Guest Post: JAWS and Loss Aversion by "Pining4TheFjords"

Wed, Jun 26, 2013 - 12:17am

Why the movie Jaws offers significant insight into preparing for the end of the Keynesian experiment. And no, I’m not kidding.

I have to admit the movie JAWS is a weakness of mine. Whenever I am channel surfing, trying to find something not entirely odious to watch and I see those four magic letters I am – pun intended – hooked. It never gets old watching the sleepy New England resort town of Amity be terrorized by a giant predatory shark! I still find the movie as compelling as I did when I saw it for the first time as a nine year old, whose parents accidentally took him to see his first “horror” movie. Turns out, I’m not alone in loving this film. JAWS became the first movie to record 100 million dollars at the box office, the first to take in 100 million in rentals, and was the highest grossing film of all time until it was supplanted by Star Wars. Adjusted for inflation, Jaws has earned almost $2 billion worldwide. All of which is truly incredible, given that the whole story was built around fear of a giant shark, and in this movie the shark itself was a rubbery, mechanical joke that looked entirely fake in almost every scene in which it appears.

So why the popularity? Why has it stood the test of time and is still eminently re-watchable? Why is this unquestionably a great movie? First and foremost, it is just plain good entertainment- Spielberg strikes a perfect story-telling note by crafting moods, developing a plot, and pacing the action masterfully. But films that are truly great do far more than just entertain us; at their very best, they provide genuine insight into the human condition and allow us to glimpse, as if passing a mirror on a city street, a reflection of ourselves. Jaws does this brilliantly.

The three major figures of the movie are well known, and all three roles were beautifully portrayed in the film. The role of “decent man who faces his fears and redeems himself” Chief Brody was played in solid but genuine fashion by Roy Schieder. The audience knows from the start that he is a good man and we believe that the chief will ultimately do the right thing, even when the aquaphobic Brody shrinks from his first encounter with the shark, retreating into the shelter of Quint’s cabin pleading “You’re gonna need a bigger boat”. Brody, however, is pretty standard cinematic fare- Mr. Smith goes sharking.

Richard Dreyfus played Mr. Hooper, a young scientist and shark expert. The Hooper character has been described as emblematic of “modern, technological man” in some reviews of the film, while others claim he is the younger half of a classic odd couple / buddy film relationship with ship captain Quint. Regardless, his character development is also fairly typical, the “plucky youngster who earns the respect of the old veteran” found in everything from sports movies to war films.

Ship Captain and shark-hunter Quint was played in a tour de force performance by veteran actor Robert Shaw. The character was such an overt reference to Melville’s Captain Ahab that Director Steven Spielberg wanted to include a scene of Quint sitting in a theater watching Moby Dick and laughing so raucously and inappropriately that patrons around him got up and left. Unable to secure the rights from Gregory Peck to show even a short cut of Moby Dick, Spielberg was forced to give up on the scene, though the idea persisted and was eventually used in the movie Cape Fear. Despite the power of Shaw’s portrayal and the intensity of the character, Quint is an archetypal figure dating back to the ancient Greeks- the driven hero whose intensity turns to obsession, and ultimately self-destruction. Like Ahab, Quint is dragged beneath the waves by the thing he both hates and loves most.

But of all the outstanding performances, taut suspense and gripping action of Jaws, do you know what haunts me the most about that film? It’s certainly not the rubber Carcharadon Carcharius. It’s not Brody having to shark-hunt from a small boat despite his fear of the water, nor Hooper climbing into an aluminum shark cage with a three ton monster just waiting to rip it to shreds. It’s not even Quint slamming the throttle of his crippled engine full ahead in a maniacal act of self-destruction. No, the most haunting and frankly disturbing aspect of this movie is the pitch-perfect performance of Murray Hamilton as Larry Vaughn, the Mayor of Amity.

Why, yes- the blue “sea anchor” blazer is indeed frightening. Haunting, even. But examine this character more closely, scrutinize his actions and motivations, and you will see something truly worth realizing and internalizing; Mayor Vaughn is a perfect blueprint of how our leaders will act during the End of the Great Keynesian Experiment. He provides us with a veritable roadmap demonstrating exactly what we can expect in the near future, and indeed how some of our leaders are reacting at this very moment, to the great unwinding of the debt-based economy and governmental structure.

To understand Vaughn, and the politicians who are going to be making the decisions that will affect our wealth, safety, and freedom through possibly the biggest unwinding of bad debt and mal-investment in the history of economics, the crucial ideas to understand are the psychological principles of “Prospect Theory” and its constituent part, “Loss Aversion”. Prospect theory is a behavioral economic theory that describes the way people choose between alternatives that involve risk. The theory states that people make decisions based on the potential value of losses and gains rather than the probability of final outcome, and that people evaluate these losses and gains using certain heuristics. Loss Aversion is the finding that people tend to be risk-averse for gains but simultaneously to be risk-acceptant for losses. To put it simply, gaining ten dollars gratifies us far less than losing ten dollars will upset us. Additionally, people will risk far more in order not to lose ten dollars than we would to possibly gain ten dollars. Rationally, it seems nuts, right? But it is thoroughly well research and has been proven true in experiment after experiment.

What this means is that, when it comes to assessing risk in relation to potential gains, people tend to be fairly conservative and will generally take on only those risks that are commensurate, and make sense in light of, the potential gains. But what is strange, and in the context of this discussion is actually quite frightening, is that people will engage in FAR riskier behavior in service of the goal of avoiding losses, often to a degree that seems to make no rational sense.

Let’s talk about some examples. It is a well-known that the final race at any race track will be see the heaviest betting of the entire day. This is not because people suddenly have an insight into the field, it is because by that point most people betting at the track that day have incurred substantial losses, and rather than simply accept their losses and go home, they are willing to bet an inordinately heavy amount on the final race in hopes of avoiding the finality of having to book their losses by going home. They are willing to wager (risk) more than they normally would to avoid losses, even if this rationally makes no sense at all! Traders, at least beginning traders, often make the exact same mistake in the markets- rather than book losses and get out of a losing trade, they irrationally hold a deteriorating position (because if you don’t sell, the losses aren’t made “real”) or they even double down on what has been a poorly performing investment, making a riskier bet in the hopes of a big comeback to avoid their losses.

This is classic Loss-Aversion, and it is deeply hardwired into the human psyche. Studies have shown that when people are presented with two versions of the exact same problem, they are willing to take far greater risks when the problem is phrased as “avoiding losses” than when it is phrased in terms of” potential gains”. Keep this principle in mind, and let’s take a good, hard look at Mayor Larry Vaughn and see what we can learn.

For those who haven’t seen the movie but have somehow managed to crawl out from beneath their rock long enough to locate a computer and read this blog (a rather unlikely prospect, I’ll grant you) here’s the gist: a pretty young lass is skinny-dipping at night near the resort town of Amity, Mass. and gets torn to shreds by a huge shark. A few bits and pieces wash up on shore and the horrifying prospect of this happening to someone else prompts the local Sheriff (Brody) to have a talk with the mayor about closing the beaches until something can be done, which seems a very reasonable course of action under the circumstances. The mayor, however, steadfastly refuses and in doing so gives us our first key insight: Leaders benefit most from the status quo, and will perceive that its preservation is of enormous importance, all out of proportion to its true value. They therefore cannot rationally assess the real cost of maintaining the status quo.

What could possibly be worse than a young girl being mutilated and dying a horrible death? Well mayor Vaughn seems to think that closing the beaches and losing tourist dollars would be worse. Is he a monster? Absolutely not- in fact, he sees himself as behaving in a manner entirely consistent with his duty as he sees it; protecting and defending the prosperity of Amity. “I'm only trying to say that Amity is a summer town. We need summer dollars. Now, if the people can't swim here, they'll be glad to swim at the beaches of Cape Cod, the Hamptons, Long Island...”. It’s not that the mayor wants anyone to be killed, it’s just that that threat doesn’t seem as ‘real’ to him as the economic costs (losses) of closing the beaches. Loss aversion.

We have already seen numerous examples of this type of ‘Mayor Vaughn’ behavior in the maintenance of the public and private debt Ponzi. One could cite George W. Bush reacting to the financial crisis of 2008 by approving massive government bailouts of the banking sector, and defending what can only be described as the ushering in of a truly Fascist/Socialist monetary regime by saying “I had to abandon free-market principles in order to save the free-market”. One could argue that the entire TARP bailout, followed by QE1, QE2, QE lite, QE3, ZIRP, and QE infinity have all been examples of risky strategy and “doubling down” to preserve the status quo- i.e., to prevent incurring losses just as Prospect Theory predicts. Regardless, the bottom line is that the more an individual owes their status/position/wealth to the current system, the more irrational they will be about trying to save it, regardless of the costs involved. Think about who is and will be deciding what to do, what strategies to pursue, and what actions to take as the great debt Ponzi unwinds. Do you think they will be rational about costs/benefits of saving the current system? Think again.

Additionally, back in 1975 Mayor Vaughn foreshadowed modern MOPE- Management Of Perception Economics. To Vaughn, and countless politicians like him, public perception is reality. Vaughn is an exemplar nonpareil of the ability to dissemble, to rationalize his actions, and to put an almost pathologically positive public spin on the situation. Notice, for example, that when Chief Brody wants to shut down the beaches and prevent anyone else from becoming shark food, Vaughn manages to portray his own position (exposing the public to great danger) of keeping the beaches open as the rational, responsible thing to do. He says “Martin, it's all psychological. You yell “Barracuda!” everybody says, "Huh? What?" But you yell “Shark!”… and we've got a panic on our hands on the Fourth of July!” It is easy to hear shades of Mayor Vaughn in the public pronouncements of numerous Fed lackeys post-2008 about the importance of “calming investors” (we wouldn’t want a panic on our hands) and “backstopping” the markets, “supporting asset prices”, the Bernanke Put guaranteeing stocks will never go down, etc. Never mind that people might be entirely rational to avoid or want to wind-down risky investments. Never mind that by managing perception you are both distorting the clearest signal of risk – the cost of borrowing – that exists, but you are also deliberately tricking people into risky behavior by encouraging them to deploy their hard-eared capital in ways they might not otherwise do if they understood the true dangers… but apparently the IMPORTANT thing is to reassure the public that everything is fine. Isn’t it? Thus, lesson number two: Count on being given distorted, incomplete, or deliberately misleading information at every turn, and when it comes to the true dangers and actual risks to you, count on being lied to.

In the movie, the shark kills a second victim whose mother then offers a bounty to anyone that can kill the shark. This sets off a wild amateur fishing spree culminating in a shark (that is obviously not the killer) being caught. Mayor Vaughn, of course, pounces on this opportunity (and again is the pitch-perfect model for our current leaders) mixing truths, half-truths, and outright lies into the most comforting story he could possibly tell to the public:

[to reporter] I'm pleased and happy to repeat the news that we have, in fact, caught and killed a large predator that supposedly injured some bathers. But, as you see, it's a beautiful day, the beaches are open and people are having a wonderful time. Amity, as you know, means "friendship". Sounds strangely like a Janet Yellen interview on CNBC, doesn’t it? Liquidity, as you know Maria, means prosperity.

And the parallels just keep coming! How does the mayor deal with the multiple deaths and mounting evidence that he has a catastrophe on his hands? This is lesson number 3: As the crisis deepens, leaders will engage in ever riskier behaviors including the aggressive denial of the obvious danger of the situation, and will attack those pointing out the danger, accusing them of acting in bad faith.

Hooper: Mr. Vaughn, what we are dealing with here is a perfect engine, an eating machine. It's really a miracle of evolution. All this machine does is swim and eat and make little sharks, and that's all. Now, why don't you take a long, close look at this sign [refers to the graffitied billboard] Those proportions are correct.
Mayor Vaughn: Love to prove that, wouldn't ya? Get your name into the National Geographic?

For good measure, Vaughn steadfastly refuses to own the consequences of his choice to desperately clinging to the status quo, shifting the responsibility for making good on his dangerous gamble to others, declaring “You boys do what you need to do to keep people safe, but these beaches will remain open… it’s gonna be our best 4th of July ever!” Sounds just like the glorious ‘Summer of Recovery’ of 2010!

In the film, the danger from the killer shark that Mayor Vaughn worked so assiduously to ignore finally hits home, of course. Both Vaughn’s and Brody’s sons are in a small sailboat when the shark kills an adult boater within feet of them. This, you expect, is the moment when Vaughn finally comes to terms with the true enormity of his misguided actions; the moment when he realizes that he has been risking people’s lives for a few extra tourist dollars and it nearly cost him his own son. Yet even when the disaster and danger is obvious and touches his family directly, even when he is a shaken, mumbling idiot whose son was almost killed… he must be almost manhandled by Brody into signing the hunting order to close the beaches and kill the shark.

This is the final, and most important thing we can learn from the good mayor: The defenders of the status quo are psychologically incapable of changing their mindset even when the dangers of their course are undeniable- they will engage in riskier and riskier behavior regardess of the costs, until disaster leaves them no other choice.

* * *

We live in a world where misguided economists, venal politicians, and a culpable, grasping public have all conspired to construct an economy and indeed a society predicated on the status quo of unlimited debt creation. The creation of value (goods, services, technologies) has been superseded and largely replaced by the creation of currency. It is a simple fact of mathematics that this status quo cannot endure permanently, and prudent individuals are planning today for the inevitable changes that are coming tomorrow. In formulating a strategy for surviving and possibly even thriving in such a situation, it will be crucial to understand exactly how our leaders will react during the inevitable crisis. Prospect Theory and Loss Aversion give us well-researched signposts and predictions, but on a more human level I think Mayor Vaughn shows us exactly how we can expect our leaders to react to the great unwinding of the public and private debt Ponzi- i.e., the status quo. It isn’t a pretty picture:

1. Leaders benefit most from the status quo, and will perceive that its preservation is of enormous importance, all out of proportion to its true value. They therefore cannot rationally assess the real cost of maintaining the status quo.

2. Count on being given distorted, incomplete, or deliberately misleading information at every turn, and when it comes to the true dangers and actual risks to you, count on being lied to.

3. As the crisis deepens, leaders will engage in ever riskier behaviors including aggressive denial of the obvious danger of the situation, and will attack those pointing out the danger, accusing them of acting in bad faith.

4. Leaders will shift the responsibility for making good on their dangerous gamble to others

5. The defenders of the status quo are psychologically incapable of changing their mindset even when the dangers of their course are undeniable- they will engage in riskier and riskier behavior regardless of the costs, until disaster leaves them no other choice.


About the Author


Jun 26, 2013 - 2:46pm

A classic example

When someone can't stand it that someone doesn't join their collective happy feelings dreambubble groupthink.

Jun 26, 2013 - 2:50pm

Congrats Pining!

I was hoping to get a cheer in on the first page of your first guest post -- but seems I am slow on the draw.

For all those bemoaning their sad and woeful fate in holding PMs (and also to the posers who pretend to be doing so to discourage those of us who actually do hold PMs), I jotted down some notes on the previous thread.

Now off to read Pining's tale of sharks and mayhem. I can already hardly wait for Part II: Attack of the Pygmy Goats

EDIT: Headliner post on ZH:

Gold Drops Below Its Average Cash Cost

Jun 26, 2013 - 2:51pm

@ DirkDirkler

You are a classic example of something yourself.

Silver Alert department of truth
Jun 26, 2013 - 2:53pm

will they be selective with gold?

Asked by dept of truth:

Question for other readers . . . do you think it would be safer to own foreign gold or pre-1933 gold, in terms of possible moves to confiscate by the Federal government? Or will they be that selective?

Whatever the elite own will be safe.

What physical gold is allowed in retirement accounts? (Rhetorical question.) Now, will this gold be confiscated because it is what the government can get its hands on? OR, is it safe because it's what the elites also have?

Jun 26, 2013 - 2:55pm

@ Pining

Word pictures, graphic pictures; wish I was not an artist like you aren't

Thanks for that great read; much food for thought there.

Jun 26, 2013 - 2:59pm

At these prices

The miners with adequate resources (cash) should be putting mined PMs into inventory and leaving them there, and if they have lots of cash, should be buying some physical if the cost is less than their costs of production. An announcement to that effect by ABX, or GG, or NEM would definitely help propel a little spike. Then again the majors are probably saving their cash to pick off the cash short juniors at fire sale prices.

Jun 26, 2013 - 3:04pm

My Wife

Called from work today and said to buy more. When I told her I have already bought over 200 oz in the last two weeks she said if I have anymore money, buy more. So happy I have taken the time to explain to her what we are doing and why. She gets it. I guess I am lucky that my wife is not an externalizing bitch like our present crop of trolls!

Bongo Jim
Jun 26, 2013 - 3:18pm
Mr. Picklepants
Jun 26, 2013 - 3:24pm

Tmosley is probably right.

Tmosley is probably right. It's all going to zero. The only question is does it gradually go to zero? Or will it be a flash crash at a certain point.

القراع عصفور benny_bomb_boom
Jun 26, 2013 - 3:26pm

@ b3 - same situation here

do you have any zig-zags? good post as always. hope the stupid assclowns don't call you a troll now.

Jun 26, 2013 - 3:35pm

Mayor Vaughn and Quint

Although Mayor Vaughn is a fantastic metaphor for human psychology in certain conditions, I am actually a bit troubled by the significance of the sailor, Quint, vis-a-vis us stackers.

As stackers, we would perhaps like to think of ourselves as the Roy Scheider character; down to earth and honest, and capable of reacting in a rational way, and indeed of acting while others avoid doing so. But there is a little bit of Quint in us too; the character who unlike the sheeple on shore, is in possession of a greater knowledge of the enemy. Armed with knowledge and being of independent means (his boat = our stacks), he can stand tall and fears not the monster in the deep.

But the monster is greater than even he could imagine, and smarter, and will be the end of him.

So, the price action of the last two months is instructive in highlighting what we are up against. I knew that they could take the paper price to wherever they liked, but I'd not have believed that after two months of this crap, that physical prices still have such a strong link to the paper spot price.

Meanwhile, in the seas of the paper markets, the monster chases schools of 'longs,' and the prices will keep dropping till they are all devoured. The final cartel war is against the Asian cash buyers. That will be the final showdown in this PM battle. My assumption is that they cannot extinguish Asian physical demand, in spite of having for example the Indian government in their pockets.

All the same, this is an assumption, and not a hard fact; they may find a way (and their options include war). This showdown with Asia's appetite for physical is where the fate of the metals prices will be decided, and I'm sure that we should not be complacent about the outcome.

AGAU billwilson
Jun 26, 2013 - 3:44pm

Hedges n assholes

Maybe the miners are being screwed into the ground until they commit to hedging forward sales again ?

One thing is evident for sure,, the miners will NOT stand up to the big boys they are afraid of them it seems??

These are surely trying times guys - my arse is chewing on my drawers daily now ha ha , its tough when your "mates " take the piss and ask "hows your PMs doing now?" almost like they enjoy it,

I just tell em "last time I checked it still weighed the same - hows your dollars?"

Jun 26, 2013 - 3:56pm

Probably hit 16-ish

I think the hits keep coming into July, we probably hit somewhere around 16 or so.. I would wait on buys until then. Although price could still go down I have a feeling doing a massive buy later than that is too risky. Maybe save some dry powder for it but do some buying at this point too. I just have a feeling that supply is going to get more and more hard to deal with. Not shortage exactly but really hard to feel good about unless its directly in your hand/in stock etc. I don't have a good feeling about the ability to easily buy stuff by end of year if prices continue to go down or even stay sideways.

Note that is not a prediction price will rise, because this is all bullshit. Supply and demand don't mean much at this time in regards to spot price. They of course eventually will effect some widely regarded common price, just not now and probably not for a year or more. I'd say 2 years or so personally.

ancientmoney Byzantium
Jun 26, 2013 - 4:01pm

@Byzantium re: Quint . . .

"I knew that they could take the paper price to wherever they liked, but I'd not have believed that after two months of this crap, that physical prices still have such a strong link to the paper spot price."


I have thought about this, too.

I think they make sure that, for now at least, there is plenty enough silver devoted to meet retail demand. They know silver, especially, is a Giffen good.

We know they manipulate PMs every which way from Sunday, using their paper derivatives. So, how do we trust that they are not drawing down SLV phyzz to sell into the market, and not reporting it? Simply because they do report drawdowns of GLD? Are the reports given of either ETF accurate? We don't know, and I don't trust them.

It is amazing to me that SLV stocks have barely moved, when ASE sales are through the roof. My dealer has a 30 day wait for ASEs and silver Maples, and today his premium went back up again to $3 on ASEs.

I think silver is still the canary, and they go to extremes to make silver seem plentiful, because they can and must.

Jun 26, 2013 - 4:09pm

Paper Price

will be whatever it needs to be to keep the illusion alive in a large portion of westerners minds that PMs are not really any better than major currencies.

The sea change will happen when people realize that a $300 gold price in USA/Europe doesn't line up to what someone can buy in India or China where they can get $1000 in goods for an ounce. Until we see such a thing widely talked about nothing will change.

This is basically saying the same thing as the premium difference in shanghai vs comex but not entirely. Because that is what traders use. When real people start thinking in terms of international barter then you will see the change. IMO.

Jun 26, 2013 - 4:14pm

Great Post Pining!

I also agree with Tmos/Turd that the paper price will indeed go to 0. My spirit is strong and I am in good position.

If they take Silver to $10 an oz and someone is ignorant enough to sell it to me for that....

Truck Back Up Beeping

Probably not a bad idea to fill some gas tanks too. Once again Great Post! Love the insight of this site Turd!

Jun 26, 2013 - 4:18pm

@ Ancient Money

Do you recall a series of posts that JY and I had been working on, suggesting that based on UK trade data and on face value, that silver was being stockpiled within UK borders (read LBMA) at an unprecedented historical level?

While noting at the time, that it might be bad or misleading data, I had also mooted at the time that it might be cartel preparation for the mother of all price smashes.

It is all speculation, but noteworthy nonetheless.

When I have time, I'll see whether Q1 data is available yet. (Actually, JY does it better, his graphics are top notch).

ancientmoney Byzantium
Jun 26, 2013 - 4:27pm


I do recall those posts re: stockpiling (importing as I recall) silver into UK. That may be at least a part of the story.

I also think that they may be selling phyzz silver out of SLV, but not reporting it. It's been done before (Morgan Stanley comes to mind, but there were others).

Especially with JPM as custodian. As mentioned several times here, they can withdraw silver at anytime they wish, according to the prospectus, with the only penalty being they must pay the prevailing price in fiat.

The Watchman
Jun 26, 2013 - 4:35pm

It Is A Bizarre World

Jeff Olson, California Man, Faces 13 Years In Jail For Writing Anti-Big Bank Messages In Chalk

Jeff Olson, a 40-year-old man from San Diego, Calif., will face jail time for charges stemming from anti-big bank messages he scrawled in water-soluble chalk outside Bank of America branches last year.

The San Diego Reader reported Tuesday that a judge had decided to prohibit Olson's attorney from "mentioning the First Amendment, free speech, free expression, public forum, expressive conduct, or political speech during the trial."

With that ruling, Olson must now stand trial on 13 counts of vandalism, charges that together carry a potential 13-year jail sentence and fines of up to $13,000.

"Oh my gosh," Olson said on his way out of court on Tuesday. "I can't believe this is happening."

In an interview with San Diego's KGTV, Olson maintained that "free speech is protected" and said he "was encouraging folks to close their accounts at big Wall Street banks to transfer their money local nonprofit, community credit unions."

The Reader first broke news of the case over the weekend, reporting that Olson and his partner had been active in the campaign to encourage people to move their money as early as 2011. During one protest outside of a Bank of America branch, they drew the ire of Darell Freeman, vice president of Bank of America's Global Corporate Security, who accused them of running a business with their demonstration.

Olson later began showing his opposition with chalk drawings outside various Bank of America branches. Security camera footage from the banks apparently recorded his actions, and he eventually got a call from San Diego's Gang Unit in August 2012, when he gave up the artistic protests. The Reader reports that Freeman aggressively pressured city attorneys to bring charges against Olson until they announced that they would do so in April.

Jun 26, 2013 - 4:52pm

You took my hard earned money,

now here is what you can do with it.

Jun 26, 2013 - 4:52pm

Nice writing P4

Besides the subject and the analogy your writing is quite professional. Hope to read more from you.

I'm not sure if this was posted here or not, if so pardons but if you didn't catch it, worthwhile.

Also came across this from Two Short Planks. I can't see his extreme valuation happening but interesting concept of using your gold to buy real estate.

When/If real estate prices take another hit, expect that your bank may come knocking on your door if your Investment Property LVR goes south. If they do, disclose that you have hedged with physical Gold and give only figures which allow that hedge to cover the estates/s (no more). Say it's secured elsewhere and that's nonnegotiable. One day you will move to the top of the Cat1 lender list and placed on speed dial for future investment borrowing.......

I also liked a response of his in the comments section

TwoShortPlanks25 June 2013 18:00

Personally, I believe there isn’t anything any Central Bank can do to stem this tide. It’s either;
1. Debt Deflation Spiral (Stagflation)
2. Hyperinflation: money velocity is dead, so increasing prices will downturn into Deflation
3. A series of cascading defaults on Bonds leading to defaults in Derivatives
Of course, not all places will be the same and none will occur at precisely the same time. We may see Debt Deflation in the US, but Hyperinflation followed by Debt deflation in Japan and China.
Gold may get smoked by high rates initially, but high rates are completely unsustainable, so, they’ll print and print just to keep a lid on rates as well as deficit spend…this will then lead to a point where the Central Banks (BIS) will call it quits. They will then look for an alternative, any alternative…in steps Gold. The worse it gets, the more chance Gold has of making an entry.
I think you’re forgetting the only thing which does matter; Markets, Bonds, Currencies, Treasuries, Wages, Mortgages, Stocks, Shares, every financial instrument you can think of, is simply a Derivative pointing to an underlying economy. You can avert the inevitable for a while however, inevitable means that the underlying economy WILL shape those financial instruments in due course.
So, the reality is this; for 30 years we borrowed money from our future selves by expanding Central Bank Balance Sheets, Credit Markets, and Derivative Markets. Once we started we become addicted to the new standards of living which came from it, as such, we borrowed more and more, and created more and more complex ways of creating more and more money. We became Wizards of fake Wealth, and we fooled ourselves in the process. Eventually we became arrogant that a new prosperity had come from our intelligence, and we forgot about reality and mathematical inevitability. We fooled ourselves into believing higher and higher prices were a form of savings and prosperity. Then came debt saturation (GFC), so we pumped more and more money into the system to hold off the inevitable. To heal this, like everything in this universe, will take an unwinding, be that fast or slow…but it will hurt either in severity or longevity.
When this reality strikes home hard, then the powers that be will fear being in the wrong place at the wrong time more than anything else. This system will collapse and to save their skins they will Monetize Gold or Deflate Against Gold…either is fine by me.
Gold will hit $134,000/oz in today’s terms.
This also means that Real Estate will collapse in today’s terms. This is where I wrote that a Gold holders can leverage up and buy real estate progressively, then, progressively back-fill that debt by profit taking Gold on the way up. You just have to have faith and good timing.

Jun 26, 2013 - 5:01pm

Did anyone else see this?

HFT dumpfest. I have a screen grab of my IG Index account. I don't know how to upload it, but at GMT 19.13 and 58 seconds silver hit single digits!!!! Silver at $9.43. Anyone shed any light on this? I see more pain for silver.

ancientmoney murphy
Jun 26, 2013 - 5:03pm

@Murphy re: Two short planks . . .

How many trolls will poop their drawers when they read that 4th-last line: "Gold will hit $134,000/oz. in today's terms."

Jun 26, 2013 - 5:11pm

Yes, excellent post Pining!

And you're a damn good writer. Great stuff.

Lamenting Laverne
Jun 26, 2013 - 5:21pm

Loss Aversion - check!

I didn't know the word for it before reading Pining's excellent post, but I feel quite "undressed" by the information laid out. I am a clear cut example of a person, who have taken on much greater risks, than what is regarded as prudent by most people, in order to protect me from loss. Whether I have based that decision on faulty analysis remains to be seen, but for me the decision to get almost entirely out of the "system" to avoid the risk of losing everything by staying inside was much more important and executed with a sense of urgency than the risk of making unconventional changes to my life and alienating friends, who have increasingly had enough of my obsession with the markets. I'm an all or nothing maverick kinda gal in that respect. The sense of urgency meant that I did not average in - once I felt, I had done my homework, and the decision had been made, I jumped right in the middle of the soup - which means all at once as after that as soon as new fiat hit the account. When I occasionally review my decisions, I have so far always returned to the same set of thinking points: 1) I have been reasonably successful/lucky (with one pitiful exception) with most of my projects in life. The overriding reason for that is that I have hardly ever walked straight in other peoples footsteps, doing what everyone else does. I tend to walk my own walk, even if it hurts me at the time. 2) When I ask myself, if the events of the last 4 years have contradicted my overall expectation - I conclude, they have not. The interim result is quite different than expected in the details so far, but nothing has happened that makes all the reasons for me being a contrarian invalid. 3) When I remind myself that I could have waited, and bought at much better entry points all the way down, I also remind myself that the sense of urgency 4 years ago was not without reason - and that we have actually had a couple of close calls since then. What if a tactical error had been made during those periods of stress? If the Euro had crashed last year, I would probably have been glad to have moved with a sense of urgency. If the debt ceiling debacle had prompted a bond sell off, I would also have been tankful for moving fast. The crash in 2008 was the last warning in my book. Next time it is game on. 4) If I would come to the decision to rotate out of my current going-ons, where would I then go? I still have no clue, where I would rather be, so that is a pretty good reason to hang tight. 5) Looking at this in a longer time historic perspective helps as well, because it shows how long time things take to evolve, but it also shows how incredibly explosive the situation will be once the fuse cannot be tempered. That scares the shit out of me, but also makes me totally confident, that I am on the right side of this. 5) Finally, I remind myself of all the toilets I have scrubbed in my earlier youth, and tell myself - Self... if this risk, that you have taken on TOTALLY blows up in your face, and you become the self proclaimed "Sucker of the century", you can always go back to scrubbing toilets. (I am a bloody wizard with bucket and soap - even though I don't particularly enjoy that line of duty). My worth is not the same as the worth of my stack - and as long as I remember this, the risk suddenly boils down to a much smaller: waste of time and a hurt pride from making a bad decision. The benefits on the other hand - an outstanding opportunity to learn about a whole new world of markets and finance in the process, and the prospects of being both insured during a moment of historic proportions and possibly making a tidy return in the end, is quite enough to put the uncertainties to rest for me. *ff*** irritable nontheless - but to rest. By our actions, we have taken the most formidable opponent - I expect the journey to everything but a piece of cake for some time to come still. I didn't mean to be so overly self-centered with this post, but I thought that sharing those thoughts might be of use to some of you, who are hurting right now. Thanks Pining for a great guest post!.

Jun 26, 2013 - 5:28pm

Fundamentally Speaking

As Joe Friday of 'Dragnet' fame would say "Just the facts Mamm."

What has changed in the macro-economic picture, to force the prices of gold and silver lower?

Nothing and everything! Nothing, in that there is no improvement. Everything, in that all the fundamentals have gotten much worse. The system and the status quo is becoming unglued. Disintegration is visible now for all to see, for those that wish to see. Yet there are still those who live on 'hopeium.' Amazing!

Paper gold & silver have nothing to do now, with the actual price of the physical metals. If someone wants to sell me the real thing for the present paper price, then that's good for me! Bad for them!

This just proves how desperate the present system is. They fully realize that faith & confidence in 'paper' is quickly waning and they must keep the pressure on the paper price, to make them "seem" like a poor bet.

Its no longer as effective as it once was. The global fundamentals are terrible. Getting worse each day.

Dark Matter
Jun 26, 2013 - 5:38pm

We can't win!

We can't win. It's always the brokers on Wall Street, the big banks, the smug bankers that make the big bucks.

We can't win.

My conclusion is: No stocks, no bonds, and no more PM.

All the money on my savings account, and if the interest rate is 0.25 % - well, we can't win.

So be it.

Lamenting Laverne
Jun 26, 2013 - 5:38pm

@ jmcadg

You can use Paint to save the screenshot as jpeg. Then in the TFMR comment editor - click the square icon picture next to the smiley icon. That opens a browser, that will let you upload your picture and insert it in the comment. Can't wait to see what you have got there ;-)

Jun 26, 2013 - 5:46pm

Who has the money

This is the best video I have seen explaining not only the financial crisis, but our role in it.

Video unavailable

Take away from this:

1. If we want honest money we must start by being honest ourselves. Supporting the system because we get a subsidy from it (welfare cheque, low prices etc) will not achieve this end.

2. Nothing will change without transparency. We have to find out who the bad guys are and not deal with them. Not save out money with them, buy their products, or give them our admiration. (The red button question in the video)

3. Stop doing things that drain energy like eating processed food and watching TV. (Attack poodles in the video)

4. Put your money in local and ethical concerns.

5. Realise that the small holder and the worker are the engines of economic growth. The reason the "recovery" is not materializing is ordinary people are being excluded from the recovery. We give our capital to the corporations instead of sharing it with each other.


Two women are friends. One borrows money from a NY bank at 20%. Another has an account with that bank and gets 3%. If one loaned to the other the could collectively save a huge amount of money.

Consider a house bought on a 25 year mortgagae will end up costing 2-3 times the cost of the house. Multiply that by 20 families and that is 40 - 60 houses! If they formed a credit circle and each put up 5%. They could buy a house each year.

6. Finally remember that the future is supposed to be created not predicted. When you predict, you try to guess what someone else wants. When you create, others have to guess what you want.

Jun 26, 2013 - 5:49pm

Nostra Dumb Ass

Im buying more silver at least another hundred pounds shortly.....

Will probably pull trigger Friday....

Still no consummation on the perth bars.

Might have to buy online cause i dont have alot of time this week.... work. work work.



Tmos- i agree 100% let it go to 0 on paper and ill buy all the silver and gold i can on the way till they default.


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