The Dollar versus the Ruble, a very interesting comparison.
December 16, 2014 Castries, Saint Lucia
Last night, the Russian central bank announced a shock decision to hike up its key interest rate from 10.5% to 17%, effective immediately. Incredible.
On Monday alone the ruble declined more than 9% against the dollar, and almost 50% in 2014. It looks like a massacre.
If you listen to conventional financial news, they�ll all tell you that you�d have to be insane to own anything in Russia right now�stocks, bonds, currency, etc.
They�ll tell you that the ruble is in freefall, and that the dollar is the place to be.
But if you have been a reader of this column for any length of time, you know that I am a very data-driven person.
So� just for kicks, I decided to dive into the numbers and make an objective comparison between the US dollar and the Russian ruble.
The results might surprise you.
First of all, I start off with the premise that ALL paper currencies are fundamentally flawed.
Our global monetary system is absurd�the idea of letting unelected central bankers conjure as much money as they want to out of thin air is simply insane.
But it is true that some fiat currencies have better fundamentals than others. And if you want to understand the health of a currency, it�s imperative to look at the ISSUER of that currency, i.e. the central bank.
As with any bank, one of the most important metrics in determining a central bank�s financial health is its level of solvency.
Specifically we look at the bank�s capital (i.e. net assets) as a percentage of its total balance sheet.
The US Federal Reserve only has a basic capital ratio of 1.26%. Talk about razor thin. (This is down from 4.5% just a few years ago)
That means if the value of the Fed�s assets declines by only 1.26%, the issuer of the world�s dominant reserve currency becomes insolvent.
Now, what happens to the liabilities of an insolvent entity? They decrease in value. Just like how Greek bonds (the liabilities of the Greek government) collapsed a few years ago.
What are the Fed�s liabilities? Open your wallet. Those green pieces of paper aren�t �dollars�. Just look. They have �Federal Reserve Note� (i.e. debt) printed on them.
So the Fed�s pitiful financial condition directly affects the value of the dollar over the long-term.
On the other hand, the Russian central bank�s ratio is 12.5%�literally almost TEN TIMES GREATER than the Fed.
Capital cushion is crucial because when the unsuspected happens, this is what can help keep you afloat.
Think about it: you might be able to keep going without savings, perhaps even accumulating debt, but only until something happens out of the blue.
Until your car breaks down, or you need to go to the hospital, for example. Then all of a sudden, your lack of capital can become a serious issue.
Another important metric is gold. As I mentioned, since all fiat currencies are fundamentally flawed, it�s important to see the amount of REAL ASSETS that a central bank holds in reserve.
To make an apples-to-apples comparison, we look at a central bank�s GOLD reserves as a percentage of the money supply, i.e. how much gold backs the money supply.
In Russia, it�s 6.2%. And rising. Last year it was 5.5%, and the central bank is continuing to heavily stockpile more.
How much gold backs the dollar?
Precisely zero point zero percent. Zilch. Nada.
The Fed doesn�t own gold. It loudly proclaims this on its own website: �The Federal Reserve does not own gold.�
It holds �certificates� which are redeemable for US dollars. But there�s not a single ounce of gold backing the US dollar.
So� with no gold and pitifully razor thin solvency levels, it really wouldn�t take much of a shock to topple the dollar.
By comparison, the ruble is much better capitalized and actually has something backing it.
Now, I�m not necessarily advocating to buy the ruble, but hard, publicly available numbers clearly demonstrate the discrepancy between �sentiment� and objective data.
And at a time when the ruble and the whole Russian economy have been beaten down so much that Apple alone is now worth more than the whole Russian stock market, Russian assets certainly make for an interesting speculation.
The bottom line, however, is�if you wouldn�t own the ruble, then what are you doing holding 100% of your assets in the dollar?
Sovereign Man�s Tim Staermose is currently on the ground in Sydney and was literally a block away when yesterday�s tragic events unfolded. Here�s his first hand account.
RW, your article is written by the same guy who predicted $50,000.00 per ounce gold back in March of this year.
He's a kook.
Well, he may be a kook and so on and so forth. But it seems that two points the article makes are quite sound, even if he is a kook.
The first is the shakiness of fiat currencies. There is no doubt that value of the dollar has depreciated greatly over the years. That trend to devaluation will continue and the kook is quite correct about that. The "when" and the "how bad" are uncertain but the "direction" is clear and it is down. In the short term, the dollar may go up but then it will resume its decline for sure.
The second point of the article is simply one of diversification to investments other than the dollar. Again, quite sound.
When I was a youngin' I could purchase a gallon of gasoline for 2 silver dimes. Todays melt value for two silver dimes according to coinflation.com is approximately $1.16 each, with gas here at $2.36 per gallon today, I can still purchase in a round about way, a gallon of gas for two silver dimes. The very reason to keep some silver and gold IMHO, though I do agree, that you can't eat it.
Gold Standard has failed 3 times in the last 200 years, it is NOT a flawless system. Value is ALWAYS in the mind of the people, that's the fundamental truth of ANY currency. Once the people are no longer interested in following your "rules" it failes; even if it's gold.
The Gold Standard failed in the 1860's, it failed at the turn of the 20th century, and it failed in the early 1920's. Three such failures is why the entire world abandoned the gold standard. The gold standard doesn't allow for ANY currency manipulation in times of crisis. People see the words "currency manipulation" and just assume it's some sort of scam, but it's sound financial process that has proven to work time and time again to stave off the huge failures of the gold standard. You gotta ask yourself, if the Gold Standard is so great, why was it abandoned by literally every nation in the world? There are HUGE problems with the Gold Standard.
Fiat currency offers a lot of options that gold doesn't have, but a fiat currency, like gold is based on perception of value. If the perception of value is eroded, then it's game over...and it doesn't matter what standard you're on then.
Have there been any fiat currencies that have not failed in the past?
There certainly have, no doubt. Ours nearly failed during the Great Depression. The difference mostly, fiat currency gives you the ability to make changes to ward off smaller issues before they become bigger issues. Gold standard doesn't allow for that. Gold standard tends to work very well when things are going well. It's when all hell breaks loose that it tends to fail.
The big problem with a gold standard failure is, it tends to go worldwide when it does fail; and that you don't see with a fiat currency (but could happen now that the Euro exists).
But to be honest, there is no perfect currency system and there never will be. Because its all based on a perceived value.
The failure of the gold standard in the '20's started in Germany in 1919. Germany had depleted the bulk of their gold during WWII (much of which ended up in US banks; we held nearly 2/3 of the world�s gold at the end of WWI). So the gold that existed in German banks didn�t reflect the GDP of Germany at all. Meaning, if you were to pay the German workers what they were owed, in D- Marks, there wasn�t enough currency to go around. The system was completely out of balance and became irrelevant. So the German public dumped it and began using Pound Sterling and the Franc. Eventually over the next two years that failure would happen in London and Paris, and eventually all of Europe. The only country that had enough gold at that time was the US (actually we had a huge surplus, and had to take a good deal of gold out of circulation); we were the only nation that had gold in sufficient quantities to cover payroll for all of America. This is right about the time that gold mining production stopped matching worldwide growth of currency also.
I would have to see more documentation on those events...
It's in books, not little snippets on the internet (or if it is, I don't know where). If you take a macro-economics course, it should be in your text book. Here's the updated version from the class I took: http://www.amazon.com/Macroeconomics-N-Gregory-Mankiw/dp/1429240024
Also Google up the Genoa Conference of 1922 which was a conference on how to return to the gold standard (after its failure)...and in fact lead to the eventual full abandonment of the gold standard. First by not minting gold coin, then by finally just converting to a fiat currency.
Read what I said in my previous post about the 1919 failure in Germany, it makes sense.
Cyprus "bail-in" is the blue print for American asset confiscation when inflation eats out the banks. So says the fellow you call a kook.
And 1974 patterns in gold seem to be exactly what is happening now; manipulate the gold down through naked shorts, coil the spring and then jump on and let it roll on up and make gajillions... I think that is what the banksters are doing now.
You can only manipulate gold down for so long. Cannot do it forever.
They are not manipulating gold. Gold goes down during a bull market in stocks. Gold won't begin heading north again until interest rates start jumping up quickly.
The Gold standard also failed the Spaniards back in the 1500's. They brought so much gold back from the New World they experienced 500% inflation.
I am going to look hard at the events Gungeek is talking about; but the influx of Gold from the New World is the only real time that I know of that the value of gold went down for actual physcical non-flim-flam reasons.
The Keynsian fiat flim flammers don't want currency tied to reality because governments like creating money out of thin air; but the charade cannot last forever. The only precious metal backing our fiat paper is aircraft grade aluminum formed into B-52 bombers. Folks take our money because we can and do blow folks up.
That is where I am at in my dull world of groping and wandering about in the dark. Gonna go back and re-read "The Case for Gold"
They are not manipulating gold. Gold goes down during a bull market in stocks. Gold won't begin heading north again until interest rates start jumping up quickly.
At the very beginning of the take down in gold in recent years it all started off by naked short selling. As I recall...
They are not manipulating gold. Gold goes down during a bull market in stocks. Gold won't begin heading north again until interest rates start jumping up quickly.
Fact of the matter is that the Fed is "in" a number of markets.
Also, you may want to check the correlation of gold and the DOW. Often they move in concert. Depends upon the time period chosen depending on how one desires to promote a premise.
The Gold standard also failed the Spaniards back in the 1500's. They brought so much gold back from the New World they experienced 500% inflation.
I am going to look hard at the events Gungeek is talking about; but the influx of Gold from the New World is the only real time that I know of that the value of gold went down for actual physcical non-flim-flam reasons.
The Keynsian fiat flim flammers don't want currency tied to reality because governments like creating money out of thin air; but the charade cannot last forever. The only precious metal backing our fiat paper is aircraft grade aluminum formed into B-52 bombers. Folks take our money because we can and do blow folks up.
That is where I am at in my dull world of groping and wandering about in the dark. Gonna go back and re-read "The Case for Gold"
Coming to a theater near you!
My opinion... fwiw...
Gold has over the centuries been considered to be "money." There have been times when it trades erratically. Sometimes it seems to trade as a commodity and is subject to price fluctuations caused by simple supply and demand of the physical metal. Sometimes it trades as a "currency" or as true "money." When it trades as a currency, value moves from fiat to some type of gold investment vehicle. Could be stocks, futures or physical.
In my opinion, the death of the dollar and financial convultions are assured but I only know that it is inevitable and in the future. The forecast of $50,000 per ounce is easily seen as possible BUT before the dollar trades like the ole German mark, our gov't will step in and probably stabilize the world financial system. Check out the SDR. It is already in place and may be used by large corporations and governments to settle debts much like the BIS does now. The "dollar" will likely be stabilized before it devalues too much and be restricted to domestic use only. This means a two tier monetary system...one for the peasants...the dollar... and the SDR for the elites.
Note that the value of the SDR will be a combo of commodities such as oil, a basket of annointed currencies and gold.
TF
btw... check out the long term relationship between gold and a barrel of oil. An ounce of gold, over longer terms, trades for 12-19 times the price of a barrel of oil. Seems to average about 13-14..that it gold at $1400 and oil at $100. When we are out of whack like we are now, there is something big coming and it will likely not make us happier.
The drop in oil price and russian selling of gold lead me to think gold is going lower....gold is overvalued measured against oil .... in the short term.
My forecast? ... gold and oil both going lower then snapping back much higher in later 2015 - early 2016
They are not manipulating gold. Gold goes down during a bull market in stocks. Gold won't begin heading north again until interest rates start jumping up quickly.
Fact of the matter is that the Fed is "in" a number of markets.
Also, you may want to check the correlation of gold and the DOW. Often they move in concert. Depends upon the time period chosen depending on how one desires to promote a premise.
TF
Martenson, another nut, who predicted we were already at peak oil in 2008, predicting oil was headed to $200.00 a barrel.
He reminds me of Jevons prediction that we were at peak coal in the 60's....1860's that is. We have more reserved now then ever.
They are not manipulating gold. Gold goes down during a bull market in stocks. Gold won't begin heading north again until interest rates start jumping up quickly.
Fact of the matter is that the Fed is "in" a number of markets.
Also, you may want to check the correlation of gold and the DOW. Often they move in concert. Depends upon the time period chosen depending on how one desires to promote a premise.
TF
Martenson, another nut, who predicted we were already at peak oil in 2008, predicting oil was headed to $200.00 a barrel.
He reminds me of Jevons prediction that we were at peak coal in the 60's....1860's that is. We have more reserved now then ever.
Martenson is just another permabear.
AS,
Abusive fallacy � a subtype of "ad hominem" when it turns into verbal abuse of the opponent rather than arguing about the originally proposed argument.
You seem not able to participate without resorting to discrediting an author or premise by simply dismissing them as a "kook."
I think you should do a quick internet search and post some links.
Why should they also be accepted by private persons in private transactions in exchange for goods and services? The short answer�and the right answer�is that private persons accept these pieces of paper because they are confident that others will. The pieces of green paper have value because everybody thinks they have value. Everybody thinks they have value because in everybody's experience they have had value... Money Mischief (1992), Ch. 2 The Mystery of Money
So what happens when folks lose that belief? That thought is already with us and is a growing concern in the US.
MF charted the course and set the US on its current tack.
Milton Freidman took the easy way out and traded away long term stability for short term gains. May have been in the pocket of the bankers and politicians. He was pro debt and pro inflation but, in his favor, he did seem to know that limits existed. That seems forgotten now.
Debt does not go away. It is always paid. By someone in some way.
The short-run correlation between returns on gold and returns on US stock price indices is small and negative and for some series and time periods insignificantly different from zero.... Only short-run relationships are evident. Granger causality tests find evidence of unidirectional causality from US stock returns to returns on the gold price set in the London morning fixing and the closing price. For the price set in the afternoon fixing, there is clear evidence of feedback between the markets for gold and US stocks.
The short-run correlation between returns on gold and returns on US stock price indices is small and negative and for some series and time periods insignificantly different from zero.... Only short-run relationships are evident. Granger causality tests find evidence of unidirectional causality from US stock returns to returns on the gold price set in the London morning fixing and the closing price. For the price set in the afternoon fixing, there is clear evidence of feedback between the markets for gold and US stocks.
Here's a peer reviewed article using a multiple linear regression model, which once again found a negative correlation between Gold prices and stock prices, but found a strong positive correlation between M1 and Gold Prices, which of course is what Uncle Milton said in the video I posted above:
The short-run correlation between returns on gold and returns on US stock price indices is small and negative and for some series and time periods insignificantly different from zero.... Only short-run relationships are evident. Granger causality tests find evidence of unidirectional causality from US stock returns to returns on the gold price set in the London morning fixing and the closing price. For the price set in the afternoon fixing, there is clear evidence of feedback between the markets for gold and US stocks.
AS,
And your point is what?
TF
The point is, exactly what I said that sparked you off.
The correlation between equities and gold is negative, don't buy gold in a bull market.
Why should they also be accepted by private persons in private transactions in exchange for goods and services? The short answer�and the right answer�is that private persons accept these pieces of paper because they are confident that others will. The pieces of green paper have value because everybody thinks they have value. Everybody thinks they have value because in everybody's experience they have had value... Money Mischief (1992), Ch. 2 The Mystery of Money
So what happens when folks lose that belief? That thought is already with us and is a growing concern in the US.
MF charted the course and set the US on its current tack.
Milton Freidman took the easy way out and traded away long term stability for short term gains. May have been in the pocket of the bankers and politicians. He was pro debt and pro inflation but, in his favor, he did seem to know that limits existed. That seems forgotten now.
Debt does not go away. It is always paid. By someone in some way.
TF
"The pieces of green paper have value because everybody thinks they have value"
I'd make one small modification to the above.
The pieces of green paper have value because everybody's thinks they have value agreed to accept them as a medium of exchange.
We all know those little green slips of paper have not real value. We've all just agreed to use them instead of barter.
As for Milton Friedman believing in inflation, he was in favor of a Constitutional Amendment limiting the growth of the money supply, so to say he was in favor of inflation is just not true.
Why should they also be accepted by private persons in private transactions in exchange for goods and services? The short answer�and the right answer�is that private persons accept these pieces of paper because they are confident that others will. The pieces of green paper have value because everybody thinks they have value. Everybody thinks they have value because in everybody's experience they have had value... Money Mischief (1992), Ch. 2 The Mystery of Money
So what happens when folks lose that belief? That thought is already with us and is a growing concern in the US.
MF charted the course and set the US on its current tack.
Milton Freidman took the easy way out and traded away long term stability for short term gains. May have been in the pocket of the bankers and politicians. He was pro debt and pro inflation but, in his favor, he did seem to know that limits existed. That seems forgotten now.
Debt does not go away. It is always paid. By someone in some way.
TF
"The pieces of green paper have value because everybody thinks they have value"
I'd make one small modification to the above.
The pieces of green paper have value because everybody's thinks they have value agreed to accept them as a medium of exchange.
We all know those little green slips of paper have not real value. We've all just agreed to use them instead of barter.
As for Milton Friedman believing in inflation, he was in favor of a Constitutional Amendment limiting the growth of the money supply, so to say he was in favor of inflation is just not true.
AS,
I wonder what he meant when he said this:
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. � A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society. The Counter-Revolution in Monetary Theory (1970)
This is what we did and it got out of hand.
From another article on MF:
"Friedman was the main proponent of the monetarist school of economics. He maintained that there is a close and stable association between inflation and the money supply, mainly that inflation could be avoided with proper regulation of the monetary base's growth rate. He famously used the analogy of "dropping money out of a helicopter.",[40] in order to avoid dealing with money injection mechanisms and other factors that would overcomplicate his models.
His protege Ben Bernanke famously quoted MF in regard to the use of helicopters.
I would think that he would not have favored the current financial shenanigans and debt, he did in fact favor inflation as a spur to growth. Just got out of hand when politicians got drunk on monetary excess and the bankers got into it.
Why should they also be accepted by private persons in private transactions in exchange for goods and services? The short answer�and the right answer�is that private persons accept these pieces of paper because they are confident that others will. The pieces of green paper have value because everybody thinks they have value. Everybody thinks they have value because in everybody's experience they have had value... Money Mischief (1992), Ch. 2 The Mystery of Money
So what happens when folks lose that belief? That thought is already with us and is a growing concern in the US.
MF charted the course and set the US on its current tack.
Milton Freidman took the easy way out and traded away long term stability for short term gains. May have been in the pocket of the bankers and politicians. He was pro debt and pro inflation but, in his favor, he did seem to know that limits existed. That seems forgotten now.
Debt does not go away. It is always paid. By someone in some way.
TF
"The pieces of green paper have value because everybody thinks they have value"
I'd make one small modification to the above.
The pieces of green paper have value because everybody's thinks they have value agreed to accept them as a medium of exchange.
We all know those little green slips of paper have not real value. We've all just agreed to use them instead of barter.
As for Milton Friedman believing in inflation, he was in favor of a Constitutional Amendment limiting the growth of the money supply, so to say he was in favor of inflation is just not true.
AS,
I wonder what he meant when he said this:
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. � A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society. The Counter-Revolution in Monetary Theory (1970)
This is what we did and it got out of hand.
From another article on MF:
"Friedman was the main proponent of the monetarist school of economics. He maintained that there is a close and stable association between inflation and the money supply, mainly that inflation could be avoided with proper regulation of the monetary base's growth rate. He famously used the analogy of "dropping money out of a helicopter.",[40] in order to avoid dealing with money injection mechanisms and other factors that would overcomplicate his models.
His protege Ben Bernanke famously quoted MF in regard to the use of helicopters.
I would think that he would not have favored the current financial shenanigans and debt, he did in fact favor inflation as a spur to growth. Just got out of hand when politicians got drunk on monetary excess and the bankers got into it.
TF
You didn't watch the video....did you?
As for Nephew Ben, a Great Depression scholar, he saved us from an even worse financial crisis.
The short-run correlation between returns on gold and returns on US stock price indices is small and negative and for some series and time periods insignificantly different from zero.... Only short-run relationships are evident. Granger causality tests find evidence of unidirectional causality from US stock returns to returns on the gold price set in the London morning fixing and the closing price. For the price set in the afternoon fixing, there is clear evidence of feedback between the markets for gold and US stocks.
AS,
Not sure what your point is. I think you are trying to show that when the stock markets go up the gold price goes down and vice versa. As I said, they can move in concert. Gold prices and the Dow both moved up nicely from 2009 through 2012. Four years. In the ten year period from 2003 to 2012 gold and the DOW reached year end levels over the previous year 8 years out of ten.
It is a gross and erroneous error to believe that gold and the DOW have a reverse relationship. Nice and simple but wrong.
It could be that both the DOW and gold move up in the next two years.
Why should they also be accepted by private persons in private transactions in exchange for goods and services? The short answer�and the right answer�is that private persons accept these pieces of paper because they are confident that others will. The pieces of green paper have value because everybody thinks they have value. Everybody thinks they have value because in everybody's experience they have had value... Money Mischief (1992), Ch. 2 The Mystery of Money
So what happens when folks lose that belief? That thought is already with us and is a growing concern in the US.
MF charted the course and set the US on its current tack.
Milton Freidman took the easy way out and traded away long term stability for short term gains. May have been in the pocket of the bankers and politicians. He was pro debt and pro inflation but, in his favor, he did seem to know that limits existed. That seems forgotten now.
Debt does not go away. It is always paid. By someone in some way.
TF
"The pieces of green paper have value because everybody thinks they have value"
I'd make one small modification to the above.
The pieces of green paper have value because everybody's thinks they have value agreed to accept them as a medium of exchange.
We all know those little green slips of paper have not real value. We've all just agreed to use them instead of barter.
As for Milton Friedman believing in inflation, he was in favor of a Constitutional Amendment limiting the growth of the money supply, so to say he was in favor of inflation is just not true.
AS,
I wonder what he meant when he said this:
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. � A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society. The Counter-Revolution in Monetary Theory (1970)
This is what we did and it got out of hand.
From another article on MF:
"Friedman was the main proponent of the monetarist school of economics. He maintained that there is a close and stable association between inflation and the money supply, mainly that inflation could be avoided with proper regulation of the monetary base's growth rate. He famously used the analogy of "dropping money out of a helicopter.",[40] in order to avoid dealing with money injection mechanisms and other factors that would overcomplicate his models.
His protege Ben Bernanke famously quoted MF in regard to the use of helicopters.
I would think that he would not have favored the current financial shenanigans and debt, he did in fact favor inflation as a spur to growth. Just got out of hand when politicians got drunk on monetary excess and the bankers got into it.
TF
You didn't watch the video....did you?
As for Nephew Ben, a Great Depression scholar, he saved us from an even worse financial crisis.
AS,
Here you are making another broad and sweeping statement. "Ben saved us".... No, it was only a reprieve and he went right back to forcing the money supply. Ben has made the situation much worse.
You need to see how the money supply grew under dear Ben.
TF
btw... here is a link for YOU and a few more comments:
To combat deflation, Bernanke provided a prescription for the Federal Reserve to prevent it. He identified seven specific measures that the Fed can use to prevent deflation.
1) Increase the money supply (M1 and M2).
"The US government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."[1]
You need to understand that the activity of the "printing press" is not just some benign Fed program... it has sowed the seeds of the dollars destruction and the impoverishment of at least one generation of citizens. It is debt that we cannot repay without some sort of cost or repudiation.
Here you are making another broad and sweeping statement. "Ben saved us".... No, it was only a reprieve and he went right back to forcing the money supply. Ben has made the situation much worse.
You need to see how the money supply grew under dear Ben.
TF
btw... here is a link for YOU and a few more comments:
To combat deflation, Bernanke provided a prescription for the Federal Reserve to prevent it. He identified seven specific measures that the Fed can use to prevent deflation.
1) Increase the money supply (M1 and M2).
"The US government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."[1]
You need to understand that the activity of the "printing press" is not just some benign Fed program... it has sowed the seeds of the dollars destruction and the impoverishment of at least one generation of citizens. It is debt that we cannot repay without some sort of cost or repudiation.
TF
First, they didn't use the printing press, they used open market operations to purchase bonds. These purchases have stopped, and these bonds can be sold again. They will unwind it, or to extend your analogy, those little green pieces of paper can also be burned. This will become necessary as the velocity of money begins to normalize.
What Bernanke did was avoid prevent US capital markets markets from freezing by providing liquidity in a way that did not occur in 1929, because we all know how well THAT worked out for us.
As for M1 under Bernanke, yes I'm well aware of what happened to M1 under him, I'm also aware of what happened to the velocity of M1 under him:
Here's a peer reviewed article using a multiple linear regression model, which once again found a negative correlation between Gold prices and stock prices, but found a strong positive correlation between M1 and Gold Prices, which of course is what Uncle Milton said in the video I posted above:
Here is what you posted: "... Gold goes down during a bull market in stocks. ...."
To support this thesis you provide links to esoteric articles and proclaim your thesis to be defended. This is nothing more than obfuscation on your part.
Your statement is wrong period. Stick with me and I can show you in a couple of paragraphs. If one takes year end values for gold and the DOW from 2002 until 2012...it becomes clear.During this time period the Dow went up 157% and gold went up 398%. If the range is expanded to 2014, the DOW shows an increase of 288% while the Dow went up 212%.
Has the DOW been in a bull market? Yes....has gold been going up during that bull market? Yes...
No esoteric bankster baloney required to see it.
Does that mean that gold is a better buy than the DOW now? Not necessarily. Does that mean than one should forsake gold for the DOW? Not necessarily. The point is, gold can go up in a DOW bull market.
TF
btw, I am aware that dividends were not included in the above figures. THe conclusion is still the same.
1. They are very handy when it comes to settling private and public debts and provide a neat small package to do so versus carrying in a bag of potatoes into the barber shop to settle up on a haircut, or pay for my reloading components at the corner SG store.
2. They give one a universal basis to use as comparison of value. If establishment A charges $29.00 for a brick of primers and establishment B charges $37.00 for the same brick, one can then compare and decide on their purchase. That is depending on whether each establishment still accepts FRN's
On the other hand, gold and silver will get me from the possibility of our fiat currency being recalled and replaced with some other form of fiat currency. In other words it will get me from here to there, as and far as I know gold and silver have never been worth nothing. To me that is a good reason to have some on hand, same as having cash on hand.
1. They are very handy when it comes to settling private and public debts and provide a neat small package to do so versus carrying in a bag of potatoes into the barber shop to settle up on a haircut, or pay for my reloading components at the corner SG store.
2. They give one a universal basis to use as comparison of value. If establishment A charges $29.00 for a brick of primers and establishment B charges $37.00 for the same brick, one can then compare and decide on their purchase. That is depending on whether each establishment still accepts FRN's
On the other hand, gold and silver will get me from the possibility of our fiat currency being recalled and replaced with some other form of fiat currency. In other words it will get me from here to there, as and far as I know gold and silver have never been worth nothing. To me that is a good reason to have some on hand, same as having cash on hand.
Gold and Silver have been worth nothing. There we considered of no value to the American Indian. Specifically the Sioux called it "The rock that makes white men crazy".
Gold and Silver are also subject to inflation and deflation, and can also be debased or recalled. It happened in this country during the 1930's.
�Gold and Silver have been worth nothing. There we considered of no value to the American Indian. Specifically the Sioux called it "The rock that makes white men crazy".
Gold and Silver are also subject to inflation and deflation, and can also be debased or recalled. It happened in this country during the 1930's.�
It is also true that gold has used as a store of wealth and a vehicle of commerce for over 2500 years. Much of the world was on a �gold standard� until the 30�s. Gold was convertible to fiat currencies until Nixon went off in the early 70�s. An ounce of gold could been had for about 42 greenbacks. Today, it takes 1200 greenbacks to buy an ounce of gold. Does this mean that gold went up or that the dollar went down?
If gold is seen as stable, the dollar has lost 95% of its value in those 42 years. Takes 28 times more greenbacks to buy that ounce.
Now let�s look at how the dollar fared against oil. When Nixon disconnected the dollar and gold, oil was about $2 a barrel. It takes $56 dollars to buy a barrel today. Has the true �value� of oil gone up from $2 to $56 or has the value of the dollar, the number of dollars required to buy a barrel of oil risen as the dollar lost value? We all know the answer to this; the dollar has been degraded and has lost value. It has lost about 95% of its value.
Here is the point. It now takes 28 times more dollars to buy that ounce of gold and it now takes 28 times more dollars to buy that barrel of oil. Coincidence? I think not. Let�s look at it another way: a barrel of oil is worth a barrel of oil and an ounce of gold is an ounce of gold. They are commodities that have intrinsic use and in turn value to mankind.
Sorry to be boring but let�s look at this another way. Before the Nixon theft, it took 21 barrels of oil to buy an ounce of gold. That is at $42 and oil at $2. Today it takes 21 barrels of oil to buy an ounce of gold. Gold at $1200 and oil at $56�. 1200/56 = 21.4
The point is that both oil and gold have enduring value to the world and the fiat currencies they are measured in always� always� devalue and deteriorate.
Gold does indeed have enduring value, as does oil or an ounce of silver or an acre of farmland. The fiat currency has value but will ALWAYS be devalued. Want to give something to your kids or grandkids that will have value? Which do you give greenbacks or gold or silver?
My prediction? The dollar will collapse and gold, silver, land etc will �sky rocket� in terms of their �greenback� valuation. Gold may be $4800, oil may be at $224. The DOW may go up or down depending upon how some financial cataclysm develops. Could be DOW at 7000 but it could also be DOW at 50,000. When folks start to lose confidence in value of US debt obligations, those �dollars� will come out of the bond/T bill markets and rush into anything that can be perceived to be an inflation hedge or to have enduring value. Then here comes the �New Dollar.�
FDR confiscated wealth from the US citizenry once. He called gold in at $20.67 then devalued the dollar when he set gold at $32. Clear confiscatory practice. Stole gold and stole purchasing power from the public. This can of course happen again. While gold will almost certainly be part of the SDR basket, that does not mean that gold ownership could not be outlawed. Could mean a worldwide ban on gold mining. BUT, given how gov�ts work around the world, I don�t see this as effective or even likely. Most likely there will be a variety of excessive taxation measures. BTW, I have read that only the dumb sheep turned in their gold at $20.67. Much gold made it to Canada, Mexico and beyond.
So, gold has been �money� for 2500 years and I expect it will continue to be. In fact, one could argue gold has been of enduring value in all cultures engaged in �business� and �commerce� for the past 2500 years. But yes, not with the American Indians and Neanderthals and other primitive cultures. Who among thinks there won�t be a gold market alive and well in 10, 50 or 100 years?
To each his own, you pay your money and take your choice.
When Brenton Woods collapsed oil was at $3.56 a barrel, so your perfect correlation is lost. As for your understanding of Brenton Woods, it's also lacking. Fiat currencies could be converted into the Gold Backed dollar, and the dollar could be exchanged for gold at the "gold window". In August 1971 Nixon closed the gold window to eliminate the arbitrage opportunity, because, lets face it, $35.00 were not worth an ounce of gold at the time. As for changes in values of currencies, fiat or otherwise, that was Economist speak in terms of "constant dollars" and "purchasing power parity" to deal with these differences. As for FDR's gold grab, most of it was turned in at 20.67 an ounce. Over half of the 1.22 billion in gold outstanding was in certificate form. After the cut off date, 287 million in coin remained unaccounted for, indicating almost 80% was actually turned in. (Friedman, A Monetary History of the United States 1865-1960, 9th paperback edition, footnotes page 463-464.)
The relationship you express between Gold and Oil is nothing new. The Saudi's for along time have at some level unofficially thought of their price targets for oil in terms of gold. We can also see this in the econometric model I posted earlier where X(1) is the CRB commodities index. This index is heavily weighted to the price of oil.
As for Fiat currencies ALWAYS being devalued, let me as you this. HOW MUCH OF YOUR WEALTH IS ACTUALLY IN DOLLARS? If you were to look at the personal balance sheet of most americans, our assets are not in dollars. Sure you may have a few months worth of expenses in a plain savings account, but most of your assets are in equities, real-estate, bonds, and other real property such as pianos, antiques, guns and ammo. Some will have a position in precious metals, and may even have a position in foreign currencies.
As for what's considered currency during a true EOTW collapse, look at the Chinese famine of 1941. By and large, those most affected by the famine did not accept precious metals for barter, the two mediums of exchange quickly became gain and daughters.
If you are truly worried about a collapse, you might want to put aside a few Koku of rice (the Koku is an ancient Japanese currency equal to the amount of rice required to feed a man for a year), and have a few daughters.
One of the benefits of our current system is it allows the American participants the freedom to own a diversified set of assets to hedge the impacts of inflation, or for some profit from them.
As for what will our currency look like in 2500 years? I suspect with will be virtually all digital, or we will be back to gain and daughters.
As for your predicted collapse, when do you expect it to happen?
As usual you miss the point and then choose to purposely mischaracterize re-define my opinion in order to advance your agenda.
First let�s look at the FDR theft. You state � ...Over half of the 1.22 billion in gold outstanding was in certificate form. After the cut off date, 287 million in coin remained unaccounted for, indicating almost 80% was actually turned in�.� Of course gold in certificate form is not gold bullion. So, your point was what? Gold certificates were turned in but bullion not so much? So you be ok being required to turn in gold in certificate form and then have that same �certificate gold� revalued upward to $32?
Second, let�s look at your �issue� with Bretton Woods. Fact is, I never mentioned Bretton Woods and somehow you allege that I do not understand it???? Where are you coming from? �.and it is well known that the �collapse� of Bretton Woods was not a one time or spur of the moment happening. What did happen was Nixon closed the gold window because (the French in particular) were drawing down US gold reserves. The dollar was under attack. You picked $3.56 and linked that with Bretton Woods and somehow think I have made an erroneous statement. No, it is you obfuscating. You have only an agenda and no facts. No, you chose �Bretton Woods� so you could plug in a different price of oil. The result is the same NO MATTER what dates you choose. YOU even state that when you made mention of the Saudis and the long term relationship with oil ...... YOU agree with the premise!
So now let�s look at your statement about �fiat.� Here is what you posted: �....As for Fiat currencies ALWAYS being devalued, let me as you this. HOW MUCH OF YOUR WEALTH IS ACTUALLY IN DOLLARS? �.� So, what does my portfolio have to do with the statements about fiat and how it ALWAYS depreciates in value? What point are you trying to make? Let me help you along here by asking a question: If I have $10,000 in Chevron is that an investment in �fiat dollars� or in �oil.�
Now regarding your comment about the EOTW. So, American Indians and some but not all Chinese in 1941 had no use for gold. Is that it? How about American Indians today? Or the Chinese in 1942? Did you know that 5 gold coins got a Vietnamaese on to a US helicopter at the fall of Saigon? But, I tell you what, why don�t you do an internet search and see if Yap Islanders had any use for gold in the 18th century???? Let me ask you another question. Do you think that the OP�s question was �gold or not gold?� Is the question gold or fiat? Is that YOUR point? You seem to be saying that gold has no value or no place. Odd, gold has held value for centuries but you seem to think it is worthless as either an investment vehicle or even as a �doomsday� barter item.
Now let�s look at this statement you made: � �..If you are truly worried about a collapse, you might want to put aside a few Koku of rice ��.� Why would you allege that I have not done this? Here you go again, you do not have any idea if I have �rice� put away but you try to make an issue out of it. You do not know whereof you speak.
Here is another statement you make: � ...One of the benefits of our current system is it allows the American participants the freedom to own a diversified set of assets to hedge the impacts of inflation, or for some profit from them. �� Well hell, who would quibble with that? Did you include that statement because you think I disagree with it? WTH?
Now, as for MY predicted collapse. Ah yes�. MY collapse � oh boy...anyway, I have stated before that I do not know when but it is in the future. Who knows? How would I know that? My guess? Two to eight years if we do not have significant armed conflicts.
So, what does my portfolio have to do with the statements about fiat and how it ALWAYS depreciates in value?
It's a demonstration of the natural way we diversify our assets to protect against the evils of inflation.
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If I have $10,000 in Chevron is that an investment in �fiat dollars� or in �oil.�
Neither. It is a dollar denominated equity of an oil producer.
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You seem to be saying that gold has no value or no place.
I've said no such think. I just don't believe gold is the panacea that some people make it out to be. In addition, if you read closely, you will notice I qualified my statement to "those most affected by the famine", i.e. those who were starving to death. Gold still retained it value among those members of the aristocracy with a full belly.
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Is the question gold or fiat?
That is your question, not mine. Look at my original statement. I paraphrase, "gold goes down in a bull market". It was a simple statement regarding the simple truth that econometric modeling shows gold and equity prices are negatively correlated. The general rule is not to own gold in a bull market, but as you so aptly pointed out there are times when other variables may have a greater influence over the price of gold. In the above model, these include the size of M1 (or the running of the printing press as you call it), and commodity prices (which includes the price of oil).
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If you are truly worried about a collapse, you might want to put aside a few Koku of rice ��.� Why would you allege that I have not done this?
Actually, I intended to put in a disclaimer (that I missed), ...if you haven't, or a few more if you have.... My apology.
[quot]Did you include that statement because you think I disagree with it? WTH?[/quote] Why would I only include statements I thought you would disagree with? I thought we were having a conversation?
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My guess? Two to eight years if we do not have significant armed conflicts.
I give you credit for making such a bold prediction.
How severe do you think it will be. Are we talking 2008, 1929, or people in this country starving to death in the streets?
The third shows a longer term look at how gold and oil move together. As I had posted earlier, the ratio varies quite bit. It has been as low as ten or so and up in the ranges about 21 where it is now. If one looks at these graphs and thinks a bit, one can conclude that the dollar has lost 95% of its value since 1972. I expect this trend to continue in the coming years.
The third shows a longer term look at how gold and oil move together. As I had posted earlier, the ratio varies quite bit. It has been as low as ten or so and up in the ranges about 21 where it is now. If one looks at these graphs and thinks a bit, one can conclude that the dollar has lost 95% of its value since 1972. I expect this trend to continue in the coming years.
If you use the price deflator, between 1971 and 2011 the dollar lost 77.5% of it's value. It would take $4.44 in 2011 to buy the same goods and services you could buy in 1971. However if we extend you example and go back another 40 years, the would take $2.79 1971 dollars to purchase the same good and services as you could in 1931. During this 40 year period, the dollar lost 64% of it's value, much most of which we were on your coveted Gold Standard.
If you use the price deflator, between 1971 and 2011 the dollar lost 77.5% of it's value. It would take $4.44 in 2011 to buy the same goods and services you could buy in 1971. However if we extend you example and go back another 40 years, the would take $2.79 1971 dollars to purchase the same good and services as you could in 1931. During this 40 year period, the dollar lost 64% of it's value, much most of which we were on your coveted Gold Standard.
AS,
There you go again, majoring in minors. Also, you again are trying to put words in my mouth. How do you conclude that I "covet ... a Gold Standard?"
If you use the price deflator, between 1971 and 2011 the dollar lost 77.5% of it's value. It would take $4.44 in 2011 to buy the same goods and services you could buy in 1971. However if we extend you example and go back another 40 years, the would take $2.79 1971 dollars to purchase the same good and services as you could in 1931. During this 40 year period, the dollar lost 64% of it's value, much most of which we were on your coveted Gold Standard.
AS,
There you go again, majoring in minors. Also, you again are trying to put words in my mouth. How do you conclude that I "covet ... a Gold Standard?"
TF
You like to talk about the devaluation of fiat currencies, but ignore how asset back currencies can still devalue, as evidenced in my example.
If you use the price deflator, between 1971 and 2011 the dollar lost 77.5% of it's value. It would take $4.44 in 2011 to buy the same goods and services you could buy in 1971. However if we extend you example and go back another 40 years, the would take $2.79 1971 dollars to purchase the same good and services as you could in 1931. During this 40 year period, the dollar lost 64% of it's value, much most of which we were on your coveted Gold Standard.
AS,
There you go again, majoring in minors. Also, you again are trying to put words in my mouth. How do you conclude that I "covet ... a Gold Standard?"
TF
You like to talk about the devaluation of fiat currencies, but ignore how asset back currencies can still devalue, as evidenced in my example.
So, how severe is the collapse going to be?
AS,
I do like to talk about about fiat currency devaluation as that is a "today" issue for the US. Folks will be better equipped to deal with the financial issues of the day if they understand what is going on.
btw, why would one want to talk about "asset backed currencies?" Is that relevant to today or not?
I already commented on the possible outcomes of financial calamity.
TF, Gold backed is a subset of asset back currencies. I just used the broader term. As for their relevance today, the only currency still partially backed by an assets is the Swiss Franc, with is 40% gold backed.
As for the severity of the calamity, I'm asking about your vision of the severity less in terms of financial numbers (you commented on a possible $240 a barrel oil), but in terms of suffering. 10% unemployment? maybe 25%? Will inflation devalue the welfare checks to the point the underclass riots?
How does Republican control of both the House and Senate affect your timeline?
Are you assuming QE will not be reversed, an if it is, like I predict, how will that affect your model regarding the timing and severity of the calamity?
[quote=antelope_sniper]TF, Gold backed is a subset of asset back currencies. I just used the broader term. As for their relevance today, the only currency still partially backed by an assets is the Swiss Franc, with is 40% gold backed.
As for the severity of the calamity, I'm asking about your vision of the severity less in terms of financial numbers (you commented on a possible $240 a barrel oil), but in terms of suffering. 10% unemployment? maybe 25%? Will inflation devalue the welfare checks to the point the underclass riots?
How does Republican control of both the House and Senate affect your timeline?
Are you assuming QE will not be reversed, an if it is, like I predict, how will that affect your model regarding the timing and severity of the calamity? [/quote
AS,
OK, here are some thoughts:
1. - I do not "know" and my thoughts amount to only views and are certainly subject to change as parameters change. All thoughts will change if we see a �shooting war� of significant magnitude.
2. - I would not be surprised to see the DOW head up to 21,000 - 25,000 as the dollar appreciates, being the best currency amongst a host of other weaker currencies. This may happen in the next 18-24 months. Money begins to leave US bonds/t-bills. The world continues to see a gradual reduction in business activity as the QE, in its various forms, around the world does not yield economic growth. Yes, QE continues. Money begins to flow from other countries to the US. This movement of money takes place as folks become more and more concerned about the lack of growth in anything but debt. A gradual crisis of confidence builds and the smart money moves first. We will see "inflation" in asset prices as "money" loses confidence in financial instruments. This is why the stock market goes up. Money searches for any type of hard asset that is not someone else's "promise to pay." Gold moves up with the DOW and the dollar. Other commodities languish.
3. - A Republican Congress means little as far as �solutions.� Congress and the Federal govt� continue in a state of deadlock with recriminations and blame abounding.
4. - The situation with Russia and the ME seems to improve and politicians declare victory and vow to work on world economic growth. However, ME oil production is plagued by continuing political issues within the ME. They continue to fight amongst themselves.
4. - Unemployment continues to rise and the middle class is further pressed. US gov�t increases all types of benefits so as to reduce pressure on the populace. Taxes are increased in attempts to cut deficits. Much political unrest ensues. Divisive issues such as race relations get much worse. Weak government begins more class demonization. I would not be surprised to see riots of significant magnitude. Police responses are insufficient. Vigilante action is not uncommon in many areas. Some areas are peaceful and some are not. As always, avoid the big cities and the coasts.
4, - The chickens come home to roost on the immigration issue. Illegal aliens are on the voting rosters and their impact is huge. He who robs Peter to pay Paul can always count on the vote of Paul.
5A. - The economic situation does not improve and then money begins to move in ways that are sudden and disturbing. Oil and gold fluctuate madly. Currencies wobble and there is great media coverage of a worldwide financial calamity. World leaders get together and proclaim a new economic order must begin. We find that large corporation and countries have been settling business debts/payments using SDRs and this has been going on for a couple of years. World leaders pledge to support the �new currency� and most people are glad and believe in it because they are weary of the impoverishment, crime and trouble. Countries yield sovereignty to this �new economic order.� The USD remains in some form but may only be used in North America�and only by the peasantry.... the euro will be used in Europe and Africa and the �yuan� used in Asia. The SDR currency is valued by a basket of ever changing commodities and by the $, Euro and Yuan. This seems to work well for a while. Precious metals do well as they are large components of the SDR basket. The new economic order does not work well in many areas of the world and barter economies emerge. Some bartering will be on a very large scale. This happens in 5-15 years.
5B - The economic situation does not improve and then money begins to move in ways that are sudden and disturbing. Oil and gold fluctuate madly. Currencies wobble and there is great media coverage of a worldwide financial calamity. Somebody..? Russia perhaps does not make debt payments to their European banks. Banks begin to fail. Confidence is lost VERY quickly. Other nations and banks repudiate their debt and confiscate assets of depositors. Capital controls have been implemented. Gold� and other hard assets rise dramatically in price and nervous money searches for safe harbor. Commerce begins to break down as nobody can figure out how to get paid. Food deliveries stop ...etc� police are overwhelmed and have walked off the job in some areas. Martial law was declared at some point. We get a Mussolini type in power and the American populace are initially happy as some promise of order has come. We get a �new dollar.� Indonesia and Peru are two great examples of currency devaluation and replacement with some new monetary instrument. This happens in 5-10 years.
Perhaps. It seems to be like watching a boxing match. Our guy in the red,white and blue did pretty good for a couple of rounds but it is now the 12th round and he is getting badly beat up. We watch and wonder if the next punch will put him out� or maybe it will be a TKO � or maybe he will last all 15 rounds and there will be a decision. We think our man has lost, we just don�t know if by KO, TKO or decision. If the KO comes soon or he is out by TKO in 2017 or by decision in 2020, we don�t know, but this isn�t Hollywood and our man is not Rocky.
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