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    Chaos & Volatility On The Rise

    The systems that support us are breaking down
    by Chris Martenson

    Saturday, May 7, 2016, 12:01 AM

No, that’s not a ‘click bait’ sensationalist title. Things are getting ‘weird’ out there if you’re trying to be polite, and downright 'chaotic' if you're being blunt.  Everywhere we look, we see signs that the systems that support us are breaking down. 

The economy no longer spins off enough surplus for the elites to take what they consider their share with enough left over for everyone else.  So the wealth gap grows unchecked into politically and socially destabilizing levels.

The oceans are rapidly dying off: with corals bleaching, tide pools acidifying, and phytoplankton disappearing.  Weather weirdness is now so entrenched that all of the 50, 100 and 500-year events that happen each week are mainly reported on locally and garner little national and international attention.

Financial markets are increasingly volatile and dominated by an unruly universe of computer algorithms that now mainly play against each other, having driven off all the humans. 

Politically, we're seeing the former fringes of both parties increasingly come into power as they appeal to increasingly disenfranchised and disappointed electorates.

All of these are signs that the status quo has failed and continues to fail us. But the form of power expressed by our so-called ‘leaders’ today seems nearly incapable of healthy introspection coupled to correct action; preferring instead to do more of the same things that got us into this mess in the first place.

Those of us who can read the signs for what they are, not what we wish or believe them to be, have a special duty to first prepare ourselves for what's coming and then help others. To put on our own oxygen masks first, and then help the others around us.

For a variety of reasons, most of them rooted in archaic evolutionary brain structures, most humans are not well adapted to face change, let alone major change.

And the volatility and chaos that's arising all over the globe is well beyond major change. Therefore it's well beyond the capability of most people respond to effectively — perhaps even at all.

So it’s up to you, the one reading this, to lead the way by becoming the change you wish to see.  If you want to live in a world of abundance and where everyone is at least minimally prepared for an uncertain future, then begin by building up your own 8 Forms Of Capital: financial, living, emotional, social, knowledge, cultural, material and time.  [Note: The 8 Forms of Capital are fully explained in this podcast with Ethan Roland as well as covered extensively in our new book, so I won’t re-explain them all here.  But the concepts are vitally important, and I encourage you to dig deeper now if you haven’t already]

Market Volatility

Recent market volatility, while pretty far from extreme absolute levels, is remarkably aggressive in terms of its relative swings.  The ups and downs are getting more frequent, packed together in a way that's increasingly concerning to astute market observers.

There are many factors at play here that have created a fragile market structure.  First, the unchecked rise of the machines (computer algorithms) coupled with severe information asymmetry (the very biggest firms have access to tradeable data that you and I never see) has led to a lamentable abandonment of fundamentals in favor of momentum and trend following. 

Second, the central banks have nurtured a very unhealthy market dependence on their words and actions. Indeed, the central banks in Japan, the US and Europe have all shown a severe dislike of falling equity prices, and so routinely trot out a series of officials to make soothing noises every time the broad indexes fall even a few percent.

What are they so afraid of?

Well, for starters, they know full well that the global economy is shaky, at best. Financial markets valuations are so high that you might say they are 'priced for perfection'.

The fear is that if these market ever get rolling to the downside, they'll fall a very long way before finally finding a true bottom. And along that path lies a bevy of failed mega-banks and ruined political careers. So, the status quo has a very strong interest in keeping the financial markets propped up for as long as possible.

However, as mentioned before, these unhealthy market conditions have led to a general retreat by flesh and blood traders leaving only the computers to play financial ping pong with each other.  This means trading volumes have fallen and volatility has increased:

'Paralyzing Volatility' Means Trouble for Wall Street Giants

May 6, 2016

There’s plenty of volatility, but what happened to the volume?

From stocks to currencies and bonds, the upswing in turbulence to start the year is chasing all but the bravest traders from financial markets.

Despite the recent rebound in U.S. equities, volume in the S&P 500 Index is down 23 percent. Speculative bets on the direction of currencies have also dropped to the lowest in two years, while average daily trading among dealers in U.S. Treasuries is close to a seven-year low.

Worries about the outlook for the U.S., Europe and China, as well as mixed policy signals from central bankers around the world, have all contributed to what UBS Group AG Chief Executive Officer Sergio Ermotti called a “paralyzing volatility” that’s scaring away clients and caused industry-wide trading revenue to tumble to the lowest since 2009.

Normally, a rise in volatility tends to lead to higher trading activity as traders jump in to bet on the market’s ultimate direction, according to Gulberg. That hasn’t been the case this time. Violent swings across assets have whipsawed just about everyone as concern deepens over the state of the global economy and the effectiveness of negative interest rates and quantitative easing.

At the start of the year, it took just six harrowing weeks for the S&P 500 to lose 11 percent and then a mere five weeks to recoup all the losses. What’s more, it came within months of its August swoon, the first time since 1998 that bull-market investors have suffered two such swings in close succession.

Even after stocks rallied in February, trading has fallen off. U.S. equity volume has averaged 7.2 billion shares a day since the bottom, compared with 9.3 billion shares a day in the first six weeks of the year, data compiled by Bloomberg show. Daily moves in the S&P 500 have also averaged 0.84 percent since August, versus 0.55 percent in the prior two years.

“We’re seeing huge dislocations in markets in this year,” said Atul Lele, the chief investment officer at Deltec International Group. “It isn’t the type of volatility where you see opportunities come out of the woodwork.”

(Source)

Yes, the so-called “markets” are not really markets anymore.  They are the playgrounds of remorseless computer algorithms which can (and regularly do) turn on a dime and run the other direction simply because that’s where all the other programs are running.

Along the way, traditional traders and investors who do important things like analyze earnings and spot fundamental errors have been routinely trampled and they are doing the sensible thing by backing away.

That’s what I did a number of years back once I understood that the playing field was steeply titled and getting more steeply tilted by the day.  Wall Street is always something of a rigged casino but now the rigging is extremely unfair and completely obvious.

And it’s not just the little guys that are harmed here, even the biggest players are being smacked around in these brave new “markets.”

Hedge funds are doing terribly

Apr 22, 2016

Pity the hedge fund manager.

The elite, highly compensated men—they’re mostly men—who run money for the world’s wealthy are having a devil of a time finding a way to make decent returns. As an asset class, hedge funds lost 0.4% during the first quarter, according to research firm Eurekahedge.

Hedge fund clients have noticed that they’re not making money. As a result, they’ve yanked roughly $15 billion in assets from hedge funds in the first quarter, the worst stint of redemptions since 2009, during the nadir of the Great Recession.

(Source)

Even the hedge funds, with nearly $3 trillion under management are not big enough, or well-positioned enough, to figure out what’s going on and make positive returns.  This means that you and I stand even less of a chance of gaining access to useful trading information.

The reason for this is contained in this snippet from a FT article on hedge funds:

The [hedge fund] strategy that has been winning the year so far is dictated by computers: systematic hedge funds that surf trends using financial models and algorithms have dominated the lists of the best-performing funds.

(Source)

Yep – computerized “trend surfing” is the latest hot thing.  Of course, to do that, nothing need be known about the underlying reason for the price moves, only being on the right side of those moves.  If that sounds like a completely societally useless thing to do, except to the extent it lines the pockets of the people playing the game, that’s because it is.

The idea of capital markets existing to align surplus capital with promising ideas has long since given way to a Wild West casino mentality fully supported and coddled by fearful central banks.

This is a terrible ‘reason’ for markets to exist and shows just how far off the tracks we’ve gotten.  The Federal Reserve has a lot to answer for in being the leader of the pack in creating these Frankenmarkets.

At any rate, market volatility is increasing and with it the chance of a market crash also increases.  Twitchy, trend surfing computers with microsecond reflexes are not exactly the makings of a resilient market structure.

Weather Volatility

Now I happen to live in New England USA so the idea of weather volatility is something I have to try and become worked up about.  Hey, weather has always been somewhat unpredictable and chaotic, right?

But recent events have driven home the idea that we are now experiencing highly unusual weather events that even the most ardent Pollyanna would have a hard time overlooking.

Driving all of this is an extreme spike in atmospheric temperatures itself kicked off by a very pronounced El Niño.  Fluid dynamics are notoriously difficult to model but the basic idea is that what are considered stable patterns at one temperature will shift into new patters at a higher or lower temperature.

Think of food coloring dropped in a glass of cold water vs the same dropped in a vessel of hot water the temperature of which is rising.  Yes it swirls in both containers, but far faster and in a more wide-ranging way in the hot vessel than the cold.

(Source)

While it’s thought that the moderating El Nino will also moderate the rapid temperature spike, we can already see some of the effects brought about by a jet stream with unusual patterns.  The first is in the tragic story of the forest fires that burned through Fort McMurray, which were stoked by a very unusual jet stream pattern that brought temperatures 30 degrees warmer than normal to the area.

Fort McMurray fires

Unseasonably hot weather in Alberta, Canada, is fueling the worst wildfire disaster in the country’s history. An extreme weather pattern, known as an omega block, is the source of the heat.

An omega block is essentially a stoppage in the atmosphere’s flow in which a sprawling area of high pressure forms. This clog impedes the typical west-to-east progress of storms. The jet stream, along which storms track, is forced to flow around the blockage.

At the heart of the block in Canadian’s western provinces, the air is sinking and much warmer than normal. Such a clog can persist for days until the atmosphere’s flow is able to break it down and flush it out.

Centers of storminess form on both sides of the block, and the resulting jet stream configuration takes on the likeness of the Greek letter omega. In this case, cool and unsettled weather is affecting the eastern Pacific Ocean and eastern North America, including much of the U.S. East Coast.

As the Fort McMurray wildfire rapidly spread Tuesday, temperatures surged to 90 degrees (32 Celsius), shattering the daily record of 82 degrees set May 3, 1945. 

More records are likely to fall today. Temperatures are forecast to climb well into the 80s today at Fort McMurray, about 30 degrees warmer than normal.

The videos of the fires in Fort McMurray are quite alarming and many people were caught quite unprepared.  While the loss of life has been kept to a minimum by prompt evacuation calls, at last count more than 1,600 homes had been burnt to the ground, with some residential communities practically burned to the ground.

More on that lack of preparedness in Part II below.

On the other side of the Atlantic another jet stream anomaly brought unseasonably late ice and snow and hard freezes to areas where fruit production and vine growth were already underway ruining the growing season across entire swaths of Europe:

Extreme snowfall and frost damage in Europe

May 3, 2016

In several European countries – such as Austria, Switzerland, Italy, Croatia, Germany, Slovenia, France and Belgium – apples, pears, cherries and grapes were frozen early last week. The snowfall also created challenges with the roofing systems, and occasionally the snow completely ruined things. Snow and cold temperatures are predicted for some places in the coming nights again. NFO, the Dutch fruit growers association, summarised the results per country as follows:

Austria

In the cultivation area in the state of Styria the words ‘complete catastrophe’ have been used. About 80 per cent of the fruit harvest would be destroyed (see photo left of the news report in which firefighters remove snow from hail nets in Gleisdorf, the link is at the bottom of this article and external). During the night from Monday to Tuesday the small fruits had to endure temperatures of 2 to 6 degrees below freezing according to the Landwirtschaftskammer. Initial estimates concerning approximately 2,000 Styrian cultivators indicate €100 million Euro in damages for the fruit sector (without grapes) alone. Councillor Hans Seitinger: “This is truly a unique situation, which has not occurred in the last 50 years.”

Italy

The Italian agricultural organisation Coldiretti also reported that the fruit cultivation suffered damages from the weather circumstances. The increasingly often occurring results of climate change resulted in more than 14 billion Euro of damages to agriculture in the last ten years, according to Coldiretti. Last winter, Italy had the warmest winter in history. This resulted in an early development of crops.

(Source)

The longer list of country effects shows that fruit and grape production was just hammered making this a lost growing season for those unfortunate farmers.

In my own small corner of the world there may be zero peaches produced by several New England states, mine included, because it dipped to a bud-killing 18 degrees one night and then 19 degrees the next in April.  Those are very unusual temperatures courtesy of a late season polar vortex itself courtesy of a wonky jet stream.

So no peaches this year.

Yes, sometimes weather does unusual things.  But it is the increasing frequency of such events that makes it increasingly obvious that we had better start planning on them continuing far into the future.

The problem is, we don’t have the slightest clue how to really plan because the new patterns are emergent – they don’t just happen all at once, it’s a process that takes time – and it’s too early to declare anything beyond “change is happening.”

This NYTimes article did a good job of capturing that dynamic:

A New Dark Age Looms

Apr 19, 2016

IMAGINE a future in which humanity’s accumulated wisdom about Earth — our vast experience with weather trends, fish spawning and migration patterns, plant pollination and much more — turns increasingly obsolete.

As each decade passes, knowledge of Earth’s past becomes progressively less effective as a guide to the future. Civilization enters a dark age in its practical understanding of our planet.

To comprehend how this could occur, picture yourself in our grandchildren’s time, a century hence. Significant global warming has occurred, as scientists predicted.

Nature’s longstanding, repeatable patterns — relied on for millenniums by humanity to plan everything from infrastructure to agriculture — are no longer so reliable. Cycles that have been largely unwavering during modern human history are disrupted by substantial changes in temperature and precipitation.

As Earth’s warming stabilizes, new patterns begin to appear. At first, they are confusing and hard to identify. Scientists note similarities to Earth’s emergence from the last ice age. These new patterns need many years — sometimes decades or more — to reveal themselves fully, even when monitored with our sophisticated observing systems.

Until then, farmers will struggle to reliably predict new seasonal patterns and regularly plant the wrong crops. Early signs of major drought will go unrecognized, so costly irrigation will be built in the wrong places. Disruptive societal impacts will be widespread.

Such a dark age is a growing possibility

(Source)

A ‘dark age’ is simply a time when your prior accumulated knowledge is either lost or is no longer applicable.  There’s much groping about as culture realigns itself and finds its new footing.

The new wanderings of the jet stream have brought unseasonable cold to some areas and drought to others.  It has blocked storms from some areas and dumped unusual amounts of rain in others.

It’s now common to read of “100 year” events, they seem to happen every month. 

These new patterns are noticed somewhere in our animal cores, leading people to report a feeling of anxiety, or that “something is just not right.” 

Certainly there’s no shortage of things that might contribute to that sense, but we need to hold open the idea that we remain attuned to the natural world and as that shifts dramatically all around us, we are deeply affected.

Summary

Market volatility is on the increase, as are weather anomalies. Perhaps they're connected in some deeper way that is not obvious. Or perhaps each just represents the logical end stage of a system grotesquely deformed by too much hot money (in one case) and trapped heat (in the other).

If you're waiting for things to become even more deformed before you begin to prepare yourself for a future of disruptions — don’t.  Get started right now.  Preparing takes time, money and emotional energy. All of those things tend to evaporate once a crisis really gets rolling along.

This new volatility is now here with us. And that has enormous implications — some we can plan for, and others we cannot.  I can plan on losing peaches now and then but if the rains stop falling, I’m screwed.

In Part 2: How To Prepare For Volatility, we conclude that nobody can predict exactly how or when these changes will manifest.  We are entering a new dark age, one marked by an unknowing.  We can either acknowledge that reality and begin to act on it today, or we can ignore it and assume we’ll have time to react to circumstances later, along with most other people. 

And there's much we can do today — right now — that will make a huge positive difference difference in our outcomes should crisis arrive soon. But we need to act soon.

Those who wait will mostly be caught off guard and very disappointed in themselves. It happens all the time — just ask the residents of Fort McMurray.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

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65 Comments

  • Sat, May 07, 2016 - 2:28am

    #1

    debu

    Status Bronze Member (Offline)

    Joined: Aug 16 2009

    Posts: 39

    Bracing Stuff!

    Very much welcome the addition of weather/climate volatility to the discussion. As for a major cause look no further than the horrors unfolding in the Arctic and Greenland. Difficult to read about but Robert Scribbler doing a stellar job covering it, and other climate-related developments.

    It is hard not to feel that we are in the process of losing our stable climate system, if we haven't done so already.

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  • Sat, May 07, 2016 - 2:42am

    #2
    pat the rat

    pat the rat

    Status Member (Offline)

    Joined: Nov 01 2011

    Posts: 115

    understand

    I think the hardest thing we will do is to live in a world we don't understand. Good luck in your prep. 

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  • Sat, May 07, 2016 - 6:25am

    #3
    Time2help

    Time2help

    Status Platinum Member (Offline)

    Joined: Jun 08 2011

    Posts: 2272

    Ugh

    Not looking forward to this year's fire season.

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  • Sat, May 07, 2016 - 7:39am

    #4

    sand_puppy

    Status Platinum Member (Offline)

    Joined: Apr 13 2011

    Posts: 1976

    Potter's Ranch High Tunnels

    I wonder if planting and growing under "hoop" green houses, also called "high tunnels," will catch on with the increased weather stress.  Here are some pictures from Rob Shepler's Potter's Ranch facebook page.  One size green house is massive.  Large enough for fruit trees.

    A hoop Green House with a heater running during this last frost.

    Building the "high tunnel."

    This style of covering is called a "caterpillar" hoop house.

    On way to protect low growing crops from frost damage is to have a low tunnel hoop green house built within a high tunnel hoop green house.

    Here is a low tunnel.

    The instruction manual on how to make these "Quick Hoops" from Johnny's Seeds

    http://www.johnnyseeds.com/assets/information/9018_quickhoops-high-tunnel_bender_instruction-manual.pdf

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  • Sat, May 07, 2016 - 12:33pm

    #5

    LesPhelps

    Status Silver Member (Offline)

    Joined: Apr 30 2009

    Posts: 488

    Weather, Climate Change and the Main Stream Media

    I don't fall in the category of "climate change deniers," a term I personally despise.  Point of fact, I have witnessed warmer temperatures over decades in my neck of the woods.

    I am, however, less of a fan of the way climate science has been managed.  Sir Francis Bacon would not have approved, to say the least.

    The other phenomenon is that the main stream media will print anyone saying that any event is climate change related, without considering the amount or extent of science behind the pronouncement.

    I've wondered about some of the claims and, in honor of Al Bartlett, ran the numbers to the extent possible. There is no data available to the masses, that I have been able to find, regarding fires and floods, but there is data available regarding tornadoes and hurricanes.  What I found when looking at major tornadoes and all hurricanes is that the slope of the trend line for both hurricanes and major tornadoes is very slightly negative.  Their frequency is declining ever so slightly since tracking began in the US.

    So, I personally, am left with the opinion that, the Midwestern United States seems to be warming over an extended period.  However, I am not convinced the numbers generated by the science for 100 years hence are reliable.  Short of the climate change scientific community excluding members with unshakeable, preconceived notions on the subject, there is no good answer.

    Having said all that, here's a scary environmental topic.  We talk frequently about water shortage and atmostpheric CO2 levels.  Has anyone ever wondered how we are doing regarding atmostpheric oxygen?

    http://scrippso2.ucsd.edu

    The article talks about lower atmostpheric oxygen due to burning petroleum products, but I wonder what the impact of our dying oceans is on oxygen and what it will be going forward?

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  • Sat, May 07, 2016 - 12:47pm

    #6
    storm chaser

    storm chaser

    Status Member (Offline)

    Joined: May 07 2016

    Posts: 1

    volatility

    IMO, this article is not entirely accurate, and certainly too late to do the readers any good.

    It has been obvious for a LONG time now that we have a "3 dollar bill" stock market which TPTB cannot ALLOW to drop even the slightest, for fear of momentum driven nosedive into the abyss.  But they are far from just jawboning the market up from any attempted sell-off.  They are manipulating derivatives (particularly the VIX) and levering off algos to create short squeezes,–hence the magical reversal of every market sell-off and subsequent "levitation" of the market, without volume.  

    Put another way, we have an inverted pyramid with a larger body of derivatives driving a smaller body of stocks underneath.

    We also have an inverted pyramid with a financial "economy" on top larger than the physical economy underneath.  That's why continued attempts to explain the stock market with economic factors is not only futile but laughable.

    Instead of RISING volatility (measured by the VIX), I see it being killed off completely!  Instead of the stock market crashing, I see it levitating forever (ultimately at the expense of a trashed US dollar, which is part of the plan anyway).

    Write an article to refute this thesis, with some specifics (i.e. explaining the mechanics).  Now THAT would be an article worth reading!

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  • Sat, May 07, 2016 - 12:58pm

    Reply to #6

    Chris Martenson

    Status Platinum Member (Offline)

    Joined: Jun 07 2007

    Posts: 4771

    Regarding market manipulation

    [quote=storm chaser]

    Write an article to refute this thesis, with some specifics (i.e. explaining the mechanics).  Now THAT would be an article worth reading!

    [/quote]

    I've written and spoken plenty on the topic, with lots of specifics.  Try googling these words and you will several pages of tasty results: Martenson market manipulation

    In a nutshell, these computers provide a perfect playground for market manipulators, some of which are just short-term operators spiking prices for their own gains, while others are using the momentum ignition parameters to reverse declines and put hard floors at key technical moments.

    Who those operators are would probably be revealed if we understood the particulars that underlie the CME's preferred buyer incentive program for central banks…

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  • Sat, May 07, 2016 - 3:05pm

    Reply to #5

    ckessel

    Status Silver Member (Offline)

    Joined: Nov 12 2008

    Posts: 170

    weather and climate change

    I agree with your take on the issue Les. We were having a similar conversation yesterday about the fact that the earths climate has always been in change but the cycles cover such a vast time period that we do not really have time to notice much in one lifetime. 

    But our ability to observe and deduce from scientific investigation tells us it is true IMHO. My personal take on the peak oil climate change issue has been virtually the same since my college days. As M.King Hubbert pointed out, the stored carbon in the earth's crust was created over a several hundred million year period of time when living organisms from the earth were absorbing sunlight and storing carbon into what would become fossil fuels.

    So we have now converted about half of the total stored carbon contained in fossil fuels and put the residual heat and carbon (among other things) back into our atmosphere in a couple of hundred years. At the same time we have harvested a good portion of those living conversion units (AKA Trees, plankton and other living things green things) which give oxygen back to the atmosphere.

    I wonder if good old mother nature will notice. I'm not sure we are being the change we want to see either!

    A more important question to me is what is she going to do about it! I say get ready for massive change …. including our climate.

    Coop

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  • Sat, May 07, 2016 - 5:08pm

    #7

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    another perspective on CB equity ownership

    People like to say that fiat currency is unbacked.  That's not true; each dollar of base money (Fed deposits and/or currency) is backed by a dollar of assets – usually sovereign debt.  Each dollar of bank deposits is backed (supposedly) by a loan taken out by some hard-working person or company, usually collateralized by property, equipment, oil in the ground, assets of the company, etc.  There is ultimately "something real" behind almost every dollar in circulation, though its ultimately only as real as the validity of the accounting.

    Now then – if you wanted to back a currency, you could theoretically choose anything.  Gold, land, sovereign debt, municipal debt, corporate debt – or you could choose equities.

    Would you rather have (let's say) shares in AAPL, or the sovereign debt of Italy?  Or Spain?  Or Portugal?  Or Non-performing loans from Italian banks?  Or rotten subprime mortgage-backed securities?

    Ultimately, what's wrong with having high quality equities on the balance sheets of our central bank/hedge funds?  Say, just the dow 30?  As a taxpayer, I'd almost prefer them over sovereign debt.

    SNB buying AAPL doesn't sound so foolish when you consider the alternatives.  And if we really are in Armstrong's "private wave" where sovereigns end up defaulting right and left leaving bondholders with very little, SNB may have the last laugh.

    Of course, price does matter…and ultimately maybe that's the real objection here.  "SNB shouldn't own AAPL because its just too expensive."

    The thing that gives me pause is that just about every commentator I read says we're going to have a massive crash in equities.  Except – its the bond market that's at a 40 year peak.  Half of bonds have negative yields.  And when everyone is on one side of the boat, usually something else happens.  And when bonds blow, where will the big money go to hide?  Armstrong says there's only one place: equities.

    And isn't SNB buying AAPL instead of sovereign debt evidence of this very phenomenon?

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  • Sun, May 08, 2016 - 12:19am

    Reply to #7
    dryam2000

    dryam2000

    Status Bronze Member (Offline)

    Joined: Sep 06 2009

    Posts: 270

    Wow!!!

    [quote=davefairtex]

    People like to say that fiat currency is unbacked.  That's not true; each dollar of base money (Fed deposits and/or currency) is backed by a dollar of assets – usually sovereign debt.  Each dollar of bank deposits is backed (supposedly) by a loan taken out by some hard-working person or company, usually collateralized by property, equipment, oil in the ground, assets of the company, etc.  There is ultimately "something real" behind almost every dollar in circulation, though its ultimately only as real as the validity of the accounting.

    Now then – if you wanted to back a currency, you could theoretically choose anything.  Gold, land, sovereign debt, municipal debt, corporate debt – or you could choose equities.

    Would you rather have (let's say) shares in AAPL, or the sovereign debt of Italy?  Or Spain?  Or Portugal?  Or Non-performing loans from Italian banks?  Or rotten subprime mortgage-backed securities?

    Ultimately, what's wrong with having high quality equities on the balance sheets of our central bank/hedge funds?  Say, just the dow 30?  As a taxpayer, I'd almost prefer them over sovereign debt.

    SNB buying AAPL doesn't sound so foolish when you consider the alternatives.  And if we really are in Armstrong's "private wave" where sovereigns end up defaulting right and left leaving bondholders with very little, SNB may have the last laugh.

    Of course, price does matter…and ultimately maybe that's the real objection here.  "SNB shouldn't own AAPL because its just too expensive."

    The thing that gives me pause is that just about every commentator I read says we're going to have a massive crash in equities.  Except – its the bond market that's at a 40 year peak.  Half of bonds have negative yields.  And when everyone is on one side of the boat, usually something else happens.  And when bonds blow, where will the big money go to hide?  Armstrong says there's only one place: equities.

    And isn't SNB buying AAPL instead of sovereign debt evidence of this very phenomenon?

    [/quote]

    Wow!  I'm not sure which is more fundamentally flawed: our debt based monetary system or your logic.

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  • Sun, May 08, 2016 - 3:28am

    #8

    Taz Alloway

    Status Bronze Member (Offline)

    Joined: Feb 18 2010

    Posts: 461

    Fruit culture in weird weather

    This year has been brutal for fruit growers.  One way to protect (or hedge) against total crop loss is to diversify. A familiar concept for investors that works with fruit too!  

    Plant early and late ripening varieties. Plant varieties that are 1 or 2 plant hardiness zones above and below your location.  Plant varieties that thrive in wet and those that prefer dry conditions.

    Much can be done with intensive culture in small spaces. Select dwarf varieties and plant in dedicated beds. Prune aggressively.

    Plant a living hedge!

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  • Sun, May 08, 2016 - 5:00am

    Reply to #7

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    fundamentally flawed

    dryam-

    Wow!  I'm not sure which is more fundamentally flawed: our debt based monetary system or your logic.

    Well gosh, if its so flawed, it should be easy for you to state the reasons why you think its flawed, and then we can have a discussion on the merits of your fact-based criticism.

    Unless of course for some reason you're finding it difficult to generate any fact-based criticism…

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  • Sun, May 08, 2016 - 5:24am

    #9

    kaimu

    Status Member (Offline)

    Joined: Sep 20 2013

    Posts: 161

    FIND A VOLCANO

    Aloha! Greatest growing season ever here in Hawaii. My mango trees are full of fruit! After 18 years here I have never seen such abundance and I do nothing to the trees. No water no fertilizer no pruning! Capt Cook knew …

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  • Sun, May 08, 2016 - 11:09am

    #10

    Chris Martenson

    Status Platinum Member (Offline)

    Joined: Jun 07 2007

    Posts: 4771

    When a disaster has to be...

    When a disaster has to be viewed by satellite to really appreciate its dimensions, that's when you know it's a big deal.

    These before-and-after roll-over photos show the extent of the complete devastation to some enclaves within Ft McMurray.

    And these videos show that Canadian people are incredibly well behaved…self-dangerously so!

    I cannot believe that biker did not cut into the open lane and make for it!  Or gun it up the side walk.  He only finally reacted when his skin was being burned by the intense heat.

    Or why not one of those drivers in trucks decided it was time to screw the lawns and make use of their trucks capabilities to move over alternative terrain.

    But Canadians are also incredibly generous, with AirBnB recording a huge input of "rentals" being offered in the region for $0 to Ft McMurray evacuees.

     

     

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  • Sun, May 08, 2016 - 11:12am

    #11

    blackeagle

    Status Bronze Member (Offline)

    Joined: May 16 2013

    Posts: 228

    Every dollar backed

    I don't think I understand all the intricacies of the financial system, but this, I am sure of: Banks print money out of this air (Not backed dollars), then they back it against some real assets when they lend it. The problem is that not all assets are (easily?) convertible into $$$. and when there are too many $$$ in circulation, then there is hyperinflation. But every $$$ still represent something, although smaller in quantity. It is the lending process that links every $$$ to some assets.

    This is the simplified way I see it.

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  • Sun, May 08, 2016 - 11:51am

    #12

    Jbarney

    Status Silver Member (Offline)

    Joined: Nov 25 2010

    Posts: 198

    On Spot

    Good article Chris.

     

    I find it as an examination of the present state of things, about how a slow decline has started.  Just a couple of examples woven with your narrative that make perfect sense with your article. 

    1.  It is not a disaster, but it is a sign of the times where the United States, the richest country on the planet, can no longer spend the money for manned space missions.  Based on our current budget picture, it would appear Americans paying for manned missions into space is a thing of the past, unless we hitch a ride with someone else.

     

    2.  School districts are starting to really cut back budgets.  Here in Vermont, Burlington, by far one of the largest districts in the state, has had to lay off something like 20 professional staff in the last few years.

     

    3.  I am really frustrated at this point when someone observes weather events which are unquestionably out of the norm, and then respond that it is all part of the natural cycles of the planet, or that climate change is some liberal plot by the government. Arg.  Anyway, the climate variability is starting to be an issue for growing seasons, which has always been one of my primary concerns since starting to prep.  Been investigating ways to grow food that stays good long into the winter. 

     

    Peace

    Jason

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  • Sun, May 08, 2016 - 1:13pm

    #13

    KugsCheese

    Status Gold Member (Offline)

    Joined: Jan 01 2010

    Posts: 845

    Build A House

    Build a house on water, in a forest, on a fault line…then not expect Nature's Knock?

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  • Sun, May 08, 2016 - 1:59pm

    #14

    kaimu

    Status Member (Offline)

    Joined: Sep 20 2013

    Posts: 161

    WHO SURVIVES?

    Aloha! It is either the current "usual suspects" in government that survives or the People, the Middle Class. The US Fed was created by a Congressional act at the behest of the bankers for obvious reasons so in true corrupt tactics Congress influences the US Fed. Is it in the governments best interest to see the US Fed raise rates when Obama has single handedly created more debt than all other past Presidents combined? Please do not be so naive to think that both sides of the isle differ on debt issuance. History shows both Reps and Dems enjoy creating more debt. Do you think the struggling family in Middle America with $20k on his Visa card wants to see rates go up? Certainly the real estate market doesn't want higher rates.

    Only the older Americans who worked hard their entire life and bought into the oft repeated advice of every financial planner since 1950 want rates to go up. These are the fixed income folks who need interest income and dividends to survive. Even pension funds need rates to rise as they too serve the senior citizens of America. Yet who has the US Congress thrown under the bus for decades now? Pretty much anyone they could sucker to vote for them except their "handlers". Here's a novel idea … why not let government live on less for once? Dump income tax and let each US government agency go on GoFundMe or Kick Starter. Let the US Dept of Defense go on Kick Starter for its next fighter jet. Want a dam in your State … GoFundMe! 

    If people knew how corrupt government contract bids are they would want the US government out of the process. Suddenly they would realize prisons, schools, dams and roads would be cheaper by at least 30%, just on the labor side! Right now if you want US government funds in your infrastructure projects you may as well have the Mafia, they'd be easier and cheaper to deal with!

    US Congress … meet The Bobs!

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  • Sun, May 08, 2016 - 2:33pm

    Reply to #10
    Yoxa

    Yoxa

    Status Silver Member (Offline)

    Joined: Dec 20 2011

    Posts: 286

    Orderly evacuation

    [quote] Canadian people are incredibly well behaved…self-dangerously so [/quote]

    Not self-dangerous when you look at the larger picture.

    The fact that the evacuation was mostly orderly is why so many people are safe despite all the damage.

    Cooperation and looking out for the common good are major survival values.

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  • Sun, May 08, 2016 - 3:14pm

    #15
    Uncletommy

    Uncletommy

    Status Bronze Member (Offline)

    Joined: May 03 2014

    Posts: 529

    Do what you can!

    Dropping off some diapers, baby wipes, and underware at Edmonton's airport receiving centre. Place is packed and more is coming in. You can do all the "prepping" you want in this world, but survival will depend on a self sacrificing COMMUNITY. If the Fort Mac fires demonstrate anything, it is this basic fact.

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  • Sun, May 08, 2016 - 6:19pm

    Reply to #7
    dryam2000

    dryam2000

    Status Bronze Member (Offline)

    Joined: Sep 06 2009

    Posts: 270

    davefairtex

    [quote=davefairtex]

    dryam-

    Wow!  I'm not sure which is more fundamentally flawed: our debt based monetary system or your logic.

    Well gosh, if its so flawed, it should be easy for you to state the reasons why you think its flawed, and then we can have a discussion on the merits of your fact-based criticism.

    Unless of course for some reason you're finding it difficult to generate any fact-based criticism…

    [/quote]

    Debating this topic with you in this forum is fruitless for a variety of reasons.

    First, there is a lot of material involved & I don't have the time or energy to layout the counter argument.  I'm not one of these people who writes posts nearly 24/7 with posting times of 12:30am, 2:30am, 4am, 9am, 11am, 2pm, 5pm, 8pm, 10pm, 11pm, etc. voraciously advocating for much of the financial status quo.  The anti-status quo types generally are the voracious ones.  I have a job that is significantly more than full time (for which I am quite thankful for), I have a full family, I like a full night's sleep, and I like to be as active as possible for my health & well being.

    Second, I have no interest in debating people with fixed, firm beliefs.  I do have an interest in pointing out to others who are less familiar with the financial system that there are differing thoughts out there, especially when I believe fiction is being peddled.

    I would refer folks who are interested in learning more about our debt based monetary system to The Crash Course videos which can be clicked on in the upper left part of this web page, many YouTube videos, a Google search, the movie 97% Owned, etc.  People should do their own research.  One major problem with the world, especially in the U.S., is that people have gotten intellectually lazy & want others to tell them what's going on.  This is why our politicians & financial system has gotten away with so much propaganda.  I highly recommend everyone try to learn as much as they can doing their own independent research & then arriving at their own conclusions.  Isn't this what Dr. Martenson alludes to in this article?

     

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  • Sun, May 08, 2016 - 7:36pm

    Reply to #7

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    fruitless

    dryam-

    No fact-based objections to raise of your own, eh?  Ok no problem.

    The amusing thing for me is when you label me a supporter of the status quo.   I know, I either have to toe the goldbug/Austrian economics/money-printing-shoulda-sent-gold-to-$5000 party line or else I'm a shill for the bankers.

    My problem is I'm a non-mainstream-goldbug goldbug.  So the mainstream goldbugs get really upset and want to crucify me for coloring outside the mainstream-goldbug lines.  One would think the "non-mainstream" thinkers would be more flexible in their thinking, but they really aren't.  They just jumped from one inflexible viewpoint (mainstream) to another inflexible viewpoint (goldbug).

    Me, I'm still exploring.  I have the temerity to ask questions like, "hey, so what's wrong with central banks owning equities?"  Its fun to color outside the lines.  At least in my world it is.  Most teachers don't like it, some bosses don't like it (other bosses really love it – go figure), and you clearly don't like it, but I just can't help it.  Its fun.

    If your job is inventing new things, it generally works out pretty well.

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  • Sun, May 08, 2016 - 8:37pm

    Reply to #11

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    dollars backed after-the-fact

    blackeagle-

    Banks print money out of this air (Not backed dollars), then they back it against some real assets when they lend it. The problem is that not all assets are (easily?) convertible into $$$. and when there are too many $$$ in circulation, then there is hyperinflation.

    Yes!  Banks print unbacked money out of thin air, then instantly get it backed by some real assets.  (Its nice to have a banking license, isn't it?  Its actually a license to print money.  Who knew?).  I simplified the process, but your version is more correct.

    Here's the new piece though.

    Neither inflation nor hyperinflation comes from an increase in the quantity of money.  Goldbugs will squawk, but I point them to Art Cashin, a contributor at KWN who says, "if I gave you a trillion dollars, and you kept it in the basement, it would not add to inflation at all."  Quantity alone doesn't cause inflation.  Only spending the money causes inflation.

    As far as I can figure it, new bank credit causes inflation because it is (almost always) promptly spent into circulation.  If people borrowed money from the bank and kept it under the mattress, that wouldn't be inflationary, but that's not what happens.  People borrow money to buy cars, houses – basically, to buy stuff.  So the new bank credit automatically has a spending action attached to it.  People imagine it's the new money that causes the trouble, but its actually the spending of the new money that does the inflationary heavy lifting.  So who cares about this distinction?

    Well, we can see this more clearly with government deficit spending.  Government deficit spending is very clearly inflationary (I can cook up a million charts to show you this), but the act of deficit spending creates no new bank credit.  So what's the inflationary mechanism?   Basically what happens is, existing bank credit (sitting in a savings account) is snatched by the government, a bond is given to the saver in exchange, and that snatched money is promptly spent into circulation.  Savings that was just sititng there (velocity = 0) was mobilized by the government.  No new money is created, but velocity increases, and so does inflation.

    Same thing happens if the central bank monetizes the government deficit who then spends it into circulation.  Monetized deficits and unmonetized deficits are actually no different in terms of the change in velocity.

    And if the savers just suddenly decided to spend their savings, that causes inflation too, without increasing the quantity of money.

    Of course, if people lose confidence in the money (savers increase spending), AND the government is monetizing the deficit (creating money and then spending it into circulation), then that has a multiplying effect.  That's a double velocity increase x mass of money increase = a squared-effect and that's why things just go nuts.

    Japan is a great case in point.  The great mass of Yen just sits there and does nothing.  Basically, its Art Cashin's Trillion Dollar basement money.  Not inflationary.  Once the Japanese decide their money has become problematic, that mass will be multiplied by a higher velocity and then the wheels come off.  But until people actually start to spend it, it won't matter how much they print.

    I think about all these low level details because someday I want to develop a simulation and see if I can get a business cycle as an emergent property, kind of like Steve Keen has done, but – with a bit more of a wargame flavor to it.  I need a staff, I really do.

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  • Sun, May 08, 2016 - 9:04pm

    #16
    dryam2000

    dryam2000

    Status Bronze Member (Offline)

    Joined: Sep 06 2009

    Posts: 270

    Dave

    Who said anything about gold?  I've noticed you like to use the term 'goldbug' to throw discussions off on other paths when gold isn't even being discussed.  It's a subtle attempt to disparage others that disagree with & mislead others.

    Btw, I highly doubt involving gold in some new type of monetary system is going to be of much benefit.  

    Work is now over.  I'm headed home & will go for a walk with my wife and dog.  I recommend everyone get some sunlight and vitamin D.  It can do wonders.  Happy posting.

    Peace

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  • Sun, May 08, 2016 - 9:10pm

    #17
    Uncletommy

    Uncletommy

    Status Bronze Member (Offline)

    Joined: May 03 2014

    Posts: 529

    Afterthought on economic repercussions of disaster

    Alberta government will be issuing $1000 to $2000 per person affected by the FMac fires, so they can have money to buy a meal or a few groceries or replace a debit card or "cooked" plastic money. Many "savers" will be contributing to inflation and velocity by spending some of those hard earned dollars helping their neighbors in the north to get just enough to survive on their "new normal" (no home, perhaps no job and years of rebuilding for a very tenuous future in a very low margin industry). My impression is, however, that the majority of them are committed to persevere and will try to make a future by rebuilding an economy and functioning community.

    Contrast this to a continuing civil conflict in the middle east where vastly more quantities of capital is being sequestered in arms and the destruction of lives and a way of life. Pick your disaster: environmental catastrophe or a man made one. You know who gains in the man made situations  –  those loaning money to both sides and collecting commissions and interest. I know where my savings will be spent. As for the government's actions, I get to decide at the next provincial election. 

    Appreciate your insights, Dave!

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  • Sun, May 08, 2016 - 9:52pm

    #18

    kaimu

    Status Member (Offline)

    Joined: Sep 20 2013

    Posts: 161

    ITS THE QUALITY STUPID!

    Aloha! Money is money and the money we have today is decreed by government and essentially backed by a military junta. No diff between what Obama and the US Treasury enforce and what Caesar enforced back in Rome. You can't go to Starbucks and buy a McMuffin with Canadian money or beads or barter whether gold or slaves! The POS exchange has to be "coin of the realm"! Decreed by law! You can sell your gold or your beads and take the US Dollars and buy the McMuffins. But who didn't know that?

    My biggest concern is not about "what is money", but the "quality of money". When politics enters the equation then so does corruption. Here let me show you …

    I cut this out of the US Treasury Daily Statement and it shows for FY2016 Obama's Regime issued some $1.04TRIL in debt to date. There are four months left in this fiscal year so I am sure there is more debt to be issued. The following is just for one day at the US Treasury, May 5th.

    Look at the bottom line called "Net Change" and see the far right corner …

    Now here is how much taxation the Obama Regime sucked out of the productive members of the US economy to date. See that in the right lower corner? It is $1.74TRIL.

    If you add the taxes to the debt you get $2.744TRIL. The $1.04TRIL of debt is to be paid or not by future generations … your kids and their kids. The income and corporate taxes are gone! They get scooped away every day, every week, every month and spent right away on various political agendas. Usually the agendas involve making government bigger and your paycheck smaller.

    Now this is where that money goes. It goes to pay off insiders, lobbyists and to buy votes. It goes to a myriad of government agencies. You can see for May 5th some $108BIL went through the US Treasury and all those agencies. These funds are in the Federal Reserve Account. The USA is the only customer the US Fed has, supposedly. See below here.

    Wow, look up there on the right … $7.15TRIL ran through the US government coffers for FY to date, siphoned off to hundreds of agencies and millions of workers and dependents. That is a lot to keep track off in an accurate manner.

    Do you really think government workers and their bosses and the US Congress can spend that $108BIL on May 5th wisely and prudently and without temptation of fraud or corruption? The money is there but there is no QC! Those who have been entrusted to spend that capital know they are spending other people's money, not their own. Is there a conflict of interest? Are politicians human? Most of the politicians can't even count past 100 without getting mixed up, yet they are handling $108BIL in one day. Do we trust the government programmers to make sure every dime is accounted for? Who audits the auditors?

    Empire historically has little to do with efficiency and decency and a lot to do with fraud and corruption and hubris and narcissism. It is all just human nature!

     

     

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  • Sun, May 08, 2016 - 10:29pm

    Reply to #11

    blackeagle

    Status Bronze Member (Offline)

    Joined: May 16 2013

    Posts: 228

    Velocity of money

    Dave,

    Thanks for the explanations.

    If I understand correctly, there is something scary: To keep the wheel of economy and finance spinning, governments are swapping our savings by debt. As long as you don't claim your savings (spending) then things are stable for a long way.

    Money is part of a complex system to exchange work for something else we need. Over the ages, this system got more and more complex.

    I think complexity is part of our genes. We start things small and simple and progressively add complexity to them. Complexity is a function of: population size, resources and energy availability, quest for efficiency, quest for profit, etc… All systems humans build (social, economical, political, technological, etc…) are doomed to be more complex over time and eventually crashes. As someone wrote (was it on PP?): We are a cyclic animal, not an evolutionary one.

    JM

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  • Sun, May 08, 2016 - 10:57pm

    #19

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Monetarily demented: DaveFairtex

    Many are losing their way here at PP.com.. thanks to DaveF.  I can't believe the number of folks who up voted Dave in his discussion with DrYAM.  This is the problem with having a banker shill as the resident Gold analyst, given a pulpit by the owners of this website.  I only seek truth.. I care not what anyone thinks of me for what I say.  Here is the truth as I see it;

    Dryam is correct in his assertion that Dave is off his rocker here. Dave said, 

    Now then – if you wanted to back a currency, you could theoretically choose anything.  Gold, land, sovereign debt, municipal debt, corporate debt – or you could choose equities.

    Would you rather have (let's say) shares in AAPL, or the sovereign debt of Italy?  Or Spain?  Or Portugal?  Or Non-performing loans from Italian banks?  Or rotten subprime mortgage-backed securities?

    Ultimately, what's wrong with having high quality equities on the balance sheets of our central bank/hedge funds?  Say, just the dow 30?  As a taxpayer, I'd almost prefer them over sovereign debt.

    This is perverse (even though some central banks, namely Japan and Switzerland, are already doing it).  First off, the idea of markets is that they price things based on supply vs. demand.. the stock market being no different.   Does anyone other than myself (and DrYam I would suppose) intuitively grasp the fact that when central banks create thin air money in order to buy stocks whose value is denominated in said money, that they are essentially capturing that market.  The "values" of the stocks are now in their control… and they are in a sense meaningless.  That this might, "back" the money is simply describing a self-referential hall of mirrors.  

    This same game goes on in precious metals..  in a different way;  between the Comex, and London markets, you have synthetic paper markets that are much bigger than the underlying physical trading markets, that are captured by the bankers who make the money.  Here are two posts for those who want to get better educated as to how this works;

    https://www.bullionstar.com/blogs/bullionstar/infographic-london-gold-market/

    And,

    http://www.tfmetalsreport.com/blog/7605/comex-gold-open-interest

    There is a very important concept that one needs to grasp to really understand money – I was first exposed to it in Vincent LaCascio's book, "The Monetary Elite vs Gold's honest discipline", and that is; scarcity integrity.

    Now if the monetary masters of our system allowed for deflation to happen.. in other words they allowed the amount of money to wax and wane based on demand for debt… then our unbacked, debt-based money system could actually have a reasonable level of scarcity integrity. 

    But it doesn't.. when bankers get too powerful, using the money they create effortlessly to pervert everything and anyone in their way, they will always use their printing press to their own benefit.. to the furthering of their status quo.  Scarcity integrity is what real physical Gold has.. and it's also what makes Bitcoin so successful (aside from the elegance of the Blockchain) …  QE is a perversion of the system.. it's a way to print money when none is being demanded.  QE to buy sovereign debt is a perversion.  QE to buy stocks is a further perversion, signaling the ultimate fusion of corporate and government interests… there's a name for it.  There a bill for it to;

       https://en.wikipedia.org/wiki/Transatlantic_Trade_and_Investment_Partnership

    So, up vote away folks… I am sorry to see the discourse here going so far downhill.  I am sorry to see how Dave has taken over the conversation and pulled the wool over so many eyes in this most important discussion about what money is, and what it should be.  I am not going to come back here and argue with Dave..   like DrYam I am busy too. 

    Finally, if you want to understand where we are in the Gold story.. and I believe we are getting very close to the point where the captured, leveraged paper markets break down and the realization sets in for many who think they own Gold that they own only paper markers for Gold that are not redeemable… here is a wonderful guide;

      http://www.tfmetalsreport.com/blog/7615/guest-post-death-gold-market-paul-mylchreest     

       

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  • Mon, May 09, 2016 - 4:41am

    Reply to #19
    Time2help

    Time2help

    Status Platinum Member (Offline)

    Joined: Jun 08 2011

    Posts: 2272

    Triggered

    [quote=Jim H]

    I only seek truth.. I care not what anyone thinks of me for what I say.

    [/quote]

    I like that quote Jim. Here's a favorite of mine as well.

    [quote=Mark Twain]

    In the beginning of a change the patriot is a scarce man, and brave, and hated and scorned. When his cause succeeds, the timid join him, for then it costs nothing to be a patriot. – Notebook, 1904

    [/quote]

    One of the interesting takeaways from Rowe this year was how many of the posters with masculine usernames turned out to be women. Doesn't matter how long you've known someone online, until you've met them in person…you really don't have a good idea who they are or where they are coming from. 

    Something relatively new that has been working for me…if we've never met in person, then I make a conscious effort not to allow that person to get under my skin…to stay detached when they start hitting emotional buttons.

    Put another way, if I know you personally I'll put more out there.

    If not, no point in getting stirred up. The person stirring the online pot could literally be anybody…

                         

     

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  • Mon, May 09, 2016 - 7:18am

    #20

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    TTH: could be this too

    We aren't always at the keyboard…although sometimes it seems like it…

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  • Mon, May 09, 2016 - 7:28am

    Reply to #19

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    its about prices - and expectations

    JimH-

    Boy that went bad in a hurry.

    In my recent posts which seem to have really triggered you, I have been trying to explore the concept of a central bank-as-hedge-fund and its implications for prices going forward.   My thought process started when I looked at the assets and liabilities of the Fed, really thought about what Chris said about the SNB, and then I thought about Armstrong's "private wave" where sovereign debt will be defaulted on, and then asked myself, as taxpayer, if I were forced to pay for the losses of this hedge fund, what would I prefer to have it holding?  And as manager of the hedge fund responsible for the potential losses, what would I do?

    Part of my problem is my thinking process (and where I want to end up) isn't clear sometimes when I'm starting out on a topic.  I don't even know where I'm going.  I just have questions in my head and I want to ask them.  Now I think I'm getting clearer, so after agreeing with your central point, I'll do just that.

    …when central banks create thin air money in order to buy stocks whose value is denominated in said money, that they are essentially capturing that market.  The "values" of the stocks are now in their control… and they are in a sense meaningless.  That this might, "back" the money is simply describing a self-referential hall of mirrors.

    Yes.  I totally agree.  This we can clearly see happening in the case of the BOJ.  They deliberately set out to own the JGB market, and so the price of those bonds is most definitely self-referential.  Same thing to a lesser extent with the Fed and the Treasury market.  That's a bad thing because the price signal is lost, and that's bad in a number of different and really important ways.

    But that's not what I was talking about!  Just to be very clear, I'm not advocating that the central banks buy equities (or other assets) with thin air money to keep the markets propped up!  I think it is a terrible idea.

    So back to my point.  Let's assume we run the SNB.  Because of the way central banks work, we are required to back the CHF by owning stuff – some of it being gold, other stuff being financial assets.  What would we pick?  Just perhaps – the dow 30 might be in the mix.  And if our other option were sovereign bonds that we know are about to blow up…what action would we take?  Buy more sov debt?  Or buy something else?

    In order to avoid moving the markets by our actions, we have to pick markets that are very deep.  That means gold is probably out (and also given we central bankers don't want gold to go nuts – gold is probably out for that reason too).   That leaves equities.

    What are the larger implications of this?  A single central bank won't move markets by what it decides, but if they all decided to independently move more or less at the same time, what would that look like?  And what would trigger such a move?  If the safe EU sov debt was all trading at negative yields (and it is), what then?

    I'm claiming that we may be seeing the start of this process right now.  What we imagine is "central bank market propping" may be partly that, but it may also be partly something else too.  If the EU really does explode, there are a lot more central bank reserve assets that currently own EU sovereign debt that will flee.

    Net-net?  Those expecting a stock market crash (currently including me, but I'm starting to waver) may well be faced with a flood of money coming from official and semi-official sources fleeing both JGBs and Euro sovereign debt right into equities.  SNB's AAPL position may be warning us of exactly this.

    So instead of laughing at the "clearly silly" behavior of the SNB, and assuming that equity-market price movements are all about market-propping behavior or sneaky futures-buying, we might ask ourselves, what might happen when the prospects of an EU breakup increase?  Clearly they've crossed the equity ownership rubicon already…

    Again, I'm about prices.  My goal is not to be so entrenched in a world view so that I ignore what prices are actually saying because my belief system is screaming at me "the market must crash because the P/E values are too high."

    And this place here can be a bit of an echo chamber in that regard.  Stepping outside the lines of peak prosperity orthodoxy carries with it the usual penalty for different-thinking that carries back to playground days, and is enforced by playground-bully-activity.

    Let me ask you the following (related) question: did name-calling behavior save any of us from the 4 year gold bear market?

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  • Mon, May 09, 2016 - 8:02am

    Reply to #11

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    swapping savings for debt

    blackeagle-

    If I understand correctly, there is something scary: To keep the wheel of economy and finance spinning, governments are swapping our savings by debt. As long as you don't claim your savings (spending) then things are stable for a long way.

    Yeah that's it.  We are now in a position now where the government deficit-spending of our savings contributes materially to economic activity.  Without it, we get a wave of deflation and the economy tanks.   I'm not advocating this, just describing what is.

    At the same time, if we all decide we want to spend our savings, that ends up causing a wave of inflation.  In some sense, the checks are only good if we (mostly) decide not to cash them.

    We've become addicted to a built-in government deficit and/or a built-in growth in private debt.  Steve Keen proved this with his spreadsheets.  Any stepping-off this particular treadmill and society gets hit with a wave of deflation that tosses the current party right out of power.  Humanity dearly loves to have a scapegoat.

    But and as you said, humans seem to be cyclical beings by nature.  Herd behavior writ large.  And politicians all promise that they will somehow prevent the cycles from happening ("I'll make america great again") when the cycles themselves appear more or less written into our DNA.

    Uncletommy-

    I agree with all of what you said.  Savings spent to rescue your neighbor in a bind is the right thing to do, even if it is inflationary, while savings spent to further destabilize some middle-eastern nation is counter productive in so many different ways.  "When you find yourself in a deep hole, the first thing you must do: stop digging."

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  • Mon, May 09, 2016 - 8:06am

    Reply to #11
    reflector

    reflector

    Status Bronze Member (Offline)

    Joined: Aug 20 2011

    Posts: 252

    real money is not printed

    [quote=davefairtex]

    Yes!  Banks print unbacked money out of thin air, then instantly get it backed by some real assets.  (Its nice to have a banking license, isn't it?  Its actually a license to print money…

    [/quote]

    dave,

    you may want to re-consider what it is that you are calling money – if you can print it ad nauseum with little or no effort, then it's not money. real money stands for real labor, for real value.

    i know there is a lot of mis-direction by the counterfeiters who call themselves "central bankers", but if we look back to the classic definition of good money put forth by aristotle, money has these properties:

    • durability
    • portability
    • divisibility
    • fungibility
    • scarcity

    something that can be printed out of thin air is not scarce, and therefore not good money.

    the US dollar is nothing more than an IOU note from a deadbeat uncle (uncle sam).

    as jp morgan himself put it, "only gold is money. everything else is credit".

    if you'd like to know more about the central bank counterfeiting scheme called "fiat", the renegade economist has this excellent short clip:

    for a more in-depth review of the difference between money and currency, i recommend watching mike maloney's truly excellent hidden secrets of money series, here is episode 1 to get you started:
    https://www.youtube.com/watch?v=DyV0OfU3-FU

    [quote=davefairtex]

    People like to say that fiat currency is unbacked.  That's not true; each dollar of base money (Fed deposits and/or currency) is backed by a dollar of assets – usually sovereign debt

    [/quote]

    you're a funny guy, dave! you're trying to say that a promissory note (us dollar) is not unbacked, because it's backed by "sovereign debt", or, in other words, another promissory note?

    i can understand how you might be confused on this topic.

    it used to be that in the usa there were gold certificate and silver certificate dollars, that one could walk into a bank and exchange the then-backed dollars for gold or silver coins. well, those days are long gone, there is nothing currently backing the dollar, there is nothing set aside on deposit to trade dollars for, they are completely unbacked, except by promises from your good ol' deadbeat uncle sam.

    convertibility of the dollar was ended in 1971 by "tricky dick" nixon, who lied and claimed he was "temporarily suspending" the dollar's convertibility to defend it against the evil speculators. of course, it was permanent not temporary, and the only thing he was defending, was america's profligate ways, america's exorbitant privelege, after being called out by charles degaulle of france.

    the truth is, it was a default by the usa, it was a promise that was backed out of, and it's one of a long list of examples of why it would be unwise to trust the federal government or its promises.

    [quote=davefairtex]

    I have the temerity to ask questions like, "hey, so what's wrong with central banks owning equities?"

    [/quote]

    wow, that's a great question, dave, and i have one for you as well:

    hey, so what's wrong with the mafia buying up all the land and all the productive businesses in your town with cash that they earned through extortion, theft, counterfeiting, and racketeering?

    you do understand that central banks are essentially a crime syndicate, extracting wealth from working people and funneling those funds to the top .01%, don't you?

    you have heard of financial repression, i hope? here's investopedia's definition of it, in case you haven't:

    http://www.investopedia.com/terms/f/financial-repression.asp

    chris did an excellent off-the-cuff podcast with john rubino a while back concerning financial repression and the central banks' war on savers, i highly recommend you give it a listen if you truly are interested in why it is a problem for the wealth of our society to be extracted by duplicitous means by the central bankers:

    https://www.peakprosperity.com/insider/88401/cuff-war-savers

    i hope the above sources for info are of help to you.

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  • Mon, May 09, 2016 - 10:16am

    #21

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    what's next?

    reflector-

    Yes, I'm familiar with all the history, and agree in large part –  that is generally why my long term holdings are mostly "real things" (or derivatives of real things) rather than money.

    And yet I am still stuck with my original question, which I find you did not answer.  Given we remain in the current paradigm, if a central bank like the SNB is going to buy a financial asset to back its currency, should it buy a sovereign bond from Italy or a share of AAPL stock?  Those Swiss are pretty conservative.  What does it mean when they choose AAPL over German sovereign debt that has a negative yield?  What would I do in their place?  Would I approve if I were a Swiss citizen?  And what does this mean for the future?

    A lot of people get confused and mistake my questions and comments for advocacy or support for the system.  I'm trying to explore both how things actually work, how the people in place running things might be thinking, and from that to suss out generally what might happen next.

    So, where do you see things going next?  What's the path of the buck over the next year?  Will it tip over and sink relentlessly until it hits zero?  (That prediction hasn't done so well in the past 3 years).  If so – what happens to the USD when the EU implodes?  And why?  How about Japan?  How about US equities?  A mind-numbing crash, or is a spike higher possible if/when all that central bank money flees the Euro and runs for somewhere other than sovereign debt?

     

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  • Mon, May 09, 2016 - 12:13pm

    Reply to #19
    Luke Moffat

    Luke Moffat

    Status Silver Member (Offline)

    Joined: Jan 25 2014

    Posts: 367

    We the (Un)people

    [quote=Jim H]

    So, up vote away folks… I am sorry to see the discourse here going so far downhill.  I am sorry to see how Dave has taken over the conversation and pulled the wool over so many eyes in this most important discussion about what money is, and what it should be.  

    [/quote]

    I'm quickly learning that those who determine what money is and what it isn't don't care about my opinion (or indeed that of many others here). The system works for them, it allows them to rapidly generate vast amounts of capital and supercharge the economy which the underlying fundamentals can't possibly sustain. Were it my choice, I, like Jim, would elect something scarce to function as money, not only to store value, but to inhibit the reckless exploitation of our life support systems (forests, oceans, soil) and to limit the stress we put on ourselves (through debt needed to afford insane asset prices).

    The point is; we don't get to decide what money is – for we are the unpeople. We don't even get to discuss what it should be in formal debates (i.e. UK parliament). The bankers tell us what it is – it is strictly their plaything.

    I'm starting to think that is where the reform is going to come from – developing a monetary system that reflects the capacity of our immediate environment. In Edo Japan it was rice. Try printing that…

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  • Mon, May 09, 2016 - 6:30pm

    #22

    Jbarney

    Status Silver Member (Offline)

    Joined: Nov 25 2010

    Posts: 198

    Evidence of the Slow Decline

    http://www.cnn.com/2016/05/09/europe/greek-debt-crisis-fourth-bailout/

    Coming to a nation near you?

     

     

     

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  • Mon, May 09, 2016 - 9:45pm

    Reply to #21

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 695

    Central Bank Investments

    [quote=davefairtex]

    And yet I am still stuck with my original question, which I find you did not answer.  Given we remain in the current paradigm, if a central bank like the SNB is going to buy a financial asset to back its currency, should it buy a sovereign bond from Italy or a share of AAPL stock?  Those Swiss are pretty conservative.  What does it mean when they choose AAPL over German sovereign debt that has a negative yield?  What would I do in their place?  Would I approve if I were a Swiss citizen?  And what does this mean for the future?

    [/quote]

    Dave,

    I don't have anything other than a gut reaction to your question. I don't like the idea, but I don't have any sure fired alternatives that are guaranteed to work. I have more questions than answers.

    How much is too much? Which stocks should be bought and which ones should be avoided? What happens to the bank's balance sheet when the inevitable bear market arrives? If they make the wrong choices, who pays the consequences? Can connected insiders somehow profit from a CBs imminent (but unannounced) buy or sell decision?

    If CBs were restricted to owning something like gold or silver, the demand for these PMs would rocket higher. As a result, miners would have incentive to ramp up production. It would cost more in energy and other resources while increasing the amount of pollution. For what – a lump of metal in a vault that wouldn't see the light of day??? That doesn't make much sense either.

    Why does a CB have to invest in anything? The Federal Reserve pays for their functions and remits excess monies back to the Treasury. Why not allow them to print a small percentage of base money (unbacked by anything) to fund their operations? In fact, why not dispose of them completely and have the US government perform their necessary functions? Isn't that what happened before 1913 when the original act was signed?

    Up to this point, all the questions were pretty much rhetorical. I'd like your insight into the following question: Is there anything the Federal Reserve does that can't be handled by the market?

    Grover

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  • Tue, May 10, 2016 - 1:49am

    #23

    jtwalsh

    Status Bronze Member (Offline)

    Joined: Oct 01 2008

    Posts: 263

    Volatility did you say?

     

    Just sitting here at 9:13 EST in the midst of my first information blackout.  Cox Cable is having some type of technical difficulty which began around 2:30 this afternoon.  I first lost contact with my office when a call in proclaimed there was no service for our land line numbers.  A call to my assistant's Verizon cell phone revealed that all internet was down also.  Calls to Cox customer service were producing no answers as they were not picking up the phone.  Needless to say all production came to a halt. Arriving home around 7:00 my wife informed me we had no landline service to the house. At 8:00 I sat down to watch the news and the cable television went out five minutes into the program.  At 8:30 my grand-daughters informed me that the house internet had stopped working. Calls to family and neighbors revealed that numerous people had no phone service.

    I have been able to get online with my Verizon MYFI (basically a cell phone dedicated to providing internet service.).  No one seems to have a clear answer as to why outages are occurring in New York, Connecticut, Rhode Island and Massachusetts.  Except for one news channel, the radio and television news were not even mentioning that there was an issue. The one channel reporting said that numerous police, fire, municipal and school district systems were out.. Time Warner in New York is having the same type of problem which they blamed on someone cutting a cable.

    I learned a lesson about having back up systems today.  Thankfully Cox only has our accounts for land based service.  Our home and office cell phones are all Verizon which kept working and allowed me to stay in contact with employees and family.(as well as stay connected to the web).

    If these systems can go down over several states for hours with no explanation I would say volatility is here.  

    JT

     

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  • Tue, May 10, 2016 - 3:29am

    #24
    Peter Harris

    Peter Harris

    Status Member (Offline)

    Joined: May 10 2016

    Posts: 2

    Your answer.

    http://global-mind.org/

    http://noosphere.princeton.edu/gcpintro.html

     
     

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  • Tue, May 10, 2016 - 3:44am

    #25
    Peter Harris

    Peter Harris

    Status Member (Offline)

    Joined: May 10 2016

    Posts: 2

    Everything is connected.

    The more chaos in the collective consciousness, the more that chaos will be reflected in the material systems.  
    And yes, the both will be feeding off one and other, like a feed back loop.

    http://www.collective-evolution.com/2014/11/11/consciousness-creates-reality-physicists-admit-the-universe-is-immaterial-mental-spiritual/

     

     

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  • Tue, May 10, 2016 - 4:40am

    Reply to #10
    Jmansdorfer

    Jmansdorfer

    Status Member (Offline)

    Joined: Sep 22 2008

    Posts: 1

    Fort McMurray People

    with respect to the lack of selfish behavior in the face of personal danger and the generosity of the people of Northern Alberta, I would expect nothing else! This is oil country and these people are drillers and roughnecks and welders. You can critisize the upper management of some oil companies but the vast majority of oilfield workers have big hearts and will put their own neck on the line to help others. If i ever find myself in a desperate situation I hope I am on an oil community!

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  • Tue, May 10, 2016 - 5:35am

    Reply to #21

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    reserve assets, no more central banks

    Grover-

    So we have two threads here:

    1) if you were running a developed-nation central bank, what would you have in the "reserve asset" column?

    2) why not simply get rid of central banking entirely?

    Hitting #1 first: reserve assets are a way of both "backing the currency" as well as having a way to remove currency from circulation if the need arises.  We haven't talked about that for a very long time, but in the old days when we weren't at peak debt and banks would loan money to real people, having the ability to remove base money from the system was really important.  The CB would sell off assets, taking base money out of circulation, which in tandem with reserve requirements (another limit from a dimly-recalled past) would result in fewer bank loans being made, which would cause an economic contraction.

    So if we take as given we need a central bank, they must have reserve assets.  Equities are problematic since valuation changes – but that's true of gold these days too.  If we stick to the major companies, there is less concern.  I'd rather have a big company equity on the books than shale driller junk debt, for instance.

    And the gun really is to the central banker's heads right now.  The choices are:

    1. low yielding Spanish & Italian sovereign debt
    2. negative rates on German (and other core-nation) debt
    3. higher yielding US equities.

    Wacky ECB policy has brought even the SNB to this decision point.  SNB cannot simply put all their eggs in the US treasury basket.  Right now 20Y US bonds yield 2.18%.  AAPL yields 2.08%.  Would you give your money to the US government for 20 years – and I mean, for real, not just as a trading sardine?  No way in hell would I do that; I think the buck will scream higher in the next few years, but it won't be a durable move, certainly not lasting 20 years.  And so if long rates jump by 2%, that's an (estimated) 30% loss to capital if for some reason you later need to bail out of that 20 year bond.  AAPL starts to look reasonable given that situation.

    Now for #2: do we need a central bank?

    I'll make a simple if-then argument: if we don't have fractional reserve lending, then we don't need a central bank.  If we do have fractional reserve lending, then we do need a central bank – specifically, a lender of last resort that can act to stop bank runs.  The other "services" central banks provide are strictly optional.  Lender of last resort is not optional.

    The underlying question behind the fractional reserve lending choice is, do you want to have an economy where credit can expand if opportunity presents itself?  Credit expansion of this sort is inflationary, but it also allows the economy to take advantage of opportunities.  Without constructing a simulation, I don't know the specifics of the trade-off.  I tend to think that humanity dearly loves a bubble, and fractional reserve lending definitely facilitates such things.  At the same time, if you had a fixed money supply, and there was a big breakthrough in some new technology (say, power generation), the fixed money supply would limit the ability to deploy the new technology irrespective of the attractiveness of the business model.  That, or literally all the money would get sucked out of every other part of the economy and thrown into the new area.  No more farm or home loans because they simply don't have the same ROI as the fancy new windmills.  "Sorry, we're simply out of money", the banks will say.

    Likewise, if savers decided they wanted to reduce risk because the economy turned down, loans could easily become impossible to get.  That's because in a non-fractional system, duration of savings deposit must match duration of loan or else you're back to needing that central bank again.  There might just not be any savings at all in the longer-term CDs at some points in time.

    Imagine that.  Banks running out of money.  Great if you are a saver, but what would that do to business investment, home construction, and the like?  I think money gets a whole lot more expensive, but that's just my gut feeling.

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  • Tue, May 10, 2016 - 7:34pm

    #26

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 695

    System Question

    Dave,

    Thanks for the reply. You read between the lines of my post. I agree that as long as we have fractional reserve banking, we need some sort of backup bank to keep their promises. I suppose if there were real consequences for banks getting into trouble (unlike in 2008,) I'd be more forgiving. The banks get a free pass to make money and a free backup when they fail. We, the public, get screwed both ways.

    We've had a great ride for the last century that the Federal Reserve has been in existence. Sure, there have been some rough patches, but look at all the great ideas that got funded by all that instantly available money. While marveling at all the modern conveniences, look at all the problems that have tagged along as so much excess baggage. The problems accompanying our successes are large enough to destroy us. (I think we would get to this point regardless of the monetary system – just not as fast or completely.)

    Realistically, the corruption in the system makes continuance of the system a foregone conclusion. Politicians are beholden to moneyed interests … and the bankers always have money available to "invest" in future returns. Once a politician sucks from a banker's teat, the banker owns them. We're unlikely to fix the problems until the system fails.

    So, after the system fails, will we rebuild a system exactly like this one? Probably not. Undoubtedly, there will be some components that will survive. If you were to set up a new banking system, what would you incorporate from the old system and what would you abandon? In other words, what do you like about the current system and what is abhorrent?

    Grover

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  • Wed, May 11, 2016 - 8:03am

    Reply to #26

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    how I'd reshape banking going forward

    Grover-

    So here's my sense.  Nations with elastic money seem to do better than those without.  If the US decided to lose elastic money, our competitors would probably kick our butts.  "Sorry, your credit card doesn't work anymore, we're out of money here at the bank."  There are lot of unintended consequences to "no fractional reserve lending" I suspect.

    The price we pay for elastic money is inflation.  People should have the ability to protect themselves from this effect.  If we allow gold to be a parallel currency (i.e. there's no tax on moving in and out of gold) then people can have a refuge during times of inflation, a floating gold standard with the free market dictating price.

    Here's how I'd restructure the banking system:

    Ownership structure: central bank is a publicly traded corporation.  Nobody can own more than 5% of the shares.   And perhaps retail banks cannot own the shares, nor anyone who owns a controlling interest in banks can own the shares.  CB needs to be at arms length from their bank customer base, so they don't end up giving them any sweetheart deals.  Shareholders elect (via cumulative voting) the directors of the company (i.e. today's FOMC).  Perhaps government owns 20% of the equity, and is able to appoint one of the directors, so they have influence, but no control.  Dividends are paid to the shareholders.

    Mission: should be reset back to its 1914 roots.  Central bank oversees printing of the currency, clearing services, and is the lender of last resort, and that's it.  Its not a regulator, a setter of interest rates, a monetizer of sovereign debts, or a rescuer of economies.  And lender of last resort doesn't mean bankers get a pass on stupid decisions.  It just means that solvent banks that run into liquidity problems can get money when they need it in exchange for good assets so they don't go under unnecessarily.  Insolvent banks still get taken down by the government regulator.

    Reserves & Base Money: central bank should provide base money in exchange for gold and/or corporate debt.  No sovereign debt.  Reserve requirement fixed at 10:1.  Base money should grow at a rate equal to GDP, but no more.  This is the area where I'm less sure about how much authority to give the central bank.  Control base money, and you control the inflation rate.  Ideally I would have a feedback mechanism whereby the free market withdraws some amount base money from the system (say, into gold) when inflation starts to get too crazy, but that could be subject to abuse.  This is my biggest question mark.

    Books: central bank publishes their 10K like everyone else, and are audited like everyone else.  Specific identity of banks provided liquidity are withheld, but the amounts provided are not.

    There are issues of international trade finance that I havent thought about also.

    Retail deposit insurance:  I'm generally in favor, I like the FDIC, but it shouldn't be complete insurance, only partial – say 80% coverage – paid for by fees, backed by full faith & credit of the Treasury.  Banks get this in exchange for being regulated.  That way weak banks will still make people nervous, but nobody will get wiped out on a failure.  And if banks want to provide more complete coverage, they can get it from private insurance companies.  If the private insurance company revokes coverage, that's probably a bad sign for that bank.

    Capital structure: savings-account depositors should be higher in the capital structure of the bank than unsecured creditors, but lower than secured creditors – a savings account owner is a semi-secured creditor.  Checking-account deposits don't pay interest, and are at the very top of the food chain, above the secured creditors.

    Trading:  banks cannot engage in trading.  All they can do is make loans and take deposits.  Banks must retain all the loans they make.  No more securitization.  No more derivatives.

    Postal Banking: basic government checking accounts.  Accounts fully reserved at the central bank, no lending, limits on transaction count, low fees, no interest.  Must be an actual person to have this account.  Its designed as a public banking utility service for poor people, who right now pay 20+ billion dollars in "gotcha" fees every year.  Post offices exist nationwide.  It will be the only bank with national reach.  ATM withdrawls will be very low, or free.  Its a "safety net" program disguised as a bank.

    Deposit diffusion: no retail bank should own more than 5% of total national deposits.  This reduces bank influence on the national stage.  Banks may be important regionally, but won't be important nationally.

    Ultimately, I'd rather have a (regulated, diffuse group of) private organizations overseeing money than the government.  I believe in the power of the free market, as long as it doesn't become a cartel that controls the levers of power.  Keeping them individually small keeps power diffuse.  Try getting 20 CEOs to agree on something.

    Allowing politicians to control, or even influence money supply seems problematic to say the least.  "Here's a tool to keep you in power, at the expense of potentially creating massive inflation.  Have fun!"

    Also perhaps allow for local forms of money.  Why not let people experiment?  They wont be FDIC insured.  You could even have gold-money, since gold will remain a parallel currency and it will no longer be taxed.

    These are my initial thoughts.  Its really a mix of banking post Glass-Stegall, with a deliberately partial FDIC, a postal bank, a rollback of Fed powers back to 1914, mostly-private (and non-bank) ownership of the Fed, and a Fed perpetual transparency requirement.

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  • Wed, May 11, 2016 - 5:43pm

    Reply to #26

    thc0655

    Status Platinum Member (Offline)

    Joined: Apr 27 2010

    Posts: 1540

    Opting out

    You touched on what I'd be hoping for in a new monetary system after the Big Reset. I don't want to have to rely on those who run "the system" to do the right thing AND I don't want to have to rely on the regulators to actually regulate. I want the new system to have a way for people to OPT OUT any time we see or believe the system is beginning to work against us. Nothing would seem easier to design and implement than for the new design to allow gold and silver to function as unregulated (market driven) parallel currencies. That would give those in power some wiggle room (eg. Adjusting money supply up or down) but they could only distort things so far before people started opting out by converting digital and paper currency into gold and and silver (or vice versa). After all, if they're legitimately running the system for the benefit of all they should not be intimidated by the people's ability to move freely (without regulations or taxes) back and forth between currency and money (gold and silver). Some day I'd love to go shopping and see every item priced in dollars, gold and silver (buyer's choice). I guess I'm describing a free market for money!!

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  • Wed, May 11, 2016 - 10:16pm

    #27

    blackeagle

    Status Bronze Member (Offline)

    Joined: May 16 2013

    Posts: 228

    Matrix

    As in the matrix, we are the ultimate energy source that powers this (or another) system. Unfortunately, the opt-out option, as sexy and desirable as it sounds, will never be an option freely available in any system. We have to take it without asking permission.

    Realistically, given that I see big and sudden changes mostly as passing the torch to some other crooks, my strategy would apply at the individual level.

    – Do what I have to do within the legal limits.

    – Reduce my dependency to the system as much as I can (Total independence is impossible – as soon as you own some land, then you become part of the system).

    Doable, not easy, but highly rewarding.

    Another strategy, is to finely analyze and understand the system and use it for our own benefit without forgetting who we are.

    These two strategies can be seen on PP member's posts. And their writings are very interesting.

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  • Thu, May 12, 2016 - 5:07am

    Reply to #27

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    a positive vision, perhaps?

    blackeagle-

    Realistically, given that I see big and sudden changes mostly as passing the torch to some other crooks, my strategy would apply at the individual level.

    So as a practical matter I agree with you; that's the sort of thing that has happened in the past.  Even though we got rid of explicit physical slavery, it transitioned to a new and different form; now most of us are in debt slavery, or slavery of another more mental/emotional kind.

    That said, I am starting to think it might be important to have a vision of where we'd like to get to.  At some level I'm an optimist.  Incredible as it may sound, it is possible that someday, one of us will be in a position to influence an important outcome.  You just never know.  And if at that moment our fortunate someone doesn't have any positive idea where to take things and instead is only looking to strap on his own personal parachute, it will be a missed opportunity.  Its difficult to lead the parade in a compelling way when you are constantly eyeing the escape routes.  And if you believe in the plan yourself, it will be a lot easier to explain it to others.

    Most people (me included, until Grover asked me that question – and even then I had to explicitly bend things away from the negative) have no idea of what sort of system they'd like to see in place.  They just focus on the bad stuff they don't want to see – natural enough, that's how our parents trained us.  What does Abraham Hicks say about that?

    Since I'm not them, I'll paraphrase.  On an energetic level, if you have a clear vision of where you want things to go, it is more likely for that vision to be created.  If you have no vision at all, you just take what comes.  If you focus instead on what you don't like, then – paradoxically – that's what you tend to end up helping to create.  "That which you put your energy and attention on grows stronger."

    I'm not saying we engage in self-delusion, but having a clear vision of where we want things to move towards can be a very powerful thing.

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  • Thu, May 12, 2016 - 9:29am

    #28
    JuanSantosSuarez

    JuanSantosSuarez

    Status Member (Offline)

    Joined: May 12 2016

    Posts: 1

    Burgundy vineyards

    Overwhelming images of combating frost in Burgundy vineyards due to the last episode of Jet Stream blockage

    http://vinosybodegas.iprofesional.com/2016/05/03/guerracontralahelada/

    the cost of global climate change could be . . .

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  • Thu, May 12, 2016 - 10:36am

    Reply to #27

    blackeagle

    Status Bronze Member (Offline)

    Joined: May 16 2013

    Posts: 228

    I agree

    Dave,

    i agree totally with what you wrote. We need people that have a vision to move things toward the good side. I just think I am not this person. I also have sometimes the tendency to "complain a lot", and it takes me a lot of energy to look the other way: how to get out of the mess; focusing a lot on the solutions instead of (too much) on the causes; doing, doing and doing.

    Incredible as it may sound, it is possible that someday, one of us will be in a position to influence an important outcome.

    Already happened with good results (I put aside the political hijacking): Buddah, Moise, Jesus and Mohammed.

    And also with terrible results: Hitler, 

    Yes, someone someday will will be in a position to influence an important outcome. If everyone act at his level, stay honest and be not naive, then, reaching a critical mass will certainly help find the good leader. If the entire society stays too passive, then I don't see how things can change for the better.

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  • Thu, May 12, 2016 - 12:42pm

    #29
    robie robinson

    robie robinson

    Status Gold Member (Offline)

    Joined: Aug 25 2009

    Posts: 892

    The Archdruid speaks in a recent blog

    of these things that concern you, Dave and Blackeagle.

     

     

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  • Sat, May 14, 2016 - 5:08am

    Reply to #26
    Time2help

    Time2help

    Status Platinum Member (Offline)

    Joined: Jun 08 2011

    Posts: 2272

    More of the same mindset

    [quote=davefairtex]

    Here's how I'd restructure the banking system:

    Ownership structure: central bank is a publicly traded corporation.  Nobody can own more than 5% of the shares.   And perhaps retail banks cannot own the shares, nor anyone who owns a controlling interest in banks can own the shares.  Central bank needs to be at arms length from their bank customer base, so they don't end up giving them any sweetheart deals.  Shareholders elect (via cumulative voting) the directors of the company (i.e. today's FOMC).  Perhaps government owns 20% of the equity, and is able to appoint one of the directors, so they have influence, but no control.  Dividends are paid to the shareholders.

    Mission: should be reset back to its 1914 roots.  Central bank oversees printing of the currency, clearing services, and is the lender of last resort, and that's it.  Its not a regulator, a setter of interest rates, a monetizer of sovereign debts, or a rescuer of economies.  And lender of last resort doesn't mean bankers get a pass on stupid decisions.  It just means that solvent banks that run into liquidity problems can get money when they need it in exchange for good assets so they don't go under unnecessarily.  Insolvent banks still get taken down by the government regulator.

    Reserves & Base Money: central bank should provide base money in exchange for gold and/or corporate debt.  No sovereign debt.  Reserve requirement fixed at 10:1.  Base money should grow at a rate equal to GDP, but no more.  This is the area where I'm less sure about how much authority to give the central bank.  Control base money, and you control the inflation rate.  Ideally I would have a feedback mechanism whereby the free market withdraws some amount base money from the system (say, into gold) when inflation starts to get too crazy, but that could be subject to abuse.  This is my biggest question mark.

    Books: central bank publishes their 10K like everyone else, and are audited like everyone else.  Specific identity of banks provided liquidity are withheld, but the amounts provided are not.

    [/quote]

    Can't speak for others, but you lost me with five counts of "Central Bank". 

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  • Sat, May 14, 2016 - 8:25am

    #30

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    i lost you

    I probably lost you the first time I mentioned the word bank.  🙂

    "Can you give me a banking system without any banks at all in it?"

     

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  • Tue, May 17, 2016 - 6:57pm

    #31

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 695

    Currency Systems

    Dave,

    I've been away from the computer for the past week. I realize that this line of thinking is akin to questioning how many angels can dance on a head of a pin. When the system breaks, lots of things we take for granted will not exist. Whatever system does emerge will have to incorporate the leftovers or invent something completely novel.

    Your system sounds more or less like the current system with tweaks where needed. It seems that everybody likes a flexible money system while the going is good. It is when times are bad that folks want hard tangibles rather than soft promises. If the current system breaks, that preference likely will be the trigger. That is the biggest flaw that I see with the current system. That said, I do like most of your suggestions for dealing with the current system's shortcomings. They are steps in the right direction.

    I liked THC's idea of parallel money systems where gold and silver can compete with debt based money without regard to tax implications. The dollar price of PMs would be a direct measure of relative value. Because of the current tax implications of PMs, they act more like a commodity than a currency. Even though my dollars lose value over time, they still have the same nominal value – hence, no tax implications.

    Should bitcoin (and other cryptocurrencies) be another parallel currency system(s) allowed to be untaxed? I'm a fan of lower taxes, but government's insatiable appetite just means that taxes need to be levied elsewhere. Also, listing prices in multiple currencies becomes cumbersome quickly. What is and what isn't a currency (subject to nontaxable status) in the free market? Should a merchant be able to legally limit what they'll accept as currency? What happens if they choose not to accept paper dollars?

    Grover

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  • Fri, May 20, 2016 - 8:30am

    Reply to #31

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    currencies, tweaks, etc.

    Ok, so here's the thing.  We have (more or less) one decision to make, and everything flows from that.  Forget for a moment the desire to toss out the old system because you're pissed off.  Pretend you're coming at this anew, so you don't let (justified) anger at banks or stupid central planners color your viewpoint.  You are designing a system, and there's no place there for anger – or so I say anyway.

    In an attempt to avoid triggering anyone (and you know who you are), I won't use any words that people might find distasteful, such as "central bank", or even "bank".

    Primary decision point: do we have elastic money or not? 

    1. No Elastic Money Option:

    All money storage places can only lend out the deposits they have on hand.  (Presumably we have such organizations – nobody wants to just deal with cash.  Electronic bill-pay is awfully convenient, so is delegating the task of guarding your cash to someone else.).  As a depositor, you can select where your money goes: either a "storage-only" account where you pay a fee for the service, but your money can never incur a loss, or a "risk-lending account" where your money can be lent out to others, and you can either receive interest or possibly suffer losses.  Money storage places make money on the spread they make, paying something to the risk-lending depositors while receiving income from the interest they receive from borrowers, as well as money storage fees from the storage-only accounts.

    In this system, no participant in the system is allowed to create money.  The money we start with is the money we end up with at all times.  Inflation is limited to just that caused by increased velocity rather than being a multiple of velocity times an increase in money supply.  This system is inherently deflationary if population and/or the economy grows.  If there is a panic, money will be hoarded and we will simply run out of circulating money to conduct business – the lack of ability to grow the money supply will be worse than a gold standard in this case, since at least gold gets mined at 2% per year.

    Some organization has to print the actual paper currency, as well as handle clearing between the different money storage organizations.  This org can either be public, or private.

    Within the no-elastic-money case, we have another decision point.  Do we require that risk-deposit terms match loan-duration terms?

    1a) Durations must Match:

    If a borrower wants to borrow a depositor's savings for a 5 year term, the depositor must agree to keep money in the money-storage-place for that same 5 years.  This ensures no money-storage-place runs, but it also ensures that long term loans probably don't exist.  (Who ties up money for 30 years – I mean, for real.  Anyone you know?).  If we choose this case, there is no need for a systemic lender of last resort, but there is no pot of money avaiable for long term lending – or you could borrow money that might be called in at any moment if the depositors decide to panic.  (That particular situation hasn't worked so well in the past; you lose your farm because someone else gets nervous and you can't come up with the loan balance in 30 days).

    1b) Durations Dont Match

    If durations of deposits don't match duration of loans, then gratutious money-storage-place runs can happen to otherwise-solvent MSPs.  Probably good idea to have a lender of last resort to stop that sort of thing.  Lender of last resort can be either private, or government-owned.  That's a third decision point I'll leave to you to ponder.  Which would you trust more?

    2. Elastic Money Option

    If we choose the elastic money option, we have to assign the responsibility for overseeing the method of money supply growth and shrinkage.  In an elastic money situation, someone has the power to create new money in order to faciliate commerce.  Elastic money avoids the fate of "running out of money" for loans, both during expansions and (possibly) contractions too.

    There are two candidates I see: government, and the private sector.

    2a.  Public elastic money

    Government decides how much money is in the system.  When they want to expand, they simply print more money than they collect in taxes and spend it into circulation.  When they want to contract, they spend less than they collect.  Mechanism for influencing the government's conduct can be left to your imagination.  I'd suggest some sort of direct-democracy vote on "how much new money to inject" this year.  I would not leave it up to "elected representatives" because that has been shown not to work so well.

    Direct democracy requires an intelligent and educated electorate, otherwise you are back to having idiots in the control room of the nuclear power plant.

    Side effect of this: there is no government borrowing.  Any deficit is, by definition, using printed money.  One bonus of that: no interest payments on the debt.  Interest payments more or less occur via inflation.

    By definition, since voters control money supply, there can only be the MSP's from case 1.  You have some very restricted loan types – most likely, any loan is callable within 30 days, and if things get bad, "being in debt" means losing the thing you borrowed the money for, and individual private MSPs can still run out of money.

    2b. Private elastic money

    Private elastic money is about delegating the expansion or contraction of the money supply to the private sector, for projects that materially contribute to society by fulfilling an unmet need by funding the expansion of some good or service with new money.  In this arrangement, inflation is deliberately traded off against the possibility for improvement.  Furthermore, the responsibility for performing this assessment is delegated to the private sector and the marketplace rather than being a part of a government bureaucracy.

    For this to work, criteria must be established that assess the likelihood of success as well as the potential contribution of each project.  Once the project is done, it must be assessed again, to see if it succeeded or failed.

    One can immediately see lots of ways for this to go wrong.  If the criteria are too fluffy, money will be created like crazy.  If there is no severe private-enterprise penalty for failure, likewise, money will be created like mad.  Project failure must lead to existential risks for the private sector money-creator, for discipline to be maintained.  Likewise, the judgement of "what is failure" must not be an easily-influenced academic or bureaucratic assessment, but rather the cold assessment of the marketplace.  There must not be any friendly bureaucrat to appeal to.  A private sector solution must have private sector discipline: "If nobody wants this thing, your project has failed – and you take a loss."  Otherwise, regulatory capture means everything always succeeds.

    Also, too, the person being funded by the money-creator must have skin in the game.  If the project fails, the project owner must also suffer losses.  Perhaps the funder can post assets as collateral for the new money, so the money-creator has the ability to mitigate losses.

    Good news is, new money can be provided for any duration, since money never runs out.  But if so, that requires a lender of last resort.

    You see where I'm going with all this.

    It boils down to the following:

    1) Elastic money or no elastic money

    2) If elastic, private money creation or public money creation?

    Is the discretion for growth in the money supply delegated to "the marketplace", or left in the hands of the central government?

    Each decision point implies constructing a particular structure.  Its not me that wants banks or central banks, they are simply a natural outgrowth of decisions made.  I want elastic money, I'd like longer term loans made for valid projects – bingo, I get fractional reserve lending and require a lender of last resort.

    If those things aren't important to you, if you trust government and/or "the people" to make decent choices, you can have a different structure.

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  • Fri, May 20, 2016 - 10:19am

    #32

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    non responsive

    Grover-

    I realize my message was largely non-responsive to yours.  I was talking to someone in my own head.  🙂  Let me try again.  (Although I still really enjoy the stuff I wrote: "features dictate structure")

    It is when times are bad that folks want hard tangibles rather than soft promises.

    Its because a bunch of implicit promises get defaulted upon.  There are lots of implicit promises in our system.  It might be a good idea to make them explicit.    "As a depositor who gets interest, you could end up losing money."  Or, "if you want to forego interest and instead pay us a fee, you have no chance of losing money."  If the structure is really clear on where the defaults happen, then there is less need for commodities.  Maybe anyway.

    I liked THC's idea of parallel money systems where gold and silver can compete with debt based money without regard to tax implications. The dollar price of PMs would be a direct measure of relative value.

    Yes, I liked it so much, if you scroll back in the convo, you will note that it was he who was being approving of my suggestion to do that.  As a (non-mainstream) goldbug, I like the idea of a built-in escape hatch.  I assume things will get all wonky at some point in the future, and I want the next system I participate in to have a designed-in way out available to everyone.  Just having the escape hatch legally written into the structure will make the gang in charge more cautious about going nuts – it will act as a check/balance to their power.

    Should bitcoin (and other cryptocurrencies) be another parallel currency system(s) allowed to be untaxed? I'm a fan of lower taxes, but government's insatiable appetite just means that taxes need to be levied elsewhere. Also, listing prices in multiple currencies becomes cumbersome quickly. What is and what isn't a currency (subject to nontaxable status) in the free market? Should a merchant be able to legally limit what they'll accept as currency? What happens if they choose not to accept paper dollars?

    I think in practice we'd all use USD for transactions, and everything else will get converted at the current exchange rate.  Like the bit-gold visa.  Transactions occur in dollars, things are priced in dollars, but your gold account is appropriately debited at the current x-rate.  Think: "transaction currency" vs "reserve currency."

    I could see argument for having the same treatment for bitcoin – but I don't have a firm position on bitcoin or other currencies vs taxes.  While I like elastic money, I also want my tax-free gold escape hatch.  🙂  I don't mind having a special carve-out for gold here. 

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  • Fri, May 20, 2016 - 11:59pm

    #33
    Luke Moffat

    Luke Moffat

    Status Silver Member (Offline)

    Joined: Jan 25 2014

    Posts: 367

    Money - will it ever work for us?

    Rather than asking what money is, perhaps it's better to ask 'what do we want money to do?'

    I get the sense, and correct me if I'm wrong, that Dave wants to make money/currency available to explore ideas (i.e. if scarcity exists under a commodity backed system and someone comes along with an idea to cure an illness then it may not be possible to pursue that goal given the inherent constraints). I get the sense, and again correct me if I'm wrong, that Charles wants to make money/currency available to enable full employment (i.e. allow someone to utilise their skill-set in exchange for payment where the current system does not permit).

    My idea of money/currency would be a mechanism which reduces waste – or what might better be described as reducing 'entropy'. I think systems run best when they are efficient and that any overhang (i.e. debt, resource depletion, environmental degradation) reduces that efficiency and thereby acts as a barrier to prosperity (please note: I take prosperity to mean health and happiness).

    Immersing myself in Gail Tververg's work and the nature of debt helps me understand the degree of 'overshoot' that fiat systems permit (dare I say 'pre-determine'?). She clearly articulates that debt is required to extract the vast amounts of energy that our system depends on whilst at the same time increasing entropy due to the complexity of our current system (i.e. excessive debt, bureaucracy, overpopulation) and now an inevitable contraction in all three must occur.

    Typically we'd rely on a market to eliminate waste but I think that ship has sailed and is never coming back. I get the sense that monetary reform needs to be hit from multiple angles at once, such as education, application and direction, just as much as monetary units and accounting – and that there isn't a singular 'neat' solution.

    Instead it'll come down to meeting the following issues head on;

    What society do we want our monetary system to build/enable?

    How do we get there?

    How do we maintain it?

    For me, most of these items are just as much a matter of awareness along with any gold vs fiat – again I find Catherine Austin Fitts' 'tapeworm economy' a useful illustration in generating awareness. It might even be the case that some people don't like gold because we have to bore holes in the landscape to get it out of the ground.

    But going back to the three questions; we have enough historical evidence/examples to build an accurate model of how and where monetary systems/policy go wrong. Personally, I'd focus on the waste issue.

    At the minute we are working for the system, the system isn't working for us.

    All the best and excellent dialogue,

    Luke

     

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  • Sat, May 21, 2016 - 12:23am

    #34
    Time2help

    Time2help

    Status Platinum Member (Offline)

    Joined: Jun 08 2011

    Posts: 2272

    System is gone

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  • Sat, May 21, 2016 - 5:17am

    Reply to #33

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    that's right

    Luke-

    I think you have the right view, on both my viewpoint as well as Charles too.

    What am I really worried about?

    Well, let's imagine we need to build out a new power system and a new distribution system in the near future.  If we have a commodity money system with no ability to create money, well – we will have no inflation, and also no power system.  No windmills, no solar, no power at all except the small bits and pieces that savers happen to be able to support at the moment.

    Mostly we'll just descend down the bad side of peak oil, our ability to respond strictly limited by a commodity money system which was structured to avoid inflation at all costs, even if it means the end of the very civilization from which it sprang.

    This is in the back of my mind when I think about a system where you can't create money from thin air.  It means no inflation, but also no flexibility, no ability to fund important projects.  I don't think people really understand the full implications of what they are asking for.  Its a jail cell from which there is no escape.  Definitely, it successfully fights the last war (the one where gold was $20/oz in 1914 and is 1250/oz today), but I think it leaves us ill-equipped to fight the next one.

    I'm not sure if you and others are asking too much of our money system, if the goal is for the money system to "make/encourage/incentivize people to act responsibly."  If people were responsible, they'd act properly regardless of the money sysytem.  Should we try to design money so that people somehow become better than they normally would be?  Is money truly to blame for the world's sins?  To me money just seems neutral.  It doesn't on its own make people act badly.  They do this on their own.

    Money isn't the root of all evil.  Its the LOVE of money that causes the trouble.

    CAF suggests that transparency is the key.  If you know that someone else is acting badly, they can be shamed back into line.  Its the ability of someone to act badly in some remote area of the world, make a bunch of money from their bad acts, and then have respect of their community where they live without those around them realizing just what they did to get rich.

    At the same time, I'm totally prepared to be convinced if someone comes up with a new system that I feel can work, given humanity's propensity to create bubbles, and engage in fraud.

    I probably just lack the imagination to create such a thing myself.

    Ultimately while I think Charles has good intentions, allowing local creation of a national money system is a problematic model.  Any national money system acts as a "commons", and each local region will want to seize as large a chunk of the commons as possible, with the net result being of course a hyperinflationary "tragedy of the commons."  Trying to police such a system involves having to constantly swim upstream.  If you have local creation of local money, there's built-in restraint involved in not pooping where you live.  That's why the local currencies work relatively well – you have a "local feedback" incentive for not making trouble.  But allowing local creation of national money is a structure that's just asking for trouble, because the incentives are flipped.

    If his system were strictly local, that would take care of all my objections.  Local discipline would apply, and people would be motivated to self-police at that local level.

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  • Sat, May 21, 2016 - 6:33am

    #35

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 695

    Real Alternatives?

    Dave,

    Thanks for answering my requests for information. Your first post essentially said that we have to have elastic money or switch to a commodity based monetary system that can't meet current/future needs. That seems pretty limiting. Which is the lesser evil? Our current elastic money was conjured up by a bunch of bankers who wanted to benefit themselves and future bankers and shift the cost to debt slaves. If you look at GNP as a big pie, they get an increasingly larger slice each year. Are their services increasingly valuable each year … or is the game rigged? There's got to be other options out there.

    I'm not a fan of central bankers or banks in general. I'm also not too keen on regulation. Regulation only shuts the barn door after the horses have left. If they try to close it ahead of time, those being regulated complain that the regulators are running amuck.

    As a prime example of failures in all 3 groups (CBs, bankers, and regulators) we only need to go back to 2008. Remember when Paulson and Bernanke met with Congress to push the $700 billion bailout plan? The banks took on unwise bets, regulators let it happen, and the Federal Reserve bailed them out. Did anyone go to jail? Nope. Did the big banks get broken into smaller pieces so this threat couldn't occur again? Nope. The problems are bigger all around.

    The system is destined to fail again and again until it fails so catastrophically that the elastic money literally snaps. It won't matter so much how we got to that point. What will matter is what happens afterwards. What parts of the current system are worth keeping and which parts should be scrapped? Is debt based, elastic money a good idea? It certainly has gotten us to this overextended position. (I don't consider that a good thing.) What real alternatives are there?

    I like Luke Moffat's questions. What do we want, how do we get there, and how do we maintain it?

    Dave, I'm asking you because you really, really like this stuff. You've thought about it enough that it makes sense to you. You can even explain it to people so they understand (a small portion for a fleeting moment, at least.) Assuming you could set up a monetary system, what features would it include? What features wouldn't it include? What self referencing mechanisms would keep it in check?

    I'm not sure there is such a system out there. Perhaps our fate is to endlessly repeat currency mistakes. Meet the new boss. Same as the old boss.

    Grover

    Edit: I just read your response to Luke. I think I'm asking too much based on your post. Feel free to expound, or leave it alone.

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  • Sun, May 22, 2016 - 4:34am

    Reply to #35

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    currency mistakes

    Cycles repeat, because each new series of generations doesn't really learn from history.  We cannot design a monetary system that will work properly "for all time" because that system will have to be guarded in practice by our descendants, who will not have gone through the same experiences, and will feel that the protections we put in place don't apply to their new world any longer.  Hubris to think we can eliminate this basic human cycle and do their thinking for them.  Each new generation must learn lessons on their own.  That's why cycles happen.

    Our great grandfathers put in place a fine banking system post-1933 where the banks were absolutely not in control of anything.  You can tell from the stats that the banking industry post-1933 was boring – bankers weren't particularly well paid, they were a small fraction of the economy (less than 1%), deposits were diffuse and no one bank's failure would endanger the system, they were not crazy traders, and banks clearly were servants rather than masters of the universe.  But true to cycle theory we promptly forgot the lessons of our great grandfathers (bunch of old fogies don't understand the modern world, you know), we tore down the protections they put in place, and now we have to deal with the current monstrosity that banking has become.

    There are two mind-sets for solutions here at PP.  One is to return to commodity money with no fractional reserve lending – more or less a middle ages solution, effectively burning down the entire banking industry and tossing out elastic money because of our own stupidity in gutting the protections our great grandfathers put in place.  Its a system comprised entirely of base money.  Another is to propose an entirely new money system that will make us all (somehow) into better people.  "If we just had better money, we'd all be better behaved."  And there is a third motivation, which is the persistent myth: "we have to redesign the system because otherwise we won't have enough money to pay the interest."  Thats one myth I used to believe too, until I was shown that this particular myth was just completely wrong.  Once you add in base money, and money flows fast enough (i.e. you model the actual world), everything works fine, but you need to have a basic understanding of how systems work to wrap your brain around it – that, and a willingness to admit a long-held belief of yours might be incorrect.  Usually its the second bit where people run into the most trouble.

    Anyhow, both proposed solutions involve revolutions, radical solutions guaranteed to provide huge numbers of unintended consequences.  How would non-elastic commodity money work in an industrialized economy?  How would it function on the downslope of peak oil?  Or – how would a new socially-engineered money system work when confronted with the usual subset of selfish, greedy, people (i.e. most of us) who dearly love nothing more than to figure out all the ways to game a new system "centrally planned" by fallible mortals with the best of intentions?

    Tthere is a tradition in the software industry, where you take a largely functioning system that has problems or limitations, and you become enchanted with the idea of rewriting the thing from scratch so you can "do it right this time."  Do you know how well this approach works?  It works so poorly, and it happens so frequently, it has a name: it's called the Second System Syndrome.  I myself have personally experienced this.  The temptation to "do it right this time" is incredibly strong, and it very rarely leads to success.

    The second-system effect (also known as second-system syndrome) is the tendency of small, elegant, and successful systems to have elephantine, feature-laden monstrosities as their successors due to inflated expectations.

    The phrase was first used by Fred Brooks in his book The Mythical Man-Month.  It described the jump from a set of simple operating systems on the IBM 700/7000 series to OS/360 on the 360 series.

    Communism is a fantastic example of a social experiment "second system syndrome" designed with the best of intentions by an extremely clever fellow, the implementation of which turned out completely differently than the original author had intended.  You will be shocked to learn that, instead of following the authors original virtuous intent, people ended up focusing on gaming the system.  It turns out, any system not based on individual self interest has a very difficult time in the real world, at least once you try to scale it up.

    IMO, we just need something simple.  Glass-Stegall was 32 pages long, and it fixed banking for a generation.  That's a pretty efficient solution to me.  Why not just swipe that code and reuse it?  We know it worked!  There is a huge virtue in that.

    Did it work for all time?  Of course not.  But it worked well for 40 years.  It worked as long as the people wanted it to work.  And if you tell me that 40 years isn't long enough – "oh no, I want a system that will be fixed for all time."  Sorry, that's just not possible.  Each generation has to figure things out for themselves.  All we can do is address the issue for our generation, declare victory, and go home.  A Dirty Harry quote: "A man's got to know his limitations."  We can't do the next generation's learning for them.  That's on them.

    What would the 40-year solution look like?  Ponzi will leave banking, they'll go back to 1% of the economy (i.e. an 80% reduction of the industry), banking will return to a boring utility, no more trading or derivatives written with grandma's deposits, diffusion will mean they won't have enough concentration to control government, and largely, everything will return to the status quo ante.  Money won't make us into better people, but then again, I think that's a false promise anyway.  If you can show me a case where such a thing actually worked on a large scale, I'd be more inclined to listen.  Communism is great on a small scale, after all, its only when you go non-local that things tend to blow apart.

    And of course I want my tax-free gold escape hatch.  That's my personal tweak to the system that was missing last time around.  Its a check and balance I'd personally like to have in place.  My descendants might decide to remove it – but I can't really address that, any more than I can dictate fashion or anything else.  All I can do is propose a fix for things in the here and now.

    That's more than two cents, I know.  But I had a lot to say.

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  • Sun, May 22, 2016 - 7:37am

    #36

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    local-only systems

    By the way, there are a whole lot of local-only systems that work really well when they stay at the local level.  Communism is one such system that seems to do all right when everyone more or less knows each other.  Likewise, local money systems have done well at the city level too, where local peer pressure, shaming, or enforcement can punish people who step out of line.  I'm entirely in favor of encouraging such systems, which can flourish within the context of a national self-interested regulated boring old elastic money system with a gold escape hatch.

    For some reason, however, shaming (or "self-criticism", communism-style) doesn't work so well when you try to scale it up.  I'm not quite sure why that is, but that's how it seems to be.  Maybe shame only works when you really know your neighbors and their daily visible unhappiness at your conduct really can have a moderating influence.

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  • Sun, May 22, 2016 - 12:19pm

    #37

    blackeagle

    Status Bronze Member (Offline)

    Joined: May 16 2013

    Posts: 228

    Shaming

    Dave said:

    For some reason, however, shaming (or "self-criticism", communism-style) doesn't work so well when you try to scale it up.  I'm not quite sure why that is, but that's how it seems to be.  Maybe shame only works when you really know your neighbors and their daily visible unhappiness at your conduct really can have a moderating influence.

    I can add: the neighbors that know you, can (and will) punish you because you directly affect their interest. The police and the court are part of the community and their judgment is based on two things: facts and sentiments. When you scale up things, this is no more the case: you remove from the punishment mechanism the sentiment part. I think absence of shame comes also from this point. You can always fool the system because you can tweak the way facts are presented. You can't do that with your neighborhood that sees you everyday.

    We can also add, the less local things are, the bigger they are, and consequently, the more attractive they become to the ambitious?

     

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  • Wed, May 25, 2016 - 6:42am

    #38

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 695

    After The Reset

    Dave,

    My line of thought was to find out what (if any) properties of our current monetary system would remain intact after the wheels come off. I frankly don't see much surviving. Transportation will be limited (and dangerous.) Replacement parts will have to be scavenged. For the most part, fuel will be exceedingly expensive unless it is a local product. Central anything will be a distant memory. Money itself will migrate back to the old time definition. Why will we need banks?

    Right now, we have to use Federal Reserve Notes because they are mandated and accepted by our government to pay our taxes. You could pay your tax bill with pennies, but they will all be valued at $0.01 regardless of any numismatic rarity. Even PM coins that were minted by the US mint will only be worth the nominal price stamped on them ($1 for a 1 oz. silver eagle and $50 for a 1 oz. gold eagle.) Precious metals or bitcoin are considered collectibles. Price gains are taxed at the collectible tax rate. It may not seem fair, but it is what it is.

    It works reasonably well now. How will it work after the series of failures finally bring all of modern society to its knees? Lots of things that we take for granted now will simply not exist after the reset. The paper currency that we work so hard to procure may last for a short while, but its ultimate use will be for fire tinder or toilet paper. Copper sandwich coins (post 1964) will hold value a little longer. Junk silver (pre 1965) will likely be recognized and valuable for quite some time.

    Junk silver and barter will likely be the currency between strangers/casual acquaintances. Within your family/neighborhood/clan/tribe, it won't be necessary. Gifting will be the "currency" and gossiping will be the regulatory system. It will work as long as everyone knows one another and shares in the commonwealth. It falls apart when the population gets too large and diverse.

    This really is small scale communism at work. It currently works in most families. The parents earn the income and spend it as necessary. Do you force young children to pay for room and board? No! What would they do to earn money to pay their keep? Young children's job is to grow up to be a contributing member of society. When they get older, parents expect more from them. Would you give the same grace to a 20-something sponging off your goodness as you would a darling pre-schooler? If so, wake up and smell the shit your 20-something leaves behind.

    The bottom line is that for now the $ (and the CBs) matters. It won't forever. I suspect that a form of communism will be the best system going forward. With localized communism, there won't be money for a new dam or a new school. Resources will be limited to what the local tribe(s) can produce. They might be able to build a new ditch to bring water to your fields (as long as it isn't too long and the perceived payoff is worth it.) Moon shots will be "so pre collapse!"

    Grover

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  • Wed, May 25, 2016 - 8:42am

    Reply to #38

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3233

    one outcome

    Grover-

    I think you describe one possible outcome at a relatively distant point in time, and given that outcome, I agree with the outcome in the scenario you lay out: in a circumstance with little security and no government (except perhaps your local feudal lord to whom you turn for protection from the brigands), banks won't exist, nor will fiat money.  We'll be just barely above the barter level.  Hunks of metal, silver coins if you are particularly well off, think: "dark ages commerce."

    That is not the only outcome, nor is it the inevitable outcome.  If we go down the route of more of a "slow burn", what CAF describes, rather than a drop through Mad Max into feudalism, banks will still matter, and much of society's structure will remain intact.  After all, we did all right back in the 1920s, with a whole lot less energy use than we have now per capita, and we had banks back then.  And so that's what I was describing, simply because I think its the more likely outcome.  Or maybe its just the outcome I prefer, its hard to say.

    I focused on what I'd implement after the next banking crisis: the system for a still-existing civilization attempting to manage things in a state of peak resources.

     

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  • Wed, May 25, 2016 - 7:59pm

    #39

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 695

    Different Focal Points

    Dave,

    I appreciate your thoughts on this. I agree that my scenario is only one possibility. There are too many variables to be considered. The next crisis will have fewer variables to consider than any subsequent ones. Banking systems likely will still be functioning in some capacity. If our "leaders" need to modify the system, it will be sold as a "one and done" type of solution. It will work until it doesn't.

    I'm in the stair step crash camp. CAF's slow burn implies a more uniform rather than a herky jerky transition. To me, the response to 2008 was what I expect more of. In nominal terms, we may have recovered the prior level of economic activity, but in real terms, we are still languishing. Silicon Valley and other unicorn islands may be in full glory, but most of the rest of America (e.g. Detroit) hasn't recovered. When the next upset happens, we'll be starting from a lower overall economic level.

    This can only go on for a few cycles at most. Our systems have evolved to be efficient, not resilient. Break a few links in enough chains and modern commerce fails. Will the police be there to protect citizens when there isn't any pay? Who will keep the electricity running? How will food get to the cities? At that point, the slow burn turns into a self cleaning oven.

    That is my reset point. I don't know when it will happen. Shoot, there may be some technological advancement that figuratively expands our petri dish world. I'm convinced that we'll eventually find one or more other limiting factors. We've already overshot sustainability levels without converting energy into edible calories. We can't go back to the relatively placid 1920s with this many people on earth. Something's got to give.

    So, I don't worry too much about the intermediate steps while you focus on the next banking crisis. You'll likely gain far more from the next crisis than I will. As long as the system functions, I'm set up to do just fine. It's fun to postulate and speculate on which cog will break first, but it is more or less morbid curiosity for me. My dog isn't in the hunt. It is lounging on the living room rug.

    Grover

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