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    Paul Brodsky: The Seeds of Our Destruction Were – And Still Are – Sown in the Bond Markets

    by Adam Taggart

    Friday, October 21, 2011, 11:25 PM

Paul Brodsky does not trust the bond markets. That position may seem strange coming from someone who has spent most of his professional career trading bonds, but it's precisely this insider knowledge that has led him to start directing investors to safer harbors.

In fact, he thinks our credit system is so far out of control that it will cause a massive and largely unavoidable, at this point devaluation of the U.S. dollar (and most other fiat currencies, as well).

In our interview with Paul, we asked him to explain the reasons for his concern and to detail how he sees a bond market breakdown unfolding. At the heart of the matter is the run-up in overnight systemic repurchase agreements among banks that started in 1994, which goosed the ensuing credit-driven buying orgy in our economy and has left the system much more vulnerable to exogenous shocks as a result:

All the way through 2006, a monetary aggregate called M-3, which was the only aggregate that included repurchase agreements (which is the process by which banks fund themselves with each other), grew almost 12% a year. It is an enormous amount, and that basically tells you that this overnight lending among banks provided the fuel from which all of the term credit, the 30-year mortgages, auto loans, and revolving consumer credit came — which of course has never been paid down from whence it came. So in effect, we knew that the system became highly susceptible to any hiccup.

So the system is levered at least 20 to 1, and there is effectively 20 times more debt than money with which to repay it. And so that is a long-winded way of setting the table for where we come down in our macro views. Clearly, it has great ramifications, negative ramifications for the currency, and given that the dollar is the world’s reserve currency, we think it has significant ramifications for the global monetary system in general.     

Add to this the lax oversight from the Fed at the time, which as Paul states seemed primarily focused on making sure "banks could expand their balance sheets." Along with the repurchase agreements, the practice of "sweep programs" helped the banks gain unfair advantage while technically not breaking the letter of the law. Chris summarizes this process as:

This is a story of leverage which really began in the mid-nineties. So this is not any particular policy disaster that went off the rails in 2000 or even more recently than that. Interestingly, I have never connected the stop before between the overnights, the repos, and something else that really caught my eye in the mid-nineties. Actually, it was ninety-four or ninety-five.

I don’t know if you know about the sweep programs. For the benefit of listeners who may not, what Greenspan did was he allowed banks to essentially dodge the reserve requirements by "sweeping" demand accounts. And what I mean by that is, if you have money in a checking account, that is yours to demand anytime you want; the banks have to hold a reserve against that, by law, of 10%. But banks were allowed, through this policy tweak that the Fed had done, to effectively sweep that money out of that account just before the stroke of midnight.

So that at midnight when they take the snapshot and say, "How much money do you have to hold in reserve against?" they would sweep the money out of the way. The snapshot would be taken, and the bank would say, "Look, there is no money; we get to hold very light reserves here." And then the money would get swept back in at let us say, 12:01. But during the snapshot period, oops; it would have disappeared.

That is where I had chased back where this credit bubble really got into high gear. And I thought it was due to the fact that banks were allowed to dodge these reserve requirements, effectively running leverage far, far higher.

At some point, the growing leverage in the system and the rising amount of new credit and money supply lead to ever larger distortions in market pricing. Paul sees this as leading to inflation:

So economics has kind of taken leave of the bond market. The Treasury bond market is no longer, we think, a true signal of interest rates, where they should be, or a true signal of inflation. It is an interest-rate curve that has been distorted by terribly distorted incentives, as we see it.

So we understand that. We do not think it is right. We would rather have markets be free to adjust to where they should be, but frankly, we do not see that happening. To your question specifically about will we have something similar to what happened in Greece here in the U.S., we do not think we are ever going to get to that point here. And it is not because we are proud Americans and we think that the U.S. is better in every way than every foreign land; that is not the case at all. We think it is not going to happen here because if anything dire happens in terms of interest rates, like the threat of rising interest rates, you would see the Fed's balance sheet come under severe stress.

I think the Fed is going to have to continue printing. They are going to go to a significant QE3 at some point. I do not know exactly what form it will take, but they are going to have to monetize debt. The process of doing that is, I am sure your listeners know, is when you buy debt, you print money with which to buy it. That moves new money out, ostensibly into the system, but as we have seen, it only goes into banks as excess reserves. This process is the exact process of inflation, so if you print a dollar, you are diminishing the purchasing power of that dollar through dilution. And it is a very easy thing to understand that more dollars chasing the same amount of goods and services and assets must drive the price level higher for those goods services and assets. And so what we see happening is, through this process of money printing, we will have rising prices that rise much faster than wage growth or income growth, and it is going to make the ability to service debt that much harder.    

It's these growing inflationary pressures that Paul sees leading to an accelerating devaluation of paper currencies in the coming years. He sees a revaluation of the U.S. dollar vs. gold as a likely outcome at some future point (estimating that gold could reach a price in the neighborhood of $10,000 per ounce, if it is indeed re-monetized). 

Ultimately, he recommends that investors who are concerned with protecting the purchasing power of their wealth today get exposure to hard assets that can't be so easily inflated away:

All of these currencies are baseless and are losing their purchasing power versus the goods and services with inelastic demand properties, such as natural resources and things of scarcity. 

Gold should be thought of as cash in the best currency. I would suggest anything scarce with inelastic demand properties, and that is, of course, how we get energy and how we get agriculture and various other things. They should be considered very strongly.

Click the play button below to listen to Chris' interview with Paul Brodsky (runtime 49m:12s):

 

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Our series of podcast interviews with notable minds includes:

 

About the Guest
Paul Brodsky

Paul Brodsky is co-founder and co-managing member of QB Asset Management. Paul spent several decades trading bonds and other securities for such Wall Street firms as Drexel Burnham Lambert, Kidder Peabody, and Spyglass Capital, where he actively managed mortgage-backed derivative funds for over a decade (over 85% of investor capital in that fund was returned by June 2006, before the wide-scale credit contraction occured). QB Asset Management serves accredited investors; more information on the firm and its investment strategy can be obtained by emailing Paul

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41 Comments

  • Sat, Oct 22, 2011 - 1:39am

    #1

    Arthur Robey

    Status Platinum Member (Offline)

    Joined: Feb 03 2010

    Posts: 1814

    Thinking as a form of cheating.

    Is gold truely inelastic? The Matabele were uninterested. They were keen on cattle, women and children.

    TPTB will view thinking as a form of cheating.

    If we anticipate going back to a gold standard and take a position in the metal, the powers that be will confiscate it before backing their money with the yellow stuff. I plan sell on the rise long before $10 000. Leave it to late and go bust.  $7500 will do me.

    Feeling lucky?

    Is there any chance of the Government (The People) getting control of the printing press? Some sort of head bashing exercise. The problem there is that the elected officials have outsourced all dangerous decision making. The elected officials should be forced to do their job and make decisions themselves.

     

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  • Sat, Oct 22, 2011 - 11:55am

    Reply to #1

    frobn

    Status Bronze Member (Offline)

    Joined: Nov 28 2010

    Posts: 38

    I follow your line of

    I follow your line of reasoning perfectly and agree that at some point gold will be confiscated or taxed out of individual possession. What I don’t know is that if you sell at $7500 per once what do you do with the $7500 you receive? Buy land? Commodities? But by the time gold reaches $7500 won’t commodities and other hard assets also be as highly inflated as gold, so maybe switching earlier may be wiser. I am not playing devils advocate I am trying to understand and figure out the best strategies.

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  • Sat, Oct 22, 2011 - 1:57pm

    #2

    Aaron M

    Status Platinum Member (Offline)

    Joined: Oct 22 2008

    Posts: 790

    So the system is levered at

    So the system is levered at least 20 to 1, and there is effectively 20 times more debt than money with which to repay it. And so that is a long-winded way of setting the table for where we come down in our macro views. Clearly, it has great ramifications, negative ramifications for the currency, and given that the dollar is the world’s reserve currency, we think it has significant ramifications for the global monetary system in general.

    Adam,
    Where are the numbers to support this? 
    This is indeed a huge deal, and I don’t doubt it – but I want to be able to cite something credible. In the current fiasco, I doubt there’s enough honesty to acknowledge the depth of debt anyway – fuzzy numbers and all.

    It’s these growing inflationary pressures that Paul sees leading to an accelerating devaluation of paper currencies in the coming years. He sees a revaluation of the US dollar vs. gold as a likely outcome at some future point (estimating that gold could reach a price in the neighborhood of $10,000 per ounce, if it is indeed re-monetized).

    Another very interesting point – but the "dollar" value of Gold is not germaine to me in the case of inflation/hyperinflation… what can we expect the actual purchasing power of metals to do once the inflation sets in?
    I know the Argentine black markets were quick to replace .gov currency with metals (according to Fernando Aguierra) but was there any mention of rates of exchange? 

    My current plan is holding metals for debt relief once the Hyperinflationary cycle begins – That way, I can put $1600 into an ounce of Gold now, and perhaps that same 1 oz coin will trade fairly equally for an acre of land or so that is currently marketed for an insane price of $10,000 per acre (in the PNW).

    In other words, pay cash now, until the case becomes too common, (loss for the seller) and eventually it’s no longer accepted (finalize debt repayment in metals – everyone wins – I get land I couldn’t otherwise afford, while the seller receivers a viable currency).

    In nominal terms – I’m certain the "value" of Gold in dollar terms will be breath-takingly high, but I’m still concerned that it won’t parlay "dollar value" into ‘purchasing power" – especially if the Government does recognize metals as a viable form of currency…

    Under such circumstances, we might see Gold devalued intentionally by way of introducing it into the money supply to offset the inflated value of Gold relative to the available supply.

    Who knows. Interested in hearing others’ comments though.

    Cheers,

    Aaron

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  • Sat, Oct 22, 2011 - 2:06pm

    Reply to #1

    Arthur Robey

    Status Platinum Member (Offline)

    Joined: Feb 03 2010

    Posts: 1814

    Muddle

       Frobin asked

    $7500 you receive? Buy land?

    I am as much in the dark as you Frobin. The best answer that I can give is to generate as many options as possible.
    Land has it’s advantages but some serious downsides. Are you prepared to kill to keep it?
    The Hadley Cells here are already expanding and making marginal land unviable.

    There is some evidence that the expansion of the Hadley cells is related to climate change.[2] The majority of earth’s driest and arid regions are located in the areas underneath the descending branches of the Hadley circulation around 30 degrees latitude.

    I seem to recall that the prarie will also be susceptible to climate catastrophe.

    2000-2009 has been the driest 10-year period in the observed historical record (2008 through 2009 data are estimated)
    Projected 2010 April through July runoff is 78% of average
    Not unusual to have a few years of above average inflow during longer-term droughts (e.g., the 1950’s)
    Tree-ring reconstructions show more severe droughts have occurred over the past 1200 years

    Todays paradise may be tomorrows desert.
    My uncertainty qualifies me to be flipant.  Buy cattle, women and children.
    Muddle through.
     

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  • Sat, Oct 22, 2011 - 2:30pm

    #3

    Tom Page

    Status Silver Member (Offline)

    Joined: Sep 26 2008

    Posts: 266

    Great interview

    Thanks! – Paul offered a clear, easy to understand insight into how the bond markets work. Particulary interesting is how the Primary dealer banks have their secondary sales all set beforehand, so Treasury auctions always go off without a hitch.  I’m beginning to understand how the system is so distorted it will let us continue to live beyond our means for quite a little while yet, despite the issues apparent to us, until perhaps one day it doesn’t.   

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  • Sat, Oct 22, 2011 - 5:40pm

    #4

    gak

    Status Member (Offline)

    Joined: Nov 10 2008

    Posts: 12

    Another great interview

     Chris,

    Great job on the interview. I have emailed Paul several times and he has always been very approachable  and wiling to explain his thoughts to non accredited investors. This interview  (along with the paul Tustain one) are fantastic.

    If possible, I would really like to hear you interview FOFOA . I know he is anonymous, but even an email exchange between you two would be worth the price of admission.

    Keep up the great work!

    Gak

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  • Sat, Oct 22, 2011 - 5:53pm

    Reply to #4

    SailAway

    Status Silver Member (Offline)

    Joined: Aug 11 2010

    Posts: 234

    Great Interview

    Paul Brodsky was IMO one of the best presenters at the Casey summit. He is calm and reasonable with his comments, great technical analysis and also among the very few at the conference who didn’t believe in the "Mad Max" scenario.  That was refreshing… 
    Thanks Adam & Chris for this interview.
     

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  • Sat, Oct 22, 2011 - 9:47pm

    #5
    corn1945

    corn1945

    Status Member (Offline)

    Joined: Jun 12 2011

    Posts: 5

    These "They'll just print"

    These "They’ll just print" theses are mostly poorly thought out. I agree they want to print and have done so in the past. But the amounts you would need to print are well into the tens of trillions. That blows the system up immediately.

    Also, the print theses (and the financial repression thesis) fail to take into account that the debt is still growing! Government debt is increasing at a $1+ trillion run rate every year. So the amount you need to print keep increasing as well.

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  • Sat, Oct 22, 2011 - 10:35pm

    Reply to #5

    Johnny Oxygen

    Status Gold Member (Offline)

    Joined: Sep 09 2009

    Posts: 454

    corn1945 wrote:These

    [quote=corn1945]
    These "They’ll just print" theses are mostly poorly thought out. I agree they want to print and have done so in the past. But the amounts you would need to print are well into the tens of trillions. That blows the system up immediately.
    Also, the print theses (and the financial repression thesis) fail to take into account that the debt is still growing! Government debt is increasing at a $1+ trillion run rate every year. So the amount you need to print keep increasing as well.
    [/quote]
     
    Yep I agree with you Corn.
    The deflation argument always appears rational on paper but as I have stated before seems strangely academic.
    Yes they can’t print into infinity but does that mean everyone holding fiat currency will stay in the game? IMO no way.

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  • Sat, Oct 22, 2011 - 11:56pm

    #6
    butterflywoman

    butterflywoman

    Status Member (Offline)

    Joined: Oct 02 2010

    Posts: 9

    silver eagles have "one

    silver eagles have "one dollar" printed on them

    perhaps it’s future declared value?

    right now the us gov’t considers silver eagles as money….that;s why there is no tax when buying or selling them.

    gold and platinum coins are the same, if from the us mint

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  • Sun, Oct 23, 2011 - 12:00am

    Reply to #6
    hucklejohn

    hucklejohn

    Status Bronze Member (Offline)

    Joined: Dec 13 2008

    Posts: 64

    Great interview!  What will

    Great interview!  What will be the market signal to go short on bonds??

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  • Sun, Oct 23, 2011 - 7:07am

    #7

    Mark_BC

    Status Bronze Member (Offline)

    Joined: Apr 30 2010

    Posts: 320

    Great interview, thanks.

    Great interview, thanks. That clarified a lot of things about how the bond market works. I have three interrelated questions / issues.

    Firsty, the Fed could revalue gold to $10,000, or in other words, devalue the dollar. This figure is based on using the official US gold reserves and the monetary base, as explained in the interview. But the other day I read that China just ordered a huge amount of physical. China knows the Fed is suppressing gold price artificially, and the Fed knows that China knows. To keep the scam going they have to provide physical at paper prices, to anyone that demands it. The whole world is being offered physical at firesale prices. Where is all this gold coming from? I would assume the official US gold reserves are being raided. It hasn’t been audited in 50 years or so. Why not? Therefore, how can we reasonably come to a $10,000 figure when it’s likely that the US will soon no longer have any gold left? And the longer the suppression continues, the less physical gold the US will retain. And say the Fed did devalue the dollar to $10,000 gold. Because the dollar will have been devalued about 7 fold in terms of real stuff you can buy (the point of revaluing gold is to devalue the dollar to inflate away debts), your gold will then still only buy you the same amount of real stuff that it did before. Is that reasonable to presume considering future international pressures on gold price? For gold to be really revalued upwards in terms of physical things you can buy with it, rather than as a simple inflation hedge, then it would have to go up even higher. Which leads me to my next question:

    Why are we assuming that the Fed will retain any say in the international price of gold in the future? The Fed could value gold at $10,327 but so what? I can invent my own currency too and value gold at what I like, but that doesn’t mean anyone is going to care. Considering the US has lost most of its productive capacity and is only hanging on by a thread due to the reserve status of the dollar, a fact which China is taking full advantage of in order to steal as much wealth as it can right now, then when the reserve currency status of the dollar ends (I have a feeling China would love to step up to that role), the USA will have no more say in the international price for gold than does, say, Brazil today. The US will be a country just like any other. It has no real-world bargaining chips left other than Apple, the Volt, lots of corn, and a military that requires copious amounts of oil that can no longer be supplied.

    Thirdly, revaluing gold / devaluing the dollar may solve a lot of the outstanding debt problems but you can’t solve the physical structural problems in the US overnight like you can devalue the dollar overnight. When this happens, the US will still be physically dependent on foreign oil, and since it will likely lose its reserve currency status, it seems unlikely that it will be able to continue buying oil in quantity. This will cause tremendous problems.

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  • Sun, Oct 23, 2011 - 9:20am

    #8

    SingleSpeak

    Status Bronze Member (Offline)

    Joined: Nov 30 2008

    Posts: 169

    Another Piece to the Puzzle

     

    Thank you Chris and Paul,

    This explanation of the bond markets, although still not fully digested, really helps one get a more complete picture of how the money guys have been able to keep the wheels turning for so long, and how it is quickly coming closer to a monetary showdown in the future. 

    SS

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  • Sun, Oct 23, 2011 - 3:10pm

    #9
    Doug

    Doug

    Status Platinum Member (Offline)

    Joined: Oct 01 2008

    Posts: 1375

    wealth transfer

    The thing that occurs to me with the notion of devaluing the USD against gold, particularly when  the notion of it being done over night to $10,000, is that it amounts to a tremendous transfer of wealth to the 1% of us who actually own bullion.  Although there are certainly some of the current top 1% who own bullion, it will amount to a big shift of wealth.  How will the other 99% react to our sudden enrichment?  I suspect the current OWS movement may pale by comparison.

    This certainly occurs to the people who have the power to devalue the USD.  Since they don’t want social upheaval, particularly if it means that some portion of the current 1% won’t be nearly as wealthy if they don’t also own gold, it seems reasonable that there won’t be a sudden change like that…unless they can convince the currently wealthy to also buy large amounts of gold.  That would, of course, drive the price up also.

    Doug

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  • Sun, Oct 23, 2011 - 3:17pm

    #10
    RJV45

    RJV45

    Status Member (Offline)

    Joined: Oct 23 2011

    Posts: 0

    Gold at 7,500

    I bought a chunk of gold on Bullion Vault not too long ago at 1.8K, knowing it would be a volatile ride, but also being sure it will get to 2.5K at some stage next year.

    I plan to sell then, add those profits to my savings, and be set up rurally and  sustainably, debt free, away from large urban centres.

    I say this becasue of the comments here about how high gold will go, and what does that matter anyway if inflation raises the price of everything else as well, which is a fair point.

    So to my mind, the trick is to get in, but get out early enough to take some profit, while that profit still means something, and use that profit and your savings to help pay to set yourself up sustainably, and then ride out the coming re-set.

    Waiting too long on gold,  to see how high it might go, might get you nowhere in the end.

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  • Sun, Oct 23, 2011 - 4:03pm

    #11

    JAG

    Status Silver Member (Offline)

    Joined: Oct 26 2008

    Posts: 240

    Deflation is a choice?

    Sorry Dr. M, but your rationalizations are growing more and more unrealistic by the day.

    Deflation is not a choice, it’s a consequence. Just because we won’t deliberately choose death, doesn’t mean that we can prevent it from occuring by choosing life. 

    I have lost faith in your ability to observe our situation objectively, which was the trait that I admired about you the most. 

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  • Sun, Oct 23, 2011 - 8:55pm

    Reply to #9

    frobn

    Status Bronze Member (Offline)

    Joined: Nov 28 2010

    Posts: 38

    Doug wrote:The thing that

    [quote=Doug]
    The thing that occurs to me with the notion of devaluing the USD against gold, particularly when  the notion of it being done over night to $10,000, is that it amounts to a tremendous transfer of wealth to the 1% of us who actually own bullion.  Although there are certainly some of the current top 1% who own bullion, it will amount to a big shift of wealth.  How will the other 99% react to our sudden enrichment?  I suspect the current OWS movement may pale by comparison.
    This certainly occurs to the people who have the power to devalue the USD.  Since they don’t want social upheaval, particularly if it means that some portion of the current 1% won’t be nearly as wealthy if they don’t also own gold, it seems reasonable that there won’t be a sudden change like that…unless they can convince the currently wealthy to also buy large amounts of gold.  That would, of course, drive the price up also.
    Doug[/quote]
    Isn’t it more likely that the government would take several intermediate steps to confiscate gold outright or perhaps put a high tax on gold with a window to exchange your gold for dollars at a much less tax? Then the government, after transferring most of the gold to the top .1% elite,  will push the final devaluation of the USD.

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  • Sun, Oct 23, 2011 - 9:29pm

    #12

    straight

    Status Bronze Member (Offline)

    Joined: Aug 25 2008

    Posts: 42

    if you think inflation is our future and you are sure about it..

     if you are that confident in an inflationary future then surely the best play bar none is to go into massive debt and use the money to buy gold/silver.

    the debt will become easier to pay off with rising inflation and the value of the gold and silver will rise… indeed you will be able to pay off the debt with some of the gold and silver.

    all you need is someone to lend you the cash… easy enough in this environment.

    if you are wrong then you are royally screwed as there will be less money in the system to pay down the debt and the value of the gold and silver will drop …. 

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  • Mon, Oct 24, 2011 - 12:15am

    Reply to #11

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Deflation is the only path?

    JAG wrote,"Deflation is a choice?
    Sorry Dr. M, but your rationalizations are growing more and more unrealistic by the day.
    Deflation is not a choice, it’s a consequence. Just because we won’t deliberately choose death, doesn’t mean that we can prevent it from occuring by choosing life. ‘
    Then he got nasty… so I won’t include the last part.  
    Brodsky stated his mind in a quite straightforward fashion in the interview, regarding the bond market, he said,
     
    "And the reason we have not shorted them is because, frankly, a Central Bank, especially the Fed, has an infinite ability to create infinite amounts of money with which to buy debt."
    So there you go… two views of a predicament that would seem to have only two possible outcomes… a deflationary depression, or some kind of inflationary, dollar destructive arc.  Everything I have learned and experienced supports the Brodsky view, but it’s always good to test your position by studying the writings of those who take the opposing view.   There is a place where all participants believe as JAG does… and it’s called THEAUTOMATICEARTH.  If you want to enter a kind of anti-matter CM.com universe, the best place to go is this post, which is a counter to Chris’ post about commodity inflation ahead;
    http://theautomaticearth.blogspot.com/2011/10/october-3-2011-commodities-and.html
    The comments section is even more interesting, because the TAE accolytes love to make fun of those who expect hard assets to be a functioning means to protect savings.  
    From the article by Stoneleigh… here is one of her more egregious speculations IMO,
    "We have said for some time that we do not expect the Fed to provide a QE3. Even if it were to attempt to do so, we are of the opinion that it would be a miserable failure. The previous rounds of quantitative easing occurred against the backdrop of a supportive rally, and rallies are kind to central authorities by making their actions appear effective. Rallies unfold on a temporary resurgence of optimism, which leads people to extend credence to their leadership. "
    Yeah, right… the (stock) and commodity markets just happened to be rallying, and that made QE3 look good?  You gotta be kidding me… she has cause & effect all backwards… the printed money from QE3 clearly leaked into all markets, creating the rally that Ben very much wanted.  And, BTW, QE3 will come… it’s just a matter of time.  As well, in her address of the monetary aggregates vs credit Stoneleigh never speaks to the impact of the (since 2006) missing M3 Eurodollars.  I guess she really trusts the FED….  
    So, JAG does have a place where he can find lots of positive affirmation of his views… it’s TAE.  For me, I see nothing to convince me that the forces of deflation cannot be overcome with a motivated (digital electronic) printing press.
    Finally, take a listen to John Embry in this recent interview, as he states his own view of the inflation vs deflation debate;
    http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/10/22_John_Embry.html    
     
         

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  • Mon, Oct 24, 2011 - 12:23am

    Reply to #12

    Johnny Oxygen

    Status Gold Member (Offline)

    Joined: Sep 09 2009

    Posts: 454

    straight wrote: if you are

    [quote=straight]
     if you are that confident in an inflationary future then surely the best play bar none is to go into massive debt and use the money to buy gold/silver.
    the debt will become easier to pay off with rising inflation and the value of the gold and silver will rise… indeed you will be able to pay off the debt with some of the gold and silver.
    all you need is someone to lend you the cash… easy enough in this environment.
    if you are wrong then you are royally screwed as there will be less money in the system to pay down the debt and the value of the gold and silver will drop …. 
    [/quote]
    Remember. They will change the rules of the game to their benefit.
    I would not be surprised to see them adjust mortgages for inflation.
     

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  • Mon, Oct 24, 2011 - 12:25am

    #13
    jbynes

    jbynes

    Status Member (Offline)

    Joined: Jan 28 2010

    Posts: 0

    Gold at $10,000

    Ladies and Gentlemen;

    I turn 72 this month.  This gives me some advantage of having lived through some history that many of you have not.  Although i was born after the great depression let me remind you that President Roosevelt seized privately held gold in 1933 (I think that was the year) and artificially pegged it at $32/oz.  So much for freedom, liberty and the pursuit of happiness.  I think it is reasonable to assume that in a national financial emergency history will repeat itself.  So the question becomes: as investors do we think it wise to wait for gold to rise to some imaginary number before selling or is it more important to wait until we see signs of government desperation?  I look forward to your thoughts and valued opinions.

     

    jbynes

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  • Mon, Oct 24, 2011 - 12:37am

    #14
    corn1945

    corn1945

    Status Member (Offline)

    Joined: Jun 12 2011

    Posts: 5

    Remember. They will change

    Remember. They will change the rules of the game to their benefit.

    I would not be surprised to see them adjust mortgages for inflation.

    Weimar had some retroactive taxation/clawback schemes after the hyperinflation. I’m not sure how effective they were, but they existed.

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  • Mon, Oct 24, 2011 - 1:12am

    #15

    KugsCheese

    Status Gold Member (Offline)

    Joined: Jan 01 2010

    Posts: 845

    Non-Linear Events

    The outcome is not nicely predictable.   For example, scare resource(s) and foreign debt holders may trigger trade war(s) that leads to real war.  Rome tried printing and it resulted in much war as opponents saw weakness.

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  • Mon, Oct 24, 2011 - 2:06am

    Reply to #12

    Tom Page

    Status Silver Member (Offline)

    Joined: Sep 26 2008

    Posts: 266

    straight wrote: if you are

    [quote=straight]
     if you are that confident in an inflationary future then surely the best play bar none is to go into massive debt and use the money to buy gold/silver.
    the debt will become easier to pay off with rising inflation and the value of the gold and silver will rise… indeed you will be able to pay off the debt with some of the gold and silver.
    all you need is someone to lend you the cash… easy enough in this environment.
    if you are wrong then you are royally screwed as there will be less money in the system to pay down the debt and the value of the gold and silver will drop …. 
    [/quote]
    My take is debts don’t get easier to pay off if your wages don’t increase at the same rate as inflation.  Inflation also can result in having to spend more money on the things you need, leaving less money to pay off debt.  One also has to be disciplined to not be taking on additional debt along the way.  
    I’ve seen my wages barely increase with the official rate of inflation around 3% the past years, while expenses have risen more like the true rate of inflation suggested by John Williams at Shadowstats.com.  Plus increasing complexity in life has added additional expenses.  Debt is harder than ever for me to pay off. But PMs may still be good insurance for protecting existing wealth.

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  • Mon, Oct 24, 2011 - 3:43am

    #16
    paulpu

    paulpu

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    two statements which I have

    two statements which I have heart before and heart here again and which seem to contradict each other.  

    1. the Fed has the ability to create infinite amounts of money

    2.  the Fed’s balance sheet would be under stress or insolvent, if interest rates raise 50 basis points

    Why do we care about the Fed balance sheet?  Can someone explain?  Thanx

     

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  • Mon, Oct 24, 2011 - 3:48am

    Reply to #12

    Damnthematrix

    Status Diamond Member (Offline)

    Joined: Aug 09 2008

    Posts: 1132

    Johnny Oxygen

    [quote=Johnny Oxygen][quote=straight]
     if you are that confident in an inflationary future then surely the best play bar none is to go into massive debt and use the money to buy gold/silver.
    the debt will become easier to pay off with rising inflation and the value of the gold and silver will rise… indeed you will be able to pay off the debt with some of the gold and silver.
    all you need is someone to lend you the cash… easy enough in this environment.
    if you are wrong then you are royally screwed as there will be less money in the system to pay down the debt and the value of the gold and silver will drop …. 
    [/quote]
    Remember. They will change the rules of the game to their benefit.
    I would not be surprised to see them adjust mortgages for inflation.
     
    [/quote]
    I was wondering about this too……  because here in Australia, where our Federal Reserve Bank is NOT privately owned, but IS independent of the government, inflation is "controlled" by the Fed by manipulating interest rates.  Unlike US rates which are around zero, ours is ~ 5.5%.  What will it go to if inflation hits 10/20/30/40% or, God forbid, more?
    Who "manipulates" interest rates in the US?  Is it not the Fed? (Bernanke was responsible for the zero rates was he not?)
    Mike

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  • Mon, Oct 24, 2011 - 3:53am

    #17

    Damnthematrix

    Status Diamond Member (Offline)

    Joined: Aug 09 2008

    Posts: 1132

    can't see it......

    I can’t see how a deflationary spiral is possible at a time when all commodities become rarer and rarer.  Like if oil drops to $60, I’ll bet oil companies will simply stop pumping it.  Why would they sell to us at a loss?  And we all know what happens when oil becomes unavailable… the whole world stops.

    We’ve never been "here" before.  So I can’t see how anyone can predict anything with any accuracy.  We really are in uncharted territories.

    Mike

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  • Mon, Oct 24, 2011 - 5:14am

    Reply to #11

    JAG

    Status Silver Member (Offline)

    Joined: Oct 26 2008

    Posts: 240

    Jim H wrote:If you want to

    [quote=Jim H]
    If you want to enter a kind of anti-matter CM.com universe, the best place to go is this post, which is a counter to Chris’ post about commodity inflation ahead;
    http://theautomaticearth.blogspot.com/2011/10/october-3-2011-commodities-and.html
    [/quote]
    Hey Jim, thanks for that link. I don’t think I have seen this.
    I don’t read TAE because I don’t like Ilargi’s writing style (too whiny), though I occasionally visit to see if Stoneliegh has written anything new. 
    Regarding your comment that I should follow the TAE crowd; I think you missed my point. It’s not about which blogger to blindly follow, it’s about keeping your mind open to the unkown. You can’t keep an open mind if it’s preoccupied with self-image, and group-think fosters self-image at the expense of individual creativity and idependent thinking. 
    Best…Jeff
     

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  • Mon, Oct 24, 2011 - 6:41am

    #18
    SPAM_anil007

    SPAM_anil007

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    Paul Brodsky: The Seeds of Our Destruction Were - And Still Are

    ~Spam~

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  • Mon, Oct 24, 2011 - 8:12am

    #19

    Mark_BC

    Status Bronze Member (Offline)

    Joined: Apr 30 2010

    Posts: 320

    Regarding keeping an open

    Regarding keeping an open mind, without doing a statistical analysis, I think we’ve seen more pieces on CM.com lately by deflationists than hyperinflationists, and Chris has a regular debate with Mish the deflationist. I doubt you’d see that kind of open mindedness from most deflationist blogs.

    I would like to learn more about the deflationsts’ arguments, but in the big picture, the US dollar is I believe the longest lasting fiat currency in history so I can’t take the deflationists’ arguments too seriously because I see nothing special about the dollar that would lend it to lasting any longer than previous fiat currencies, especially given the amount of abuse it has taken lately.

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  • Mon, Oct 24, 2011 - 8:47am

    #20
    plato1965

    plato1965

    Status Bronze Member (Offline)

    Joined: Feb 18 2009

    Posts: 86

     Playing devils

     Playing devils advocate…

     Maybe the dollar isn’t *really* a fiat currency.. at least in the conventional sense..

     Historically most have been national currencies backed by force / taxation…

     The dollar is backed by those factors within the US sure.. , but in external reserve currence role, you could argue it’s essentially oil / defence backed.

     

     

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  • Mon, Oct 24, 2011 - 9:43am

    #21

    Arthur Robey

    Status Platinum Member (Offline)

    Joined: Feb 03 2010

    Posts: 1814

    Fool Gadaffi's gold

    , but in external reserve currence role, you could argue it’s essentially oil / defence backed.

    Plato.

    Thanks P.

    Yes, the petrodollar. All oil must be paid in dollars or we bash you on the head. In order to buy oil, them foreigners have to get US$. That makes the greenback desireable.

    Nice. Until the oil supply goes funny and then the US$ goes funny too. Oops. That is what we see. All else is stuff and nonsence.

    I heard that Gadaffi wanted gold for his oil and wanted other oil countries to follow suit. I guess he wont be makeing that mistake again.

     

     

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  • Mon, Oct 24, 2011 - 12:21pm

    Reply to #21

    KugsCheese

    Status Gold Member (Offline)

    Joined: Jan 01 2010

    Posts: 845

    Arthur Robey wrote: , but

    [quote=Arthur Robey]

    , but in external reserve currence role, you could argue it’s essentially oil / defence backed.

    Plato.
    Thanks P.
    Yes, the petrodollar. All oil must be paid in dollars or we bash you on the head. In order to buy oil, them foreigners have to get US$. That makes the greenback desireable.
    Nice. Until the oil supply goes funny and then the US$ goes funny too. Oops. That is what we see. All else is stuff and nonsence.
    I heard that Gadaffi wanted gold for his oil and wanted other oil countries to follow suit. I guess he wont be makeing that mistake again.
    [/quote]
    I was always scratching my head over why the US (via NATO) attacked Libya.  Yes, old wounds were scarred but GWB reached out to the dictator so the policy did not make sense on the global stage.  Unless the gold payment for oil was a true threat…

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  • Mon, Oct 24, 2011 - 12:27pm

    Reply to #16

    KugsCheese

    Status Gold Member (Offline)

    Joined: Jan 01 2010

    Posts: 845

    paulpu wrote:two statements

    [quote=paulpu]
    two statements which I have heart before and heart here again and which seem to contradict each other.  
    1. the Fed has the ability to create infinite amounts of money
     
    2.  the Fed’s balance sheet would be under stress or insolvent, if interest rates raise 50 basis points

    Why do we care about the Fed balance sheet?  Can someone explain?  Thanx

     
    [/quote]
    The FED has some of the banks reserves on its books for which it pays interest; this is one of the reasons credit lending is not good as banks can make easy money on this FED loan instead of the costly prusuit of credit worthy private loans.  See Dexia article http://www.starnewsonline.com/article/20111022/ZNYT01/110223003/1005/sports.   But how does the FED go insolvent when it is the central bank and can print money? 

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  • Mon, Oct 24, 2011 - 12:29pm

    Reply to #20

    KugsCheese

    Status Gold Member (Offline)

    Joined: Jan 01 2010

    Posts: 845

    plato1965 wrote: Playing

    [quote=plato1965] Playing devils advocate…
     Maybe the dollar isn’t *really* a fiat currency.. at least in the conventional sense..
     Historically most have been national currencies backed by force / taxation…
     The dollar is backed by those factors within the US sure.. , but in external reserve currence role, you could argue it’s essentially oil / defence backed.
    [/quote]
    Ask England about reserve currency.  Maybe oil will start trading in Yuan at some point, for example.

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  • Mon, Oct 24, 2011 - 1:45pm

    Reply to #16

    Tom Page

    Status Silver Member (Offline)

    Joined: Sep 26 2008

    Posts: 266

    paulpu wrote:two statements

    [quote=paulpu]
    two statements which I have heart before and heart here again and which seem to contradict each other.  
    1. the Fed has the ability to create infinite amounts of money
     
    2.  the Fed’s balance sheet would be under stress or insolvent, if interest rates raise 50 basis points

    Why do we care about the Fed balance sheet?  Can someone explain?  Thanx

     
     
    [/quote]
    My basic understanding…
    The Federal Reserve Balance Sheet is linked here, consolodated in Table 8.
    http://www.federalreserve.gov/monetarypolicy/bst_frliabilities.htm
    Assets included Treasuries, Agency debt, and Mortgage Backed Securities.
    Liabilities include Federal Reserve Notes and deposits from institutions and other junk stuff from bailouts.
    The Fed had no theoretical limit to expansion of the balance sheet by printing money and purchasing assets.
    But the Fed can only reduce its balance sheet by the value of assets it sells.  If interest rates rise, the market value of existing bonds etc. on the balance sheet  decreases.  So that would make it harder to pull back money out of the system if the Fed decides that is needed.  Until it’s needed, maybe an insolvent balance sheet doesn’t mater?

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  • Mon, Oct 24, 2011 - 2:10pm

    #22
    plato1965

    plato1965

    Status Bronze Member (Offline)

    Joined: Feb 18 2009

    Posts: 86

    FOFOA's dilemma

     I’d like to introduce a FOFOA concept.. the separation of currency and saving.

     

     The dollar as the temporal medium of exchange.. lubricant of world trade and development.. and a blessing..

     I’m dubious about it a vehicle for saving.. unless.. you believe current conditions are sustainable.. and 99 years of "price stability" indicates otherwise..

     Transacting.. day to day.. hour to hour…  T=0 .. the $ and euro.. and (insert curency here) – are fine..

     Long term saving.. T=+20 , +40 , +OO   dollar denominated debt a good option.. ???

     How long does the OPEC / FED / Gold triangle stay stable ?

     … your guess is as good as mine,.

     

     

     

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  • Mon, Oct 24, 2011 - 2:26pm

    #23
    HarryFlashman

    HarryFlashman

    Status Member (Offline)

    Joined: Jul 31 2008

    Posts: 33

    Pound?

    Surely the British pound would be the longest lasting fiat currency,or am I making a mistake?

     

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  • Mon, Oct 24, 2011 - 3:23pm

    #24
    plato1965

    plato1965

    Status Bronze Member (Offline)

    Joined: Feb 18 2009

    Posts: 86

    nominally.. yes.

     http://www.financialsense.com/contributors/dominc-frisby/the-long-and-tragic-history-of-the-british-pound

     nominally.. yes.

     

     in nomine Offa of Mercia, et Newton, et spirtitus Mervyn.

     

     

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  • Mon, Oct 24, 2011 - 10:39pm

    #25

    Damnthematrix

    Status Diamond Member (Offline)

    Joined: Aug 09 2008

    Posts: 1132

    (No subject)

    http://a6.sphotos.ak.fbcdn.net/hphotos-ak-snc6/226077_1745101502041_1073861966_31537549_4712792_n.jpg

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  • Wed, Dec 07, 2011 - 3:46am

    #26
    SPAM_Sell Gold

    SPAM_Sell Gold

    Status Member (Offline)

    Joined: Dec 07 2011

    Posts: 0

    UK Pound...

    "Surely the British pound would be the longest lasting fiat currency,or am I making a mistake?"

              -I would think so? Isn’t this correct? … gold value per gram

     

     

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