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The Fed Is Out Of Ammunition

Monday, November 24, 2008, 5:09 PM

This title is not mine, but that of an article that appeared in The Wall Street Journal today (Nov 24), which closely mirrors my own assessment of where we are and what is likely coming next. In short, deflation is so unacceptable to a debt-based money system that it will be avoided at all costs. And I do mean all costs.

This was written by an equity strategist in Hong Kong; be sure to catch his startling conclusion at the end. Startling because of where it was printed – in the main circular of the high church of fiat money, a.k.a. the WSJ.

The whole thing is worth a read, and a ponder, but let’s review some of the more relevant bits.

The Fed Is Out of Ammunition

A discredited dollar is a likely outcome of the current crisis.

With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.

Those who want to understand the mechanism might ponder Irving Fisher's comment in 1933: When it comes to booms gone bust, "over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money."

My comment: Here he’s laying the groundwork – our current crisis is ultimately one of “too much borrowing.” Given this, one can easily be stumped by the current plan of having the US government borrow even more to give to already failed institutions. How does borrowing more solve a crisis rooted in “too much borrowing?”

It’s a great question, and one that you will be hard pressed to find discussed in the usual mainstream media outlets.

Why is the government so desperate to borrow our way out of this deflationary problem? Let’s continue.

The growing risk of falling prices raises a challenge for one of the conventional wisdoms of the modern economics profession, and indeed modern central banking: the belief that it is impossible to have deflation in a fiat paper-money system. Yet U.S. core CPI fell by 0.1% month-on-month in October, the first such decline since December 1982.

The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s -- persistent deflationary malaise unresponsive to near zero-percent interest rates -- shows that it is not so easy to inflate one's way out of a debt bust.

My comment: The great fear of a deflationary spiral for central economic planners (like the former Soviet Union or the US central bank) is the loss of policy traction. That is, once the main levers break, the Federal Reserve rapidly loses both the ability to effect outcomes and credibility. Of the two, credibility is the most important feature in a faith-based economy. This is a large reason why such an outcome will be fought with every tool in chest. And also every dollar. Read on.

It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.

My Comment: This massive increase in total Fed assets and bank reserves will someday, possibly sooner than most expect, come flooding back out into the “real economy,” creating another boom. That’s the way these systems work. Presently, all that matters to the central planners is that the economy (meaning credit growth) returns to higher levels than before. That is what it requires, and that’s what they will seek. Unfortunately, this will only mean that we’ll have failed to learn our lessons from the past crisis and will have sown the seeds for an even larger, more disruptive crisis in the future. I will note that such crises are becoming both more frequent and larger with every passing rescue.  [Next part: emphasis mine]

There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.

Virtually everybody blames Mr. Paulson for the decision to let Lehman Brothers go. But this decision should be applauded for precipitating the deflationary unwind that was going to come sooner or later anyway.

My Comment: Exactly so – as long as this crisis is prevented from fully resolving itself, which it would do all on its own, we can be sure that it will take longer and have a less restorative outcome than if allowed to progress more or less naturally. But the author is correct - this is a horribly difficult issue to “solve,” probably because it is more of a predicament than a problem (hat tip to Switters). Problems can have solutions, predicaments only have responses.

What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.

It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.

My comment: And here’s the predicament in a nutshell: The only way to ‘solve’ a debt crisis in a debt-based money system is by adding more debt. Clearly, that cannot really work. I have long taken Bernanke at his word and assumed that he will use the power of the printing press to defeat deflation. I believe that is precisely why he was hired, and I believe it explains the more than one and a quarter trillion dollars (!) of money that he’s created out of thin air to buy distressed bank debts.

In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.

The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.

My Comment:  And finally, the interesting conclusion. Any mention of the gold standard, let alone postulating its return, is a remarkable thing to see in the WSJ.  In any crisis, the solutions are usually fashioned from whatever happens to be lying around at the moment. The gold standard is well understood, and would undoubtedly have prevented the various monetary and trade imbalances from having grown to their current dangerously large proportions. Because it is a possible solution that 'happens to be lying around,' it stands a chance of being seriously considered.  So this conclusion is interesting, in part because of where it was printed (the WSJ), and in part because such thinking is creeping into more and more articles, indicating that it’s once again being considered by more and more people.

However, the possible return of some form of the gold standard is more speculative than his other assessment that the present crisis will end up discrediting the dollar itself, leading foreign investors to flee the dollar. This is something that I fully expect to happen at some point in the future and is something that everyone should consider.

How likely is it, and what will be the impact to you if it does?

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48 Comments

Cloudfire's picture
Cloudfire
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Re: The Fed Is Out of Ammunition

If there is a return to the gold standard, what does that do to the likelihood of gold confiscation?

rowmat's picture
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Re: The Fed Is Out of Ammunition
c1oudfire wrote:

If there is a return to the gold standard, what does that do to the likelihood of gold confiscation?

One would assume very likely!

dcary's picture
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Re: The Fed Is Out of Ammunition

I made such a prediction to Mish, and he responded by chastising me for being so dollar centric in my thinking.  His point being that although we are surely trashing the dollar, all currencies are being trashed by just about everyone else...so the dollar may survive on relative terms...with the world still believing in the power of America to pull through.

 I raised this concern because I have a bet against the long bond...expecting interest rates to rise as the dollar is eventually shunned.

He is clearly of the view that deflation is the great worry...I have a foot in each camp, just wanting to survive.

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Re: The Fed Is Out of Ammunition

I thought the concept of a gold standard was based on the idea that a unit of currency was redeemable for a certain amount of gold, and/or silver.  When I was a kid they still had gold and silver certificates…which I think could be traded for bullion.

 

Why would gold be confiscated if one could trade metal for paper?  I would appreciate a full discussion of how such a system might be put in place…if the idea were to be played out.

 

capesurvivor's picture
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Re: The Fed Is Out of Ammunition

Uh,

 

Anyone have a good answer to Chris's parting question?

 

Inflation, Zimbabwe-style?

 

SG

Floyd's picture
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Re: The Fed Is Out of Ammunition

I don't think the "govmint" will confiscate gold. They can tax it heavily if they so choose.

switters's picture
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Re: The Fed Is Out of Ammunition

I'm not sure what's going to happen and the truth is that nobody is either.  I like Mish and I think he's super smart, but as Chris has mentioned elsewhere he has a strong belief about deflation.  In times like these, it's probably best to keep an open mind and consider all possibilities. 

There is more than a zero percent chance that the dollar will collapse, so it makes sense to hedge against that possibility.  There is also a chance that the dollar will perform well in relation to other fiat currencies, as Mish suspects.  So one should be hedged against that possibility as well. 

What does that look like?  Probably owning both dollars and gold.  However, it could be argued that since gold could perform well in both deflation with a relatively strong dollar and inflation with a weak dollar, that one might want to weight their portfolio more towards gold than towards any fiat currency.  That's what I've done.  Gold and silver. 

Davos's picture
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Re: The Fed Is Out of Ammunition

dcary:

http://www.wellsfargonevadagold.com/confiscation-order.pdf

In 1933 FDR needed to fill the "Feds" safe with gold. The U.S. citizens used gold coins then, and the U.S. was, as a result, flush in gold. FDR yanked the gold from them and handed it over to the "Fed."

It gets better. Gold was "purchased" by the govt. for $20.67 an ounce with paper money, then it was re-valued at $35.00 an ounce. 

Basically if you held gold you got screwed out of 70% of your hard earned investment - overnight. Like selling your shares in an IPO like Google the day before Google went public.

Or, another way of looking at things is, the dollar which they paid you in for "your" gold now was worth 70% less than the day they "bought" your gold. Inflation. (And I use the word loosely.)

Now, to answer the rest of your question: Other countries could trade paper for gold, but U.S. citizens could not.

And trade it they did. I pictured that they smelted the coins into bullion bars. Reading up on this I found out that they didn't. Most coins then were less than .99999% gold, if I recall about .96% pure. So what they did is do face dollar value on the coin. So on a million dollar trade of gold for dollars they screwed the foreign country out of $40,000.00 by paying them in gold coins at face not melt value.

Nixon declared BK or force majeure (performance of contract not possible due to reasons out of your control) and took the U.S. off the gold standard 15 August, 1971. At the time de Gaulle called the bluff suspecting that the U.S. was printing too much "funny" money. They were. Johnson didn't like the bread or bullets ultimatum, he wanted his cake and he wanted to eat it to, so it was print baby print. Almost like today. Almost.

In 1974 U.S. citizens could own gold again.

So, my take on Chris's question? Own gold and have relatives you trust implicitly who live overseas with it? Don't know. Do know, or suspect that our dollar will be as SG/capeSurvvor says Inflation, Zimbabwe-style? (worthless) Switters has a valid merit about silver, they didn't take that before, and they don't seem all to creative these days. You won't get as much bang for your buck with silver though...

I do recall also reading that you couldn't open a safe deposit box at a bank without an IRS agent standing there after this law went into effect. 

Somewhere I have a 25 page pdf done by a Brooklyn prof. on the Constitunality of this. His take - ot wasn't Constitutional. 

 

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Re: The Fed Is Out of Ammunition

The big question that has to be asked when one considers the possibility of the dollar going to hell in a handcart is where is the money going to flow.  I mean there aren't stronger currencies lining up, are there?

The US has tremendous financial mobility, great access to cheaper labour south of the border, amazing inventive skills and much more.

 

Damnthematrix's picture
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Re: The Fed Is Out of Ammunition

How likely is it and what will be the impact to you if it does?

I defy anyone to say they really understand economics......  So, having admitted I don't, (at least none of it makes any sense to ME) would not the return to a gold standard imply that the entire wealth of the world, at least, would need to be covered by gold?  Would that not mean, then, that as a gold is just as finite a resource as oil, and less and less of it is being discovered and mined, that the price of gold would have to go through the roof (into orbit!)....?  I mean like millions of dollars an ounce?

Starting to wish maybe I had bought some now! 

Damnthematrix's picture
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Re: The Fed Is Out of Ammunition

"Why is the government so desperate to borrow our way out of this
deflationary problem? Let's continue."

Becuase they are clutching at straws?  Because they don't understand economics any better than I do? 

Juvysen's picture
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Re: The Fed Is Out of Ammunition

A guy on "talk of the nation" today on npr said that the gold standard doesn't make sense for a global economy because there just isn't enough gold in the world to cover the amount of amassed wealth in the world.  Is this simply because it has to keep growing because of the debt based fiat currency or what? 

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Re: The Fed Is Out of Ammunition

Is it worth considering the likelyhood of some 'semi gold standard'........something like OPEC demanding payment in gold.

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Re: The Fed Is Out of Ammunition
Floyd wrote:

I don't think the "govmint" will confiscate gold. They can tax it heavily if they so choose.

You must not be aware of what Roosevelt did.

alwayssaturday's picture
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Re: The Fed Is Out of Ammunition
Juvysen wrote:

A guy on "talk of the nation" today on npr said that the gold standard doesn't make sense for a global economy because there just isn't enough gold in the world to cover the amount of amassed wealth in the world.  Is this simply because it has to keep growing because of the debt based fiat currency or what? 

 

All they would have to do is to increase the value of gold and print more money.  Remember, if the central banks convince us to go to a gold standard...so that we never have these boom and bust cycles again  then they can set the price of gold as high as they want.  Since they own something like three quarters of all the above ground gold, they will profit greatly. 

 

Juvysen's picture
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Re: The Fed Is Out of Ammunition
alwayssaturday wrote:
Juvysen wrote:

A guy on "talk of the nation" today on npr said that the gold standard doesn't make sense for a global economy because there just isn't enough gold in the world to cover the amount of amassed wealth in the world.  Is this simply because it has to keep growing because of the debt based fiat currency or what? 

 

All they would have to do is to increase the value of gold and print more money.  Remember, if the central banks convince us to go to a gold standard...so that we never have these boom and bust cycles again  then they can set the price of gold as high as they want.  Since they own something like three quarters of all the above ground gold, they will profit greatly. 

 

Well, that's what I was thinking... but why did they not do that instead of removing the gold standard, then, back in the 70's?

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Re: The Fed Is Out of Ammunition

Roosevelt wanted to devalue the dollar and couldn't with legal tender gold floating outside the system.  We aren't in that situation now so I doubt that the same conclusions can be drawn.  The chance of gold becoming legal tender again is zero.

The argument that there is not enough gold to go around is fallacious and has been addressed on several economic sites.  http://www.Mises.org is a good one to start looking through for more info.  As I said, though, it isn't going to happen although some sort of a Bretton Woods like pseudo gold standard might arise.

I agree with Mish on deflation over the short to intermediate term but even Robert Prechter, the "uber deflationist", admits that at some point the Fed printing will swamp the the system and then the dollar will be in deep weeds.  If the Fed starts buying Treasuries, we will be very close.  Gold will be what you want to own.

I will end with a quote from Ludwig von Mises:

 "The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Ludwig Von Mises, Human Action, 3rd Revised Edition, pg 572 

 

Ray Hewitt's picture
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Re: The Fed Is Out of Ammunition

A guy on "talk of the nation" today on npr said that the gold standard
doesn't make sense for a global economy because there just isn't enough
gold in the world to cover the amount of amassed wealth in the world. 
Is this simply because it has to keep growing because of the debt based
fiat currency or what?

That's a standard inflationists argument. There is always a price at which there is enough gold. 
Money mouth

Davos's picture
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Re: The Fed Is Out of Ammunition

I really think the U.S. will fight the gold standard tooth and nail. Our military is global. Unless the U.S. wound up with all the gold, that would stop. The Roman empire fell, so I'm not saying it can't happen, I'm just saying they will fight it all the way.

The govt. loves inflation. (and I'm using that definition loosely). More taxes, it could wipe out the 73 trillion debt and keep entitlements if there were hyperinflation. People could pay off their debt and would be ready to suck down more debt after the dollar was re-denominated. Gold would screw that up for them.

Not to say that PMs won't become the dafacto standard until this is sorted out. I have NO doubt that Ben the mad printer will chart this course, and if they can him I'm certain the next guy/gal will be even worse.

Oh, woostock46,

I think they are buying, I'm seeing signs of Quantitative easing now.

 

capesurvivor's picture
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Re: The Fed Is Out of Ammunition

Davos,

Your last statement is probably the best reason, IMHO, why the U.S. wouldn't support a gold standard; it would require too much honesty and result in too much loss of power for those in power. Governments hate deflation but they will cheerfully watch their citizens struggle like hell through inflation because citizens do the suffering while "their government" and big money benefits.

What constantly amazes me is the number of sharp folks I read here and elsewhere, much more economically knowledgeable than I and probably than our "leaders",  who in truth have no idea what is going on and what will happen. Opinions go in all directions and have numerous variables. That is very worrisome.

 

SG

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Re: The Fed Is Out of Ammunition

Interesting article and as valid a view as any, we are in uncharted waters here despite similarities to previous crises. The question I have is; going forward what effects will this have on the status of the $US as world reserve currency? I believe other nations are now actively considering alternatives and who can blame them after the recent and ongoing abuse by the US of that privilege. One option is a standard unit of exchange based on a basket of commodities, not a currency as we know it but an incorruptible measure of exchange applying to all international trade and debt/credit. This could even arise naturally in response to international uncertainty but would gain widespread support in short order if fairly structured. God knows where this crisis will end up but those countries with large debt levels and a large consumtion based economy are incredibly vulnerable in a de-leveraging of this magnitude. As an aside I can't see the west's financial centres recovering to anything like their former levels, you can't expect this fiasco to be forgotten easily.

Cheers,

David,

New Zealand

mred's picture
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Re: The Fed Is Out Of Ammunition

As it was pointed above, the pressure against the remonetization of gold has nothing to do with its amount. It has everything to do with how the monetary system influences and, in the long term, determines the balance of power in a society. For this reason the fiat currency regime will fight with everything they got to ensure their own survival. If this means ruining the rest of us, so be it. Commodity money is the money of the free person. Gold is not "legal tender" because it doesn't need "legal tender" laws for people to accept it, it doesn't need coercion, as depreciating paper does. As Adolf Hitler said: "Gold in the hands of the public is the enemy of the state". And the SOB knew about totalitarianism, one can give him that. There are several ways in which gold can be remonetized gradually. If I am not mistaken, Murray Rothbard proposes one such possibilities in his book "The Case Against the Fed". Here is an outline of another one, this one proposed by Antal Fekete:

*************

The
plan's most important purpose is to eliminate the monopoly that the
Federal Government and its central bank have over what constitutes money
in our economy. It will do this by repealing the "legal tender
laws" that mandate our acceptance of Federal Reserve paper dollars
for business transactions and purchases. The plan establishes a parallel monetary system to operate alongside our present Federal
Reserve System, and thus it allows the people to reject the Fed's paper
money if they wish. It does this by:

1.
Opening the U.S. Mint to all citizens, miners, jewelers, processors,
etc. to bring whatever gold and silver they wish to be minted into
standardized gold and silver coins to circulate as money.

2.
Putting all the gold that the Federal Government and its various
agencies presently possess (gold that they stole from the American
people in 1933) into a Rehabilitation Fund that will then be minted into
gold eagle coins and apportioned out to state chartered Credit Unions
according to the capital of their various subscribers.

3.
The gold coins will then form the basis of the new parallel monetary
system. With this gold as their reserves, the Credit Unions will then
issue paper certificates to be used as money in society by their
subscribers. The certificates will be REDEEMABLE at any time in gold
and/or silver to whoever presents them to the Credit Union.

4.
The Credit Unions shall have reserves of gold for no less than forty
percent of their note and deposit liabilities. The remainder shall be
covered by reserves in the form of gold-based short-term commercial
credit, i.e., self-liquidating bills of exchange that mature in 91 days or less.
Paper instruments such as Treasury bonds, notes and bills will not be
eligible.

5.
The Credit Unions' primary function will be to supply gold and silver redeemable
currency for the payment of salaries and wages to employees and workers
who choose (through collective bargaining agreements) to be paid in gold
backed currency instead of irredeemable
Federal Reserve notes.

6.
These three factors (opening the U.S. Mint for all gold and silver to be
minted into standardized coins, the chartering of Credit Unions to issue
currency redeemable in gold and silver, and the revival of "bills
of exchange" to provide the necessary elasticity of credit) will
effectively establish a parallel monetary system to the present one we have now. No longer
will the Federal Government and its central bank cartel be able to
dictate that we only deal in its paper money that is relentlessly being
debased every year by inflation.

7.
The Federal Reserve's fiat paper money will now have to compete with
legitimate redeemable gold and silver backed currency of the Credit
Unions. Gradually over the years, gold and silver as money will become
used more and more, and the various Federal Reserve banks will either
have to convert to its usage or go out of business.

8.
The greatest beneficiaries of the plan will be those workers and
employees who opt to be paid in Credit Union currency rather than
Federal Reserve notes. This can be done through union-negotiated
contracts. Their wages and salaries will then hold their value. One's
savings will not be worth 25% less ten years down the road, and then 50%
less ten years later.

9.
The plan is meant to get American citizens acclimated to using and
saving gold and silver as money again. It will start out small, but
should grow into a viable circulating money throughout society. But even
if it remains small in its use, it will be immense in its effect because it will act as a competing
form of money to the Federal Reserve's money. This will break the
government's mega-bank monopoly, which will force the Federal Reserve to
stop debasing the dollar.

*****************************

The full article, from 2005, should be of interest to those who think that the monetary system is the fundamental problem we face, or at least what got us into this mess. It can be found at:

http://www.financialsense.com/editorials/hultberg/2005/0203.html

It is not lack of ideas what is stopping the people in power to fix this, it is lack of political will, or inability to oppose the vested interests of the international bankers that for some reason always get every single thing they want from the government.

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Re: The Fed Is Out of Ammunition
Barnside wrote:

The big question that has to be asked when one considers the possibility of the dollar going to hell in a handcart is where is the money going to flow.  I mean there aren't stronger currencies lining up, are there?

I don't recall reading anything here about the Amero. There are enough people out there who firmly believe the US is already printing a replacement currency. Google comes up with 1.4m results and you can see the coins spinning on a table over at YouTube.

 

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Re: The Fed Is Out of Ammunition
rowmat wrote:
c1oudfire wrote:

If there is a return to the gold standard, what does that do to the likelihood of gold confiscation?

One would assume very likely!

In a way they are taking gold now.  In my area, there are commercials for buying gold often on radio and TV.  Many people are selling it and if the dollar becomes worthless they have a nice stack of paper.  Interesting how the people in the know take action weeks even months before the fesses hits the fan.

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Re: The Fed Is Out Of Ammunition

I found this article "The G-20"s Secret Debt Solution" to be an interesting take on how governments could return to a gold standard.

 http://www.moneyandmarkets.com/the-g-20s-secret-debt-solution-27996

 

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Re: The Fed Is Out Of Ammunition

Can somebody explainme why if we are in deflation mode the groceries are more expensive now?

Can we have both( deflation/inflation) and how that works?  It is hard for me to understand the concept.

 Evelyn

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Re: The Fed Is Out Of Ammunition

I know my house is going down in value but my grocery bill is going up.  Rice is 50% more expensive than it was in Jan. 08

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Re: The Fed Is Out Of Ammunition

Has anyone else watched the Money Masters documentary?  I'm impressed that it was made sometime in the 90's.  It's over 3 hours long but we've all watched the crash course already so that shouldn't be a problem.

http://video.google.com/videoplay?docid=-515319560256183936&ei=Rfv_SPStJ...

I watched it and found it very informative and it touches on a lot of the same things Chris does.  If anyone doesn't fully understand our debt based economy, central banking, gold and silver standards, and fractional reserve banking it will provide useful information.

- Jason

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Re: The Fed Is Out Of Ammunition
emdiaz wrote:

Can somebody explainme why if we are in deflation mode the groceries are more expensive now?

Can we have both( deflation/inflation) and how that works?  It is hard for me to understand the concept.

Evelyn

 

There is a post elsewhere on the site about this that pretty much sums it up:

http://www.peakprosperity.com/forum/deflation/8974

 

- Jason

 

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Re: The Fed Is Out Of Ammunition

Jason -

Might also recommend "Money As Debt" - also on Google Video.

It presents in simplified fashion, a monetary-theory basis for a debt-based currency, along with a description of fractional-reserve banking.

 Produced by Paul Grignon, he presents his own economic/political "solution" near the end (as does Money Masters)

However, it does reiterate much of what Chris has presented as to the source and basis of a debt-based currency, with perhaps an equally absorbing presentation of fractional-reserve banking, and helps to establish an understanding of the concepts.

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Re: The Fed Is Out Of Ammunition

Anyone here been checking out Max Keiser’s stuff?

Max seems to be way ahead of most and disparaged by just about everyone.

One buddy told me he sees Max as a traitor and akinto Tokyo Rose. So far I have found vastly more credibility in Max Keiser then in any of the Hank Paulson types who keep getting all the prime TV “news” spots. The homogenized, corporate owned news media (including PBS) is very good at killing any and all messengers who would expose the ballooning lies they more and more frantically want to sell us.

PBC presented two views on the City bail out deal last night. Both agreed wholeheartedly that City was too big to fail. No one ever questioned Government’s ability to bail out everyone every time forever. This one sided take on reality would be a joke if it were not so ubiquitous.

So here is a joke my mom told me growing up.

-Some people got back from the casino and their friends asked them if they had a good time. Oh yes, they said. We just kept winning and winning until we ran out of money.-

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Re: The Fed Is Out Of Ammunition

Hello Evelyn:

There are a million takes on it and all the links everyone posted are good.

I've simplified it down to my HS education as this:

Inflation- them printing gobs of money, what your buck can buy goes way down.

Deflation- them not printing, your buck can buy a lot.

Hyperinflation- them printing gobs and gobs and gobs and gobs of money and your buck is about worthless.

Personally, I don't think inflation should be applied to goods or services, because in my humble opinion, the price of groceries or whatever is determined by TWO things: 1.) the value of our dollar and 2.) Oil. If we run out of oil, oil will cost a fortune and oil is in EVERYTHING especially our petro chemical farming.

If your asking why food costs the same and other products are falling in price that is simple. Right not it is because food is in demand and will always be. Consumer crud we don't need isn't being purchased as people wake up in a home valued below what it was a year ago and open up a 401k statement valued 50% less than a year ago and watch the news and see 10 million out of work and then watch the insame asylum "bail" out banks with money backed by our grandkids taxes and then admit they don't know what the F&%# they are doing and made misstakes.

There is a glut of consumer junk out there as a result because now factories are shutting down in China. Prices will continue to plummet. GDP is 70% driven by consumers, most of that was consumers borrowed money. Now that consumers cant use their house as an ATM they have in 10 weeks put money on credit cards equivelent to the past 10 months of credit card charges. This will be the next domino to fall.

America is maxed out. There isn't enough new debt to support the old debt. The opera lady is getting ready to sing. 

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Re: The Fed Is Out Of Ammunition

Me?

I just feel like wiley coyote with an umbrella and a sign that says "yikes" while a boulder comes crashing down.

Reading the tea leaves I saw something bad coming up over a year ago, got out of usd backed securities and into international along with some gold. However I'm not sure that was the wisest action. Sounds like gold is the way to go no matter what in these uncertain times.

 

iv 

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Re: The Fed Is Out Of Ammunition
Davos wrote:

... the price of groceries or whatever is determined by TWO things: 1.) the value of our dollar and 2.) Oil. If we run out of oil, oil will cost a fortune and oil is in EVERYTHING especially our petro chemical farming.

If your asking why food costs the same and other products are falling in price that is simple. Right not it is because food is in demand and will always be...

There is another branch of farming which is the way farming used to be done before agribusiness.  Some call this alternative farming or sustainable farming.  I suggest that everyone get to know small diversified local farmers in the area and find out about this alternative branch of farming.  If you want a way to control your grocery bill, and to eat more healthy and nutritious, then please do some research to find out where your food comes from.  This is also an entrepreneurial opportunity because food processing is labor intensive so if you link up with farmers you can provide for yourself and for others.

Remember, you can't eat gold or silver but farming set up the right way generates food for people directly from the sun and renews the soil and doesn't require fossil fuels.  Gold and silver has its place in a portfolio but we need to move beyond static ideas of wealth and understand that labor and renewable resources are our future.  Fortunately the future is brighter than what we have today - but the trick will be the transition.  I hope that each of us thinks about this transition and takes steps to get there.

All the best,

James

 

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Re: The Fed Is Out of Ammunition

Try this on for size Damnthematrix, I didn't understand the Gold standard either, this helps:

Gold and Economic Freedom

by Alan Greenspan

[Editor's note - It may surprise more than a few gold devotees to learn they have an ideological friend in none other than Federal Reserve Board chairman Alan Greenspan. Starting in the 1950s, in fact, Greenspan was a stalwart member of Ayn Rand's intellectual inner circle. A self-designated "objectivist", Rand preached a strongly libertarian view, applying it to politics and economics, as well as to religion and popular culture. Under her influence, Greenspan wrote for the first issue of what was to become the widely-circulated Objectivist Newsletter. When Gerald Ford appointed him to the Council of Economic Advisors, Greenspan invited Rand to his swearing-in ceremony. He even attended her funeral in 1982.

In 1967, Rand published her non-fiction book, Capitalism, the Unknown Ideal. In it, she included Gold and Economic Freedom, the essay by Alan Greenspan which appears below. Drawing heavily from Murray Rothbard's much longer The Mystery of Banking, Greenspan argues persuasively in favor of a gold standard and against the concept of a central bank.

Can this be the same Alan Greenspan who today chairs the most important central bank of them all? Again, you might be surprised. R.W. Bradford writes in Liberty magazine that, as Fed chairman, "Greenspan (once) recommended to a Senate committee that all economic regulations should have fixed lifespans. Senator Paul Sarbanes (D-Md.) accused him of 'playing with fire, or indeed throwing gasoline on the fire,' and asked him whether he favored a similar provision in the Fed's authorization. Greenspan coolly answered that he did. Do you actually mean, demanded the senator, that the Fed 'should cease to function unless affirmatively continued?' 'That is correct, sir,' Greenspan responded."

Bradford continues, "The Senator could scarcely believe his ears. 'Now my next question is, is it your intention that the report of this hearing should be that Greenspan recommends a return to the gold standard?' Greenspan responded, 'I've been recommending that for years, there's nothing new about that. It would probably mean there is only one vote in the Federal Open Market Committee for that, but it is mine.'" -- Editor, The Gilded Opinion ]

GOLD AND ECONOMIC FREEDOM

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire -- that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.

When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one -- so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists -- why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely -- it was claimed -- there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.

The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form -- from a growing number of welfare-state advocates -- was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which -- through a complex series of steps -- the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

by Alan Greenspan
1967

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Re: The Fed Is Out of Ammunition

That was before Greenspan sold out. The man had a price you see.

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Re: The Fed Is Out Of Ammunition

James:

In addition to a large garden and a greenhouse we also raise organic chickens. Easy, fund, cheap and very healthy. We buy chicken food from Mennonite farmers.

Farmers today are faced with a lot of issues as a result of dwindling prices. They are getting by with older equipment and buying less fertilizer and growing less. This will have an impact when we consider the exponential population growth - that is if things continue as is. The bright side to this is a lot of ethanol producers are going tango uniform. 

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RUSSIAN ANALYST PREDICTS DECLINE AND BREAKUP OF USA

http://www.drudgereport.com/flashrur.htm

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Citigroup could lead to a shutdown of the global banking system

 http://www.moneyandmarkets.com/citigroup-collapses-banking-shutdown-possible-28325

And now, here we are, nearing the end of the road with the largest banks of all endangered and with no larger bank that can swallow them up. It’s a day of reckoning that leaves me no choice but to issue this three-part warning:

  • Despite the U.S. government’s massive Citigroup bailout, it is going to be difficult for the global banking system to survive the shock to confidence for very long.
  • Even if insured depositors do not pull out their funds, uninsured institutional investors are likely to run with their money, threatening to bring the system down.
  • And alas, even if you have your money in a safe bank with full FDIC coverage, you could be adversely impacted.
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Re: The Fed Is Out Of Ammunition

 

I'll watch that in addition.  The more material the better.  

Thanks!

 

- Jason

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Re: The Fed Is Out Of Ammunition
Davos wrote:

In addition to a large garden and a greenhouse we also raise organic chickens. Easy, fund, cheap and very healthy. We buy chicken food from Mennonite farmers.

Thanks Davos,

I find it very interesting to find that quite a few active posters on this site do look after their own food supply.  I think there is a message here for the rest of us that haven't done this ourselves (including myself although I'm actively moving down this road).  If we want to be more productive in our lives we need to change our ways and start being active about our food.

Davos wrote:

Farmers today are faced with a lot of issues as a result of dwindling prices. They are getting by with older equipment and buying less fertilizer and growing less. This will have an impact when we consider the exponential population growth - that is if things continue as is. The bright side to this is a lot of ethanol producers are going tango uniform. 

The problem with conventional or mainstream farmers is that they buy retail and sell wholesale.  Everyone sells to the conventional farmer and the conventional farmer only gets about 1/15th of the retail value of the product.  The conventional farmer has been roped into the Matrix.  The other branch of farming (called sustainable or alternative) is the successful route to the future. 

Yes the problems in the developing world get worse when you consider exponential population growth.  However consider the Western World today - calories we have in abundance.  When you look at the people around you - do you see healthy people?  Do you see obese people starving for nutrition?  How many medications are people taking?  What about stress levels? 

If we want to get out of the Matrix a fundamental step is growing our food, processing our food, and who we buy our food from.  I'm further and further into the details of the book You Can Farm: The Entrepreneur's Guide to Start and Succeed in a Farming Enterprise by Joel Salatin...who clearly outlines the problem of the Matrix on page 206... talking about a farmer who was recognized for awards by a pinnacle of conventional wisdom but who was foreclosed on a few months later.  This farmer said: "You know what really hurts?  I did everything - everything - just the way the experts told me to."  The author continues:

"Any government agent who reads these words should be stricken to the quick, should be sobered by this statement.  The emotional carcasses in America's rural communities, left to rot by supposed farming experts, are monuments to arrogance, money and power.  We are awash in bland and unsatisfying vegetables, potentially toxic meat and devitalized food - this is the legacy of a wrong philosophy skillfully implemented and nurtured at the public trough.  Heaven help us."

If you trace injustices back through the system right at the crux of the matter is the long forgotten farmer.  Conventional farming is what we have - sustainable farming is what we need.  Through Chris we may now be aware of the Matrix but awareness doesn't let us leave.  Action does. 

We each have a role to play in the Matrix with every bite of food we consume. 

Are you still part of the Matrix? 

All the best,

James

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Re: Citigroup could lead to a shutdown of the global ...

The following link provides an interesting perspective on where we are at present and why such an extreme effort has been made to preserve the Wall Street banks. In a nutshell, when they die, Main Street dies with them.

http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18

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Re: The Fed Is Out Of Ammunition

I think the only way "their" system will work is if they include those at the bottom of the pyramid in the solution, i.e., they need a "bottom up" approach to handling their "systems failure" instead of their "top down" approach".  I see it like gambling... but in a different way.  These people are chasing their money, thinking that by going to the ATM, once more, will give them a better probability of getting their money back-- which is clearly false.  Every sucker realizes this myth and the mathematical fallacy too late in the game.  The Fed and Treasury, if they want to keep the system from crashing, need to cut their losses and start injecting the trillions from the bottom up.  Who are the consumers that keep the system alive?  It's us--- way down here... give us the money and we'll keep your system.  That's the deal.

For all those in favor of getting rid of this "system" of money, I mean debt, I'm with you.

My only concern lies at the burdens of bartering, self-sustaining, and the problems associated with practicality measures.

I wonder what it will be like 20 years from now.

I can imagine a couple of different scenarios.

1. "Wow, I can't believe I thought the money system would crash!  I guess "they" were right."  "Honey, how much is in our retirement account?  Oh my gosh-- that much!!".......We should talk about retirement.

2. "Wow, I can't believe we don't have a currency.  Come over here, Joe, and I'll show you what we used to buy things with.  You see this dollar?"  Joe asks:  "Dad, what does 'buy' mean?"  "I'll tell you later, go fetch me a pail of milk from Betsy and pull some lettuce from the garden; your mother just called us in for dinner."

3. etc.

4. etc.

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Re: The Fed Is Out Of Ammunition
emdiaz wrote:

Can somebody explainme why if we are in deflation mode the groceries are more expensive now?

Can we have both( deflation/inflation) and how that works?  It is hard for me to understand the concept.

 Evelyn

I believe that we can and will have inflation and deflation at the same time. The problem is that what we consider to be "money" is not all created equal. When you use the word "money" think of it as really being "money AND credit". The Fed's Adjusted Monetary Base (AMB) is the closest thing to “pure money” that we have. In Aug of this year it was just over $850B. Today it is in excess of $1.5T ... an increase of 75% in just 3 months.

see http://research.stlouisfed.org/fred2/series/BASENS

How is this possible without causing massive inflation? Because the authorities are trying to replace the other type of money which has disintegrated. What is this "other type" of money? The credit created by the banking system through what is called fractional reserve banking (see the Crash Course). The banks have lost much (all) of their capital by betting in the unregulated OTC derivative markets (CDOs, CDSs). As a result they have had to call in many of their loans in order to survive. This means that we are seeing massive de-leveraging or vaporizing of credit that masquerades as pure money. The authorities have been madly trying to keep the banks from failing so they have increased the amount of “real money” in order to provide equity and loan infusions to the banks. Replacing credit with “real money” is highly inflationary. However the massive de-levering that is still ongoing is deflationary (lost jobs, falling house and stock prices, falling consumer spending, etc).

So how do we end up with both inflation and deflation at the same time? In deflationary times people have to increase their savings rate so they will cut out all discretionary spending. Since spending will be limited to essentials, the increase in “real money” or “quantitative easing” as the economists call it, will find its way to the price of essentials such as food and energy as well as precious metals (gold and silver) causing these prices to increase while the prices of everything else will fall at the same time.

If I am right, how do you protect yourself? Firstly reduce your spending and pay down all your debts if you have not already done so. After that, invest in gold, silver, oil, natural gas, grains, food, fertilizer but keep 25% of your wealth in cash to buy the non-essentials and other assets that will become cheaper as the deflationary spiral continues.

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Re: The Fed Is Out Of Ammunition
thefroggydude wrote:

I believe that we can and will have inflation and deflation at the same time....How is this possible without causing massive inflation? Because the authorities are trying to replace the other type of money which has disintegrated. What is this "other type" of money? The credit created by the banking system through what is called fractional reserve banking (see the Crash Course). The banks have lost much (all) of their capital by betting in the unregulated OTC derivative markets (CDOs, CDSs). As a result they have had to call in many of their loans in order to survive. This means that we are seeing massive de-leveraging or vaporizing of credit that masquerades as pure money.

I agree.  The two types of money are identical once created but it is good to identify them separately so that we understand their origin.

thefroggydude wrote:

The authorities have been madly trying to keep the banks from failing so they have increased the amount of “real money” in order to provide equity and loan infusions to the banks. Replacing credit with “real money” is highly inflationary. However the massive de-levering that is still ongoing is deflationary (lost jobs, falling house and stock prices, falling consumer spending, etc).

Another term for "real money" is "currency money" or "FIAT money".  But again - it is identical to credit money - except in origin.

thefroggydude wrote:

So how do we end up with both inflation and deflation at the same time? In deflationary times people have to increase their savings rate so they will cut out all discretionary spending. Since spending will be limited to essentials, the increase in “real money” or “quantitative easing” as the economists call it, will find its way to the price of essentials such as food and energy as well as precious metals (gold and silver) causing these prices to increase while the prices of everything else will fall at the same time. If I am right, how do you protect yourself? Firstly reduce your spending and pay down all your debts if you have not already done so. After that, invest in gold, silver, oil, natural gas, grains, food, fertilizer but keep 25% of your wealth in cash to buy the non-essentials and other assets that will become cheaper as the deflationary spiral continues.

The creation of currency or FIAT money is attempting to overcome the credit money being vaporized.  This counteracts deflation of the money supply - but only in the location where the money was created - the banks.  Eventually this will lead to hyperinflation once currency or FIAT money creation is created in excess and gets put through the fractional reserve system and generates new credit money (and people begin to borrow again).  However the ongoing depression currently running leads to a decrease in the money supply as people pay back debts or default on them.  So deflation has been ruling in the short term. 

When you refer to inflation you are referring to rising prices and deflation as prices becoming lower (I'm clarifying because I use inflation and deflation only to refer to the money supply - I don't have a term for rising or falling prices themselves which are influenced by the money supply but each item can move higher or lower in price for independent reasons). 

You then raise some insightful points.  It seems likely that price of essentials will rise or stay static or decline less compared to the price of non-essentials (which may not sell at all).  Since essentials are energy, food, and water - these are the areas that I do believe we need to focus our efforts at a grassroots level - sustainable farming, energy efficient homes and complementary currencies for trade.  Note that housing would normally be included in a list of essentials but it safe to say that with the unwind of the housing bubble this is one area that will continue to decline in price.

The first point of economic attention should be fixing the housing bubble.  But the economy has a long way to unwind before people will want to start taking on new debt again.  How many perfectly good cars will be driven 10 to 15 years before replacement - whereas previously these cars might have been replaced after 3 years?  So it seems likely that there will be an ongoing depression until the excesses get rung out of the system.

All the best,

James

numen's picture
numen
Status: Member (Offline)
Joined: Sep 8 2008
Posts: 2
Re: The Fed Is Out Of Ammunition
Quote:

I use inflation and deflation only to refer to the money supply - I don't have a term for rising or falling prices themselves

 

Right.  But there are far more regular people in the world than there are Austrian School devotees, and normal folks need a term to name rising and falling prices, and "inflation" and "deflation" have been around a long time for just that purpose.  And I don't think Austrian School economics is going to very well describe what is happening *this* cycle, when we have simutaneous inflation and deflation, especially if tis continues long term.  We may need to consider several different types of money supply as being different in function as well as origin, and it may take a long while for them to integratte.

James Wandler's picture
James Wandler
Status: Martenson Brigade Member (Offline)
Joined: Aug 11 2008
Posts: 219
Re: The Fed Is Out Of Ammunition
numen wrote:
James705ca wrote:

I use inflation and deflation only to refer to the money supply - I don't have a term for rising or falling prices themselves

Right.  But there are far more regular people in the world than there are Austrian School devotees, and normal folks need a term to name rising and falling prices, and "inflation" and "deflation" have been around a long time for just that purpose.  And I don't think Austrian School economics is going to very well describe what is happening *this* cycle, when we have simutaneous inflation and deflation, especially if tis continues long term.  We may need to consider several different types of money supply as being different in function as well as origin, and it may take a long while for them to integratte.

Thanks numen,

You are right.  Inflation to mean rising prices and deflation to mean falling prices are convenient terms.  But there is a very big problem with these terms - they don't begin to get at an understand of what drives the rising prices and the falling prices.  Generally speaking the effect of the money supply (creation/destruction of credit plus currency money) is the largest single influence on prices.  Full stop.  Give everyone twice as much money - prices double, cut everyone's quantity of money in half and prices are down 50%.

So if we are going to understand why some prices rise and some fall we need to start with the rise and fall in the money supply.  After that we then need to consider the characteristics of the individual items and why they might rise and fall in price.  That's why, generally, in a deflation of the money supply prices of all items will fall.  BUT some items, such as essentials, may resist this trend while non-essentials might fall more in price.

Perhaps the middle ground is that we stop saying inflation and deflation and start saying: price inflation, price deflation, inflation of money supply, deflation of money supply.  I know it is extra work but since this is a fundamental principle of understanding Chris' material I'm going to try and be more clear about this going forward.

Incidentally, I do believe this cycle is being driven by the money supply and I think it is imperative that people understand the underpinnings of what is going on.  Traditional economics is useful for understanding static concepts which don't exist much in the real world and while I'm embracing of the Money Supply concept of the Austrian school of economics I'm open to a new direction.  For instance I see fundamental flaws to a gold standard but, at a minimum, I am in favor of much better regulation over the Money Supply.

All the best,

James

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