Monday 1 July 2013

T'ai shang hsia

Great rising and falling—
      People only know it exists.
Next they see and praise.
Soon they fear.
Finally they despise.

Without fundamental trust
There is no trust at all.

Be careful in valuing words.
When the work is done,
      Everyone says
We just acted naturally.

Future. Present. Option. Mandatory. Promise. Broken.


DP said...

Yet goldbug pundits everywhere still expect the paper-set gold price to take off into the stratosphere from here at any moment!

The fear is palpable. Wait for the despising to get started.

costata001 said...

Interesting link posted by 'Wil Martindale' in the comments over at FOFOA's blog on his "Funeral" post. It concerned an RT article claiming that:

According to media reports of early July, the People's Bank of China is mulling the possibility of phasing out the dollar as the reference currency for the yuan exchange rate, and to start using gold as the reference point.

The article goes on to quote several Russian analysts who warn of the dire consequences of taking this step but it dovetails nicely with the following observation by Martin Sibileau in his June 30th letter (his emphasis):

The graphs above show the intervention of the Federal Reserve in the repo market. If the repudiation becomes serious, as money market funds see redemptions and the liquidity drains, the US dollar would be challenged in its role as the currency of commodity markets (if Treasuries could not be posted as collateral in the commodity markets, there would not be a compelling reason to denominate commodities in US dollars).

The Federal Reserve would have to buy the Treasuries at par and issue debt to the money market funds, to repair the damage on their positions. But as the value of its assets (US Treasuries bought) is necessarily lower than that of its liabilities (its debt to the money markets), the Fed would face a net interest loss. Whenever a central bank falls into a deficit, the gates to hyperinflation are opened. In this particular case, the violence of this event would be unseen and it would catch many participants off guard. The value of gold would overshoot.

I think this is a very important observation by Sibileau:

"In this particular case, the violence of this event would be unseen and it would catch many participants off guard."

I contend that OBA's waiting time is coming to an end. I don't pay much attention to what leveraged players are doing at the end of a credit driven boom-bust cycle. I watch the cash players and they have been moving on every hard asset that they could lay their hands on. It became very noticeable in 2012 in high-end RE, fine art and so on in the second half of 2012.

DP said...

Sibileau June 30 2013

costata001 said...

Thanks for posting a direct link to that Sibileau paper. It will be handy if I do a Tweet on it.

DP said...

Reckon you'd enjoy this one too.

My take is ESCB MTM balance sheet setup means they don't need to pay positive interest on reserves while getting a lower nominal interest on the reserve assets purchased in QE — they can pay 0% on reserves and still get a net negative nominal return from a collapse in asset valuation.

The ESCB can cope with this, if it extends beyond the ability of their equity in the system to absorb it, by devaluing € against their FX reserve assets (incl gold) to recapitalise the asset side. You know more of my detailed thoughts on that already, of course. :-)

But still, I thought you would find his observations interesting RE: the mechanism causing HI.

costata001 said...

Another interesting paper from Sibileau. I'm going to have to try to run a few transactions on this in order to grasp how quasi-fiscal deficits could come into existence for the ECB Eurosystem but I'm too tired right now to do that.

I totally agree with Sibileau about the reason why CBs can't go broke in a conventional asset-based way because they can always mark to model. I would add that the currency they issue isn't a tangible liability of a CB/Treasury or a tangible asset of the holder. So there is no mechanism for a currency quasi-creditor to pursue the issuer/quasi-debtor.
It would be like trying to sue the paper manufacturer or the printer of a bus ticket because the bus you were expecting didn't come.

Thanks again for the link.

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