Our Daily Bread

There can be little doubt is that Adam Smith’s chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do the least harm.

- Frederich Hayek, “Individualism and the Economic Order”, 1948 University of Chicago Press, pg 11.

 

As readers of this blog know, one of my strongest objections to Keynesian economics is that it facilitates, and indeed almost compels, massive malinvestment over time.  Austrian economists usually explain the concept of malinvestment by noting that during times of monetary and credit expansion, the “easy money” available as part of a central bank-fueled spending binge encourages firms to make unwise investments, reduces the discipline with which they might normally allocate funds to various projects, and essentially takes a scarce resource (capital) and facilitates poor spending decisions by making it appear to be less scarce than it actually is. 

As Ludwig von Mises wrote:

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. (Ludwig von Mises, Human Action: A Treatise on Economics, 1966)

In short, I tend to think of malinvestment as spending capital unwisely on the (false) assumption that capital is plentiful and easily obtained, when in reality that capital represents a finite amount of stored value that is (contrary to the market signals given by easy money) hard-earned and not easily replaced. In the private sector, we might point as an example to the imprudent buyout of a competitor at higher prices than can reasonably be recouped from the acquisition over the long term.  In the public sector, virtually any government boondoggle would suffice as an example, from “community development” projects to taxpayer-funded bailouts which always seem to go over budget and yet manage to underperform prior claims of economic benefit.   

OK, all of this is a bit dry and esoteric, but it is necessary background for the two points I want to make in this essay.  The first point is that I don’t think people truly understand the scope of the problem that modern central banks and politicians have created for us. We are now in a cycle of malinvestment that has lasted literally for generations, and hence has created worldwide malinvestment on a scale never before seen in human history.  The second point is that the depth of this malinvestment goes well beyond government spending and the odd “bridge to nowhere” or the thinly-stretched balance sheets of multinational corporations.  The scope of malinvestment has profoundly shaped generations of people – human capital being the most precious capital of all – and has left enormous swaths of society ill-equipped and ill-trained to actually produce anything of value, once the easy money spigot is turned off. 

 

The scope of malinvestment

The examples I am going to use are tailored to US readers, but I suspect that anyone living in an “advanced” western country will recognize exactly what I am talking about here.  Look around at the state of the economy in your city, county, or neighborhood.  Chances are that you see “For Rent” signs on many empty buildings that used to house businesses. You see EBT cards being swiped at the grocery counter, and a general economic lethargy that is impossible to deny despite the incessant attempts to convince you otherwise on the evening news.  Chances are you know somebody who has lost their job, and they will be very quick to tell you that those jobs are NOT being replaced.  Many of the people you meet on a daily basis are quietly working two jobs at low wages and still are barely managing to survive. In short, nobody in their right mind would confuse our current situation with healthy economic prosperity.

Now think about this:  the situation you see around you is what 17 trillion in debt, borrowed from the future to “stimulate” the economy of the present, has managed to buy. Six trillion of that debt has been run-up in just the last five years.  We have borrowed from futurity such an enormous amount that it will not, in all likelihood, ever be paid back.  And this is what we have bought-  this grueling existence with 45 million on food stamps, jobs disappearing or being replaced with temporary or part-time menial labor, this walking dead economy.  These are the GOOD times, purchased by borrowing from future prosperity.  Think about that long and hard, and if you ever truly wrap your mind around this it will keep you up at night. 

I have never read a reasonable estimate for the scale of malinvestment we currently have, perhaps because the scope of the problem makes it all but impossible to quantify. Or perhaps it is simply that the implications of such a study would be nearly too frightening to contemplate. What I do know is that it represents an enormous opportunity cost that will not be easily recouped, and that the transition to efficient capital/resource allocation suggests a substantially lower standard of living for a very long time.

 

Give us this day our daily bread

One aspect of this malinvestment that often gets overlooked is the human component.  As mentioned earlier, the most precious capital any society has is its human capital - the aggregate of all the education, capabilities, skills, and ability to produce- contained within the population.  Just like financial capital, human capital can be misallocated as well, and I would propose that we have seen a massive malinvestment in human capital thanks to 70 years of Keynesian policies.  This goes far beyond simply “We have too many people doing X job and not enough doing Y”. To a degree perhaps never before seen, tens of millions of people over multiple generations have been trained and educated to perform jobs that literally would not exist sans easy money. Many others have been insulated from the immediate repercussions of their behaviors or choices to the degree that they now possess such paltry skillsets as to be virtually unemployable.  To put it bluntly, we probably have a larger proportion of our population that is unable to produce anything of value than any civilization in history. This malinvestment in the citizenry (and resultant lack of productive or profitable skills) extends from the college educated Wymyns Studies major to the high-school dropout dependent on welfare benefits whose skills may not even merit minimum wage employment .  At the same time, large swaths of hard-working, well educated people may have spent their entire lives training for professions that literally would not exist outside the rarified milieu of an easy money economy.

This is not just a temporary case of “monetary solutions failing to solve structural problems” as many Austrian economists would assert.  Such a formulation downplays the true generational nature of the structural problems- decades of malinvestment  has left us with a large numbers of people either unable or untrained to produce much of anything of genuine value.  Not to put too fine a point on it, but what exactly are these folks going to do to earn their daily bread? To say that we may have a difficult transition to a different monetary regime if/when the current Keynsian debt-based system runs its course, is in my opinion a gross understatement.  Such a financial transition may well suggest a lost generation, or even generations, in terms of human capital. It may suggest social or political implications that are rather bracing to contemplate.

.    .    .

The phrase “The End Of The Great Keynesian Experiment” implies a great deal more than just a financial reset.  Bad decisions have consequences, and 70 years of bad decisions have compounded into a rather monstrous situation.  How this situation will ultimately be resolved is anyone’s guess, but I suspect that the actual costs – including the human costs - of Keynesian economics will be something that we will be paying for, for a very long time.  Prepare accordingly.

140 Comments

¤'s picture

Yamada see's $1,000 Au in 2014

Hedge Funds Raise Gold Wagers as Yamada Sees $1,000: Commodities

By Elizabeth Campbell and Debarati Roy 
January 07, 2014 7:25 AM EST 

Gold Bars

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Hedge funds raised their bullish gold bets to a six-week high, splitting with analysts at Technical Research Advisors LLC and Goldman Sachs Group Inc. who are predicting more declines after last year’s rout.

The net-long position in gold jumped 19 percent to 34,104 futures and options in the week ended Dec. 31, U.S. Commodity Futures Trading Commission data show. Short holdings slid 4.6 percent to 72,571, the lowest since Nov. 19. Net-bullish holdings across 18 U.S.-traded commodities fell for the first time in six weeks as investors became the most bearish on sugar since September.

 

Gold tumbled 28 percent in 2013, the first decline in 13 years and the biggest since 1981, after some investors lost faith in the metal as a store of value. The Federal Reserve on Dec. 18 cut the pace of its monthly bond purchases. Bullion is poised to fall another 19 percent in the coming months to $1,000 an ounce, said Technical Research’s Louise Yamada, who’s the former head of technical research at Citigroup Inc.

“With gold, in the short-term, we’re being pulled in multiple directions,” said Michael Cuggino, who manages about $10 billion of assets at Permanent Portfolio Family of Funds Inc. in San Francisco. “There were sellers trying to get out in front of the tapering. Physical demand is OK, but not strong. You also have increasing economic activity, which could begin to accelerate inflation.” ('Haze: questionable demand statement by this guy imho)

Price Slump

Futures in New York climbed to $1,247.70 yesterday, the highest since Dec. 16, as last year’s rout made the metal attractive to buyers of coins, bars and jewelry. Prices slumped 25 percent in the past 12 months, as the Standard & Poor’s GSCI Spot Index of 24 raw materials slid 5 percent, while the MSCI All-Country World index of equities advanced 16 percent. The Bloomberg Dollar Index, a gauge against 10 major trading partners, rose 3.5 percent. The Bloomberg Treasury Bond Index fell 2.5 percent.

Bullion fell to $1,181.40 on Dec. 31, within $2 of the 2013 low reached in June. Prices rebounded partly as some investors closed out bearish wagers, Cuggino said. Fifteen analysts surveyed by Bloomberg News expect gold to rise this week, two are bearish and four neutral, the highest proportion of bulls since December 2012.

While short-term rallies may occur, a head & shoulder pattern signals that gold will extend its declines, Yamada of Technical Research said. A drop to $1,000 would mark the lowest intraday price since October 2009.

‘Very Weak’

“The market still looks very weak,” Yamada said in a telephone interview from New York. “There is potential for further declines, and it’s too early to say if the market has a double bottom in place.”

Prices are “likely to grind lower” through 2014, Jeffrey Currie, the head of commodities research at Goldman Sachs in New York, said in a telephone interview Dec. 19. The metal will reach $1,050 by the end of 2014, the bank said in a Nov. 20 report.

Gold surged more than 500 percent in the 12 straight years of gains through 2012 as the dollar weakened. The rally accelerated from December 2008 to June 2011 as the Fed expanded its balance sheet through debt purchases and held borrowing costs at a record low in a bid to revive growth amid a U.S. recession. Bullion reached a record $1,923.70 in September 2011.

Fed Taper

Fed officials said Dec. 18 they would trim monthly purchases of bonds to $75 billion from $85 billion starting this month. The central bank will probably reduce its quantitative easing in $10 billion increments over the next seven meetings, before ending the program in December, according to the median estimate of economists surveyed by Bloomberg on Dec. 19.

“Gold is at a bit of a crossroads here,” ......(cont.)

http://mobile.bloomberg.com/news/2014-01-07/hedge-funds-raise-gold-wagers-as-yamada-sees-1-000-commodities.html

 
Hammer's picture

This guy is talented - choose

This guy is talented - choose your favourite

http://www.anthonyfreda.com/index.html

HappyNow's picture

The end will come when enough

The end will come when enough people lose confidence.  If they are too busy scrabbling for a living will they even have time to think it all through and then act on it?

sierra skier's picture

Good Morning all.

Now to read.

Excellent points Pining.

We have far too many folks who are employed in non productive parasitic industries such as finance and many of the useless service industries. These folks have little value in the production of the real items the population needs to live. When difficult times come their skills will be the first to become unmarketable and unless they have alternative skills and knowledge their value to society will be of little or no use.

Mr. Fix's picture

These are not just bad decisions,

What we are going through  has been carefully planned and is being orchestrated by psychopathic madmen with the sole intent of theft and depopulation.

They will need to be defeated, or any new system to arise out of the ashes will simply be a new scam to rape and pillage the populace.

Nice job Pining.

ivars's picture

http://www.reuters.com/articl

http://www.reuters.com/article/2014/01/07/us-turkey-economy-idUSBREA0608K20140107

Quote:
(Reuters) - Turkish Prime Minister Tayyip Erdogan on Tuesday blamed Ankara's widening current-account deficit on large gas and oil imports and said the gap would not pose a threat to the country "for the next four or five years".

"We have natural gas and oil, which is imported," Erdogan said in a speech during a trip toJapan.

The gas imports are "causing this current-account deficit," he said through an interpreter. "It's not because of what the government has done."

The deficit in Turkey's current account - the broadest measure of trade in goods and services - widened to $51.9 billion in the first 10 months of 2013 from $39.6 billion a year earlier.

TRANSLATION: F... You Western Bankers we are going to continue gold buying in defiance of the coup You instigated. 

Which means escalation. Turkey->Iran->China->Pakistan.... then   Saudi-> India (so far complying with Western demands, but lets see what happens after elections) ... new alliances of gold holders are forming. Debt limit ceiling increase in this spring  becomes even less likely. 

oneagleswings's picture

jobs unavailable without easy money

So the neighbor girl who has a Masters in Library Science and being paid 70k a year and insane benefits really couldn't earn a living if we weren't in an easy money environment?  Real work for real food I say as well.  Good article.  I am helping butcher four steers and cut them up and wrap the cuts.  In exchange for two days of meat cutter skills I am awarded a quarter of fine midwest beef.  There will be no USDA  inspectors there either by the way.  Barter,  the wave of the future.  Barter will be coming soon to a city, county near you.

StevenBHorse's picture

Word to the bird

Look at all these mathematicians going into high finance and quant jobs, just to be able to build a quicker mouse trap that robs from ordinary investors.  

These are some of the brightest young minds that we have, and they are squandering their talent.  They could be solving real world changing problems, but no they are enticed by the easy money coming from the whores on Wall Street.

The money would only be alluring to a society that has lost its moral compass, and that goes hand in hand with FIAT money in general.
 

ag1969's picture

Pining Malinvestment is the understatement of 2014

On a shortlist:

-A trillion dollar/year military that can destroy the earth many times over, it is so huge, it needs to fabricate enemies to have someone to kill.

- An ethanol program to "reduce our dependence on foreign oil" resulting in the requirement of more than a gallon of oil to produce a gallon of ethanol

- The destruction of our food supply with exotic chemicals and GMO monster food while we fuck up health insurance and distribute toxic pills to people poisoned by the toxic food

- Billion Dollar Campaigns

- taxing the middle class to subsidize poverty

- An unbelievably comprehensive spy network while our bridges, roads, crumble

- Billions in foreign aid while our own cities turn into wastelands

And in the end, whomever can actually earn their daily bread, ends up trading the fruits of the labor for bread made with genetically modified wheat that will kill him anyway.

Debt is the money of slaves.

Patrancus's picture

The end will come when enough @ HappyNow

lose confidence in the unseen electronic digital cards, credits and quatloos,  that just keeps on giving. So simple to figure out, it would be child's play to pull it all together. Hey how about that, the children are in charge. They only needed to have the cooperation from a hungry pack of elected and unelected stooges who owe favors for their good fortune, a supercomputer matrix and the heavy weighted power and control of gooberment to pull it all together. The age of electronic distribution of unlimited financial and economic repression meds for all in the underclass and for all the newbies of this class getting so much free electronic meds, the lame feel no pain. Its a tall order to shake confidence out of those stacks of shear confidence, no jobs, no future, no soup lines, no gruel, no pain, just key in a password and your feeling good Louie. When dose it end?, end? oh my God I hope not.

AlienEyes's picture

"malinvestment"

In my view, the be all, end all, ultimate "malinvestment" is living on Pennsylvania, Avenue, after being reelected for a second term by slack-jawed American voters with a sub 75 IQ.

As always, Pining, another great article.

realitybiter's picture

What would GDP

be otherwise?  What if we had not morphed into this economy, based on money which otherwise would not exist?  How much of a hit would that have on the economy?  20%?  30? 50? If we go to barter things would grind to a ridiculously low level.  Barter, though the absolutely most fair and honest, is inefficient and impractical (you may not have anything of value to barter for a transaction you need, hence no transaction - I think in a madmax economy PM banks would pop up everywhere facilitating credit for barter).

I have thought about this a great deal as it is a very big part of this PM trade.  What I do know is that we have stolen GDP growth from the future.  If a reset happened, that "increase" would vaporize and then some.  We used to rationalize our "future stealing" by saying "if you can borrow at 5% and increase productivity 6%, then you should borrow more."   You don't hear that anymore -even at rates near 0.

What would the US economy's GDP be if we wiped out all debts, reset the currency, and moved forward with an Austrian economic framework?

Whatever that drop is, is what the future of the stock market is.  Thoughts?

mac's picture

Bloomberg Blues

- anyone sure Bloomberg really "know" what the truth is, or that their anchors are not all cia/nsa whatever spin doctors?

realitybiter's picture

Utah Fusion Center

which is used to house all the US citizen spying data is an insane malinvestment.  I only hope that when this episode ends that the populous has the wisdom to convert it to the largest digital library, free to all, allowing free education to anyone with the time and inclination, and willingness to pay the marginal fee for high speed data.

Think about it.  Education is nothing more than transferring data/info from one being into another's head.  Technology advances, driven largely by the wildwest-free-market semiconductor and hard-drive industry (no bailouts there folks-ever)  has been driven down nearly to zero.  Yet the cost charged for transferring this data and recognizing it through govt regulated institutions has increased through the roof.  Universities are worse price gougers than DeBeers and diamonds....or plywood hucksters in a hurricane...

"Fusion University"

FU

catchy.

tyberious's picture

Gold Repricing of 1933 Was Just A Debt Default

About a week ago, we wrote about two new IMF papers who discuss a savings tax. The topic and the idea is gaining traction after the IMF described the effect of a one-time 10% tax on all savings recently.

In one of the latest two papers, Bron Suchecki brought up another interesting point from the paper. On his personal blog, he extracted a quote from the paper which proves that the repricing of gold in 1933 was nothing more than a debt default. An interesting view which has been underexposed.

“… the United States had already defaulted on its sovereign debt in April 1933 to domestic and external creditors alike. The abrogation of the gold clause in conjunction with a subsequent 40 percent reduction in the gold content of the U.S. dollar (January 1934) also amounted to a debt haircut amounting to about 16 percent of GDP.”
Bron Suchecki writes:
Nice to see mainstream economists calling a spade a spade and a handy link to use next time someone says the US never defaulted on its debt.
The rest of the paper is a depressing read, with Reinhart and Rogoff concluding that a “mix of austerity, forbearance and growth” will not get advanced economies out of their debt overhangs and that they will have to “resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression.”
While this is all stuff gold followers are aware of, it is the continued appearance of this financial repression narrative and related bail in and other talk in mainstream circles that I think is more important. As it becomes accepted wisdom that this the path we are on, then we will see money move into gold. However, while the mainstream continue to believe that we don’t have a big debt overhang and with a bit of taper here and there it will all end up peachy pie, we are going to see gold languish.

This forced repricing has been discussed extensively by Jim Rickards in the last few years. He expects the government to be forced to return to a form of gold standard and, by doing so, reprice gold. His latest expectations, as described in his newest book to be published soon, are gold going to $9,000 in that proces

http://goldsilverworlds.com/economy/gold-repricing-of-1933-was-just-a-debt-default/

NW VIEW's picture

@ realitybiter

Thoughts?     >>> Wiped out debts, reset currency, & Austrian economic framework?

We are all on a bus being driven through time and the driver is only concerned with his interests.  Nothing will change the speed and direction until external events transpire which flatten the tires and the roadways  collapse.  We are stuck on this bus with madmen as drivers.

Freedom from this journey is usually just another detour and merges onto the old dusty roadway , just down the yonder bend.  Times and future events will crush the existing framework as mankind will have to face his folly.     jmo

stephanie's picture

Too many healthy people on disability

Thanks for your post, Pining. A funny thing happened over Christmas. I was with some family who happen to be very liberal. Very well-meaning, but in denial about the reality of our fiscal situation. I had mentioned something about how disability actually hurts the people who are on it by keeping them stuck. My stepmom looked at me and said something like "You're not going to be one of those people who is going to blame people on welfare, are you?!"

I told her that while I was living in Los Angeles, I had friends my age, at the time, late 30s, who were perfectly healthy but taking advantage of government programs. One friend I had was on "disability" supposedly for Bell's Palsy, which she showed no symptoms of whatsoever the brief time (about 6 months) I was her friend, and she most certainly could have worked with it regardless. She didn't want to work, that's all. 

I had another friend who actually did have a good reason for being on disability (to a point) - she was a pilot and started suffering from migraines, which makes you unable to fly an airplane. However, disability destroyed her. She was depressed, feeding a food addiction and becoming quite obese, and spending copious amounts of time in her apartment with her shutters closed during the day. Oh, she had taken yoga teacher training and was trying to teach some yoga in the park once in a while but otherwise was not working. 

Being on disability for her only enabled and encouraged her addiction and depression. It would be better for her mental health to be forced to work to make her own way in life.

Well, my stepmom was really skeptical, but ironically enough, a few days later, we ran into a neighbor who was my age, in her early 40s, totally spry and healthy on the surface, smoking cigarettes like crazy, and she mentioned to us offhand - with no shame - she was on "permanent disability." 

Really? By your mid-40s?

Before you think I am unsympathetic to people with hidden ailments, I have had chronic fatigue syndrome since age 17 and was on disability briefly at 23. But I hated being on it and I got off it before I probably should have. I *wanted* to work. I *wanted* to contribute.

And I'm sorry, but unless you are totally sick or a quadriplegic, you can do something. Heck, even quadriplegics can contribute - look at Stephen Hawking!

A good number of Americans on disability now are just taking advantage and they don't give a damn if they take the country down with them while they do it. Their karma may be very harsh if we go into total collapse mode. 

AlienEyes's picture

@ sierra skier

Not to forget, the world's largest "parasitic industry" is the US government.

As for "non productive", the United States Congress, hands down.

ancientmoney's picture

@tyberious re: 1933 debt default through gold revaluation . . .

The same sort of thing is coming again.  We've called it the "reset."

Similar to 1933, paper gold will need to be killed off.  Those who held notes redeemable in gold were out of luck.  Nobody owning paper gold will get the benefit of the reset. 

Only those who ignored the law and kept physical gold remained whole after the government devalued the dollar (defaulted) against gold.

So long as COMEX (paper) PM trading and SLV/GLD exist, the reset is not yet upon us.

imfd's picture

Disability doubt

It is my belief that people are allowed to go on disability for minor or non existent conditions as it gets them off the unemployment numbers, you could claim not having any work is a disability.

ivars's picture

Suggested reading- Keynesian

Suggested reading- Keynesian ideas is not ending their cycle for the first time in history :

https://archive.org/stream/paperpoundof00grea#page/10/mode/2up

Bullion report 1810, Britain. Question for committee is why the price of gold in paper pounds have risen 15(!) % compared to the set exchange value ? Britain at 1797 when it could not anymore redeem paper pounds with gold due to over leverage of its debts -paper pounds- vs. gold in the Bank of England, had had Central Bank and debt money for 100 years. So they studied the issue in depth.

Turd Ferguson's picture

To that end...

MODERATOR

Excellent summary today from Bill Holter:

Some have asked the question "why does it even matter?" when it comes to whether we still have the gold in Ft. Knox or not.  They say "who cares, nobody uses gold to settle trade any more".  Even Ben Bernanke has testified (perjured himself) in front of Congress and said "gold is not money, it is an asset".  Based on this (il)logic it then goes that even if the vaults are empty it "doesn't matter".
  Let me take you back to where this all started and to how we got here in the first place.  It used to be (before the Federal Reserve was created) that banks could issue "currency" based on how much gold they had to back it.  Then the Federal Reserve came along and played the same game, they issued dollars based on how many ounces they had stored.  1934 came along and the Fed couldn't issue any more dollars because they didn't have enough gold...no problem, just change the "value" of gold from $20 per ounce to $35 and money supply could be expanded by 75%.  This worked for a while and then Bretton Woods came along and the US had the lions share of the world's gold reserves at 20,000 tons...which worked until the early 60's when Charles DeGaulle decided he (and other nations)would rather have gold than dollars because too many dollars were being issued and gold's supply was not expanding as fast as the dollars were being printed.
  Then along came 1971 when Nixon shut the gold window and effectively defaulted the US to the rest of the world.  Henry Kissinger then cut a deal with the Saudis where they would only accept dollars for oil...which worked well until about 10 years ago.  During the late 80's along came derivatives where 1 ounce of gold could "act" like 2 ounces...and then 10 ounces and now 100 ounces.  Digressing slightly, 1971 was very similar to 1934 with respect to gold needing to be revalued.  It was not "officially" revalued, the marketplace did that.
  So here we are today.  Yes, gold has been begrudgingly revalued higher but what once was a 1 to 1 relationship has become a 100 to 1 relationship as ounces (tons) have been pledged as collateral and then repledged many times over.  Notice I used the word "collateral" here?  Collateral is "backing" or "foundation" as security or guarantee if you will for loans extended.  The problem is that this same and singular collateral has been used many many times over.  Clear title and ownership cannot any longer be determined.  No problem though...because it has worked and is still working right?
  The answer is "yes" it has and still is working but would it, will it work if this 100 to 1 rehypothecation was commonly known?  Would it work if it was commonly known that the vaults were emptied in an effort to suppress the price of gold?  Maybe it could or would here in the US because the population has been brainwashed for so long that we no longer understand the definition of money.  Will it work with foreigners?  Do you really believe that the Chinese will continue to send us fabricated widgets in exchange for pieces of paper just because they have pictures of past US presidents on them?
  I guess what I am trying to explain is that Americans for the most part no longer understand currency or exchange rates.  We haven't had to because the world revolved around us, foreigners on the other hand understand exchange rates like the back of their hand because they are exposed to them every day.  What Americans also don't grasp is that currencies are "accepted" based on confidence.  There was in the past "confidence" in the US financially ...because we "had the gold".  If (WHEN) it turns out that we don't have the gold, acceptance of dollars will cease.  The "when" part by the way is what I have written about over the last year or more.  Once China can no longer exchange dollars and receive gold...they will no longer accept dollars, it really is this simple.  Yes I know, some will say "but we have the military and will force people to use dollars"...which has been true.  But, can a military perform without funding?  I guess this is a question that could have been asked of the Romans and you'd get the proper answer.
  The answer to my title is pretty easy.  "It doesn't and won't matter until it does".  Yes I know, simplistic but...when it does finally matter it will REALLY matter because when a currency is no longer accepted it collapses in value and "hyperinflates" so to speak.  Are German Reichmarks or Confederate dollars accepted anymore?  Do they have any value other than historical?  Would they still have value if they were backed by gold?  Yes I know, they were both defeated in war...partly because they did not have gold to fund their operations.  The same thing could be asked about the Russians...who ran out of gold in 1990.  They seem to have learned by that mistake. 
Regards, 
Bill Holter
Miles Franklin Associate Writer
 
tyberious's picture

AM

I'm not sure whom it was but someone on the TFMR keep disputing the fact the the US did default in 1933.  Now, I don't have time to go into it but suffice to say it was banker induced.The Banksters will not let you have a productive economy, unless you leverage your future!

mac's picture

Elves are helpful

Charts are helpful. But they can be painted. And Louise Yamada is one of the "elves". Sure they have impact, when a 50 day-200day is crossed or whatever, but people don't buy gold from belief in these pics, not always for sure, and if they do, do they sell when the pics says so (crosses a line etc)? Then they are at the mercy of the chart painters. Led by the nose? Could be a winner, to follow the pics? I feel better when say, 1240 or 1280 is taken out, so I am aware of the numbers that the charts have given as focus points.

Technically gold is not looking great. So what, stocks of PM' s companies are so cheap, and PHYSICAL always is a calm down asset to hold, especially now.

AlienEyes's picture

Re: To that end...

It seems that we are truly coming full circle....and I can prove it.

Case in point :

Richmond Federal Reserve Bank prints a $20 bill. It is worth twenty (inflated) dollars.

A twenty dollar Confederate States of America bill (in really good shape), also printed in Richmond during the War of Northern Aggression now sells on eBay for $81 USD.

Now I ask you, WHO won the civil war ???

Hence, the sign I saw in the front window of a Richmond coin shop....

"For a limited time only, we are still accepting yankee money."  smiley

ivars's picture

From 1810 Bullion Comittee report

So, nothing really new is happening, just in another country of debt money , which (USA) was forced off international gold redeemability already 58 years after FED establishment as opposed to 100 years of Bank of England(established in 1697). 

Domestically, FED moved off gold redeemability already 20 years after establishment of the FED. 

So in Britain's case, from establishment of CB, 100 years in debt money to move off gold standard in 1797, then another 24 years till restoration of gold standard in 1821. 

Totally 124 years. In USA, removal of gold standard happened in 2 phases, and faster, so already after 100 years the currency is close to disappearing.

Following Britain's experience, one of solutions would be to put it back on gold standard, or missing that, make a gradual restoration of currency value.

There are 2 options now which I think are followed both at the same time:

a) Stop growing and reduce USG debt

b) increase USG gold reserves

None of these are easy or pleasant as:

a) will cause worldwide recession

b) no one is willing to give the gold back to the USG for USD anymore. Besides, any news that USG is acquiring gold will send its price into the sky since to restore confidence in USD at present value even, its gold reserves has to be increased ..suddenly.. by at least a factor of 3-5, so to 30-50 000 tons to reduce leverage of paper over gold.

Quite a dilemma. My opinion, a) will happen ASAP since that is something USD can do alone and the West have to go along since all its finance system is based on USD and defense on US military.  

b) is happening already but that is a covert action and so far has succeeded only in somewhat slowing the growth of  the drain of the gold to the East; but nowhere near the goal of obtaining if not physical at home, then registering it officially as possession of US or West controlled  international body like IMF ( giving some quotas instead:)). Or by exchanging at par to new US debt ( that would be the simplest solution, to gather 30 000 tons USG only needs to issue one more Trillion of debt at high interest, but the gold thus obtained could be leveraged over again at least to 20 trillion more debt) 

Saudis were offered UN Security council place. They refused. Does not look good for USA attempts to repossess the gold. 

silver66's picture

Ivars- Thanks for report

I am working thru it, truly nothing new ! We can learn so much from history and position ourselves accordingly

You are sounding somewhat freegold like in your most recent post wink.

Silver66

Stack till it hurts

ivars's picture

Quote:You are sounding

Quote:
You are sounding somewhat freegold like in your most recent post

That would be a capitulation by the West I do not expect it to happen ever in real life. Like all utopias its even a bit dangerous I think. Its implementation will be so skewed from the pleasantries one would expect from it as real life communism was from utopias that tried to describe it.

But so far there is free bitcoin in a dispersed state, like freegold is supposed to work...  Enjoy while its still there:)

ivars's picture

As a summary there is no

As a summary there is no pleasant way out of current situation which is getting urgent.

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