Checkout the bar for "Europe". My take on this is that this is the entire Eurozone - 17 nations. In which case, you need to get the bar and make it 1/17th as big, and this will tell you the average for each nation state in the Eurozone.
All seventeen nation states in the zone, combined, add up to about the same level of debt as, say, Norway or Sweden (two of the great poster-children of prudence) on their own.
And yet, the Eurozone is in a debt crisis? Interesting, no?
Let's not dwell too long on the size of that UK bar on the left... :-{
In many ways, it will be the paper longs that abandon the gold markets (forcing prices ever lower) even as the physical price soars. Yes, the shorts may make a killing but the money they make will be worthless!!!!!!
MF Global seems to be scaring a lot of participants off. And, be honest, who had heard of 'hypothecation' (let alone 're-re-re-re-rehypothecation') before last week? Seems like everyone and their dog is using it now.
Why did I pick this track? Who will be lonely in the market?
Why will this determine the price direction of paper gold?
Do you remember? I'm sure you can't - by this time, most people have never known anything different. Forty years is a long time in terms of a human life. But a mere blip on the timeline, when thinking in terms of collective human experience.
Forty years of the water in the pot being slowly brought to the boil, since it last boiled over and a new, bigger saucepan was called to action, the hob cleaned up. So slowly has this pot been brought to the boil, we shrimps haven't noticed what was happening. Little by little, the water got hotter. Slowly we each were allowed less and less freedom. An illusion of freedom, sure. But honestly, do you think the average person around you really gets to make the most important choices about their lives? And to change their mind if they want to? Do you? We choose what job we will do. But do we really? Do you like what you do? Have you ever considered a change of career path - but realised you can't afford to? Our wives stopped choosing to work, found themselves needing to in order to make ends meet. We all believe we deserve more, but this "more" comes at a cost. Your time. Your soul. Your individual liberty. Schools became child-minding factories, making sure they don't come to much harm as we toil to service our debts. Turning out well-programmed little beasts of burden, ready to take over the baton of debt slavery from us. They had better too! Because if they don't the system will implode. A wonderful inheritance. Given the demographics, and the scale of the existing debt burden, is it even possible for them to pull this feat off any more?
So..?
And now? The water begins to roll and bubble around us. It's almost at boiling point. Someone chose a saucepan that still isn't large enough for the ever-expanding volume of water within. There is going to be another mess on the hob to clear up, another alternative vessel will be identified. Perhaps this time a more suitable choice will be made, this problem of the natural drift towards ever-expanding debt can be properly contained in future? Maybe a magic, telescopic saucepan?
How did we live before this system of saving each other's debts and praying we can all pay them off? Do we really live in a world without limits? The history books know. Do you remember?
Well, there's me for a start! :-) Sleeping dogs don't lie forever.
Stating the obvious now, there's just over a week until the next MTM party at the ECB. I don't know about you, but I don't see them wishing to mark their assets low. Jus sayin'.
Everyone in the media, well I should say those very few people in the media that talk about economics and the euro debt problems in particular then, seems to consider only the idea of the ECB buying the bonds of the troubled sovereign nations. To prop up the decades-old game of "ignore the debt". Rolling over old problems. Kicking the can further down the road. Playing by the $IMFS rules. Making the creditors suck up the problem and bail out the debtors by caving in and buying up their debts as they need rolling over.
Why is it that nobody seems to be considering the alternative idea? That the debts won't be rolled over. That the can won't be kicked any more. That the debts won't be ignored any longer. That they will burn and go to debt heaven (or is it hell?). That perpetuating the $IMFS is not the only game in town.
Here is what I think will happen. The troubled sovereigns will default. The banks around the Eurozone will suffer massive losses as a result of the failed loans to those sovereigns. The member CBs of the ECB will QE some new base money into the system to replace the missing deposits at their banks — the money that won't be coming back to the savers due to the defaulting sovereign bonds.
There aren't more euros in the system, they're simply qualitatively different than the ones that were replaced. They are available to spend earlier than planned. Like, immediately. M1 base money replaced M3 credit money that was already in the system but vanished.
So, for example France and Germany will receive a massive infusion of new M1 base euros into their banks, to replace the missing M3 credit euros that can't be returned to depositors because the loan failed. There will be a much higher number of euros in the overall Eurozone that day than there would have been otherwise (they would otherwise have arrived later, as and when the loans were worked off by the debtor nations). But no more than would have been in the system later if everything had worked out according to the old plan. All this money was already baked into Eurozone M3 before.
A higher percentage of the euros in the system will reside in Germany and France — no more than were going to later anyway, in fact slightly less because there won't be the interest payments that would have rolled in over time too, but for today there are more than were previously planned. A lower percentage of current euros would also be resident in the defaulting sovereign nations than would have otherwise been the case today. On the plus side, they won't have to find the euros to pay the interest over time though. Or the loan principle.
The creditors have a bigger slice of the pie than before. The debtors have a smaller slice. More supply (supply brought forward from the previously-planned future) will have diluted the value of the euro today, earlier than planned, but the creditor nations will have been repaid in full for this dilution, and they are only receiving what they were scheduled to at a later date anyway. The dilution was going to happen over time anyway, it is simply brought forward to today. They are not down on the deal. You might even consider they are actually up on it, because they got their money back and can spend it early. The debtors are down on the deal, but at least still allowed to participate in the game as long as they agree to the new, stricter rules, and free from the shackles of their old debts. They'll have to learn to live within their means, but in the long run this is only healthy for them anyway.
What am I neglecting to factor into this scenario so far..? Could it be creditors elsewhere, outside the Eurozone, who can't dilute the euro money supply in their favour, like the Eurozone creditors, but who will also have a problem with the failed loans and an inability to return savings to their depositors? What will they have to do? They will have to make their own CB print the local currency to recapitalise their banks and make their depositors whole. Will this punish the debtors but bring the creditors out relatively better off? Or will it create a drop in exchange value for their local currency against the euro, because the supply most definitely then would have been immediately expanded beyond what was previously planned, not just early but previously unplanned. Is this rewarding the Eurozone members and punishing the non-Eurozone ex-creditors? I think so, yes. And, in particular of course, the Eurozone creditor nations — who now have a bigger slice of the cherry pie waiting for them to eat it, while the non-Eurozone creditors suck on a cup of their own brand bone sucking sauce.
In the real world around you, there are only so many things available. In the pretend world of money, there are an unlimited number of claims to those real things.
If we could somehow scrape together a comprehensive list of all the things in the world that anyone could possibly buy, add up the total value of them all, we'd establish that a very large amount of money would be required for all those things to be bought.
But not as big a number as the total of all the money already in the world. (And there's still plenty more money coming from where that all came from!)
How can all the claims for stuff spread out across the bank accounts of the people of the world (not even considering the additional claims that are coming into the system all the time) provide all of the claim-holders with the stuff they will wish to purchase at some point in the future (why else would they hold money rather than spend it on something right now?), given there are already so many more claims than goods available?
What if you suddenly came to realise that your current savings are not really worth what they say they are? Because, clearly, we can't all buy what we think we can today. There is too much money and not enough stuff.
You understand this at some level as of today, if you didn't consciously know before. But what if everyone else realises too? Will you beat them to spend your money on stuff, before all the stuff runs out and your money no longer buys you anything?
Hyperinflation has already happened. We the people requested the bankers to issue more credit money. We can try to pin the blame on bankers, but at the end of the day the reality is they could only lead a horse to water. It only drinks if it wants to.
The bankers resold these loans to others, who had equity and were happy to exchange it for debt securities with a yield (creditors -- depositors and investors). The creditors gave up their equity, but the key point is that they still considered it their equity. The debtor also took that same equity and spent it into the economy somehow or another (why would they pay interest to stick it in a shoe box?).
The same equity appeared as an asset on the balance sheet of two parties in the system -- a physical impossibility but money isn't physical, it's just an idea.
So the amount of "money" in the system has been expanded, but prices didn't go up significantly as a result, because the creditors couldn't spend a debt security until the underlying base money has been repaid to them. Again, the equity is being counted twice in the system, with the debtor and the creditor both laying claim to it. The hyperinflation has already happened, but it was disguised by the locking up of equity into debts. Through creditors being led to believe their credits were assets.
In an expanding economy this doesn't seem like a big problem, because the debtor is reasonably expected to eventually over time work it off and repay the equity (base money) back to the creditor. The creditor gets repaid extra equity for the inconvenience of his foregone consumption, in the form of the paid interest, while the debtor was happy to be able to bring forward future production into the present. Everyone's a winner. Until everyone's a loser.
The problems only come in a recession, when large numbers of debtors (or large debtors, like say a sovereign nation or two perhaps) find they can no longer support the repayments on their debts. The creditors won't willingly accept that their equity is actually gone when the debts default.
So the Central Bank has little political choice but to issue new equity (base money) into their system and swap it with the creditor for its defaulting debt securities. "The debt for equity swap". This doesn't result in an increase in the overall money supply, just the equity (base money, M1) part of the total money supply (M3/M4) is now a larger percentage of the same total. The credit went to money heaven, but the creditor was made whole to prevent them withdrawing completely from the system.
All equity holders have been diluted out by this process, just like a business issuing new shares to the directors and their friends. The loss is socialised across all of the equity holders, who each now hold a smaller percentage of the increased total supply.
But, on the plus side, deflation and bank runs have been averted. Phew! No depression. So far, so good...
The difference between base money and a debt security, to the holder, is that one can be spent at will while the other cannot be spent until it is either sold on to another investor in exchange for base money, or held to maturity and fully repaid. Swapping credit money for base money means that there isn't more money overall in the system, but base money makes up a larger percentage than before. More base money is able to chase after the same amount of goods and services. Velocity increases.
An increase or decrease in money velocity has the same effect as an increase or decrease in money supply. MV=PY
Hyperinflation of the money supply has already happened. The musket was already packed.
QE is unlocking the failing credit (debt) part of the money supply by converting it into base money (equity), in order to prevent total economic collapse. That's lit the fuse. More of the total money stock is out in the wild, and it's only a matter of time before velocity will increase.
The fuse will continue to burn down until the point in time when the widely held fear of deflation is seen as the political impossibility it always was, and sentiments reverse. The recession will finally be over, but the problems will really just be getting started.
OK, how about some evidence to back this up you say?
As we can see, courtesy of the St Louis Fed, M1 (base money) has been ramping
Meanwhile we also see M3 (base money + credit money) has been basically flat
Interesting to see M1 and M3 graphs cheek-by-jowl, no? Not so very surprising the Fed haven't since 2006 really wanted you to see this and understand what is happening. To spell it out one last time, if M3 (base money + credit money) is flat, while M1 (base money) is expanding ... that means credit money has been going to money heaven and been replaced by base money. Simples.
When you want to signal to the world that using your currency as the go-to "safe haven" is simply no longer cool with you because it's killing your economy ...
"If you want a haven, go away and buy gold instead!"
Pan-Asian Gold Exchange, the new physical-only metal exchange (Kunming, Yunnan province, China) opened at the end of June.
The price of gold appears to have experienced a step-change in trajectory on the chart from the start of July.
In other news, Chavez decided to move Venezuela's gold from the US/UK/Europe, into more friendly locations (China/Russia -- or, "Asia" if you prefer..?). I wonder how many others are doing this too, less publicly?
Bill Bonner (@Daily Reckoning): The biggest single expense for most businesses is the payroll. People are expensive. So, if you’re a good businessman, you try to get rid of as many people as possible – and not hire more of them. Even when you think business is improving, you try to service the new sales with the same staff. A little more over-time... streamlining administration... making the enterprise more efficient.
In that regard, computers and modern communications technology have been helpful. They make it easy to fire people! But they don’t seem to lead to the kind of GDP boosts that you need to create jobs and increase standards of living.
That’s why the ten million or so jobs that disappeared in this downturn won’t come back. And it’s why the real unemployment rate in the US hasn’t been this high since the Great Depression.
For everybody who over the years had to learn to deal with people ridiculing them as they tried to save the world on their way to the centre of the truth, before finally realising they were wasting their time and should just look after number one: much love!
If you're someone who can't go for the idea no country wants a strong currency just because it wants an export advantage over its trade partners, let's look at it from another angle.
If your currency is too strong, you're probably paying your workers a lot more than workers elsewhere in the world. For a start off, this provides them with more disposable income than elsewhere, meaning they will eventually and inevitably bid against each other, raising the prices of goods and services. There is a higher cost of living in "rich countries" than in poor countries, the same product often for sale at a significantly higher price just because the local market can support that higher price.
Additionally, if your currency really starts to get very strong in comparison to some others, it seems to me it will be cheaper for your population to import than to buy locally produced goods and services (see: export of jobs to the Far East from The West over recent decades, unsustainable trade deficit problems).
An overly-strong currency not only undermines any export advantage you might like to enjoy, but also over time will gut your domestic economy.
Today I was inspired, by the sun and by FOFOA's stick man video comment on a NeuralNetWriter thread, to take the kids to the park and build a den with them.
A journey of 1,000 miles begins with just one step, and a stick den is no different. The first stick, which in this case I have indicated in the final photo above using the big red arrow, makes all the difference and in this case the first stick was an upright at the corner with a branch sticking out from it at just the right height for my purposes. This stick leant against one of the four trees that we chose to build around and the branch sticking out was used to support the second stick: a beam running to the second tree and against which not only the sticks forming that side wall and the roof would later be supported, but also the second of the beams going out to the third tree would be supported by it too. At first, this forms a highly rickety and precarious structure that one has to support while others pass you the parts you need (NO! Not that one dumbass, THAT one!) but as you build on more and more carefully-selected and even more carefully-placed sticks, all supported by the ones that have gone before, eventually the thing does begin to have some integrity. It can finally stand alone without ones constant assistance, even when the wind blows and the kids keep carelessly bumping against it and banging their fresh supplies of sticks into the thing. Pesky little critters. All the help you can take, as expected.
After a half hour or so of jolliness, scavenging and construction, the thing was finally plenty safe enough to sit inside and eat lunch. Not very exciting really — unless you're 7 or 8 years old, in which case it's the most exciting thing since ... well the last thing you did.
Anyway, once the kids were finally inside I had a thought and smiled to myself. Rather like the $IMFS being built atop the first "dollar", which formed the base of the system that has been pyramided onto ever since, the whole thing is at the end of the day all being held up by that first carefully-selected and even more carefully-placed stick at the corner. Without the critical support of that first stick, it would all come crashing down in a second onto these unsuspecting children, and I would piss my pants laughing from a safe position outside. Oh, the deep and plentiful joys of parenthood.
I hope nobody ever decides to kick the stick holding up the $IMFS, to see if it brings the whole house of cards down, just because they can from a safe position.
BIS Working Papers, No 348 The international propagation of the financial crisis of 2008 and a comparison with 1931
[...]
6. Conclusion
We have suggested a number of ways in which the financial crisis of 2008 was propagated internationally. We argue that the collateral squeeze in the United States, which became intense after the failure of Lehman Brothers created doubts about the stability of other financial companies in the United States, was an important propagator. The provision of large-scale swap lines by the Federal Reserve relieved many of the financial stresses in other countries that had followed Lehman Brothers’ failure. The unwinding of carry trades, particularly yen carry trades, is also likely to have transmitted market volatility to the countries that had been the destination of the carry trades when they were first put in place. It seems likely that, at the time of writing, there is still a large quantity of yen carry trades to be unwound.
In both crises, deposit outflows were not the only important sources of liquidity pressure on banks: in 1931, the central European acceptances of the London merchant banks were a serious problem, as, in 2008, were the liquidity commitments that commercial banks had provided to shadow banks. And in both crises, the behaviour of creditors towards debtors and the valuation of assets by creditors, were all very important. Flight to liquidity and safety was an important common feature of the crises of 1931 and 2008. In both episodes, the management of central banks’ international reserves appears to have had pro-cyclical effects. However, there was a crucial difference, in that the supply of assets that were regarded as liquid and safe in 1931 was inelastic and became narrower with the passage of time, whereas in 2008, it could be, and was, expanded quickly in such as way as to contain the effects of the crisis. The understanding that the role of governments and central banks in a crisis is to enable such assets to be supplied was perhaps the most important lesson of 1931, and the experience of 2008 showed that it had been learned.
[...]
Having learned an important lesson in 2008, there being a strong likelihood that future market volatility will be transmitted to the countries that had been the destination of the carry trades, and there being still an elastic supply of assets that are regarded as liquid and safe ... I see a strong likelihood that all future market volatility will be dealt with in the same manner it was dealt with in 2008.
Because, I don't know about you, but I'm on the fence when it comes to Peak Oil. My understanding is those Russians pretty much swear by abiotic, and who am I to argue really with the world's largest producer of anything? [Except in the case of dollars, natch...]
Fortunately, it's not really directly relevant to RPG or HI, and to my mind a much less pressing issue. Certainly not anything I can realistically do anything about personally, whichever side of the debate I came down on. But that's just me being a pragmatist again.
[sarc] Or am I just an idealist and I don't even realise it..? :-\ [/sarc]
A quick'n'dirty look at Freegold from the
perspective of Marx's Law of Value.
The social value of commodities in general, reduces during periods of economic contraction. (As a result of supply/demand dynamics.)
People continue with the same expectations for individual value. (They are unwilling to accept a pay cut, or "austerity".)
This disconnect results in tension between business owner/operators ('Capitalists': who must sell the production of their business at worst for break-even and optimally for a profit), and workers ('Labour': who are unwilling to accept a reduction in their individual value of labour — and, infact, expect to see a steady increase in it, at least nominally, over time).
This tension has always in turn eventually resulted in: sustained and stubborn deflation (an increase in the value of currency, in relation to goods and services in general); fear and uncertainty; economic turmoil — in the past ultimately only escaped by some form of catastrophic societal and currency collapse (depression, sometimes even revolution).
The euro-Freegold design circumvents this issue by enabling a redenomination of the denominator (currency), either upwards or downwards, to guide the social and individual values of commodities (including labour) into a constant state of relative equillibrium. Through the single and unwavering mandate of the ECB targeting — and so far achieving, it should be noted — an approximately 2%pa inflation in the HICP index of core consumer prices, adjusting the exchange value of the currency upwards/downwards to achieve that goal. The means to redenominate the denominator, is to adjust the currency against the ultimate globally-accepted benchmark of true and enduring value: gold. Gold is held as the primary reserve of the currency manager, and the ratio of their reserves (ounces of gold) to their liabilities (euros in the system) is the objective measure of their success.
Here is the fundamental difference between the euro and, say, the dollar:
The dollar is not directly and objectively measurable against anything tangible and it is a debt backed security — as the promises break down, the backing for the currency disappears along with them.
The euro is an objectively measurable, asset-backed security — the major promise of the ECB is that they will sell you their reserve gold, if necessary, at the €price they maintain to be the prevailing market €price.
You can see quite clearly that they have been making good on that promise for at least the last decade, right here.
Here is, IMO, some interesting data, collated from the ECB website. I'll just show the two graphs first, and include the underlying numbers below for all you stat porn junkies out there.
ECB gold reserves by weight
ECB gold reserves by value
My take on this (the steady and significant reduction of ounces in reserve, in spite of the increased valuation of the reserves over time -- due to the steadily rising price per ounce) is that the ECB are delaying the inevitable repricing event that is on the horizon at distance-unknown. Patrick has a slightly different view of what is going on (which I won't share, but Patrick perhaps you might add a comment to explain it, if you see fit and happen to read this post? ;-) )
So much for the gold being hoovered up by all the Central Banks these days, eh? Looks to me like the ECB has over the past decade or so disposed of about 1/8th of its gold to someone or another.
(Capitalism: The Unknown Ideal, Ayn Rand, 1967, page 107. ISBN:978-0-451-14795-0)
"[...] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets.
The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion. [...]"
And this, all of 45 years ago, straight from the hand of the great Satan himself! :->
(FWIW, "no I don't believe in evil in this instance".)
"[...] A great irony presents itself, since a Greek Govt debt default might trigger huge Credit Default Swap contract payouts by AIG, now obligated by the USGovt. [...]" (From July 1st Jim Willie article)
An interesting nuance, I thought.
I do wish he'd fade the conspiratorial tone in his articles, it's just not really necessary is it? And off-putting for potential new readers not pre-packaged with a tin-foil head adornment, IMO.
Well, of course the numbers here are totally unscientific ... but you get the general idea I'm sure. You could look back at some of my older posts to see the shape of UK M4, if you really wanted to.
This Troll's brief summer vacation is now officially over, although with the baby Trolls off school for the next couple months... I hope there will be some more!
Nessie asked me to say hi to you by the way (cue bagpipes!) :
Oh, joys arise, the sun has come again to hold you Sailing out the doldrums of the morning The polyphonic prayer here, it's all around you It's all around you out here
And if the whole world is crashing down on you Fall through space, out of mind completely Where the emptiness we leave behind on warm air rising Those are the shadows far away
The falling of the whole empire, it's here to hold you Rolling out and haunted till it sinks
Little memories, marching on Your little feet working the machine Will it spin? Will it soar? My little dream working the machine
Soothe like a wave It passes far Closing in on the moon From where we are
Little memories Your little feet working the machine Will it spin? Will it soar? My little dream working the machine
Soothe like a wave It passes far Closing in on the moon From where we are
... or, Morgan chooses to participate in the blogosphere instead. An even more excellent choice.
I wonder how many marriages and families around the world have been kept together through the emotional and intellectual outlet of blogging? It's a bit like the 21st Century answer to the Man Shed at the allotments. Perhaps Blogger should be nominated for some kind of peace prize? :-)
