Wednesday, June 30, 2010

Tuesday, June 29, 2010

Mad World

With a fresh round of "balance sheet money" petrifaction and conversion into "base money" through QE seemingly on the horizon, it may be time to take a fresh look at the most important and frightening situation that the Western public simply does not get. That the Fed and the ECB have been postponing (and ONLY postponing) the total collapse of our debt-driven economy and the entire international monetary and financial system (the $IMFS) that, without their actions, would have already collapsed.

This postponement has been effected only by piling on more of the same debt, on top of an already-too-big mountain of debt. Sterilization schmerilization. If the Fed and the ECB had not intervened on such a massive scale, everybody in the entire Western world would have already lost their illusory wealth two years ago.

How can the Western public possibly imagine what is coming? Some imagined something back in September and October, 2008, but then it didn't come. Now it is much worse, yet no one sees it coming this time. Western paper wealth is a complete mirage, more now than ever, yet they sit tight after receiving the gift of two more years to understand and prepare.

FOA wrote back in April of 2001, "My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

"Buying it outright for cash" is exactly what QE is. "Dumping it on your front lawn" is what the Fed and the ECB are doing right now. Not literally, of course, but they are dumping non-contractible, petrified base money on top of your paper wealth, diluting it in ways you will only see once, once it is too late to do anything about it, that is.

Bernanke wrote in 2002, "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost" in a speech entitled "Deflation: Making Sure It Doesn’t Happen Here." Today he is putting his theories to the real-world test, doing exactly what he said he would do back in 2002.

Optimistic deflationists like Ambrose Evans-Pritchard and Andrew Roberts at RBS see this as a good thing. Pritchard writes, "The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes." And Roberts says this is the Fed tack "which I personally prefer". [1]

More realistic (in my opinion) deflationists see the necessity of credit contraction, economic contraction and defaults to cleanse the system. But what all deflationists seem to miss is the fragility of the US dollar as the linchpin holding the entire global financial system together. And what they seem to either not realize or completely ignore, or perhaps avoid, is that Bernanke is testing the strength of this rusty old pin with every move he makes.

Gargantuan efforts have been made to extend the mirage and pretend it is real. It is not. And although this façade of paper wealth is accepted at face value by the vast majority, the rot suffered underneath through the process of extension is nearly complete.

Most readers do not understand the serious nature of what I write. They still react with a skeptical mind to my story, and to the story presented by ANOTHER and FOA, as if they were some kind of a speculative exercise for investors.

All the so-called expert economists won't dare to present today's historically dramatic situation in its correct, very alarming context. And those who do understand what is actually happening should be utterly - speechless -. People, including the experts, just don't want to believe what they are seeing. And they refuse to analyze the true implications of this dire situation.
"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again." [2]

Never mind that money velocity can reverse in one day when panic is involved. [3] The above is, in a nutshell, the $IMFS. "The only default option left is to crank up the printing presses again." Read that sentence a few times more just to be sure you get it.

This is exactly how the $IMFS reacts to each and every mole that pops its head up. They react so quickly that they forget the last mole never actually went away. It disappeared from view, therefore we carry on and pretend it is gone. This game of printing press Whack-a-Mole gives off the paradoxical feeling of safety, as if nothing ever crashes.

Can you see yet how ridiculous this whole paradigmatic façade is?

How about all this "gold bubble" talk? I will remind you that there were very few people that even knew what a bubble was back in 1999 and 2000 when the US stock market was hitting its ALL TIME HIGH and gold was at its ALL TIME LOW.

Then along came ANOTHER and FOA with over 1,000 delicious, free pages explaining exactly why physical gold taken into your own possession was the buy of the century. The general public completely missed this opportunity (so far) and now they provide the "bubble talk" necessary to cast doubt on the truth of the situation. Yet these same people are still trapped in their loss-making Ponzi bubble paper, with nary a glance at gold's outstanding performance.

And remember, to date this is only paper gold that is performing. Paper with only a fragile and fractional parity attachment to the real thing. Physical gold HAS NOT EVEN HAD ITS DAY IN THE SUN YET.

But even if you are blind to the real story of physical gold, and are simply following the technicals of the paper-gold bull-run, the signs are everywhere and amazing. Just have a look at Jesse and his fantastic charts. (And I am not saying Jesse is blind to the physical gold story. He most certainly is not.)
So we seem to have almost ten more years of upside ahead of us, and could be considered to be at the halfway point.

Gold has been gaining, on average about 70% every three years. So what is the end point?

Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.

Long term forecasts are fun, but there are so many exogenous variables that it is very hard to say what will happen even a few years out. Let's see how this breakout goes, and where we are at then end of this year first. The charts will inform us of any major trend changes. Charts provide perspective more than prediction.

Exogenous variables indeed! The above is, of course, the "paper gold story." It is the best case scenario for the powers that be and the paper-bugs. It is what the technicals indicate to a "gold bull" should the whole rickety paper gold structure hold. But what it doesn't take into account is the "gap up" when the physical gold market severs its parity relationship with processed, bleached pulp promises.

If Jesse's technical signs were aimed at paper-Ponzi investments, people would be lining up at the Ponzi window. But in gold, alas, it must be a bubble.

So what is necessarily implied by the failure of paper promises to deliver physical gold during a financial panic? And from the other side of the coin, what is necessarily implied by an overnight 50X revaluation in only one, single, physical asset? Please think about these questions.

The Fed, in all its wisdom, is now telling us "Economics is Hard." And the BIS says, "powerful measures have strong side effects, and their dangers are beginning to become apparent."

The BIS goes on to say, "The financial disruptions in the first half of 2010 have brought the fragility of the industrial world’s financial system into stark relief: a shock of virtually any size risks a replay of the events we saw in late 2008..."

"...Unlike then, however, we [Central Banks] have hardly any room for manoeuvre. Policy rates are already at zero and central bank balance sheets are bloated." [4]

Here is the situation: The system would have collapsed, paper wealth would have burned, your savings, pensions and paper promises would have disappeared, and physical gold would have gone to the moon two years ago if the Central Banks had not taken extraordinary measures. But these actions only made the system more fragile and raised the risks to new heights. And today the Central Banks have "hardly any room for manoeuver," so says the Central Bank of Central Banks.

Even our own Fed is saying, "Economics is hard." Sheesh!

Does this sound scary? A little creepy perhaps? It should. If you really take the time to understand what is happening, you should be utterly - speechless -.

But on the flipside, holding physical gold in your own possession will convey to you a sense of security rather than that sense of fear and loathing brought on by the system. Holding gold brings calm and peace of mind. Holding gold brings the power of money creation back to the people. The old saying really is true – he who holds the gold makes the rules. So please, in this time of great uncertainty, hold gold, and make your own rules.


[1] RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve
[2] Ben Bernanke needs fresh monetary blitz as US recovery falters
[3] What Obama Does Not Know
[4] BIS 80th Annual Report

Monday, June 28, 2010

Day 5 - Poll Results

After 22 months of writing The Gold Trail, FOA disappeared, saying, "My spirit is low, I will walk this trail in silence."

It was a sad day for many who followed FOA quietly, while a vocal minority hectored him right off the trail.

Perhaps he should have held a fund raiser, like my Public Opinion Poll, because it raises not only funds, but also the soul. Apparently the silent majority does not like being overrun if given a vote in the matter.

My spirit is high. I will not walk this trail in silence!

Poll Results

The poll will remain open for anyone who would still like to "vote," but the winner can now be called. The blog beats McDonald's in stunning fashion!

Total donations over the past four and a half days are $10,775.50!

I am finding it challenging to express the level of my gratitude. THANK YOU THANK YOU THANK YOU to everyone who voted! I am humbled, touched, elated and flattered by each and every one.

And again, the comments have been great. Here are a few more:

Use the fiat quickly.

For making some changes in the world, here's my bet you did. Not much, but I hope it helps. With sincere regards.

Because my blog world would not be the same without you. Wish I could give more.

Message: thanks for thought-provoking (and challenging) writings

Consider renaming yourself FOE? Friend of Everyone / FOE but banksters!

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Purpose: Promoting swirled peas. Seriously: Truth is not free!

Purpose: consider me as a FOFOFOA

Thanks for your service!

I hope this small donation will help convince you that your efforts are truly worthwhile. Please continue this blog. Thank You

Write, don't flip

Because You Deserve It

thanks fofoa for a great site

Keep on keeping on! You have one of the few intelligent blogs and commentary out there. Good luck in your endeavors. From ____ Alaska (where I can see 5 working gold mines from my front porch!)

Purpose: Support FOFOA.

I worked at McDonald's for 3.35 an hour long ago. Keep up the great work.

Thank you for enabling me to sleep peacefully, knowing I'm secure.

Read the min was $50 - here is another $40.

Tx for your wonderful job. Hope we, your worshipful followers are gonna celebrate with you soon! No burgers for you!

From Shelby with Love. Just kidding. Wish you the best..

Don't flip burger, flip GOLD (First of more to come)

Purpose: Continuing education ;)

I bought The Mogambo a beer, so why not buy FOFOA a Big Mac? We may never meet, but you are one of my best friends. Thank you.

Purpose: keep blogging!!

I owe you.

Purpose: keep throwing

Cheers FOFOA - A quick $100 to hopefully help stave of the immediate issues and I hope I can also add more monthly.

Donation to FOFOA for superb analysis, Start a paid service, I will be pleased to subscribe!

Keep the good writing coming!

To hear the birds sing you must feed them in winter.

Thank you all so much! Like your gifts, my gratitude can only be described as "epic." [1]

Your humble blogger,

Friday, June 25, 2010

In praise and support of FOFOA

A "Guest Post"

By GoldSubject on June 25, 2010
from his blog at

FOFOA has asked for our support — let’s do our best! I will be requesting an “absentee ballot,” as he calls it, and would encourage anyone who is not familiar with his blog to go over and do some reading. You will be glad you did!

I have a lot to thank FOFOA for. I found FOFOA’s blog the day after buying my first gold coin. The first post I read was “Confiscation anatomy: a different view”. Before getting to the end of the post I realized that I had come across a most extraordinary thinker and writer. I then went on to read all of his other posts, some of them more than once.

The Freegold concept that FOFOA has so compellingly written about is quite a titillating subject, not just because of the tantalizing prospect of gold at $50,000 per ounce, but because the topic is so simple and yet concomitantly so subtle and deep. This is certainly not something that you can fully master by reading only one of his posts. You have to read them all, and do a lot of thinking! Alternatively, just take his word for it and follow the instructions — you will be handsomely rewarded.

Let’s get something straight: those who harp on about an ounce of gold buying a high-end suit have probably not fully understood the message of FOFOA. The concept of Freegold as I understand it has very little to do with compensating for inflation, and everything to do with gold being given its fair value — a value that was conferred to it by the free world, and which is becoming increasingly difficult to suppress artificially.

One of the key concepts is that fiat money has been trusted to store value over the last century or so — something that would have appeared absolutely absurd and naïve to our ancestors! The result was that gold — the only true store of undeployed wealth — became marginalized, except of course by the minority of folks who know the deal. The price of gold is also maliciously suppressed by selling “paper gold,” and undoubtedly also with other more obscure means.

Trusting fiat money to store value, with the concomitant semi-abandonment of gold, has created a gargantuan loophole — the sort of loophole that only appears once every few centuries. To benefit from this loophole all one has to do is buy some physical gold — ideally as much as possible, depending on how convincing you find this theory (but bear in mind that storing wealth as physical gold is the best option even if you completely reject Freegold theory).

Fiat money has obfuscated our instinctive understanding of what constitutes wealth and what constitutes deception. It ought to be abundantly clear to even the most apathetic citizens by now that there is something terribly wrong with the economy and money of Western nations — something terribly, terribly wrong. The wealth purportedly associated with paper instruments is mostly a mirage. One is not as wealthy as paper documents claim — but there is an extraordinary opportunity to convert those paper documents and electronic digits into solid gold before the system goes “where gravity is taking it,” as FOFOA would say.

I owe my appreciation of these concepts to FOFOA. As I wrote above, I purchased my first gold coin before finding FOFOA’s blog — the day before, in fact! But while I had an instinctive understanding that surplus wealth was best stored in the form of gold rather than fiat money, without FOFOA’s writings I would not have become aware of the larger issue of debt in the context of the revaluation of gold, which is the real “mother lode”, as FOFOA wrote! I would surely have continued to store excess wealth as gold, but there is no question that FOFOA’s writings had an effect on my thinking and therefore on my behavior. Specifically, I now give extraordinary value to solid gold, and as I have written in the past, I always weigh a discretionary expense against how much gold I am foregoing, which I’m sure you will agree is an incredibly healthy habit, especially when one is on a tight budget! On a more profound level, I now have a deeper, more sophisticated understanding of the concept of true wealth.

FOFOA has clearly made a very real difference to many people, distributing vastly more value than those who are in a position of power and privilege — shame on them!

Thank you, FOFOA; we all hope that you will keep writing at least until Freegold has well and truly emerged, so that we can all celebrate!

P.S. I know for a fact that many people, despite being genuinely interested, simply do not fancy reading vast amounts of text. For what it’s worth, I suggest you read at least this one post by FOFOA, which, rightly or wrongly, I currently regard as the closest to an all-encompassing summary.

Posted in Tagged , ,

Day 2 - Early Poll Indications

I am heartened by the results thus far. Some of you have brought tears to my eyes, and you know who you are. It is looking very promising that this will not be me:

When you make a donation you get to leave a comment, or a reason, or a purpose for the donation. These are great! Here are the ones from yesterday...

Purpose: To keep you from flipping burgers

Avoiding McDonalds!

Step away from the burgers!

Great site, keep it going!

Because the wisdom you are giving is priceless.

A vote of support and appreciation for your good efforts.

please continue your work - small gesture but hoping others do same

FOFOA blog must survive together with its owner

Purpose: Enlightenment

Enjoy your writings very much, I'm sorry I can't give more.

Help to support one of the best blogs. (Favourite.)

Thank you for sharing your insight. I hope you are right!

Best econ writer living.....

So FOFOA can eat and pay the bills

thanks for giving insight and education

for the Jedi

Keep informing the public.

Saving Hamburgers From Personal Assault

Keep Up the Good Work - I've learned a lot from you

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support your blog Mr Fofoa

Hamburgers my ass! You have a unique and valuable perspective, and I enjoy your commentaries very much and in the last 2 years have learned A LOT! Thank you, and hope you stick around. By the way, consider charging a subscription for your info - I for one would pay in a heartbeat. In fact, I am!

that's about 3 hours worth of flipping... good luck!!

Thank you very much for sharing your thoughts and analysis ; these are always very original and relevant.

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small appreciation for much value

Good Guy Reward

thank you for all of your thoughts, your lessons, and your shared wisdom

Write, teach, learn. Is there really anything else?

You help illuminate a very dark world with truth. I've read all your work for over a year and I forward your articles to many whom I'm trying to "convert." PLEASE keep up the outstanding work! Many many thanks.

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Thank you so much for helping understand.

No flipping

Purpose: FOFOA Fee

Here's the poll question:

Is my time more valuable here sharing my Thoughts, or flipping burgers to protect my savings?

A) Here

B) McDonald's

To answer A, please click the donation button below and cast the desired weight of your vote. For B, don't do anything.

What a great time to be here. I got a feelin...

Thursday, June 24, 2010

Public Opinion Poll

The G20 Summit is this weekend in Toronto.

But that is not what this post is about.

A pivotal time for me has arrived out of nowhere. Isn't it crazy how time flies? We all know time flies because it whooshes overhead unnoticed every day. Yet when we fly, say in seat 38b with that fat man reclining in front of us, time moves very slowly. That's because time is up there flying with us.

ANOTHER (THOUGHTS!) lasted 11 months, from 10/97 to 9/98. FOA's Gold Trail was almost 22 months, from 2/00 until 12/01. FOFOA has now been here a full 22 months, officially surpassing the duration of each of those fine archives. While I am certainly nowhere near the league of those guys, I think I am now qualified to empathize with them. Mine is an empathy that cannot be shared with anyone who has not walked in the same shoes, or at least footprints, so to speak.

So here is a little "inside information" about me for those of you that care. I have been unemployed since I began this blog. I am living under a self-imposed austerity regime financed only by my personal savings and a very small income from gracious readers like you that have supported this blog through donations. Thank you all!

But this month a string of unexpected costs have come up. So unfortunately I must conduct this poll. Here is the question:

Is my time more valuable here sharing my Thoughts, or flipping burgers to protect my savings? Please answer A or B:

A) Here

B) McDonald's

To answer A, please click the donation button below and cast the desired weight of your vote. For B, don't do anything.

I will publish the poll results (without names) once the sample has reached a representative size. Thank you all very much for visiting FOFOA... and would you like any fries with that?


Saturday, June 19, 2010

How Can We Possibly Calculate the Future Value of Gold?

Stefan brings up a recurring topic of discussion here at FOFOA. He asks, "How could gold ever be worth more than $10,000 in today's dollars?" And I reply, "How could it not?"

Then again, look at what we're arguing over. As Michael Maloney said, It'll either be breathtakingly spectacular or stunning, one or the other.

Stefan Pernar said...

Have been doing a bit of math:

Total world wealth in 2007 in 2000 US$ = 125.25 Trillion [1]
Equivalent 2010 dollars = 125.25 TUS$ * 1.25 [2] = 156.56 TUS$
Total above ground gold = 158'000 metric tons [3]

Theoretical maximum gold value assuming ALL wealth flows into gold = 156.56 TUS$ / 158'000 tons = 30'816.55 USD / oz

Comments: this assumes that all the value of all other assets (silver, commodities, stocks, gems, houses, currency, land, etc) drops to zero. Assuming that only half the value of all other assets flows to gold then we are looking at a rationally defensible 15'000 USD / oz in 2010 dollars.

Considering that since 2007 total wealth dropped significantly due to the stock market correction this figure will have to be corrected downward 25% again. So we are looking at a realist maximum 2010 dollar gold price of around 10'000 USD / oz.

Projecting a 50'000 2010 USD gold price assumes world gold wealth alone (50'000 USD / oz x 158'000 tons of gold = 254 TUS$) eclipsing total 2007 world wealth (all assets) by about 2/3.

Conclusion: A future gold price of 50'000 USD / oz in 2010 dollars without an accompanying global total wealth increase by about an order of magnitude is grossly unrealistic.

[1] Estimating the Level and Distribution of Global Household Wealth, United Nations University, 2007

June 18, 2010 7:58 PM

Hello Stefan,

I don't think it is as simple as pouring a hundred cups of water into one large beaker and noting the total volume. But you do bring up a few common misconceptions. There are a few trillion possible methods to attempt to presage the full impact of this thing called Freegold. So as I said in Metamorphosis, "Let's spin this globe and take a look at things from a slightly different angle."

Instead of looking at wealth, or even debt, let's look at "purchasing power". Better yet, let's look at the concept of "Stored Purchasing Power". Now I realize that most people's "stored purchasing power" will be deployed at some point over the next ten or twenty years... those that have any. But for the sake of understanding the theoretical concept, imagine that I have immense stored purchasing power. Imagine that I am a "super-producer" giant. Imagine that I make something that everyone in the world wants and needs.

Let's suppose that I am similar to Bill Gates, only much more necessary to the human race. Yes, I have moral charity obligations that come with my significant wealth, but do I not also have the right to store some of it for future use? Should it be illegal for me to store my productive effort so that my descendants could benefit from it for generations to come? If you make such a thing illegal or impossible I will likely not produce as much of what everyone wants and needs! Is this a good economic strategy? Or is it an economically limiting (perhaps even deflationary) strategy spawned only by envy?

You see, time is the factor most ignored in the concept of "stored purchasing power". It is ignored because it is relatively irrelevant to most people. This is perfectly understandable. But does this mean that I should forfeit the fruits of my labor after some point in time or at some maximum? Of course not! That would be socialist nonsense. As long as my storage of wealth medium does not infringe on anyone else's industrial growth, then my accumulation actually contributes to economic expansion.

The future amount of time is infinite, therefore "stored purchasing power" is theoretically limitless. The only thing that limits its potential is a faulty storage medium, which limits the collective confidence in its ability to preserve wealth over time.

With a faulty storage medium I will not be as eager to store the fruits of my labor for deployment so far into the future. For I will recognize that at some point in time the medium will fail and my efforts will have been for naught. So I will be more likely to "spend" my considerable wealth in the here and now. Not right now, but you know what I mean. I'll probably build a 70,000 sq. ft. high tech castle on a lake for me and my wife and things like that.

And an interesting side effect of spending my considerable wealth in the here and now is that it not only reduces the purchasing power of the rest of my wealth, but also everyone else's who holds a similar medium as me. In aggregate, a faulty storage medium is self-limiting.

So, quickly cutting to the chase, the logical conclusions we can deduce from this conceptual line of Thought are that:

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

I say this is the rough limit because it represents the emergency exit from said flawed medium.

So the next step is to ask ourselves the obvious question. How much "stored purchasing power" exists in the world today? This is a good question, yes? But how could we possibly know? Today it is all denominated in worthless paper! As Another said:

One should grasp that "today, your wealth, is not what your currency say it is"! In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds its worth, as in the exchange rate for another currency?

Many will "think long and hard on this", but will find little reason for this position. For it is in your history to know only "things valued in paper terms".

Your past holds little of knowing value outside of currencies, this does block the good view!

Hear me now, what the wealthy and powerful know: "real value does not have to always be stated or converted thruout time. It need only be priced once during the experience of life, that will be much more than enough!"

Stefan, is an American home on an eighth of a desert acre really worth 200 men's suits? Is an Ivy League education in Investment Banking really worth 2,000 barrels of crude oil? Who knows? We have been living in a fantasy of government-sponsored malinvestment and soft money financial engineering for more than six decades. How will we ever know what things are really worth before it all collapses?

I am not as smart as the Superorganism that makes up the marketplace. No one is. So how much "stored purchasing power" exists in the world today? It is an impossible question to answer, yes? But let's try thinking about it for a moment anyway.

For at least 66 years now the whole world has been operating under the $IMFS. But when we really look at "who is the dollar faction" and "who is the non-$ faction" we see that roughly 25% of the world profits greatly from this system and 75% of the world is essentially "taxed" by it. In other words, roughly 25% of the world has been running a trade deficit for 66 years while 75% has been running the necessary surplus to support the other 25%. I know this is a bold, generalized statement to make without full explanation, but these are conservative numbers that I have used and explained in many posts.

For simplicity, let's call these two zones "The West" and "everyone else". Now what are a few broad, sweeping generalizations we can make about these two zones? For one thing, those in the West, unlike most everyone else, operate, as ANOTHER put it, "without 'loss of currency' Experience." And because of this they exhibit a level of confidence in paper storage of purchasing power that is quite surprising to everyone else.

The West loves its paper wealth. It loves to record it, to publish it, to know where it is, to know where it stands, to throw its weight around with it, to tax it, to track its movements, and occasionally to take it away. It is this $IMFS fascination with paper wealth that made it possible for you to even find a number for "Global Household Wealth", Stefan. And when I think about this number for a while, it is hard not to laugh at the absurdity of it.

Let me ask you this. Does that UN survey take into account the "stored purchasing power" of the Indian wives? How about the sovereign wealth hidden in Saudi Arabia? What about "old money" and "royal wealth" hidden in Europe? Large swaths of the "everyone else" 75% never stopped storing their purchasing power privately in gold, knowing that one day it would be restored.

Other recently liberalized regions are now playing extreme catch-up. And yet other subsets of "everyone else" learned the hard way how "all paper can burn" under a soft money regime. How are they all storing their productive efforts these days? What lessons did they learn from 'loss of currency' Experience?

And what about the 66 years worth of surpluses centrally accumulated in national central banks and sovereign wealth funds? Were they counted as part of the "Global Household Wealth"?

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

So when the plug is pulled on the matrix and the pitcher of water disappears, how much water will be revealed in the physical plane beneath? I guess this is the $50,000 question, yes?

If you are just dying to be able to visualize the actual mechanics of this transfer of wealth that could explode aggregate value to a much higher level than your linear model allows, Stefan, I'll give you a brief glimpse. Gold holds its unique position because it is pretty much used for nothing else. It has an extremely high stock to flow ratio. "Stock" means those who are sitting tight on their physical gold, letting it lie still for the future, and "flow" means those who are presently trading their gold.

One of the false assumptions of your linear model is that real physical gold must hold the same time-value-durability confidence level throughout 100% of the world that paper wealth holds in 25% of the world. So as people sell their paper wealth and buy physical gold, the price rise will bring down the stock to flow ratio to a much lower equilibrium point somewhere around $10,000 per ounce.

Gold is not like other commodities where supply is economically driven to ramp up and meet demand as prices rise. Nor is it like paper investments that have objective metrics like price-to-earnings ratios and interest rates. With gold, a rising price sends the exact opposite signal to the place where supply comes from. It confirms the belief in those that already hold the "stock" that it is a good investment and it is best to sit tight and not re designate it to "flow".

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough "stock" is reassigned to "flow" to meet demand. And this dynamic obviously has nothing to do with today's paper gold market where physical stock lies very still and paper stock meets most of the demand.

Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.

This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.

The true Giants of this world that hold large amounts of gold have a good idea what their gold is worth. And yet, when it finally gets there they will still not liquidate their "stocks". This is because gold as a store of purchasing power has an infinite time horizon. These Giants are not interested in "catching the top" like Western traders. They are interested in storing purchasing power well into the future.

I guarantee to you that the Noble families of Europe still possess some of the same exact pieces of gold that were in their families in the 16th, 17th and 18th centuries. And this is purchasing power stored (and increased) through several currency collapses!

So, cutting to the chase once again, the biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow.

Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude. Here is what my supercomputer spat out:

Take it for whatever it's worth, which, of course, only you can decide for yourself. The $IMFS is failing. Please don't let the fears, envy or baseless doubts of others obscure this reality. You can choose to participate in the recapitalization of world finance or you can be a victim of it when the lights go out. The choice is right in front of you. So decide what you'd rather be: a participant in the rebuild, or a victim of the collapse. Amazingly you still have this choice available as I type these words.


Friday, June 18, 2010


I would like to thank Karl Denninger and Gordon Gekko for providing the backdrop I was looking for in order to present a few concepts and Thoughts.

Karl to Gordon Gekko: You can no more provide evidence that "gold is the only real money" any more than I can prove there is a Christian God.

What I can provide is evidence that gold is the only real wealth reserve accepted by those that create our money. Debt instruments, like Treasury Bonds, have a strange parity relationship with the value of the currency. They don't quite float, making them a poor wealth reserve. If/when the dollar collapses, so does the debt denominated in it. Gold, on the other hand, when marked to market, floats quite well, even in a currency collapse.

As for gold being the only one with this specific characteristic, just have a look.

Karl to Gekko: But to believe that gold will offer you sanctity, you must believe several things:

1. The currency you have now (dollars, in the case of the US) will collapse. Again, if you're going to predict this, you must both predict an event and a time or your prediction is not actionable.

Not true. In some cases throughout history it was best to prepare for the normal event of currency collapse as soon as its possibility became apparent. Currency collapse is a normal event, even if it is extremely rare. Just like death, it only comes once; but it does come once to everybody. And the logical implications and extremely high impact of this event are great enough that it is well worth preparing for without knowing an "actionable time".

In fact, those that took Another's and FOA's advice "too early", back between 1997 and 2001, have had to "suffer" through a 500% increase in the marked to market value of their wealth reserves while waiting. Sometimes it is best to be early.

2. Gold (or whatever) must maintain it's value in real terms. That is, I must continue to be able to buy and sell it in exchange for other things. But you already claimed there would be none on the market at any price - that is, there would be no trade in it at all. If this is the case then it is worthless, not priceless.

What is referred to here is the chaotic transition period between the failure of the fractionally reserved paper gold markets and the emergence of a physical-only free gold market. During this rocky transition any former parity between "the price of gold" and the price of actual physical pieces will be broken. This is when no physical will be available at the published price.

As for the physical price, it will be unknown as it rockets in the background to new heights. So yes, any paper gold will be worthless during this time, and any physical gold will be priceless. Congratulations, you are both right!

3. Government cannot steal it, or you won't have it. But history says that government will steal it. And they don't have to do so by outright confiscation either - they can whack you with a 90% tax on it at the point of sale and demand that all dealers register and report. Oops - they already did the latter after 9/11!

What Karl says here is technically possible as long as continuity is maintained in the official pricing of gold. But what I write about here is a functional change for physical gold. And in this new function governments will find it in their best interest to encourage citizens to hold gold for the purpose of decentralized clearing. This will be preferable to the alternative which will be holding your trading partner's currency.

Gold will not be a transactional currency. That will be the dollar or other fiat currencies around the world. But gold will replace the centralized function of the US Treasury bond and other debt instruments, in a decentralized way.

We will transition from this:

Into this [1]:

I will not go into great detail here, but logical deduction is the best proof that it will not be plausible for governments to track and tax the capital gains realized by physical gold holders who ride out the fire of change. I am talking about discrete, disconnected and discontinuous pricing before and after.

And I am warning of the chaos that paper gold holders and paper gold price-trackers will realize as their price goes to zero. This is the price governments track for capital gains purposes. Most Western gold investors will be wiped out when this price ultimately proceeds from $1,250 today to $0 at some point in the future.

I have also collected logical evidence and arguments as to why a physical gold confiscation is nothing to worry about this time around. Please see: Confiscation Anatomy - A Different View

And lastly, on this subject of confiscation through taxes, the governments of the world will find their softest and most sensible target in the mining operations that they license. Not in the small percentage of Western gold bugs that had the foresight to buy physical coins instead of shares.

Costata put it succinctly in a recent comment:
1. The gold miners will be the targets for high taxes. For political and practical reasons they are the soft option.

2. Anyone holding paper gold when the transition to Freegold comes will be burned.

3. Personal holdings of physical gold will be encouraged by governments for practical reasons.

Here is where Costata gets his direction. There is a lot of wisdom, understanding and foresight in the following words. Nothing religious. Just advice you can take or leave. But you only do yourself a disservice by dismissing it without consideration:

Date: Sun Dec 07 1997 18:45

Try to live in this outcome and see how different the world will be. It will not be the end of all things, only the changing of most things in "western thought". The "Digital Currencies" will still trade, but we will value them as not before.

Anyone who has sold gold they do not have will not be allowed to cover that position. Anyone who has bought gold they do not have will not be allowed to cover that position. Many will lose all they have in a world without honor!

Looking back, one will ask, "how could I have thought that noone wanted gold, when more of it was being bought than existed"? Indeed, more gold than exists or will be produced in the next ten years! And some say, "only a fool would say the market was cornered".

During that time, a gold stock in the hand will not trade on an open market! And the government of the country, of the land, of the mine, will no doubt speak with you of new taxes on GOLD!

Date: Sat Mar 07 1998 23:37

Mr. Mozel,
The USA placed a special "windfall profits" tax on domestic oil during the last major rise in prices. I do think the oil stocks would have shown a greater value had this tax not been in place. Because gold will soon become a currency, mines will be taxed in a much greater way. Also, domestic mines will be asked to sell directly to the treasury at the "perceived commodity value" value of gold, plus an operating margin. As no private company will be allowed to do your treasury's job, "produce money". Gold in the hands of the public will be thought of as a good thing, as citizens are asked to "pull own weight" as the government is much under.

Date: Sun Apr 19 1998 15:09


Date: Sun Apr 19 1998 03:38
Drifter ( ANOTHER'S Thoughts ) ID#270447

Date: Sun Apr 19 1998 14:18
OLD GOLD ( ) ID#238295:
There will be ample time for holders of gold bullion and gold shares to sell their holdings for huge profits. Drifter was right on target here. Let's worry about getting POG to $350 this year. We have a long way to go on the upside before confiscation and/or taxation becomes a realistic concern.

Mr. Drifter and Mr. Old Gold,
If you search the "thoughts" posts provided by Mr. Sharfin, many of your conclusions are addressed. Many do feel that if "the gold mines were safe in the past", "they will be safe in the future". I submit this persons thinking for your consideration:

"The Western public has always thought of gold as money. Even after the 70s and 80s, most private investors held a small side thought, that gold was still, somehow dollar money. It was only during the late 80s and 90s that people started to completely lose the connection of paper spending money and gold.

Clearly, all evidence shows that prior to the 90s and particularly prior to the 50s, the push was to change the publics thinking away from gold money, to paper currency as money. In this political climate, gold mine investments were the correct move, as the business of gold was encouraged over the usage of gold as money! That is why the metal was called in and the mines were untouched.

However, today, the change will be counter to the prevailing public opinion, that gold "is not money". The world debt system and currency exchange, as we have known it will implode and leave little room for political maneuvering.

The governments will revalue gold and "demand" that the public carry it and use it! It will be the source of all gold, the mines, that will be controlled! That's Controlled, with a capitol "C", not confiscated!"

Mr. Old Gold,
Sir, I do read your writings and consider your thoughts! Thank You

8/10/98 Friend of ANOTHER

Michael Kosares,

Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold. Michael, you are absolutely correct in that the USA will see a hyper inflation of its currency and a gold price in dollars that reflects it.

Unfortunately, for most investors, the gold price rise will be sudden and also hyper fast, as it will occur just after a rapid plunge in dollar based assets including, stocks, debt and the entire banking system. This action will destroy virtually all gold based paper assets as they are also dependent on a functioning economic system. A local gold mine, in any country, must sell production to realize a profit. The contract system they deal with will not be functioning during this time. Contrary to many hopeful investors, local treasury officials will not allow miners to pay employees or buy equipment with physical gold. When the dust does clear for mining to continue, gold will be recognized worldwide as real money, and the mining of money will, no doubt, carry Extreme taxation. Stock prices of these operations, after being priced to zero, will then double or triple in price. Zero times three equals?


Replies (9/3/98):

However, never before in history has gold been cornered in currency terms. Not physical terms. Never before in history, has a world reserve currency, the dollar, been forced from a high gold valuation to a low gold valuation, along with a destruction of world gold market. Because gold is traded today, worldwide in dollar terms, the transition will destroy the capital assets of 99% of all mines. Please place yourself in "the context of future events". Physical gold will not reach $30,000/oz because noone is buying it! It will come to this level because the dollar, today, is already inflated to the level that will bring this price.

The perception that this dollar is "no longer a good reserve", it will bring the flood of buying. This "already printed and in circulation today" currency will seek gold!

Governments will tax mines for the right to produce money and force them to sell production in terms of whatever the new world reserve currency" is at that time. Euro? Because gold mines are the "unique" circumstance in world of investments, their owners will suffer a "unique" problem of defining what they really own!

Also, remember, gold will rise soon as world trading continues this course of change. However, at some point, when the dollar market is destroyed, noone will know the currency value of gold thru an official market. Paper gold will not do well as the currency world is at war! The true surge of gold in dollar terms will not show until perhaps a year has gone by. During this time of trouble, physical gold will prove to be "the investment and holding for a lifetime".

ANOTHER: Gw, I would say, all forms of physical gold is good to own. Even the rare ones offer the "art form", yes? Even in war, the art work is looted first, then the jewels, and always food. I prepare for not the war of men, but the war of currencies! This conflict will bring forth a new concept for many: "western governments will encourage people to hold physical gold "! When the Euro has defeated the Dollar, citizens will be asked to use gold as a savings, for holding the Euro will be frowned on. Gold will not bring your "capital gains tax" as the mines will be taxed to compensate.

Yes, rare gold will be good, but not as liquid as "bullion type" gold.

Thank You

Karl to Gekko: Then your base claim - that gold is a inflation hedge - that is, it will hold value - is false.

This is true under today's semi-free gold trade. The paper market automatically suppresses the price of physical gold through physical parity with inflating paper gold. The same as gold was suppressed at $35 in 1970. This is true even if you don't believe GATA that the Fed actively suppresses it.

It was also true under the fixed parity of the gold exchange standard. But just like physical gold holders in 1933 and 1971 profited from revaluation, so today physical holders will profit when parity is broken between paper contract gold and physical gold in hand.

And once this separation is complete and physical gold finds its natural equilibrium as a wealth asset parallel to fiat currencies, then and only then will gold be the inflation hedge par excellence. This future stasis is what I call Free Gold. [2]

Karl to Gekko: Indeed, your position is nothing other than a speculative bet - a gamble.

What isn't a gamble today? We are on the brink of a major discontinuity. Are stocks not a gamble? Perhaps they are the best gamble if you expect normal inflation and economic recovery. Are bonds not a gamble? Perhaps they are the best gamble if you expect deflation of the type that perpetually increases the value of the dollar, even in the face of unsustainable debt.

But how do each of these investments fare in the opposite situation? How are stocks in a deflation? How are bonds when the dollar is falling? How do derivatives fare when counterparties cop to insolvency?

And what happens to all of the above when the currency collapses? No, it's not the dollar bills in your wallet nor the quarters in your pants pocket that threaten the system. It is all the contractual debt that requires payment in those things. If that debt can't be paid to the satisfaction of the creditors that earned what they loaned with real labor, then that dollar in your wallet will fail. The mountain of debt is inextricably linked to the currency itself.

Sure, foreign debt can cause a currency collapse quickly. But what about domestic debt? What about the biggest debt in the world being owed by the biggest printer in the world? How long does that take to collapse? 30 years? 40 years? And when should we start counting?

So which is the bigger gamble with your life's savings, your family nest egg, you children's inheritance at this particular time in history? Is it a bigger gamble to keep it denominated in a precarious piece of paper printed by the global debtor par excellence? Or is it the solid, private, physical wealth reserve with a 6,000 year track record that, incidentally, the central banks and sovereign wealth funds hold as their wealth reserve?

The health of your nest egg is a very private matter, just like the health of your body. Do not entrust it to the opinion of others who will not lose a penny if you lose. Do not blindly follow the advice of anyone. Answer the questions above yourself. Think it through. Understand! Then decide for yourself.

(from Chris Martenson's Crash Course video Chapter 20)

This is no cult as Karl thinks it is. Some people here lost a lot of money in stocks, bonds and real estate before they started thinking it all through. Others here made a lot of money in these same schemes, and then went in search of the best way to consolidate that wealth before the coming discontinuity that anyone with eyes can see coming. Yet others, some that I have received generous support from, have family money, old money, and they thank me for sharing publicly what they already understand.

Here is the big picture historical context. When it comes to hard money and easy money history records a story of struggle between two classes of men. It is always the same two classes. Those who worked hard to save for the future and want hard money to protect the purchasing power of their efforts, and those who prefer easy money that always inflates away value making the repayment of their debts easier as time goes by. The savers and the debtors.

Sometimes the debtors rebel against the savers, as in the French Revolution. And sometimes the savers flee the debtors as in the American Revolution. Sometimes the conservative saving class makes monumental errors, as when the Regent of France put John Law in charge of their money. And sometimes the easy money crowd takes it all too far, as with the dollar today.

I know you all perceive the banker as the opposition. But just know that the banker is merely the middleman between these two classes of men. The banker facilitates the loans from the savers to the debtors, and the repayment back again.

The banker makes his largest profits during times in history when the liberal easy money crowd is in power both politically and monetarily. And he makes his most absurd profits when the debtor class allows its debt to go too far... to the very mathematical limit. But don't worry. This unstoppable avalanche will reduce banking and central banking to what it should be; a utility for the public good. [3]

As money has evolved since the time of John Law, we have always had one or the other, hard money or easy money. And this always leads to conflict or currency collapse. With hard money you get conflict when the debtors revolt against hard payment terms. Look at Greece today, or France in 1790. And with easy money you always get currency collapse.

So if you are waiting for "the people" to rise up and demand silver currency to defeat the enemy bankers, you may just be looking in the wrong direction. "The people" today don't want hard money. They are deep in debt. They want easy money. So do the Western governments and politicians. They all want to inflate away the debt in which they are drowning.

No, what is happening today is a little more complicated than in the past. Today, as in the past, we are staring directly at a currency collapse of monumental proportions. The global reserve currency now has a mountain of debt denominated in itself, at its very limit. It can no longer be rolled over on the backs of new savers.

But at the same time we are all interconnected electronically today. Never before in all of history has an easy currency been so amazingly efficient and fast in long distance transactions.

So what will happen? How will it all shake out?

If you can understand that the savers' savings today is tied up in the debtors' repayment, then you can understand that savers will be burned because full repayment today is impossible. And they will ultimately turn to a different wealth reserve than paper representing someone else's debt.

And if you can understand how the debt is inextricably linked to the value of the currency, then you can pretty clearly see the currency collapse coming.

But our modern easy currency excels at one thing greater than any easy currency in all of history, or any hard currency for that matter. It lubricates a healthy economy with greater speed and efficiency than anything else ever has. So where is the flaw? I'll get to that in a moment.

Everyone wants an easy currency today. The politicians do. The central banks do. The G20 nations do. The debtors do. Even "the people" do, because they are debtors too. And today we have the best easy currencies the world has ever seen! Since the computer came on line in the 1970's thing have never been faster.

This is probably money's most important function, transactional medium or medium of exchange. But in this function, in this transactional role the specific value of a currency does not matter at all. All that matters is stability, or relative stability since perfect stability is impossible.

The reason I bring this up is to point out that the dollar could devalue "Zimbabwe-style", then gain stability once again, lop off a dozen zeros, and get right back to performing its most important function, lubricating trade at the speed of light.

Can't picture this? That may be because I haven't gotten to the flaw yet, and the natural solution to that flaw.

Ever since John Law's time and even before, money has had three roles to play. And they were always played by the same money. This "shared functionality" always led to conflict in times of hard money or currency collapse in times of easy money. The three roles are 1. transactional medium (the physical currency), 2. unit of account (the denominator of debt), and 3. store of value (the wealth reserve).

The flaw in the dollar is that it was brought up with gold tied at the hip. Gold was always fixed to the dollar at a specific parity. So gold was no obvious alternative store of value to dollar debt. So for 100 years now the savers have found dollar-denominated debt to their liking. That was until the debt slaves rebelled and the savers' savings became worthless. I believe that was back in 2010. Or was it 2011? But I'm getting ahead of myself.

We can and will live with a modern, electronic super-efficient fiat currency. In this Karl Denninger is correct. But when the debt mountain collapses and the present value of our super-efficient fiat currencies find their new equilibrium, something will have to emerge as a parallel money to serve the store of value function that failed in the collapse. That something is gold, and gold alone!

In this, Gordon Gekko is correct. Gold is money and only money! But I don't think we will go back to shipping pallets of gold to China on Walmart Supertanker return trips. Nor do I think we will go back to gold and silver coins in our pocket on the weekly trip to the general store like Little House on the Prairie.

Gold need only perform in the savings function and the clearing of net imbalances. And not necessarily in a centralized clearinghouse. Gold’s clearing function will likely be decentralized but it will not be a currency for everyday trade.

What I see so clearly coming right at us is a separation of the traditional monetary functions into two separate mediums! The transactional role will go to the winner in that department, modern electronic fiat. And the wealth reserve role will go to the winner in that department, gold. But what about the unit of account?

Well, I have a few ideas about this, but they are all equal probabilities. Maybe this role will be split between the two mediums depending on risk appetite, time preference and knowledge or profession. In other words, carpenters won't dabble in fiat debt investing. With a golden alternative there will be no incentive to take such risks. Or maybe we'll switch from a debt-based system to an equity-based system. [4] I think this possibility is highly likely even though it seems completely alien right now.

Anyway, this is what Freegold is all about. It is about deducing the inevitable implications of an unstoppable avalanche. And it is about fiat currency finally finding its natural equilibrium with a parallel physical gold wealth reserve. And trust me, fractional paper gold promises won't work in this new world, so equilibrium will likely be somewhere north of $50,000 per ounce (and that's from just the functional change, don't even ask me about the inflation-adjusted price).


[1] Please see: Bondage or Freegold?
[2] Please see: Evolution! for more on stasis and "punctuated equilibrium"
[3] Please see: Say Goodbye to Wall Street
[4] Please see: Metamorphosis

Michael Maloney on Confiscation and Hyperinflation
h/t to Raptor for this one:

Wednesday, June 9, 2010

The Old Hyperinflation Question

I see this a lot. People say "the US dollar cannot experience Zimbabwe-style hyperinflation because:

A) it is the global reserve currency, and
B) all US debt is denominated in its own currency."

Other arguments I have seen have to do with low money velocity, which can reverse globally within a couple hours based on fear alone, and the shrinking quantity of "balance sheet money" or credit money. I'll address this second fallacious argument in a later post since it is more involved.

How wrong people are. FOA intuited this back in 1998:

Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold. Michael, you are absolutely correct in that the USA will see a hyper inflation of its currency and a gold price in dollars that reflects it. Unfortunately, for most investors, the gold price rise will be sudden and also hyper fast, as it will occur just after a rapid plunge in dollar based assets including, stocks, debt and the entire banking system. This action will destroy virtually all gold based paper assets as they are also dependent on a functioning economic system.

...So, dollar hyper inflation never arrived and gold did not make its run because world CBs bet your productive efforts on supporting the dollar reserve. In the process, the US standard of living was raised tremendously on the backs of most of the worlds working poor. But this is not about to last!

...A grand hyper inflation is now ahead on the trail. It should be ushered in with a large "crackup" in the currency derivatives market. Once this event is "in process" the paper gold markets will quickly rush to discount against physical gold. A discount that will break our gold market pricing and physical allocation system.

...Baloney! The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of Their last 30 years of hard money success.

These are from FOA's posts between 1998 and 2001. Was he wrong? Or was he early? You decide.

The following is an exchange I had just today in the comments section of an older post, so most of you probably missed it:


You describe the inflation that will take place as "hyperinflation".

I am wondering if instead you meant strong inflation, e.g. a 1:5 gold revaluation upwards, as hyperinflation is usually attributed to Weimar/Zimbabwe-style inflation.

Currently debating this with a fine mind, so if you could clear this up, it will be much appreciated.

Hello Dave,

The circulating medium is what lubricates the real economy. As such, its specific value is meaningless except to say short-term stability of value is important to its function as a lubricant.

But the dollar is so much more than just a circulating medium. It is the very yard stick of a mountain of global debt that has reached its growth limit. And when that debt structure collapses it will bring down the value of a dollar to zero, or as close to zero as is physically possible.

Study the assignat and the mandat in France in the late 18th century if you want to see the future of the dollar. Study John Law's Mississippi paper. Every time a government that runs a debt and a deficit also gets control of issuing money, it always takes it to zero.

This has been coming at the dollar for a long time now. The hyperinflation is already present in all the debt. Every penny of one man's debt is a penny of another man's retirement plan. It will all be liquidated at the speed of a lightning bolt when the US Treasury market finally burps, or when the paper gold window finally mandates "paper only".

The dollar's value will already be decimated before Bernanke even gets started issuing the high denomination bills like we saw in Zimbabwe and Weimar Germany. Yet he will issue them, as that will be the only way for the US government to pay its current account, its debt service and its other liabilities, all denominated in dollars, some structural and indexed to inflation, others simply nominal. But it will be a mad dash to print like "crazy".

"Old money" and "public money" has seen this coming for a long time now. This is why the Central Banks in aggregate have switched from dishoarding gold to hoarding gold. When the debt brings down the dollar to zero and all paper investments tied to the value of the dollar evaporate, gold, in global aggregate, will inherit all the purchasing power lost in the dollar's collapse. Currency is a small part of this loss. Debt is the motherlode!

This is different from past currency collapses because the dollar is the global reserve currency. To view this properly, you have to realize that because gold is globally fungible, and the dollar is the global reserve currency and global accounting standard, gold's value reset will have nothing to do with inflation.

Gold's value reset will be from a shift in function, as it absorbs and inherits the global purchasing power that was previously stored in dollar-denominated contracts, including US Treasury bonds, on the balance sheets of the most powerful Central Banks in the world.

Everything else that is a fine store of value like fine art, classic cars, gem stones and commodities, will retain their present purchasing power (or close to it), but gold will be different. Gold will switch roles, from commodity to wealth reserve par excellence.

Central banks like China that hold a lot of dollars and a little gold will retain their present purchasing power at the least. The bonds will become kindling while the gold becomes priceless. A simple balance sheet weighting adjustment.

Anyone who tells you the global debt pyramid scheme has reached its mathematical limit, but then says the numéraire of that system will only see a gradual "strong inflation"; or anyone who tells you that the paper gold market's fractional reserves can fail and gold will only go up 5:1... hasn't thought through the real world implications very far.

We are playing 7-layer, multi-dimensional poker here. You have to be able to see beyond your glass fishbowl if you want to avoid the psychological trauma of reality when it comes crashing in.

Yes, we will see something resembling Weimar and Zimbabwe-style hyperinflation with the dollar. And the level of gold's revaluation will have nothing to do with this currency collapse. It will have everything to do with a separation of the monetary roles in the global collective conscience and on the balance sheets of the richest Giants in the world.

Gold will not rise like an undervalued commodity... 5:1 as you say. It will be more in the range of 50:1 to 100:1, and when you add in the hyperinflation, an ounce of gold will easily pay off the US national debt as it stands right now.

Of course the US will not be able to do that. Not if it wants to keep trading certain "essential" commodities with certain "essential" trading partners. It will have to honor certain paper gold contracts at the rate they were written to keep the "lubrication" flowing. So to speak.


Thank you FOFOA,

IMO the debate comes down to severity and (most importantly) timing.

AFA severity, I expect it will be anywhere from far more severe than the majority expects to catastrophic (EOTWAWKI).

I picked 5:1 because that would bring the paper currency in line with the modern metal US currency (the melt value of quarters etc. are worth ~20% of their nominal value). Also, it's my gut feeling that they think 5:1 can be 'gotten away with' (which is wrong, naturally, but they will try as there is nothing to lose).

20:1 is slightly less likely, and at that point the pain from a 50-100:1 devaluation is not that much greater, so I can see TPTB shrugging their shoulders and printing away.

AFA timing is concerned, on or around 2012 seems right, not just from the apocalyptic expectations (which will aid it), but because round two of US mortgage resets peak out at that time, making it patently obvious there is no escape.

Any thoughts on timing would be appreciated. Have a big to-do list between now and then, would be nice to schedule it properly. : p

Hello Dave,

Money and power, good and evil, right and wrong, grand conspiracies and plain dumb luck all play a role in building unbalanced systems and blowing bubbles. But when it comes time for them to pop or collapse, these human endeavors are all completely irrelevant. I don't employ moral judgement nor geopolitics in my currency analysis for this very reason; they are irrelevant. Collapse is only organized by the Superorganism and it cannot be stopped, although under special circumstances it can be delayed.

The dollar system should have collapsed between 1971 and 1980, but it didn't. It received an assist from Europe, the Middle East, and later from the Far East. The purpose of this assist was to buy the time necessary to build another currency large enough to lubricate international trade in the event of the disappearance of the dollar. That ended in 1999 with the launch of the euro. What kept the dollar afloat since then is anyone's guess. I have a few theories. But they all seem to be expiring in 2010.

The euro was special in two ways. And by special, I mean special on an astronomical time scale. It was the first man-made circulating medium to separate itself from the nation-state, from the very ones who always crush a currency to zero. And it was also the first to sever its ties to gold. In other words, it was the first unbacked, irredeemable paper currency that not only acknowledged but supported an external store of value, gold. This can all be found in a famous speech here.

I don't know how much of my blog you have read, but I don't find the euro's present troubles overly alarming or existentially threatening because I understand why it is the way it is. Some European politicians and political appointees today are doing it great harm, but not existential harm, yet. The currency exchange numbers today are meaningless because all mediums must devalue against the debt paradigm. "It's the debt, stupid" is more than just the title of one of my posts. But please forgive me for meandering "aimlessly" in this reply.

It appears to me that you are expecting a controlled devaluation of the dollar by the Fed and the USG. This is something that is totally impossible in my judgement. First of all, there's nothing to devalue it against today, technically speaking. The only thing they can do is print base money to fill the credit money hole and the USG coffers, and they are already doing this. And they must do this. And they will keep doing this.

For the sake of your question I am trying to imagine how a controlled devaluation might be attempted, were they stupid enough to try. If the USG was the world biggest creditor, they could possibly devalue the denominator of all that debt 5:1 by forgiving everyone of 80% of their debt while printing more currency for their own needs. But the USG is actually the biggest debtor. So it would instead be forgiving its OWN debt and punishing its creditors... out of 80% of their savings. Do you think those creditors will then say, "more please?"

The best analogy I can come up with is a steep, avalanche-prone ski area. The ski patrol knocks down some of the snow after every snowfall. Because if you let it pile too high, and get packed, the whole lot will come down all at once. Either by gravity, or by a ski patrol cannon, or by skier, or by a deer farting. Any way you cut it, it all comes down if there's too much of it packed on the mountain. Gravity does all the work.

This snow pack is to the mountain what global debt is to the dollar. There's no way to do a centrally controlled devaluation of the dollar at this end stage of its life. It prices and denominates too many things, too many contracts, too much debt in the world today. This is the real essence of the dollar. Its "unit of account" function is, not its medium of exchange quantity.

And the physical plane that underlies it is completely unaligned with this precarious 'snow pack'. It is not representative of reality, therefore it has no sticking power. It's ready to come down on its own, so shhhh... be quiet and very still and let's hope the wind doesn't blow.

Regarding timing, the best I can say is "sooner rather than later." ;)


For more, please see some of my older posts on Hyperinflation:

"What are you more afraid of? The dollar becoming worthless? Or losing your job and running out of dollars?

"The whole world is constantly shifting back and forth between those two fears, so money demand bounces up and down like a yo-yo, and velocity — the speed at which the money changes hands — does, too.

"These wild shifts in money demand and velocity have the same effect as massive, instantaneous shifts up and down in money supply. It's like we're having a huge inflation, then a deflation, every few hours — because our fears change every few hours — because the politicians have all this arbitrary power and we don't know what they're going to do to us!"
-Richard Maybury from "What Obama Does Not Know"

A Little Perspective
The Waterfall Effect
Shake the Disease
Call Me Contrarian
The End of a Currency
What Obama Does Not Know
Why All Paper Will Burn (In plain English)
All Paper is STILL a short position on gold
Hyperinflation by any other name
Dollar Repudiation
More Deflation/Hyperinflation Fun
Worst Case Scenario (12" Remix)
On "Hyperinflation"
What Modern Hyperinflation Looks Like
Hyperinflation Germany 1923
Time to Warm Up the Printing Press
Deflation or Hyperinflation?
No Go

Like anyone would be
I am flattered by your fascination with me
Like any hot blooded woman
I have simply wanted an object to crave
But you, you're not allowed
You're uninvited
An unfortunate slight

It must be strangely exciting
To watch the stoic squirm
Must be somewhat heartening
To watch shepherd meet shepherd
But you, you're not allowed
You're uninvited
An unfortunate slight

Like any uncharted territory
I must seem greatly intriguing
You speak of my love like
You have experienced love like mine before
But this is not allowed
You're uninvited
An unfortunate slight

I don't think you unworthy
But I need a moment to deliberate