Parallels Between The End of Bimetallism and Innovative Bond Market Debt Settlement Products

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Sun, Sep 7, 2014 - 7:01pm

In the 1800s silver was the predominant money. Several silver discoveries occurred and miners began bringing more silver to the market, making silver somewhat more commonplace. "New" silver was in the possession of parties not of the establishment, that is to say miners rather than bankers or politicians.

At that time, both silver and gold were defacto world currency, and a certain weight of silver was the same as a smaller weight of gold. Therefore silver was convertible to gold, and both were convertible to dollars.

Soon after, the banks in the US and elsewhere, instigated by a London connection, lobbied for silver to be retired as official form of money. The required laws were passed in the US and UK. This caused a situation to arise whereby people who had borrowed from the banks were required to repay in gold. But their savings were in silver, and silver could no longer be used to pay off debts to the bankers. This hit particularly in far eastern countries, and in the lower to middle classes. The demand for gold pushed it's price upwards, and the silver sold to get gold dropped the value of silver. The bankers did very well from the demonetization of silver.

Since that time, and during most of the 20th century, the US dollar became the defacto world currency of choice. At first the dollar was convertible to gold. Dollars became more numerous and gold remained as scarce as ever. But this came to a head and during the 1930s the link between dollars and gold broke and gold rose in price and the dollar fell, in a sudden re-marking of valuations. Citizens of the US were ordered to sell their gold prior to the rise in the price of gold.

Sovereign countries could still own gold and demand repayment for dollars in gold. New dollarswere brought to the market by the US and the dollar became available to a greater degree during this period. Subsequently during the late 1960s there was another currency adjustment and this ability of countries to present dollars and be repaid in gold came to an end.

During recent years the TBond has become the convertible dollar asset. TBonds are dollars and are repaid in dollars, but there are now trillions of TBonds floating around planet Earth. Things may soon come to a head again.

At one time in the past silver became more available in the way that TBonds are now becoming more available. The result was that silver, in the hands of the people was subsequently demonetized, and at the same time gold in the hands of the aristocracy and bankers revalued upwards.

So if history should repeat, dollar debts (TBonds) will soon be settled with something which the financial-political (+Corporate?) establishment have but everybody else must acquire in order to repay their debts.

The key is who has the money. If it is the establishment that form of money will survive. If it is the people, then the money will be replaced by some new form of money that can be monopolized by the establishment.

Since TBonds are in the hands of everyone else, and the liability for TBonds is in the hands of the establishment, then TBonds will be the item which becomes obsolete through new laws. Low real interest rates and forced rollover into new form of digital TBill-cash rather than exit TBonds into cash seems likely.

So the bimetallic standard of the 19th century has now evolved into a TBond-debt-dollar standard. The people who hold the bonds will receive the same treatment that silver owners and later gold owners received from the establishment.

So the question becomes: how can TBonds (and other western country bonds) be defaulted on without legally being defaulted on? Well the lawmakers can solve that. The ECB has already created "superior status" bonds to parachute onto the insider bond owners higher rights of repayment (higher seniority).

The German courts have given some adverse reaction to this negative treatment of existing bondholders, causing difficulties but I am sure the process will continue until the indebted governments legislate absolution for their sins - and the bonds holders - the rank and file bond holders - to wit the pension funds for the people - get stiffed with the cost of the walk away debt free card the establishment is currently setting up for itself.

For the banking-political establishment to renew itself, TBonds and sovereign bonds must be separated from their functioning convertibility to TBills and cash. Thus the yield curve must assume historically unusual dimensions. Negative interest rates are a part of this. During the 1970s Swiss interest rates went negative so there is nothing new in that.

Collateral requirements using TBonds as cash will be affected by this. There is also the problem caused by Central Bank purchases of their own sovereign bonds and thus becoming a significant customer to themselves. They will therefore suffer from any default by themselves. This is presumably where seniority will be adjusted to ensure the damage falls upon other bondholders rather than themselves. Hedging is of course the alternative approach. To hedge Central Banks would presumably buy gold or cancel leases of gold to take ownership of what was a leased asset. Since such gold has probably never left their vault this is not such a problem for the Central banks. The question would then become who to take over the leases and obligation arising from swapping gold for cash? In the past a favourite gold mine of the establishment, for this purpose, would appear to have been Barrick. Will it be the royalty's and streamers this time? Whichever, it would appear reasonable to assume that Central Banks would benefit from a low gold price during the period during which their leased asset contracts expire, or during which replacement gold must be acquired. Given this situation it is unsurprising that low gold prices should appear about now but the CBs will be acquiring rather than selling gold while prices are low. Asian CBs disclose making gold reserve increases, but western CBs are tight lipped on this subject and leaked information appears to suggest divestiture of gold rather than acquisition. If only all information were reliable our life would be easier. Misinformation abounds.

The alternative hedging asset would be crude or energy assets. Therefore it is no surprise that about this time armed conflict has escalated in many countries which are strategically important in this regard. It is interesting that an African gold producing country, Mali, has been invaded/"rescued" by France, and other gold holding countries of size (Iraq/Libya) have been invaded by US/NATO. A civil war has coincidentally begun in Ukraine which is an energy conduit country and also appears to have "lost" it's gold in a moment of apparent chaos. This fits perfectly with the picture of Sovereigns and Central Banks hedging against debt failure using energy and gold assets.

In the circumstance any introduction of a new currency whether it be a digital currency, or an elevated seniority bond/bill can signal a splitting of the twins of today's money. Cash and bonds can still get the treatment silver and gold received a century ago. TBills and cash cascaded into some new digital money product could be used to achieve a revaluation at the same time, and a disenfranchisement of non-establishment external "wrong type" dollar holders.

Until then the currency which the debt is denominated in can be debased, though it's not so easy with a reserve currency, to achieve a similar result though the damage can not be aimed so precisely at disliked parties as it could with a paper asset/electronic asset devaluation.

This is outside my area of expertise, which is more trading oriented, and should be considered as a conversation document rather than anything more.

Have a good day everybody!

Argentus Maximus

The author posts daily commentary on the gold and silver markets in the TFMR forum: The Setup For The Big Trade. More information about the author & his work can be found here: RhythmNPrice.

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