Report of Deaths Are Exaggerations
Despite the obituaries that have been written about silver lately, the white monetary metal is alive and well, as am I. The rumors were well founded, however, considering my temporary disappearance and silver’s plunge to a low of $8.40 basis the December 2008 COMEX futures earlier in the week. The swoon in silver occurred as gold carried out a somewhat unconvincing recovery from its own low of $681.00 on Friday the 24th. Currently, gold remains below the important $730 range and needs to move up quickly or else gravity will drag it and silver back down again.
I must say that it was somewhat liberating to not post any comments or answer emails for a few days but now I’m back on the job. I was prepared to write had something extraordinary taken place but the past week didn’t offer much in the way of critical material with perhaps the only exception being that the Federal Reserve has once again proven me correct: the new Commercial Paper Funding Facility (CPFF) is turning out to be the primary mechanism of Bernanke’s helicopter operation as the latest Factors Affecting Reserve Balances H.4.1 Report shows. According to this report, Reserve Balances of banks grew a mind-boggling $200 billion in the latest week to $425 billion as the Federal Reserve acquired $145 billion of commercial paper. If this increase is not somehow neutralized by the Fed during the coming weeks, it will show up in the Monetary Base.
I believe the critical point for gold and silver will come if and when the banks begin to lend against these massive new reserves. Assuming I’m right about the consequences, we could see an initial move by gold to the $1,000 level and silver to $16 or so in the matter of a few days as the insiders position themselves. Alternatively, as long as the deflation theme continues to threaten the world order with the prospects of imminent financial collapse, gold and silver will remain depressed.
It would be a very bad thing if gold and silver should take out the lows of the last 2 weeks as that points to a near-term economic collapse of epic proportions. The best analogy I can think of is an empty bottle being held under water–the longer and deeper it is held, the more explosive the eventual rise, but if the bottle is pushed too deep, the extreme water pressure will cause the bottle to burst.
November 1st, 2008 at 8:42 am
Hi Tom,
I’m curious what probability you assign to your two possible scenarios - runaway inflation or deflationary implosion. It seems that the amount of money being created (both in the U.S. and in other countries) has been accelerating over the past weeks. Given that there is ultimately nothing keeping central banks from printing more money, I can’t really see long-term deflation occurring. What are your thoughts?
November 1st, 2008 at 9:04 am
I just got back from a trip to my fav. coin shop to buy 60 silver eagles at a price of, ahem… $17 each.
On the counter, there was a sheet which showed the premiums charged buy the coin shop owner when selling gold and silver. A quick peek learned that:
1) Gold coins (1 oz.) were selling for a minimum premium of $70 above spot.
2) Generic silver bars (1 and 10 oz.) were selling at about $2 above spot.
3) Silver eagles were selling at $8 above spot, $7 above if buying more than 20. These were the only silver coins available from a sovereign mint.
The coin shop was rather busy, the most people I have seen in years. People were selling little things like a hand full of old coins and some jewelry. There was just one other guy buying silver, only ONE silver eagle coin!
Online, NWT is selling silver eagles at about $5.25 above spot and buying at about $1.50 above spot (I found this out later).
This all just tells me that we have a LOOOONG way to go in this silver bullmarket. AND, that the spot price of silver is WAAAAAY too low.
November 1st, 2008 at 9:17 am
TOM…welcome back. I like your analogy:
It would be a very bad thing if gold and silver should take out the lows of the last 2 weeks as that points to a near-term economic collapse of epic proportions. The best analogy I can think of is an empty bottle being held under water–the longer and deeper it is held, the more explosive the eventual rise, but if the bottle is pushed too deep, the extreme water pressure will cause the bottle to burst.
So…are you saying if GOLD and SILVER take out the lows…then we should be in DOLLARS? hehe
November 1st, 2008 at 9:36 am
I’m staying in Indonesia. The only form of gold we have here is only in bar. We have shortages of gold bars around here too. If you want to get a gold bar, there is a premium that has never seen at least 2 months ago & we should wait for 15 days to get the delivery. Some dealers are now taking a minimum order of 1 kg from a mininum of 100 grams starting from this week. The more it goes down, the more shortages & premium we have here. Do you have any suggestion what’s going on around here?
And, if you say that we are in deflationary season. I don’t think so. I feel that prices are going up by 10% compared to prices on 26 October 2008.
November 1st, 2008 at 9:43 am
For your information, a 100 grams gold bar for immediate delivery (9999 fineness & the bar is acknowledged by LBMA) is sold for IDR26,900,000 (USD2,490.74), which is higher than the spot price of IDR25,163,617 (USD2,329.96). A 6.5% premium over the spot price! We have never seen this before!
November 1st, 2008 at 9:47 am
Tom
How can you even consider deflation as a possibility under the present circumstance given that all the monetary aggregates : M1, M2, MZM, are
pointing otherwise. Even the TIPS & the most important treasury 10-Y is suggesting inflation.
And gold taking down to new lows means nothing. It definitely does not mean deflation. It only means that the manipulation has had another field day. D-day is tomorrow, if not today.
And what is this bottle breaking business? Gold has a millenia old allure. To every “gold-bug” who loves a higher dollar price for gold, there are ten real gold-bugs who love a lower price so that more of it can be accumulated. Ask the Indians, the Chinese, the Viets & the Arabs. These people did not stop accumulating while the dollar price was falling for nearly 20 years.
November 1st, 2008 at 9:59 am
Linzhanwei
Whatever shortages that you are experiencing is now a common phenomena throughout the world. The paper market at COMEX, the metal commodity exchange arm for NYMEX decides the price of gold & silver. These paper dealers have decided at some arbitary low number for the gold price. And as you know with any price-fixing scheme shortages & black markets evolve. Throughout the world this black-market in gold is to be seen.
You should also pay attention to the gold lease rates which have shot up nearly 3 times. This also indicates the gold market is presently very tight.
Vault owners don’t want to lend their gold for the famous gold carry trade.
And yes you are right, we have inflation at the cards.
November 1st, 2008 at 10:09 am
I do not think the USD will remain as the world reserve currency for much longer. The economic summit in mid-November is a key point in time.
I fully expect a new world reserve currency will be adopted despite the ruminations in Washington. Then the USD will go free fall and we get Weimar.
November 1st, 2008 at 12:28 pm
Tom,
Welcome back Tom. Your bottle play scared all of us. You should have added that you are talking about the paper price. There are something to say myself: We are realtime experiencing Gresham’s Law: Under legal tender laws, bad money drives out good money. In other world, good money goes into hiding. Gold (and silver) did this in the last few thousands years. Actually that is one hing that made gold money. Eventually, gold always win. It is another question if we be there to enjoy the victory. The parasites will do their bests!
About the deflation/inflation battle. This is a permanent debate, even under raging hyperinflations. What made the Weimar treasury to print their trillion marks? The “lack” of money i.e., the false sense of deflation. There is always need for more money that is what makes it a financial good. We should not forget the fundamentals, especially when the quantity of money is changing so fast or I would say regroups so fast.
November 1st, 2008 at 12:34 pm
Deflation will occur affectng those commodities that do not have pricing power: e.g. labour but also cars, chips… etc.
Governments will try to undo the deflation with inflation of the monetary base: prices of goods with pricing power will inflate : e g GOLD, SILVER, oil (?) water, food, etc…
please note : the price inceases, not the value, because price is expressed in…a depreciating-ever strechting- measuring unit.
Debt : will kill you , even if you manage to hold on to your job.
The worst of deflation and inflation will occur simultaniously.
November 1st, 2008 at 12:49 pm
Here my $0.02 worth of thoughts:
The dust seems to settle now (slowly). Watch out for following events:
- a sharp drop of the $ index
- a drop in bonds = raise of the yields
When these happen the tsunami will hit the beach and in my opinion it will hit the commodities with force. This time they (the rich) will not (only) buy paper promises but *REAL* value.
And there are items with more value than PMs - the things you and I really need in daily life. I see following segments as the target of the mother of all bubbles:
- food: food producers; silos with wheat, rice and soy; retailers; supermarkets
- energy: oil and gas wells; pipelines; refineries; power grids
- fibers: cotton; cloth; clothes; paper
- medicine: pharmaceutical industry; drugstores, pharmacies and maybe hospitals
- (some) metals: explorers; miners; refiners
A 10% increase in concentration (of ownership) may yield a 10% increase in price. This list may give you an idea how the hyperinflation is going to cut into a deflationary scenario like butter. It may be the shopping list of the Chinese government and it is perfectly suited to make the rich richer and the poor poorer.
Today the lowered the US interest rates again, the Europeans will follow. In future history this day may be pinpointed as the start of the hyperinflation aera. It would have started anyway - thanks to Dr. h.c. Bernenke and Dr. h.c. Trichet [h.c. = hyperinflationaris causa].
The following segments will be the losers:
- cars, automakers
- luxury goods
- real estate, commercial and private
- bonds
- some currencies: $, €, …
- governments, states, communities: Zimbabwe, Iceland, Hungary, …
When I am right you soon will observe a sharp raise/backwardation in wheat, rice (!), …, oil, silver (!), …, gold (?), …, copper (?!)
Watch out, the tsunami might have fake waves, freak waves, and freak waves on top of freak waves which might topple even large structures.
I hoped that the tsumami will hit only the PMs, but I guess this chance has been destroyed by the (short) selling during the last months and the possible danger of a confiscation by governments. The rich will look elsewhere for real value. I am really scared.
November 1st, 2008 at 1:00 pm
Peter VC,
It is important to know what kills us. How would you define debt? When the unit of money is created by credit/debt, which side of the ledger really debt is?
November 1st, 2008 at 1:50 pm
Tom,
From beyond the grave i’d like to welcome you back!
The ongoing war of Inflation/deflation continues but deflation is winning the current battle. After the Nov meeting we shall see which force emerges stronger.
If the bottle implodes under pressure or explodes like a depth charge both these outcomes are extreme.
November 1st, 2008 at 5:29 pm
Deflation would be great, being on a fixed income I’d love to see the price of bananas drop. And gasoline. And teeth cleaning. I’m just a bit puzzled as to exactly how the dynamics of deflation are going to manifest themselves. Especially with the price of the world’s most important commodity 600% higher than it was ten years ago. The reason it’s so dangerous to imagine gold and silver and oil back at 1998 prices, is the physical shortages that would follow price declines of that magnitude. The system would lock up. Pray for inflation (controlled).
November 2nd, 2008 at 5:22 am
Kaaaaaaaaaa POOOOOOOOOOOOMMMMMMM!!!!!
Deflation is impossible, IMHO, in the longer term. We might see it for a year or so, but everything is being crushed right now. If the pressure is too much, mines will close, farms will fallow fields. My bro in law, hears rumours in Alberta oil sands that cutbacks are coming. Gold and Silver can be pummeled into the ground but they will do better than anything else.
Oh, and was there deflation in the ‘great depression’. What was England’s experience of deflation?
Oh, and Tom, you are not allowed to take any more time off until silver is over $40/oz.
November 2nd, 2008 at 12:58 pm
Mines are already closing:
“Mine giant slashes production”
“THE world’s top iron ore producer will cut its annual production by 30 million tonnes, as demand for steel crumbles because of the global economic crisis.
Vale said today it will shut some mines in the Brazilian state of Minas Gerais.”
————————————-
“Breakwater Resources on the brink of extinction”
“…the company is now in “survival mode” with the temporary closure of the Langlois mine in Quebec and Myra Falls in British Columbia. ”
http://network.nationalpost.com/np/blogs/tradingdesk/archive/2008/10/31/breakwater-resources-on-the-brink-of-extinction.aspx
See http://business.smh.com.au/business/mine-giant-slashes-production-20081101-5fzu.html
November 2nd, 2008 at 5:47 pm
Rick Akerman, who has been pretty much on the money in recent years, insists that deflation is irresistible and will prevail until at least 2015. The DOW, he says, will plunge to 4,000 sometime soon. Inflation, especially hyperinflation, is impossible. If he is indeed right, we will see conditions like the Great Depression, when unemployment exceeded 25%. Probably worse, since most pensions will be destroyed and local governments, which employ a far higher percentage of the working force now, bankrupted. The population, much older today, is far more dependant on retirement incomes than in the early 1930s and, moreover, far less able to survive in a “self-sustainable” society and economy amid a far more urbanized nation. Observers in Akerman’s camp generally predict a sucker rally in the next few months, after which the deluge ensues. Hard to imagine. But, so far, the failure of the fed bail-out, which appears to be dumping money into a black hole (big banks that refuse to lend it out) appears to validate Akerman’s apocalyptic prediction. There’s a whole lot more to it than this, of course, but it’s frightening to even think about it. If gold and silver prices collapse near term, it may signal the reality of it.
November 2nd, 2008 at 6:04 pm
“The crowd is in the deflation camp, therefore, hyperinflation it will be”
Bank that refuse to lend will go out of business, sooner rather than later. Lending and investments are the only way for a bank to live. Just hoarding money does not work in the long term.
Mind you, there was and NEVER will be deflation in current history. Japan you say? WRONG. What happened in Japan was “supply and demand. ” Prices came down because the demand was not there.
However, clever Japanese made a fortune by investing from 1990 into the NASDAQ and DOW. More money was made by investing in gold and commodities from 2000.
To comment on Rick Ackerman: he confuses deflation with supply & demand. Sure, the DOW may drop to 4,000 and housing may crumble further, but that nothing to do with deflation.
All the paper money on the planet and more, is still there and will flow to an asset class. At the moment it is bonds, soon it will be gold and silver.
Again, remember that the NASDAQ was rocketing while Japanese bonds were yielding around 0%.
So, US government bonds may yield 0% for a long time, while gold and silver will rocket, or any other market on the planet.
People need to open there eyes and see there is more on this planet than just the USA.
November 2nd, 2008 at 8:00 pm
And he also says the dollar will collapse. So what happens to prices in $ then?
I think Ackerman is saying we’ll have a deflationary collapse and the $ goes with it. That’s the only possibility I can see in a deflationary scenario where the government prints money while tax revenues and economic activity decline. Unless we expect the rest of the world to continue buying all the $ we can print and put it under their mattresses.
I think we’re headed more toward the socialist money printing state similar to Italy in the 70s and much of the rest of Europe but far worse.
Remember we are about to elect a socialist. It’s a major game changer.
Does anyone doubt that Obama will pump as much money as the fed can print to provide benefits to the starving masses. Unending unemployment benefits, double or triple the food stamp allowance, welfare payments disguised as tax refunds and plain old drop the money from the sky economic stimuli.
BTW isn’t Japan about to drop like 50 trillion yen or something onto it’s entire population. And if it doesn’t work just keep on trying sooner or later it will.
It’s back to the burning building dilemma. Print or perish. Then the only thing that can break the fall out of the window is gold (and silver).
November 2nd, 2008 at 10:45 pm
You have deflation when banks are not willing to lend & customers (corporates & households) are unable to borrow. That is the classic deflation punchline - Mish would be so proud of me!.
Today you have a scenario similar to this. but as dieuwer has pointed out if banks don’t lend they would be wiped out. But then what prevents them from speculating? That is what they did in the 30s with the US bond market and in Japan with the carry trade. And when the government printed money in either case, the deflation (that is the speculative flow) intensified. When you have a real deflation, most of the credit & money flow into a speculative bubble as against a productive activity.
During the present “deflation” where can all the speculative trillions of dollars go? Let us see.
US bond market ? default likely & imminent if huge inflows occur.
Cash (3 m T-bill) ? Risky & low yielding @ 1%
Cash (friendly neighbouring bank) ? You must be a masochist/plain dumb.
Cash (under the matress) ? Yep. Good choice but banks will not lend you for this.
Real Estate ? You must be kiddin’
Stocks? OK, if you are Warren Buffett. Otherwise forget it.
Emerging markets ? Very small
Commodities - Oil, Gold …. hmmm
Do You see now? This would be a deflation ending in a bubble in Commodities & Energy. It would be a classic deflation. Textbook stuff. But you would fail to call it a deflation since prices of commodities would rocket.
November 2nd, 2008 at 11:10 pm
Dieuwer,
What you are saying is that Japan is having price deflation with monetary inflation. It could be extended this long only with the help of check kiting and yen carry trade. Can we assume that the dollar is about to take the yen’s position? The dollar is the world currency, the “anchor”. Moving to a lower status would be fatal for the dollar. Trust is the last thing (beyond the military) that keeps it together. From any direction I look at it there is now way to have deflation. But the question remains how we explain the present (gold/silver) situation? Tzunami? Dollar Dance Macabre?
Rob,
The dollar collapse can come with the Nov15 Washington meeting, The timing (lame duck) shows that it was set up by the foreign parties. Enter a week, socialist president and we have a recipe for a dollar slide.
November 3rd, 2008 at 1:20 am
I think the first move away from the dollar in intl. trade will be for some countries to start transacting in their own currencies. E.G. europe buys from Russia in Euros. Foolars will still be good but less needed by other countries who now buy dollars so they can buy oil, wheat or just about anything. But they all have to be valued against something. So the doolar remains the common denominator until something else comes along. wonder what that might b?
November 3rd, 2008 at 1:46 am
There are 12 Federal Reserve banks and hundreds & thousands of private banks. Deflation occurs when private banks refuse to lend and the money supply collapses consequently. The Central bank tries to prevent this deflation by acting as the lender of last resort. This is what it has been doing by operating several “temperory” lending windows.
The Govt. has infused billions of bank capital in the name of prevention of financial collapse. But the real purpose of this infusion and more to come in future is to nationalise banking assets. Already, you have nationalised Fannie Mae & Freddie Mac lending to the real estate market.
Because of nationalisations and all the “temporary” windows of credit out there is no shortage of credit supply.
On the credit-demand side of the equation, you have monetisation & govt. spending programmes. Big govt. will buy-back its bonds, build bridges to nowhere, dig ditches to be covered back again etc. All this drama will be enacted in Act II of the Greater Depression. Welcome to USSA. Everything is being done in the name of preventing credit implosion (oops I should have said debt deflation).
I believe the Govt. now has the power to prevent this hyped credit implosion. Monetary aggregates ( M1, M2 etc) are being carefully watched and fine-tuned. Period. There will be no deflation.
November 3rd, 2008 at 7:00 am
BAILOUT BULL and COMEX DEFAULT
Jim Willie has a new interview explaining why the monetary inflation is not showing up. He explains it was due to the large BANKS sterilizing their OFF BALANCE SHEET GARBAGE. He also talks about how the Banks have been told not to LOAN the Bailout Money but to buy other banks. Jamie Diamond of JPMORGAN….was quoted as saying this to the other banks in a meeting…not knowing that reporters were right behind him.
Basically Jim says that JPMORGAN et al can pick and choose what part of the banks it wants to salvage at what part not to. These banks are taking over the FDIC’s job….But…they are not going through a normal bankruptcy procedure…but rather these banks can pick the best parts of the banks to keep and the others to let go.
Lastly…Jim talks about the COMEX DEFAULT in silver and gold. You can find that interview here:
http://www.contraryinvestorscafe.com/broadcast.php?media=147
November 3rd, 2008 at 8:19 am
SRSrocco, Thanks for the great JWillie interview link. It fits very well. They are following the footstep of America’s greatest fascist, FDR. That time your savings were wiped out while the banks kept calling your debt, many times from the same banks just renamed. We are living history again. Anyway, it will only slow down the dollar death spiral. They are replacing AAA treasuries with junk mortgagebonds. As I have written before, this what happened after the French 1789 revolution. It did not go to the Jacobins because the French hated their King. It went because of the financial collapse caused by very similar events. Paper money (John Law style), the Assignat was backed by freshly confiscated Church property (mortgage bonds). In three years, the guillotine was mastered and implemented to the detriment of tens of thousands. Blood literally flowed on the streets (what a great investment opportunity). I would say that time it was orchestrated to get rid of the monarchy. What are we getting rid of now?
November 3rd, 2008 at 8:27 am
Srs,
Dr Willie’s radio broadcast was interesting again.
I think its time to chillout for a while and step back to see what comes out of the Nov meeting as many are calling for a new Bretton Woods Monetary System so we shall see.
U.K. Prime Minister is in Saudi Arabia begging the ARAB SHEIKS to invest in british companies or is he down on his knees licking their rear ends ?…!!!!
Have a listen to this sweet oldskool track released in 1991 ‘WINTER IN JULY’ some of the lyrics can be related to the present disaster.
I call the track ‘Kondrattiev Winter In July’ and do not forget to turn up DA BASS!
http://uk.youtube.com/watch?v=NVSwDTq57KU
November 3rd, 2008 at 9:20 am
Could it be that the banks sopping up all that exansion in monetary base are merely shoring up their balance sheets to meet reserve requirements?
If so, we would not see any real inflation, but a stem in deflation as loans don’t need to be called in so the banks can meet reserve ratios.
I don’t know, but shouldn’t that be considered?
November 3rd, 2008 at 9:53 am
T Rob,
As Dieuwer wrote, banks are like sharks. If they stop moving/lending they die. They are just waiting for the right kill. It will be great to see, however, when Obama attempts to nationalize the biggest of them all, JPMorgan.
The epic battle of parasites: fascism or communism. History relived again.
November 3rd, 2008 at 10:24 am
Problem solved. Libor returns to normal levels.
Jump into stocks now. Not a sucker rally. Warren Buffett is right!!!!!!!
Deflation is dead.
November 3rd, 2008 at 12:07 pm
Andras, my point is that they still have loans out there, just too much loaned for their reserves.
Example:
Bank has 1B assets before credit crisis. Loans out 10B (fractional reserve banking). Bank takes a hit on its derivatives on the books to the tune of 500M. Bank now either needs to call in 5B in loans or get another 500M on its balance sheet. Feds inject 500M into bank and now bank is back to 10-1 reserves, but can’t lend any more out.
How much of the increase in monetary base is this type of injection just to get the banks back to reserve requirements?
November 3rd, 2008 at 3:12 pm
In the early 1970’s Jim Sinclair correctly forecast the 1980 high for gold to within ~$50 by dividing the number of dollars projected to be in circulation by the number of ounces available. If you do the exercise today you get a figure between $10,000 and $30,000. I do not expect this to happen as the Dollar will have been de-monetized before then, but the point is that you can still have a massive deflation AND a Dollar price for gold several multiples higher than it is now. Even if the monetary base were contracted severely it still leaves far too many Dollars chasing far too few physical ounces of precious metal.
Yes, not all of these Dollars are not shown in MZM yet, but the latest charts are starting to show an increase since September.
The COMEX price is chart painting and hedge fund liquidation - not deflation - and is being betrayed by the shortages of physical metal.
November 3rd, 2008 at 3:15 pm
This is a little off topic, but I thought I would share it for those of you looking for investment ideas. The current gasoline crack spread (refining margin on one barrel of crude) is about -$6.80. This is an extreme anomoly. Refiners will be forced to curtail gasoline production, since they are instantly losing $6.80 for each barrel of crude they purchase. There is almost a 100% chance that gasoline will outperform crude oil over the next few months. Ideally to take advantage of this opportunity you would go long gasoline and concurrently short an equivalent amount of crude oil. One way to do this would be to go long UGA (etf that tracks the price of gasoline) and short USO (etf that tracks crude oil). Unfortunately TD Ameritrade won’t let me short USO, so I’m just long UGA.
Anyway, just thought I’d share this arbitrage opportunity.
November 3rd, 2008 at 3:34 pm
Jeff, you can initiate a synthetic short of USO by selling at-the-money calls and buying an equal number of at-the-money puts. Options on USO: http://finance.yahoo.com/q/os?s=USO&m=2008-11-21
Trade ideas: http://www.theoptionsguide.com/synthetic-short-stock.aspx
November 3rd, 2008 at 3:37 pm
Dieuwer,
Good call.
November 3rd, 2008 at 3:42 pm
On Monday afternoon, the Treasury Department said U.S. borrowing needs will reach a record $550 billion in the current quarter, including $260 billion in special funding for the Federal Reserve’s extraordinary liquidity programs.
For the government’s fiscal year ending in September, borrowing in the form of new Treasury bills, notes and bonds may reach as much as $2 trillion, by far the most ever, according to bond dealers and analysts.
http://www.marketwatch.com/news/story/treasurys-borrowing-plans-could-beat/story.aspx?guid={EC3D7260-6FD3-4580-A5A5-F635E6E8B97D}&siteid=yahoomy
who needs gold anyway when there’s all these treasuries to buy? Safety in numbers right???
November 3rd, 2008 at 3:54 pm
T Rob,
I see your point. Right now all money goes to recapitalization, though Keseri says Libor is thawing. What you have after recapitalization is the normal situation: the bank manages the repayments to new loans or to reserves (and make profit or die)
I would add that what triggered this crisis was that the regulators changed the rules on capitalization (or on what counts as capital by introducing the Level 1-3 system) last year. They can change it again. It was/is very arbitrary. Moreover, if we have one big brotherhood of banks there is no point of having any rules that limit us.
November 3rd, 2008 at 5:35 pm
dieuwer is right. there has been no deflation. my mistake in calling for deflation. I meant asset deflation, not monetary.
Kesera, Mish would rap your knuckles. banks not lending does not = deflation. Only a decrease in the money supply. A lack of lending may stop the increase. The money is still there.
Further, the banks really don’t have any reserve requirements. Check out sweeps, off balance sheet SPV’s etc. Add to this the suspension of FASB 152? and you really don’t have any reserves at all.
Finally, the banks don’t have to lend and the consumer doesn’t have to borrow. If it comes down to it, the Fed can lend directly to whoever it wants, and can buy whatever assets it wants. The government can borrow more money than anyone. Google “deflation, making sure it doesn’t happen here” ( i think that’s the name of the paper).
Finally finally, I am no expert but in regards to Japan, the deflationists point out the scenario in Japan, but I think there were so many outside influences that stopped japan’s efforts. eg. the ZIRP created the carry trade. Why invest in a factory in Japan when you can get a loan for zero% and buy UST’s with it and make 4% doing nothing.
November 3rd, 2008 at 11:38 pm
T Rob
Are you confusing bank reserves with bank assets? Aren’t bank reserves held at the Fed so that fractional reserve banking can proceed?
Guys, correct me & pardon me for this oversimplified explaination:
Assets = Debt + Equity
Problem with the current crisis originated because Asset/Equity ratio for banks are say 50-100 (am I exaggerating?). So if an asset like a CDO/CDS takes a hit all the debt has to be still serviced by the banks so that the bank equity becomes negative to balance the equation. Another word for this situation: BANKRUPTCY.
What is happening in this “deleveraging” process is :
1) Assets are deflating.
2) Fed is “injecting” equity.
3) Accounting rules are being juggled.
Finally the capital ratios (Asset/Equity) after the deleveraging would be brought to some normal level say 5:1 (??).
Fed’s plan is that the vanishing assets could be written off from the profit/loss account GRADUALLY over a period of time. And not from the reserves which are negligible anyway. Meanwhile the fractional reserve lending should continue to stave the asset deflation.
The problem with the Fed is that “deleveraging” should take place whereas asset deflation should not. The numerator cannot be reduced. Therefore, the denominator is to be massively increased. Result is nationalisation of banks & massive hyperinfaltion.
November 4th, 2008 at 12:25 am
Moving back to the Dollar, there is a lot of talk of monetary changes afoot given recent meetings and more this month. Anyone have any insights into the short-term how and when of changes we might see?
I’m seeing talk of different scenarios:
· A US-led Dollar devaluation/default.
· A new world monetary system.
· Increasing development and influence of alternative non-dollar commodity markets.
· Increasing use of non-dollar bilateral trade agreements and non-dollar regional trading blocks.
· Oil exporters demanding gold for oil.
· A rush out of dollar bonds/rapid re-pricing of credit.
· A collapse of the Dollar on the FOREX and collapse of US imports.
· A Plaza Accord-type agreement to “manage” the dollar down.
Obviously multiple fronts are possible or probable. This might be a worthy topic to beat to death as soon as possible.
Earlier I posted a point of view that there might be a motivation to catch as many people off guard as possible (in cash) with a dollar devaluation. I still fear this but I also see the possibility that the outgoing US administration will have no motivation to do the dirty work for the incoming administration.
The thinking might be,
“Why start a new project now? Let Paulson do his smoke and mirrors thing for a couple more months and let the new people take on the new projects - and take the heat that follows. What reward would there be for pissing everyone off?”
A dollar devaluation would certainly piss off some powerful people.
As one is about to lose power one values his contributors and allies even more. It is not so easy to make amends later when you are out of office. The path of least resistance until January is to not burn bridges. So I see low odds of a US devaluation until Bush is gone.
But next year with new people in power looking at a worse crisis and having plenty of time in power afterward to deal with consequences anything is possible.
It looks like the other dollar related moves noted above would take some time to evolve. A couple are akin to shooting oneself in the face. The absence of a singularly suitable alternative currency makes an ”overnight” change less likely.
If indeed we have a US dollar devaluation to look forward to into the new year AND most people are caught off guard in cash, then does that not imply a few more months of horrible markets and terrified participants?
November 4th, 2008 at 12:32 am
Libor falls to the lowest level after Lehman collapse. Credit crisis solved. Money markets returning back to normalcy. $3 trillion global injection works!!!!!!!
“There are no strong incentives for banks to lend to one another yet,” said Alessandro Tentori, a fixed-income strategist in London at BNP Paribas. “People are still unsure about values of bank assets on balance sheets at this point. But as long as we don’t have a new case of bank failure, the situation will gradually improve.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=aXfKJwSgmSls&refer=home
November 4th, 2008 at 12:58 am
BarbarianWho
The collapse of the dollar from here would be sudden & untradeable. Just like the current strength. Huge upswings & downswings. Already it had become very predictable & you had hundreds of hedge funds piling into the long commodities short dollar game. Too many people riding the slide.
As of now, very few commodity bulls believe in the story any longer. Jim Rogers died - Sorry Jim for the premature obituary. Tom says 50-50 chance - Gold $100 or the moon. Sorry Tom, if I get you wrong. I am too much of a simpleton to understand a difficult message.
The point is too many people on this site are discussing deflationists like Ackerman. Many of those who post are like - “I was a goldbug, not anymore” kind. Mission accomplished.
But if gold crosses $1000 again - life will be normalise. Older goldbugs would proudly proclaim - I told you know?Yeah Yeah.Blah Blah. That might not happen the way as planned. I hate to quote Ackerman but the hyperinflationary spike ($10,000 ????)would be it - maybe weeks or even days. Then the panic selling to encash. A bust to $3000 then maybe - who knows.
November 4th, 2008 at 4:01 am
Deflation is for Joe the Plumber. And for Joe average.
Banks would be saved as they always have been. That is the game. You can bet on it. Don’t have nagging doubts. Tom’s comments on the bottle breaking kind are nothing but his nagging doubts. Otherwise, I believe he has some intelligence.
If you take hold of any newspaper/magzine anywhere it is END OF THE WORLD, DOOMSDAY, DEBT, DEFLATION, DERIVATIVES,ARMAGEDDON, CRASH…… These are the catchwords.
These things don’t announce themselves. ARMAGEDDON does not announce itself before it does its things. And not on the front pages of NY times. The masses are being brainwashed into the deflation camp. Did you see anytime for the past few months the following words - THE IMMINENT COLLAPSE OF THE DOLLAR in mainstream press? No? Because that is the real game. It is the inflation game. Always is and always was.
Asset deflation isn’t deflation. Price deflation isn’t deflation. The collapse of money supply is. And during all this commodities bust, credit crisis, stock market collapse, Fanne, Freddie, Lehman, Goldman, Morgan, BS, CDS, CDO implosions where is the freaking money supply going. UP, UP & AWAY. How many more such collapses do you need more before the money supply goes down. OK you got it - GM going bust anytime soon. Good try but hard luck. And I dont believe JPMorgan, BoA, Wells Fargo,Citi will go bust. They will be nationalised. Any smaller banks will be gobbled by these.End of crisis. Problem solved.
Buy Gold. Period.
November 4th, 2008 at 4:04 am
And also silver.
November 4th, 2008 at 5:37 am
I think I read in one of Tom’s posts that he said when a bank goes bankrupt that doesn’t have to mean a decrease in the money supply.
However, I read in a book of JK Galbraith who is quoting Milton Friedman that (like in the depression) the money supply decreases when a bank goes bust.
I am not so sure of this. But maybe you guys can comment on this. I follow the theory that deflation is a decrease in the money supply. But what happens with all the money when a bank goes bust? Bonds are not repaid. (like lehman issue) but credit default swaps are now delivering a lot of money. What happened with the money that was borrowed to the bankrupt bank. What with all the lending from the Fed to Lehman in the last year? All that money will never return to the Fed but will go to the creditors now…
This is complex material I think.
However I don’t think we will see deflation because the US government & Fed is doing everything to avoid it. Libor is easing, lending will revive, and the injections in the monetary base will run through the multiplicator when this lending between banks is again at almost normal levels.
The US just cannot afford deflation. I believe there was deflation in the 1930 in the US because they were a creditor nation. There was deflation in Japan in the 1990’s because they were a creditor nation. A creditor nation can afford deflation. But a debtor nation can not. Deflation is killing for a debtor nation, certainly for the US the biggest debtor of the world. So we are seeing this printing to avoid this deflation. We are seeing now swaps from the Fed to Mexico, Singapore, Brazil, Korea. A flood of dollars is going also to other places in the world… When will the IMF start printing? will it be dollars, or SDR’s nominated in dollars? But the IMF will need to recapitalize or print money because a lot of nations will need more help, just like Iceland, Hungary, Ukraine, etc!
Please also note about the goldwar on the Comex: There is now a counter-attack started by gold and silver bugs asking for delivery.
Major gold bugs like James Sinclair (jsmineset), Jim Puplave (financial sense), GATA, Jeff Christian (CPM Group), Eric King (financial sense) are now advising to buy Comex contracts and ask for delivery. When this happens on a large scale, we will see the effects! I think if you are in Comex you better ask for delivery fast are soon the doors will be shut.
November 4th, 2008 at 8:58 am
Good point Keseri about the Dollar being the quiet front in the media now. I agree we’re being herded as usual.
All the more reason for more discussion of a potential “surprise” dollar development that will trip up many people. Are there more thoughts out there regarding possible US dollar devaluation scenarios and the effects? Such an event, depending on how it unfolds, would affect many in ways they haven’t considered.
The endless macro **flation debate is becoming a distraction similar to the political distraction of “conservatives” vs “liberals.”
The volume of this distraction seems to be directly proportional to and biased by market events more than anything else.
November 4th, 2008 at 9:48 am
Barbarian I don’t hink we’ll see any official dollar devaluation. Currencies are not officially devaluated the “market” determines their relative values.
Al currencies are devaluating right now. Sure the $ will have to slide especially relative to gold. (Gold is in a slumber but will awaken)
Meanwhile bilateral trade agreements-just a few to test the mettle of the $.
Like with Russia, China and Europe. Lot’s of risk in bilateral trade agreements-it’s still fiat. Gold will have to come to the rescue as the ultimate currency against which all others are valued.
Qatar has talked about a gold backed dinar. Thbat’s a pretty big move right there. and a test.
Remember the chinese and most of the world are afraid of any sudden moves including collapsing the $-which doesn’t really serve any of the major players in the short run.
You guys should stop looking for big sudden upheavals in the state of the $. It’s not gonna happen at least not just yet. there’s still too much control by the G8 etc. to let that happen-cause then it all goes to sh-t.
Big moves in gold/silver that is very possible if not likely.
November 4th, 2008 at 9:53 am
WASHINGTON (MarketWatch) — The Federal Reserve’s balance sheet could total $3 trillion - roughly 20% of GDP - by the end of the year, according to Richard Fisher, the president of the Dallas Fed district bank. At the beginning of the year, the assets on the books of the Fed totaled $890 billion. At present those assets exceed $1.9 trillion. “I would not be surprised to see them aggregate to $3 trillion…by the time we get to the new year,” Fisher said in a speech in Grapevine, Tex. The expansion of the balance sheet comes as the Fed takes unprecedented efforts to counter the collapse of the credit market. The Fed’s balance sheet used to be almost 100% Treasurys, but now these securities account for less than a third of the assets, Fisher said. The Fed has been lending money and Treasurys into the market to meet demand as banks have pulled back on lending. In return, the Fed has received mortgage securities and other less-attractive collateral.
November 4th, 2008 at 10:25 am
With the fall in $Libor markets have interpreted it as a clear signal for a movement away from USTs. Hence a swift movement away from the dollar. As the dollar falls all markets - stocks, emerging markets everything would benefit from a V-shaped recovery.
The final descent of the dollar has begun. Buy Gold Now!!!!!!!!!!!
November 4th, 2008 at 10:27 am
As I type Gold has gained $36.
November 4th, 2008 at 10:50 am
Any comment on how low GOFO has gotten recently? I still get a headache every time I try to understand this number, but it’s the lowest it’s been in years right now.
November 4th, 2008 at 1:27 pm
I recommend this article: http://seekingalpha.com/article/103947-coming-inflation-to-boost-stocks-gold
Although the predictions are off-base.
November 4th, 2008 at 11:17 pm
dieuwer
Please explain what you mean by “predictions are off-base”.
Guys: Much earlier on this forum I had speculated that India was being cut off from the physical gold market. Here is the confirmation.
http://economictimes.indiatimes.com/Bullion/Foreign_banks_cut_down_gold_supply_to_India/articleshow/3674557.cms
The reason being attributed is: “the main reason is reluctance on part of these banks to take exposure to Asian banks for fear of defaults”. BUNK - Asian banks especially Indian banks have ~zero exposure to toxic waste.
November 5th, 2008 at 2:04 am
Credit crunch is another reason for hyperinflation. The logic is as follows:
Keynesians believes that supply & demand are “balanced” at the equilibrium “market price”. Keynesians are all demand-centric. If demand for goods drop there will be a price reduction etc. etc. These people delibrately ignore supply.
However, what happened during the 70s oil shock. There was a general recessionary environment everywhere in terms of demand. But still prices sky-rocketed.
If credit is not supplied to the ailing producers, production & trade would be curtailed. Already international trade is getting affected. The demand stays where it has to stay - you have to feed & clothe people and satisfy there various “needs”. But if you don’t provide capital to the supply chain. Boom — you have a supply shock. Wanna revist the 70s? Only this time it would be worse becauseFed just doubled its money base. Hyperinflation ahoy.!!!!!!
November 5th, 2008 at 5:11 am
Pardon me for what i’m about to say:
Tom disappeared a while back now it seems Pres. Bush has followed Tom’s vanishing act instead coming out and congratulating Obama’s for presidential victory just proves what we all knew long ago that Bush is just a cheap texas red-neck!
November 5th, 2008 at 9:02 am
According to JIM ROGERS:
“Silver will do better than gold,” Rogers, chairman of Singapore-based Rogers Holdings, said on Monday in an interview in New York. “It’s been beaten down horribly. If you put a gun to my head and said you have to buy one, I would buy silver rather than gold.”
http://www.silverbearcafe.com/private/11.08/betterthangold.html
November 5th, 2008 at 10:10 am
Tell Mr. Rogers the gun is not only drawn, but locked and loaded!
It just isn’t using its persuasive abilities to promote interest in PMs.
10 days and counting until the new & improved “Bretton Woods” hits the ideashpere. (I’m guessing that Obama will send Volker, at the least.)
November 5th, 2008 at 1:12 pm
“10 days and counting until the new & improved “Bretton Woods” hits the ideashpere”
Looks like you underestimate the “relentless blogger”.. the following is from todays alphaville here …
http://v2.ftalphaville.ft.com/blog/2008/11/05/17858/a-paper-gold-reserve-system/
A lot to take in, but from what i understood they want to use existing IMF SDR (special drawing right) program to facilitate a controlled diversification out of the dollar… does this not mean that the much expected “quantitative easing” (monetization of debt) from the fed just gets supported in kind by the other 4 currencies - ie the printing will be evenly distributed among the four major currencies?? I might be short-sighted about some of the details, but to me this just eliminates the other currencies from a list of “dollar alternatives” and only leaves intrinsic value assets (ie gold, silver, oil) as a safe store of savings?? But why would any of the other major currency countries jump in on this scheme - japan is understandable since they have the second largest dollar reserves in the world and would get crushed when the flight takes place, but EU??
A ‘paper-gold’ reserve system?
Posted by Izabella Kaminska on Nov 05 15:34.
With the elections out of the way, attention is now re-focusing on the global financial crisis and the upcoming G20 meeting in Washington on November 15th. In that context much has been written about the need for a “new Bretton Woods” agreement, or at least, the hopes for one.
Martin Wolf makes his case in today’s FT. He outlines four main challenges a new agreement should address:
The first is the inability to gain a purchase on the policies of countries that run huge and persistent current account surpluses.
The second is that of financing countries subject to “sudden stops” in capital inflows of the kind we are seeing, as banks and other foreign-currency lenders cut off financing to a wide range of borrowers, particularly in emerging countries.
The third challenge is that of making the financial system less unstable and, above all, less vulnerable to such huge swings in risk appetite — from financing anything, however ridiculous, to financing nothing, however meritorious
The final challenge is that of making the global institutional architecture less illegitimate than today
He concludes it is not only possible but necessary to change the global architecture to reflect changing economic weights. The world must also give the IMF more financial resources in support of its new short-term lending facility.
In the original Bretton Woods, of course, it was decided member countries keep currency values pegged to the US dollar and, in the case of the United States, the value of the US dollar be pegged to gold. Those rates could be adjusted only to correct a “fundamental disequilibrium” in the balance of payments and only with the IMF’s agreement.
The system broke down when imbalances threatened to eliminate the gold reserves of the US, and Washington was forced to suspended the dollar’s convertibility into gold. So how could it work this time?
Writing in the FT last week, George Soros said it was time to start thinking about creating special drawing rights or some other form of international reserves on a large scale to sort out the crisis. This system should, he said, be subject to an American veto.
By “some other form of international reserves”, was he referring to gold once again?
And as for extending the sums of special drawing rights - how would that actually help or be achieved?
Firstly, how does an SDR - dubbed “paper gold” by some - even work? According to the IMF:
The SDR, or Special Drawing Right, is an international reserve asset that member countries can add to their foreign currency and gold reserves and use for payments requiring foreign exchange.
Its value is set daily using a basket of four major currencies: the euro, Japanese yen, pound sterling, and U.S. dollar. The IMF introduced the SDR in 1969 because of concern that the stock and prospective growth of international reserves might not be sufficient to support the expansion of world trade. (The main reserve assets at the time were gold and U.S. dollars.)
The SDR was introduced as a supplementary reserve asset, which the IMF could “allocate” periodically to members when the need arose, and cancel, as necessary. IMF member countries may use SDRs in transactions among themselves, with 16 “institutional” holders of SDRs, and with the IMF. The SDR is also the IMF’s unit of account. A number of other international and regional organizations and international conventions use it as a unit of account, or as the basis for a unit of account.
The number of SDRs in circulation currently stands at 21.4bn (a value of $31.96bn at today’s rates) with each member country allocated its own quota. That quota is determined according to many variables but very generally, the bigger the GDP and standing of the member country in the fund (in terms of economic weight, voting rights and openness), the bigger the quota.
There are provisions for the number of SDRs in the system to be extended, when needed. Any extensions are supposed to be proportional, impacting every member similarly. That’s not to say allocations for countries don’t change - the IMF reviews the quotas on a case-by-case basis every few years.
According to the IMF: most fund loans are financed out of members’ quotas. The exceptions are loans under the Poverty Reduction and Growth Facility, which are paid out of trust funds administered by the IMF and financed by contributions from the IMF itself and a broad spectrum of its member countries.
So it seems extending the number of SDRs in circulation could go some way to addressing the current liquidity constraints currently plaguing the system.
Jan Randolph, head of Sovereign Risk at Global Insight explains to Alphaville :
George Soros’ latest idea here I think is really all about boosting this SDR currency’s money supply, though still restricted to sovereigns in circulation, to enable them to maintain or raise levels of liquidity and therefore conduct more international trade. It would be of special help to emerging markets that may face liquidity pressures as a result of the credit crunch and unlike an IMF loan, would have few, if any, strings attached.
The reallocation of country quotas in any significant manner could also presumably address the large surpluses built up in countries like China. At the end of the day, the solution to the global financial crisis problem is connected to restoring liquidity and confidence to the financial system. To do so, many say the solution must address the current imbalances which see vast sums of dollars stored-away on some sovereign balance sheets and not on others.
Gordon Brown said Tuesday the surplus-holding Gulf States, many of whom already peg their currencies to the dollar, were ready to extend money to an IMF bailout fund at the G20. The question is could that money be channelled through an SDR framework?
SDRs potentially address another problem facing the system too. As Fred Bergsten, director of the Peterson Institute for International Economics, wrote in the FT a year ago, they could help restore faith in the dollar itself. His argument being, surplus nations in many cases have no choice but to bankroll the US debt, as diversifying into non-dollar denominated assets would have drastic consequences on their own currencies.
Many dollar holders, including central banks and sovereign wealth funds as well as private investors, clearly want to diversify into other currencies. Since foreign dollar holdings total at least $20,000bn, even a modest realisation of these desires could produce a free fall of the US currency and huge disruptions to markets and the world economy.
He adds the problem is further heightened by the fact that none of the countries into whose currencies the diversification would take place want to receive these inflows either. Through an SDR substitution account though the following could happen:
Instead of converting dollars into other currencies through the market, depressing the former and strengthening the latter, official holders could deposit their unwanted holdings in a special account at the IMF. They would be credited with a like amount of SDR (or SDR-denominated certificates), which they could use to finance future balance-of-payment deficits and other legitimate needs, redeem at the account itself or transfer to other participants. Hence the asset would be fully liquid.
Via this system all countries would benefit, he says:
Those with dollars that they deem excessive would receive an asset denominated in a basket of currencies (44 per cent dollars, 34 per cent euros, 11 per cent each yen and sterling), achieving in a single stroke the diversification they seek along with market-based yields. They would avoid depressing the dollar excessively, minimising the loss on their remaining dollar holdings as well as avoiding systemic disruption.
Meanwhile, the US would be spared the risk of higher inflation and potentially much higher interest rates that would stem from an even sharper decline of the dollar. As the cost of protecting against US sovereign default in credit default swaps increases, it’s certainly a case worth considering, especially as a proposal for a special one-time allocation to double the number SDR in the system is already in place. To go through, the proposal needs three fifths of IMF members (111 countries) with 85 per cent of total voting to accept it. As of March 2008, 131 members with 77.68 per cent of voting power had accepted it - reflecting the level of the demand for the measure. Approval by the US would now put the amendment into effect.
November 5th, 2008 at 6:29 pm
Any reason why there is no futures data for COMEX silver starting May 2009? Seems strange to me.
http://www.nymex.com/sil_fut_csf.aspx?product=SI
November 5th, 2008 at 9:22 pm
Ratherbefishing
Interesting, thanks for the post.
An IMF SDRs scheme might indeed be foisted upon the world.
Let’s see if I got this right.
Deficit spending welfare states are broke and consuming themselves from within. The market wants their currencies to reflect that as part of the free market corrective process.
Productive nations with savings are growing. They possess large reserves of these deadbeat currencies. They can currently use these reserves to buy productive assets, commodities, gold. They can also trade into other currencies to some extent before they push the market against themselves.
In comes the IMF with an offer that surplus nations can’t refuse, a laundering operation for their Dollar reserves? This is a “something for nothing” scheme - lots of advertised “wonderful benefits” and NO consequences! I love the SDRs promise of diversification and liquidity guaranteed by ONE institution.
All these “unwanted” Dollars bypass FOREX and are deposited with the IMF into “special” accounts. I like that word “special.” It sounds reassuring. But wait, in exchange for all these “unwanted” Dollars the depositing nation receives “special” Drawing Rights denominated in a basket of currencies. This too sounds great – diversification out of Dollars without FOREX consequences! Yay!
Only western financial institutions could come up with something like this. It reminds me of selling someone coupons with $50 worth of purchasing power for $100.
Assuming the lion’s share of IMF deposits would be in “unwanted” Dollars, wouldn’t the creation of SDRs denominated in a basket of currencies mean we were inflating the implied supply (via SDRs purchasing power) of the non-dollar currencies that comprise this basket – as well as deflating the quantity of Dollars? Isn’t the result of this FOREX circumvention a move from over-inflated dollars into a basket of over-inflated non-dollar currencies at which point one might prefer to own deflated dollars? Yes, the basket might be less volatile than holding one currency. But why rely on the IMF and it’s newfangled coupons? I’m sure the banks involved will collect a fee somewhere.
This is another wealth transfer maneuver, a bail out for the US and the Dollar by robbing productive countries of their reserves.
Can they be that stupid to go for it?
November 6th, 2008 at 9:35 am
Guys: I don’t understand one point about this money flow business from the bond market to the commodity market business - the cornerstone of Prof Fekete’s theory. He says the whole system is biased towards a falling interest rate structure. When the system is very near ZIRP all the banks are highly leveraged and face wipeout. So the short end of the bond market carries counter-party risk - e.g, puts on a 10-Y sold by a bank need not be honoured. The long end - the bonds themselves are guaranteed by the US Govt. This makes it easy for the Fed to ignite inflation expectations by raising interest rates. The speculators would simply move to the commodity market since they no longer trust the short end to be honoured. So isn’t the system self correcting from deflation to inflation naturally?
November 6th, 2008 at 1:11 pm
Keseri,
On $10T national debt every 100 basis point increase of interest rate means $100B more service cost.
November 6th, 2008 at 2:21 pm
I have a better name for this site: “Last Month in Silver…”
November 6th, 2008 at 3:14 pm
Only one way out of the mess the financial geniuses at Wall Street have made: SPEND, SPEND, SPEND. Like World War Two. Except this will be a domestic program, geared toward winning the energy war and whatever other domestic problems we have. Obama is on to it. Finally, a guy with brainpower. Our current deficit is 40% of GDP. in 1945 it was 125% We can actually spend more, and hopefully grow GDP commensurate with the need for debt repayment. It’s the only way to prevent depression. McCain and Palen approached the problem as mercantilists might have 300 years ago, believing that wealth was static and distribution consisted of dividing up a constant pie.
November 6th, 2008 at 3:39 pm
Kondor, dude, the GDP numbers are ‘worked over’. And you think Mr. “57 states” is going to fix this problem? Please start by going to Professor Fekete’s website and start reading.
Start reading here, you’ve got a lot of catching up to do.
http://www.professorfekete.com/articles%5CAEFTARP.pdf
Around here we look for solutions in REAL money not the paper that the FEDS print.
November 6th, 2008 at 3:40 pm
Anyone heard about updates at the metal augmentor site?
November 6th, 2008 at 4:29 pm
Kondor, massive spending might get the world beyond this “liquidity crisis,” but that won’t fix the mess that its made, it just transfers the destruction from the banksters to those who “save” the notes. Or as Jim Rogers puts it, taking money from the competent and giving it to the incompetent who created this very mess.
I’m still trying to fathom the IMF-SDR scenario. It seems to me that the only way it can “work” (to avoid hyperinflation) is if all monetary assets are state-owned, so they can be sopped up by the IMF sponge.
Which seems to be the path the banking system is on. After all, what value is there to be a private bank once the zero-bound problem becomes the next hurdle? Is that when 10% government equity becomes 100% (in incremental “bail-out steps” of course)?
If so, then does credit become nothing other than political patronage? (Do as I say, and we will give you enough credit to survive.)
In this kind of reality, does capitalism stand a chance? Or will everything be destroyed in order to be saved by nationalizing it?
Like the mining industry for example.
November 6th, 2008 at 6:18 pm
An interesting article has just turned up from Hugo Salinas Price titled “The strange case of falling international reserves”.
http://news.goldseek.com/GoldSeek/1225998768.php
Extracts from the article…
“As of August 2008, as you can see from the graph, according to Alex Tanzi International Reserves were growing at the explosive annual rate of 26.5%. Suddenly, since August, Reserves have stopped growing.”
“I’ll leave you with this question: what is the significance of the drastic change in the growth-trend of International Reserves, from explosive growth, to the sudden beginning of a contraction?”
We have this among other rumours such as Comex defaults and New Bretton Woods agreements. What is important is that the basis is contracting. Something is cooking…
November 6th, 2008 at 7:28 pm
Gold in Backwardation as of 9.26PM EST: +$1.60 (November - December)
Silver: +$0 (most recent settle of November - December)
November 6th, 2008 at 10:24 pm
Lone Ranger
Yes the reserves which are essentially dollar denominated are falling. I don’t agree with tha author’s conclusion that the reserves were falling because of Euro’s fall. The real reason is dollar liquidity problem. When foreign funds were leaving all these countries towards USTs the currencies of these countries began to collapse. Central banks had to dig deep into the reserve pockets to stave this currency collapse. Read the Indian story.
http://www.rediff.com/money/2008/oct/18forex.htm
Reserves in India hit all time high in May 2008 at 316 b$. By Oct, the reserves had fallen by 42 b$ to 274 b$, “mainly because the Reserve Bank of India continued to sell dollars to check the steep depreciation of the rupee”
IMHO, Gold will not collapse to 100$ for this very important reason. After the reserves fall precipitiously for these foreign countries, their currencies would become toast. Demand for gold would skyrocket to take advantage of the new bull market in gold in local currency terms. Already it is happenning.
November 7th, 2008 at 3:05 am
Hey guy’s,
TOCOM Dec08 Gold Open interest as low 3766 contracts Goldman Sachs the major short 1808 contracts.
What do you think?
http://www.tocom.or.jp/souba/gold/torikumi.html
November 7th, 2008 at 6:20 am
Not quite correct, it seems that “STDJ” is the major with a net short position of 7,013. The large conglomerates are net short as well.
The interesting thing is that Engelhard seems not interested in taking any position.
November 7th, 2008 at 7:48 am
Oh my… This type of commentary is hitting the desks of institutional money managers and is becoming somewhat mainstream… Meanwhile the premiums on gold are quite modest and silver premiums have come down a bit (physical that is - im using ebay and major dealers as proxy)… Gold will be my marginal addition to existing PM stash…
This is from FT:
http://ftalphaville.ft.com/blog/2008/11/06/17903/fed-capitulates-the-central-bank-is-broken/
Fed capitulates: the central bank is broken
Or perhaps better, the entire banking system is broken.
For it appears that the US Federal Reserve has given up on the idea of easing stress on interbank and wholesale lending and is resigned to being the central bank-come-market-maker of last, first and every resort.
For some time now there’s been a debate about the direction of the Fed’s policy. Would we see target rates come down further? Quantitative easing? Massive T-Bill issuance in the open market?
__________________
From the Fed yesterday:
The Federal Reserve Board on Wednesday announced that it will alter the formulas used to determine the interest rates paid to depository institutions on required reserve balances and excess reserve balances.
Previously, the rate on required reserve balances had been set at the average target federal funds rate established by the Federal Open Market Committee (FOMC) over a reserves maintenance period minus 10 basis points. The rate on excess balances had been set as the lowest federal funds rate target in effect during a reserve maintenance period minus 35 basis points. Under the new formulas, the rate on required reserve balances will be set equal to the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period. These changes will become effective for the maintenance periods beginning Thursday, November 6.
The Board judged that these changes would help foster trading in the funds market at rates closer to the FOMC’s target federal funds rate.
Why do such a thing? Michael Cloherty at Bank of America points out in a research note this morning that the move will cripple the Fed Funds market - that is, interbank lending:
The Fed is going to pay target flat for excess reserves rather than target less 35bps. This is likely to sharply reduce flows in the funds market. There is a staggering amount of excess reserves in the banking system– a normal level of reserves held at the Fed is $7.5bn, where last Wed there was $420bn. With that many excess reserves, funds should trade soft. Now, rather than lend to another bank at a sub-target rate, we should just see banks leave the $ in their account at the Fed. Volumes in the Fed funds market are likely to drop dramatically.
What that means is that the effective is likely to remain below target, and with volumes down, the effective will be even more volatle (unusual trades will have a larger impact on the average). This will make Fed funds futures contract even harder to trade.
The Fed isn’t supposed to work this way. The Fed is supposed to have a control over the monetary system; by which it can manipulate the rates at which banks lend to each other, and the rate at which banks lend to the economy.
And yet the Fed has cut rates - slashed them. Its target now stands at 1 per cent. It, and other central banks, have flooded the system with liquidity through a smorgasbord of different open market operations. Banks though, still aren’t lending to the economy. And they are still keeping huge sums in reserve. (They don’t have anywhere else safe to put their cash.)
Ben Bernanke knows this scenario. It’s not been admitted yet, but it’s looking very much like a liquidity trap. Rates on T-bills are already precipitously close to zero. Paul Krugman wrote in September (emphasis ours):
You still see people saying, in effect, “never mind the zero interest rate, why not just print more money?” Actually, the Bank of Japan tried that, under the name “quantitative easing;” basically, the money just piled up in bank vaults. To see why, think of it this way: once T-bills have a near-zero interest rate, cash becomes a competitive store of value, even if it doesn’t have any other advantages. As a result, monetary base and T-bills - the two sides of the Fed’s balance sheet - become perfect substitutes. In that case, if the Fed expands its balance sheet, it’s basically taking away with one hand what it’s giving with the other: more monetary base is out there, but less short-term debt, and since these things are perfect substitutes, there’s no market impact. That’s why the liquidity trap makes conventional monetary policy impotent.
How impotent? Consider the numbers: the Fed has an $800bn balance sheet to operate in a $50 trillion credit market. The only thing that gives it power is its ability to create monetary base, and in a liquidity trap, that power is useless.
Krugman’s point then was that Bernanke had come up with a third-way alternative to escape a liquidity trap, but that the alternative was, in practice, failing.
That alternative being a quantitative-easing type expansion of the balance sheet, but not to buy T-bills, but other assets - mortgage securities, for example. A Bernanke Twist.
In 1961, the Fed launched the first - formally, only - “Operation Twist”. The idea was that the Fed would use its powers in open market operations to target asset prices: specifically, to flatten the yield curve. The Fed operated directly in the long term Treasuries market in an effort to depress long-term borrowing costs (and thus stimulate economic growth) while simultaneously seeking to prop the dollar by supporting shorter term rates. Krugman again:
I guess the Fed had to try the “Bernanke twist.” And it did - the old Fed balance sheet, in which T-bills were the vast bulk of assets, is no more. But the effects have been disappointing, especially weighed against the risk, which I know is making Fed officials very nervous.
Bernanke though, now doesn’t look like he is giving up on the twist, as Krugman thought the advent of the TARP signalled. Indeed, the realisation seems to be, that as now a mere $800bn player in a $50 trillion market, the Fed needs more ammunition. Brad DeLong writes:
…the natural answer appears to be open-market operations working not on the liquidity premium but on the risk premium–Operation Twist on a Pan-Galactic scale.
How to fund that? You could issue T-bills. But as Brad Setser points out fundamental changes in the T-bill buyer market make that a risky proposition.
So you could just admit you were in a liquidity trap and use all those excess bank reserves to your advantage instead. As Cloherty writes at BoA:
If the Fed is going to pay target, it suggests that they may scrap the SFP bill program (there is less need to drain reserves to try to keep funds above the target). If that happens, that is $630bn of outstanding SFP bills that are no longer needed. Any reduction in SFP bills would likely be replaced by regular Tbills. But this means much less need for larger auction sizes out the curve-fewer SFP bills means fewer 2yr and 5yr notes.
The Fed’s move last night is the first big signal, then, that it will pursue a policy of quantitative easing.
___________
At its core, the Bernanke Twist is a direct effort to try and support prices; to stop destructive debt deflation. We are in uncharted territory though. The Fed is not just trying to game the market in US government debt. It’s trying to support the entire asset-backed debt market.
Which is particularly risky when the the Fed is effectively supporting those prices by positioning itself as a risk sump.
No wonder, as Krugman says, Fed officials are “nervous”. This is an all-out gamble.
It isn’t clear just how much the Fed will need to throw into that system to actually prop it: so far, the Fed’s balance sheet alone has not been enough. The TARP doesn’t look like it has enough either. Consider the fact that total capital raised by the banking system is actually less than total writedowns taken to date.
There’s a big danger here for the Fed: that it is trying to catch a falling knife. The Fed is risking things it’s never risked before. That’s not to say we’re in apocalyptic territory at all; consider the firepower the Fed has behind it. It is though, to use a hackneyed, but apt phrase, paradigm shifting.
In Japan, where quantitative easing failed, the central bank’s balance sheet swelled to a size equivalent to 30 per cent of GDP. The Fed’s balance sheet is currently equivalent to 12 per cent of GDP.
Where we go from here then very much depends on how severe you see this crisis relative to Japan.
November 7th, 2008 at 10:51 am
ratherbefishing
How will the Fed, cornered as it is in a ‘liquidity trap’ act? As the article suggests printing more money won’t help as it stays in vaults. “Quantitative easing” & expansion of balance sheet is what the Fed is going to try first just like japan. All of it will not work. Then what will the Fed do? give up to massive deflation - and greater depression?
The article makes doomsday a mathematical certainty. Unfortunately, a more non-linear approach is required to assess the situation. What many people don’t realise is that the greatest financial & military power of the universe will not go down on its knees like this - especially when it is armed with a printing press.
Has somebody considered what happens when the balance sheet expands from 12% to 30% and then to 50% and then to 100% and then to 200% of the GDP. Will the cash still remain in the vaults? At some point the banks will blink and consider a en-mass exit strategy.
There is still a easier solution to the liquidity trap:
The Fed will jawbone inflation expectations by simply “suggesting” a massive new t-bill issue while keeping its favourite customers (China, Japan, etc) informed. The smaller fish would chicken out a la Taiwan (maybe Taiwan’s exit was part of a larger gameplan). The Fed may back its bluff with some new issue. Yields would start to “normalise”.
If all else fails, the Fed will risk out a massive new T-bill issue. This is equivalent to fighting deflation with hyperinflation. After-all in a situation like facing raging deflation what is there for it to lose? And who said on a “10T national debt every 100 basis point increase of interest rate means $100B service cost” ? As long as the servicing is done using monopoly money, who cares?
November 7th, 2008 at 12:33 pm
Reflating the economy through a broken banking system isn’t working???
I’m shocked to hear that! Well It looks like it’s time for a little direct socialist reflation and put that money in the hands of people, maybe even create a few jobs while they’re at it.
Isn’t that why we got Obama-who better to print it up and give it away?
the banking system is dead and will not lead us out of this mess.
Money to the people! Watch out for low flying helicopters!
So let’s see if this works:
the Fed buys treasuries from the govt. the govt. gives those $ to the people in rebates, public works whatever and the fed has more treasuries to trade the banks for toxidc debt(unless they’ve given up on that) or it keeps it on it’s balance sheet. Either way it’s straight simple money creation=inflation=???
November 7th, 2008 at 1:26 pm
keseri Says:
People who trade their labor for monopoly money at a fixed rate, maybe?
Speaking of monopoly money, check out the latest adjusted monetary base graphs (short term, long term), now up to $1.265T with the latest annualized rate going to 786%.
To the moon?
November 7th, 2008 at 3:07 pm
I wish I understood this stuff better. I read Creature from Jekyll Island and it confused me even more.
What ramifications are there for the worsening condition of the Fed balance sheet? So far, it isn’t having an impact on the dollar which is in such high demand.
November 7th, 2008 at 5:04 pm
T Rob…in a NUTSHELL…the United States as well as the US DOLLAR is SCREWED. The US DOLLAR and the US TREASURIES are the same kind of toxic instrumentst we PAWNED OFF on the world when we gave them SIV’s and Subprime Garbage. For some reason….Foreigners didn’t get ENOUGH OF A BLOODY NOSE…now they want to get their HEAD SMASHED in as well.
It’s really very simple….look at what happened to the SOVIET UNION back in 1989….it collapsed….almost overnight. It was not because of ol Ronny Reagan….but huge debts…foreign wars and huge military debts…and a political structure unable to change and deal with the problem.
The United States is on the verge of a COLLAPSE…and in reality…is in the beginning stages. People keep saying…DEFLATION…INLFATION….DEPRESSION….RECESSION….they miss the whole point. Its going to be Hyperinflation but its going to be a COLLAPSE of our ECONOMIC and SOCIAL structure.
When the United States was in a DEPRESSION in the 1930’s…we have lots of resources all around us. Today….we function also on a great deal of resources….but GUESS WHAT?? A great deal of these resources are in FOREIGN HANDS. Once the US DOLLAR and TREASURY markets collapse…say GOOD BYE to IMPORTS….or a large percentage. This will put the UNITED STATES in immediate shortages, Hyperinflation, and rationing. Its coming.
Check out Dmitry Orlov, who lived through the Soviet Collapse and gives Americans some ideas of how it was living through it. He also states….the Soviet Union was more prepared for a collapse than the USA….because of the structure of RUSSIA compared to the Suburban sprawl of the United States:
http://cluborlov.blogspot.com/2006/05/dmitry-orlov.html
November 8th, 2008 at 1:34 am
SRS, Son of Rising Sun
“Foreigners didn’t get ENOUGH OF A BLOODY NOSE…now they want to get their HEAD SMASHED in as well.” LOL.
Your comments are always entertaining to say the least. Aren’t you Jim Willie really?
November 8th, 2008 at 1:38 am
Check out the “GDP & money creation & lags” chart at http://www.nowandfutures.com/key_stats.html for projections going out to 18 months. The other charts are eye-openers too!
The monetary base is forecast to increase parabolically in 2010. The velocity of money is not projected into 2010 on this chart, but it would be expected to increase sharply as well, as Dollars are spent or exchanged before they loose too much purchasing power. This can be the seed for hyperinflation…
“Significant changes in the growth rate of money supply, even small ones, impact the financial markets first. Then, they impact changes in the real economy, usually in six to nine months, but in a range of three to 18 months. Usually in about two years in the US, they correlate with changes in the rate of inflation or deflation.”
– Milton Friedman, economist
November 8th, 2008 at 1:46 am
Rob
The old administration with Papa Paulson was better. You could count on him to give the correct advise of reflating the way to hell. And Bazooka Bush would bless him. All 3 superheroes - Bush, Bernanke & Paulson make a teriffic combination. Helicopters were almost being sighted everywhere.
Now some doubts surface especially with Volcker hanging around Obama. Remember he is the “old hero” in retrospect. He will suggest something stupid like trying to “save the dollar- the economy be damned” kind. It worked the last time. “Maybe - it will work again”, he would interject. We have to see some good dose of deflation before everybody jumps ship at once.
November 8th, 2008 at 2:39 am
Foreigners are indeed getting their skulls crushed. As of last week
Indian Forex reserves dip by another $5.5 b within a week to a current figure of $253 b (Reserves was $316 b as of May). The reserve picture is not very attractive given India’s reported external borrowing of ~$200 b (as of Mar 2008).
http://economictimes.indiatimes.com/Forex/Forex_reserves_dip_55_bn_as_FIIs_stay_in_sell_mode/articleshow/3687066.cms
At some point in the next 6 -12 months, creditors to India would panic. Unless the Fed interjects with its swap-o-rama antics with fresh monopoly money. Meanwhile, there has been & will be a steady erosion of the US bond reserves from the Indian side. As you can see, the bond market composition is changing already.
The Indian example shows that foreign currencies are toast under the present circumustances.
November 8th, 2008 at 6:10 am
Keseri,
Hugo Salinas Price did not conclude that the fall of the Euro was the cause of the contraction in foreign reserves.
Extract from Hugo’s article…
“Still, the huge rate of growth of Reserves, year-on-year, was up to 26.5%, and it seems to me that this previous explanation is not sufficient to account for a sudden halt in growth and the onset of a decrease in Reserves.”
Whatever the cause, it seams that the contraction in foreign reserves that started in September has coincided exactly with the explosion in the Fed’s balance sheet.
As Jim Sinclair would say,
“It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms.
If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall.”
As of this week, the Fed’s balance sheet has now surpassed 2 trillion dollars. It seams like the US has now turned to within to finance the shortfall. I do agree that non US currencies are suffering and will continue to do so. However Uncle Buck will not be spared in the final call.
I would put it more down to an “every man for himself” scenario, in other words competitive currency devaluations.
November 8th, 2008 at 6:31 am
What you all say about the coming hyperinflation makes perfect sense to me. However, why doesn’t the collective knowledge of the precious metals market see this coming?
I know……manipulation by the bullion banks.
But really, why would they fall on the sword? Maybe because they know the Comex will back them and settle in paper. However, then why don’t the other PM vehicles backed by real metal disconnect from the paper market? Why isn’t SLV and GLD trading at a premium to Comex prices? It would appear that the collective knowledge of the market says hyperinflation is not on the horizon.
November 8th, 2008 at 8:44 am
T Rob: Gold prices are said to change day to day in response to inflation expectations at that time, as well as being Dollar inverse. At this time the Dollar appears to be strong and deflation appears to have the upper hand. A time lag effect like this was seen in the late 1970’s. Gold had been dumped on the market to surpress gold prices and inflation expectations. It was only when the effects of inflation were seen in main street that gold really took off. You can expect the same thing this time round.
Dieuwer said that gold was in backwardation, albeit briefly. Professor Fekete predicted this would happen when gold went into hiding - a warning of possible hyperinflation.
November 8th, 2008 at 8:51 am
From Bloomberg, about this weekends G20 meeting:
“This weekend’s meeting will explore ways “to regulate global financial transactions that are outside government’s control,” Brazilian central bank President Henrique Meirelles said yesterday.”
Looks like capital/exchange controls are on the way.
November 8th, 2008 at 10:38 am
T Rob & Antifiat
T Rob raises a perfectly genuine point - why doesn’t the market discount the coming hyperinflation? Antifiat answers by saying