food and mineral prices drop, but profits do not drop, because farm and mines sell more and their own costs drop. They have to eat, too. If they can’t sell all their product domestically, they can export. Also, the city factory margins improve because they are paying less for food and minerals; they can lower the prices of their products and keep wages stable simultaneously. Reduced prices for manufactured goods also improve farm and mine margins. Farm and mine wages can remain stable too.

The reason the Great Depression was so bad is that the price deflation was not the result of a beneficial increase in productivity in a stable currency regime; it was a catastrophic drop in the money supply due to a bank and brokerage credit freeze.

With our financial sector so screwed up at the moment, it is time that people learn that our monetary system isn’t some incomprehensible irreplaceable perfect system we cannot discuss or change. It is a private for-profit business cartel, not unlike OPEC, and it is not in business to help the average Joe.

Maybe a gold standard isn't the answer, but letting gold and silver circulate in parallel with the dollar as an alternative to legal tender paper would certainly be an interesting experiment. It's not the only alternative either, but this missive is too long already.]]> Wed, 31 Dec 2008 01:21:58 -0500
Smarty_Pants understands and uses both definitions and is referring to a potentially stable alternative money supply, while Jim Myrtle is referring to price deflation only and is using the example of the Great Depression which took place in the setting of an unstable money supply managed by the Fed and its fractional reserve banking system. The problem is that Jim Myrtle is using the example of the terrible deflation of the Great Depression as an example of what would go wrong with Smarty_Pants potentially stable alternative money supply, when it is very possible that a stable money supply would have prevented the rampant speculation that led to the stock market bubble, subsequent crash, and disastrous deflation.

In 1929, due to the immense amount of credit created under the Fed’s fractional reserve system, it was possible for a self-reinforcing deflationary spiral in the money supply to occur. When money = credit = debt, and credit is tightened, that is exactly what occurs, and it has occurred repeatedly since the establishment of the Fed, despite the Fed being established precisely to prevent such “business cycles”. It happened in 1929 and it is at risk of happening again in 2008/2009.

The Great Depression was certainly bad, but characterizing all price deflation as bad because of it is as wrong-headed as characterizing all price inflation as bad, because of the example of hyperinflation in Germany. Modest price deflation, due to productivity increases in an economy with a stable money supply is no more problematic than modest inflation and has nothing in common with the sharp monetary deflation that led to the Great Depression.

To give a realistic example of benign deflation in today’s world is very difficult, because we are all just so conditioned by perpetual inflation to think that prices always go up. But, to make it as simple as possible, just imagine a society that just farms and mines in the country and manufactures in the cities. If farm and mine productivity go up, food and mineral prices drop, but profits do not drop, because farm and mines sell more and their own costs drop. They have to eat, too. If they can’t sell all their product domestically, they can export. Also, the city factory margins improve because they are paying less for food and minerals; they can lower the prices of their products and keep wages stable simultaneously. Reduced prices for manufactured goods also improve farm and mine margins. Farm and mine wages can remain stable too.

The reason the Great Depression was so bad is that the price deflation was not the result of a beneficial increase in productivity in a stable currency regime; it was a catastrophic drop in the money supply due to a bank and brokerage credit freeze.

With our financial sector so screwed up at the moment, it is time that people learn that our monetary system isn’t some incomprehensible irreplaceable perfect system we cannot discuss or change. It is a private for-profit business cartel, not unlike OPEC, and it is not in business to help the average Joe.

Maybe a gold standard isn't the answer, but letting gold and silver circulate in parallel with the dollar as an alternative to legal tender paper would certainly be an interesting experiment. It's not the only alternative either, but this missive is too long already.]]> http://seekingalpha.com/article/112402-gold-poised-to-move-higher?source=feed#comment-342112 342112 Tue, 30 Dec 2008 23:11:13 -0500 http://seekingalpha.com/article/112402-gold-poised-to-move-higher?source=feed#comment-342110 342110
All money drops in value in a famine: gold, silver, paper; it doesn’t matter. The ratio of money to food increases dramatically in a famine, so each unit of money buys less food, and prices rise. But, printing more money doesn’t produce more food; it just increases food prices even more.

Likewise, in times of plenty, all money increases in value, and prices would drop, except for interference with the money supply by the banking sector. The bankers expand credit at such times and instead of the average person reaping the advantages of the plentiful harvest, the increased credit jacks up prices. The average Joe not only pays more for goods than he should but goes deeper into debt.

The strength of gold as money is that it cannot be easily inflated like paper. That is why an ounce of gold could buy a top notch suit before the Depression, during the Depression, and can still buy one today, but the $21 it took to buy a suit in 1929 will only buy a mediocre tie or belt in 2009.

Gold does not necessarily go down in value in a deflation either. In an actual money supply deflation, money becomes dear, and precious metals are money too, so they also become dear. [Keep in mind that a paper dollar inflation is highly unlikely. What we are seeing now is a deflation of prices in select areas: real estate, gas, publicly traded commodities, etc, due to the credit freeze, but the actual money supply is not dropping. The Government and Fed are pulling out the stops to prevent that. In the short term, anything can happen, but in the long term, we are likely to see a lower or flat stock market and higher precious metals and commodities prices.]

Anything can be an investment whether it provides a return on investment or not. In fact, even a money loser can be an investment, if the alternatives result in even greater losses. How else is it possible to explain the huge amounts of money flowing into Treasuries that provide a negative real rate of return? Simply preserving wealth by buying gold and silver was an effective investment strategy, as many Germans learned during their experience with hyperinflation.

Hamilton and many others lost a big chunk of money on gold and gold stocks in the recent market market crash, but he has been in gold for quite a while, so I’m sure he is still doing quite well. He is a great researcher, but like many investors and speculators, he has not put the same amount of research into the structure and politics of the U.S. monetary system as he did into his target markets. It is an indicator of risk for all paper assets, that stocks dropped the most, paper gold such as GLD and others dropped less, and physical gold and silver in private hands dropped the least in the market crash.
]]> Tue, 30 Dec 2008 23:04:57 -0500
All money drops in value in a famine: gold, silver, paper; it doesn’t matter. The ratio of money to food increases dramatically in a famine, so each unit of money buys less food, and prices rise. But, printing more money doesn’t produce more food; it just increases food prices even more.

Likewise, in times of plenty, all money increases in value, and prices would drop, except for interference with the money supply by the banking sector. The bankers expand credit at such times and instead of the average person reaping the advantages of the plentiful harvest, the increased credit jacks up prices. The average Joe not only pays more for goods than he should but goes deeper into debt.

The strength of gold as money is that it cannot be easily inflated like paper. That is why an ounce of gold could buy a top notch suit before the Depression, during the Depression, and can still buy one today, but the $21 it took to buy a suit in 1929 will only buy a mediocre tie or belt in 2009.

Gold does not necessarily go down in value in a deflation either. In an actual money supply deflation, money becomes dear, and precious metals are money too, so they also become dear. [Keep in mind that a paper dollar inflation is highly unlikely. What we are seeing now is a deflation of prices in select areas: real estate, gas, publicly traded commodities, etc, due to the credit freeze, but the actual money supply is not dropping. The Government and Fed are pulling out the stops to prevent that. In the short term, anything can happen, but in the long term, we are likely to see a lower or flat stock market and higher precious metals and commodities prices.]

Anything can be an investment whether it provides a return on investment or not. In fact, even a money loser can be an investment, if the alternatives result in even greater losses. How else is it possible to explain the huge amounts of money flowing into Treasuries that provide a negative real rate of return? Simply preserving wealth by buying gold and silver was an effective investment strategy, as many Germans learned during their experience with hyperinflation.

Hamilton and many others lost a big chunk of money on gold and gold stocks in the recent market market crash, but he has been in gold for quite a while, so I’m sure he is still doing quite well. He is a great researcher, but like many investors and speculators, he has not put the same amount of research into the structure and politics of the U.S. monetary system as he did into his target markets. It is an indicator of risk for all paper assets, that stocks dropped the most, paper gold such as GLD and others dropped less, and physical gold and silver in private hands dropped the least in the market crash.
]]> http://seekingalpha.com/article/111655-the-deflation-scam?source=feed#comment-336052 336052

On Dec 20 08:06 AM ATWshop wrote:

> There is No logical reason for gold to increase in value as it is Not tied to anything aside from trinkets. Only the uninformed buying it make the price rise.

Gold has been money and a store of value for 3,000 years. Only central banks and national governments have made fiat currency legal tender and displaced it from that role in the last century. When confidence in the fiat currencies falter, interest in gold rises. Simple as that. Why do you think central banks still hold most of the gold in the world, because they are stupid, because the public is stupid? You sound like the one that is uninformed.

>You want a real inflation or deflation hedge?... buy "canned soup" if
you really think the world is near an end. Then you will have something
to barter with when times get as bad as gold worshipers think they
will. People can't eat gold!

Try storing a hundred thousand cans of soup in your garage and see how long you can hang on to it in a famine, and you cannot eat paper money either. But, you can trade gold for paper money or food, you can hide gold, and gold is portable.

> There are so many areas that we waste money - even on a local level.
In my area, the 3rd Grade teacher earns $64,000 per year plus benefits.
Now, be realistic here... how smart do you really have to be to follow
a lesson plan and teach a 3rd grader?

Spoken like one who has never tried it. Teaching is nothing like holding forth with your own children in your living room. It has nothing to do with being smart academically and everything to do with patience, social skills, and management ability.

> Maybe when the Fed is done downgrading the wages and unfair contractual conditions of the UAW they should take on the Teacher's Union and rid it of some of the obscene wages and work rules.

Sounds like ATWshop is angry that his own corporate masters have held his wages down while a few unions have managed to preserve their members standard of living. According to at least one source, since the early 70s, wages have dropped 18% in constant dollars. ATW would do well to study where all the productivity gains since then have gone, into the pockets of the 300 families that own 50% of the assets of the U.S.

> Isn't the Teacher's Union clause regarding "Tenure" akin to the UAW's rules on "Job Banks"?

No, it isn't. Tenure means less experienced teachers are laid off first. Jobs banks mean laid off auto workers aren't really laid off at all, but continue to be paid. It's kind of like unemployment insurance on steroids.

> We should be able to save Billion$ with just this one area.

"We?" Why should you or I have any say in the relationship between a corporation and its union employees? If a union demands too much and puts its employer out of business, then that is just foolish, but it is none of our business.

Public education is another matter. The biggest improvement that could be made to public education would be to fire the worst 10% of teachers at the end of their third year when you can really tell what they can do and replace them with new teachers.

> Don't even get me started on the local governments waste of money with Book Mobiles, city parks, etc.

WTF? How about eliminating sports programs and the arts at schools, public libraries and roads, 4th of July fireworks, while you are at it. I'll bet you are great conversation at the dinner table, ATW. ]]> Mon, 22 Dec 2008 16:08:23 -0500

On Dec 20 08:06 AM ATWshop wrote:

> There is No logical reason for gold to increase in value as it is Not tied to anything aside from trinkets. Only the uninformed buying it make the price rise.

Gold has been money and a store of value for 3,000 years. Only central banks and national governments have made fiat currency legal tender and displaced it from that role in the last century. When confidence in the fiat currencies falter, interest in gold rises. Simple as that. Why do you think central banks still hold most of the gold in the world, because they are stupid, because the public is stupid? You sound like the one that is uninformed.

>You want a real inflation or deflation hedge?... buy "canned soup" if
you really think the world is near an end. Then you will have something
to barter with when times get as bad as gold worshipers think they
will. People can't eat gold!

Try storing a hundred thousand cans of soup in your garage and see how long you can hang on to it in a famine, and you cannot eat paper money either. But, you can trade gold for paper money or food, you can hide gold, and gold is portable.

> There are so many areas that we waste money - even on a local level.
In my area, the 3rd Grade teacher earns $64,000 per year plus benefits.
Now, be realistic here... how smart do you really have to be to follow
a lesson plan and teach a 3rd grader?

Spoken like one who has never tried it. Teaching is nothing like holding forth with your own children in your living room. It has nothing to do with being smart academically and everything to do with patience, social skills, and management ability.

> Maybe when the Fed is done downgrading the wages and unfair contractual conditions of the UAW they should take on the Teacher's Union and rid it of some of the obscene wages and work rules.

Sounds like ATWshop is angry that his own corporate masters have held his wages down while a few unions have managed to preserve their members standard of living. According to at least one source, since the early 70s, wages have dropped 18% in constant dollars. ATW would do well to study where all the productivity gains since then have gone, into the pockets of the 300 families that own 50% of the assets of the U.S.

> Isn't the Teacher's Union clause regarding "Tenure" akin to the UAW's rules on "Job Banks"?

No, it isn't. Tenure means less experienced teachers are laid off first. Jobs banks mean laid off auto workers aren't really laid off at all, but continue to be paid. It's kind of like unemployment insurance on steroids.

> We should be able to save Billion$ with just this one area.

"We?" Why should you or I have any say in the relationship between a corporation and its union employees? If a union demands too much and puts its employer out of business, then that is just foolish, but it is none of our business.

Public education is another matter. The biggest improvement that could be made to public education would be to fire the worst 10% of teachers at the end of their third year when you can really tell what they can do and replace them with new teachers.

> Don't even get me started on the local governments waste of money with Book Mobiles, city parks, etc.

WTF? How about eliminating sports programs and the arts at schools, public libraries and roads, 4th of July fireworks, while you are at it. I'll bet you are great conversation at the dinner table, ATW. ]]> http://seekingalpha.com/article/111845-value-vs-price-trade-in-your-gold-for-oil-and-agriculture-futures?source=feed#comment-336022 336022
Sold my gold in the mid-900s and my silver in the low 19s before the absolute highs, bought gold back in the low 800s and luckily sold again when it rallied back up into the high-800s and before gold and silver dropped off the cliff. Can't claim any genius there, just happened to trade out and stay out while they fell.

Started buying silver back gradually and averaged down, my average cost being about $12 now. Still haven't bought back into gold, worried that it will also drop like: silver, platinum, and palladium did. Platinum and palladium look very attractive at current prices, though, but I don't know the best way to invest in them.

So, I've started looking at oil, general metals and commodities ETFs, and the agricultural ETFs. Just took a small position in USO today. Will start looking harder at the commodities ETFs. Even with price deflation, I cannot see food prices dropping much. And, if the high future inflation scenario that so many are predicting plays out, food prices should be a safe bet to rise.

Who knows though? My general rule is the greater the certainty of the analyst, the more full of sh** they are. Sometimes common sense beats out the most sophisticated analysis, and sometimes the unexpected beats the he** out of common sense. You never know for sure.]]> Mon, 22 Dec 2008 15:16:20 -0500
Sold my gold in the mid-900s and my silver in the low 19s before the absolute highs, bought gold back in the low 800s and luckily sold again when it rallied back up into the high-800s and before gold and silver dropped off the cliff. Can't claim any genius there, just happened to trade out and stay out while they fell.

Started buying silver back gradually and averaged down, my average cost being about $12 now. Still haven't bought back into gold, worried that it will also drop like: silver, platinum, and palladium did. Platinum and palladium look very attractive at current prices, though, but I don't know the best way to invest in them.

So, I've started looking at oil, general metals and commodities ETFs, and the agricultural ETFs. Just took a small position in USO today. Will start looking harder at the commodities ETFs. Even with price deflation, I cannot see food prices dropping much. And, if the high future inflation scenario that so many are predicting plays out, food prices should be a safe bet to rise.

Who knows though? My general rule is the greater the certainty of the analyst, the more full of sh** they are. Sometimes common sense beats out the most sophisticated analysis, and sometimes the unexpected beats the he** out of common sense. You never know for sure.]]> http://seekingalpha.com/article/109582-own-gold-time-to-fold?source=feed#comment-330273 330273
People were saying the same kinds of things about gold in 2000 after the Nasdaq crashed: barbarous relic, not money, can't spend it, obsolete, stupid investment, etc. Eight years later, gold has kicked you-know-what, and stocks have eaten you-know-what. The Gold/DOW ratio is still closer to its cyclical low than its high and is still in an uptrend as the US and world economies sputter.

Recent Fed actions do not inspire confidence in the dollar. Central banks are not selling gold or have cut back sales. Physical gold is difficult to obtain except at very high premiums to the spot price. Gold recently went into backwardation on the futures market, implying that people suspect that forward contracts might default and want their gold NOW.

A Fed bank, I think it was Citibank recently predicted that gold would go to $2000 by 2010 was it?

But, go ahead and sell gold. Anything can happen in the short term. You might be right. But, I wouldn't bet on it.]]> Mon, 15 Dec 2008 16:00:41 -0500
People were saying the same kinds of things about gold in 2000 after the Nasdaq crashed: barbarous relic, not money, can't spend it, obsolete, stupid investment, etc. Eight years later, gold has kicked you-know-what, and stocks have eaten you-know-what. The Gold/DOW ratio is still closer to its cyclical low than its high and is still in an uptrend as the US and world economies sputter.

Recent Fed actions do not inspire confidence in the dollar. Central banks are not selling gold or have cut back sales. Physical gold is difficult to obtain except at very high premiums to the spot price. Gold recently went into backwardation on the futures market, implying that people suspect that forward contracts might default and want their gold NOW.

A Fed bank, I think it was Citibank recently predicted that gold would go to $2000 by 2010 was it?

But, go ahead and sell gold. Anything can happen in the short term. You might be right. But, I wouldn't bet on it.]]>