Saturday, August 27, 2011

August 27 2011: Et tu, Commodities?

Detroit Publishing Co. Apocalypse Then April 18, 1906
"Looking up Market Street from near Ferry", San Francisco in the aftermath of the earthquake and fire

Stoneleigh: Our most consistent theme here at The Automatic Earth has been the developing deflationary environment and the knock-on effects that will follow as a result. Now that the rally from March 2009 appears to be well and truly over, it is time to revisit aspects of the bigger picture, in order for people to prepare for a full-blown liquidity crunch. October 2007-March 2009 was merely a taster.

As we have explained before, inflation and deflation are monetary phenomena - respectively an increase and decrease in the supply of money plus credit relative to available goods and services - and are major drivers of price movements. They are not the only price drivers, to be sure, but they are usually the most significant. People generally focus on nominal prices, when understanding price drivers is far more important. A focus merely on nominal price also obscures what is happening to affordability - the comparison between price and purchasing power.

We have lived through some 30 years of inflationary times, since the financial liberalization of the early 1980s under Reagan and Thatcher initiated the era of globalization. Money freed from capital controls was free to look for opportunities worldwide, and the resulting global economic boom greatly increased trade, resource consumption, financial interconnectedness and the multiplier effect for monetary expansion. 

The increased purchasing power that resulted, largely for the better off, found its way into asset markets around the world, allowing people to bid up prices. This created a psychological 'wealth effect', which spawned an orgy of consumption through borrowing against rising nominal assets values. This in turn led to greater monetary expansion, since money is lent into existence. Fractional reserve banking, securitization, the enormous expansion of the shadow banking system and many other factors acted as engines of monetary expansion.

This spiral of positive feedback started slowly, but gradually morphed into a global mania of epic proportions. Caution was thrown to the wind, debt expanded exponentially, risk multiplied, wealth concentration increased with higher returns to capital and consumption became almost frenetic where increasing purchasing power supported it. At the same time, rising consumer prices put increasing pressure on the less privileged, who were forced to compete for basic necessities becoming ever more expensive. As we have seen in a number of places, this has been a major ingredient in the development of social unrest. High prices, and fear of both higher prices and actual shortages, can be socially explosive.

Rising prices are not themselves inflation, as we have repeatedly explained, but are the result of it. Credit expansions create excess claims to underlying real wealth through the creation of artificial, or virtual, value. They also bring demand forward, increasing pressure on resources for the duration of the expansion period. Extrapolating consumption trends forwards linearly leads to fear of shortages, which encourages market participants to bid up prices speculatively.

However, being based on Ponzi dynamics, credit expansions and speculative manias are naturally self-limiting. Credit expansions proceed until the debt they generate can no longer be serviced, and there are no more willing borrowers and lenders to continue lending money into existence. Speculative manias continue until the greatest fool has committed himself to the exhausted trend, and no one remains to push prices up further.

As an expansion develops, one can generally expect increasing upward pressure on commodity prices, thanks to both demand stimulation and latterly the perception that prices can only continue to increase. The resulting crescendo of fear - of impending shortages -  is accompanied by the parabolic price rise typical of speculative bubbles, as momentum chasing creates a self-fulfilling prophecy. At the point where almost everyone with the capacity to do so has jumped on the bandwagon, and all agree that the upward trend is set in stone, a trend change is typically imminent.

We find ourselves still near the peak of the largest credit bubble in history. As faith in many of the more spurious 'asset' classes devised by 'financial innovation' has been shaken, faith in the ever increasing value of commodities has strengthened. However, commodities are not immune to the effects of a shift from credit expansion to credit contraction, despite justifications for endless price rises, such as apparently bottomless demand from China and the other BRIC countries. 

Every bubble is accompanied by the story that it is different this time, that this time prices are justified by fundamentals which can only propel prices ever upwards. It is never different this time, no matter what rationalizations exist for speculative fervour. BRIC demand only appears to be insatiable if we make our predictions solely by extrapolating past trends, but that approach leaves us blind to trend changes and therefore vulnerable to running off a cliff. Insatiable demand results from seemingly endless cheap credit, given that demand is not what one wants, but what one can pay for. When credit collapses, so will demand, and with it the justification for higher prices.

While credit expansion (inflation) is a powerful driver of increasing prices, credit contraction (deflation) is a far more powerful driver of decreasing prices. Credit, having no substance, is subject to abrupt fear-driven disappearance. Confidence and liquidity are synonymous, and confidence is once again evaporating quickly, as it did in phase one of the credit crunch (October 2007-March 2009). As contraction picks up momentum, the loss of credit will rapidly lead to liquidity crunch, drastically undermining price support for almost everything. With purchasing power in sharp retreat, however, lower prices will not lead to greater affordability. Purchasing power typically falls faster than price under such circumstances, so that almost everything becomes less affordable even as prices fall.

Credit expansion reversed in 2008, and this is deflation by definition. Despite the talked-up attempts to monetize debt through quantitative easing - a deliberate attempt to stoke inflation fears in order to counteract the psychology of deflation - money plus credit has been in net contraction. Talk of monetary growth based on only the money fraction misses the elephant in the room, since the vast majority of the effective money supply is credit, and the tightening of credit is by far the dominant factor.

As one can see from the graph, credit reversal had not occurred for decades until 2008. Now that it has done so, we can expect significant consequences to follow. There is a constellation of trends that had been correlated with the ebb and flow of liquidity, for instance increasing equities and commodities and a falling dollar. The end of the recent large counter-trend rally has already seen equities and commodities begin to fall, and a reversal in the fortunes of the dollar is very likely in the not too distant future. A look at long term charts of the various different commodities demonstrate both the parabolic run up in prices since 2009, and the beginnings of price retreat. This is likely to be a top that lasts for quite some time in a persistent deflationary environment, at least for the less essential factors.

Food and energy price falls come as a surprise to many, given that both are necessities in a very heavily populated world. Energy is the master resource, and net energy analysis demonstrates that supply can no longer increase meaningfully, hence the commonly held opinion that prices can only move in one direction. However, that opinion also held sway in 2008 during a previous speculative episode, and a closer look at oil prices reveals that that period ended in typical bubble fashion, with a sharp fall following the parabolic rise.

At the time, we were warning that exactly this scenario would unfold, which was an unpopular opinion. The secondary bubble formed in the price run up from 2009 is destined to end the same way, with a fall to a lower level than the 2009 bottom. Supply problems further down the line will ensure that the bottom is strictly temporary, and that future price spikes are in the cards, but that is tomorrow's issue rather than today's.

Of all the commodity bubbles, it is the end of the explosive rise in gold that is set to surprise the largest number of people. Very few expect it to follow silver's lead, but that is exactly what we are suggesting.

Gold has been increasingly considered to be the ultimate safe haven. The certainty has been so great that prices rose by hundreds of dollars an ounce in a blow-off top over a mere two months. The speculative reversal currently underway should be rapid and devastating for the True Believers in gold's ability to defy gravity eternally. Expect to hear all about the enormous Ponzi scheme in paper gold, and a lot more about plated tungsten masquerading as gold. It doesn't even matter whether or not that rumour is true. What matters is whether or not people believe it, and how it could feed into a spiral of fear as prices fall.

Central banks are buying gold, which some consider to be a major vote of confidence, and therefore bullish for gold prices. However, it is instructive to look at the previous behaviour of central banks in relation to gold prices. When gold hit its low point eleven years ago, after a long and drawn out decline, central bankers were selling, in an atmosphere where gold was dismissed as a mere industrial metal of little interest, or even as a 'barbarous relic'.

Selling by central banks, which are always one of the last parties to act on developing received wisdom, was actually a very strong contrarian signal that gold was bottoming.  They would not have been selling if they had anticipated a major price run up, but central banks are reactive rather than proactive, and often suffer from considerable inertia. As a result they tend to be overtaken by events. Regarding them as omnipotent directors and acting accordingly is therefore very dangerous.

Now we are seeing the opposite scenario. After eleven years of increasingly sharp rise, central banks are finally buying, and they are doing so at a time when the received wisdom is that gold will continue to reach for the sky. Once again, central banks are issuing a strong contrarian signal, this time in the opposite direction. While commentators opine that central banks will hold their gold even if they develop an urgent need for cash, this is highly unlikely. In a deflationary environment, it is cash that is scarce, and cash that everyone, including central bankers, will be chasing. Selling gold to raise cash may well not be a matter of choice.

Typically a speculative bubble is followed by the reversal of speculation causing prices to fall, and then by falling demand, which undermines prices further. As the bubble unwinds, people begin to jump on a new bandwagon in the opposite direction, chasing momentum as always. The need to access cash by selling whatever can be sold (rather than what one might like to sell), and the on-going collapse of the effective money supply as credit tightens mercilessly, will also factor into the developing vicious circle. 

Gold has been considered money for thousands of years, and will hold its value over the long term. However, this does not preclude a huge downward move in the shorter term, and for those forced to sell early, there is no longer term perspective. Spot prices will fall, but those with no bargaining power will get much less than the spot price if they are forced to sell into what is likely to be the ultimate buyers market during the next few years. They will never be able to buy back into the market, and would generally have been better off holding the cash that will appreciate in value for the few years of the credit collapse. Only those who can genuinely hold gold for the duration of the deleveraging, without having to rely on the value it represents in the meantime, will really be able to use it as a store of value.

We stand on the verge of a precipice. The effects of the first real liquidity crunch for decades will be profound. We are going to see prices fall across the board, but far fewer will be able to afford goods or assets at those lower prices than can currently afford them at today's lofty levels. The social effects of this will be enormous, and will spread to many more countries. The collapse of our credit pyramid will be the driving factor and it will sweep all before it like a hurricane for at least the next several years. Beware.

How Long Can the ECB Prop Up Europe’s Sick Banks?
by Simon Kennedy and Gavin Finch - BusinessWeek

The region’s banks may have so much bad debt they won’t even lend to each other

Four years to the month since the global credit crisis began, the European Central Bank has emerged as the lender of first resort to the Continent’s broken banks. With the bond market shut off to all but the strongest lenders, the ECB’s unlimited loans are keeping the most afflicted banks in Greece, Portugal, Italy, and Spain afloat. "Banks are becoming more nervous about being exposed to other banks as they hoard liquidity and become more suspicious of other banks’ balance sheets," Guillaume Tiberghien, an analyst at Exane BNP Paribas, wrote in a note to clients on Aug. 19.

On that date, banks deposited €105.9 billion ($152 billion) with the ECB overnight, almost three times this year’s average, rather than lend the money to other banks. They are also stockpiling dollars and hoarding cash in safe havens such as Swiss francs. "I’m not sleeping at night," says Charles Wyplosz, director of the Geneva-based International Center for Money and Banking Studies. "We have moved into a new phase of crisis."

Investors are concerned, too. The price of European bank stocks sank 22 percent between Aug. 1 and Aug. 22, led by Royal Bank of Scotland (down 45 percent) and France’s Société Générale (down 39 percent). The extra yield investors demand to buy bank bonds instead of benchmark government debt surged to 2.98 percentage points on Aug. 19, the highest since July 2009, data compiled by Bank of America Merrill Lynch show.

Despite the ECB’s best efforts, some of Europe’s banks may be inching toward insolvency. The cost of insuring the bonds of 25 European banks and insurers set a record high on Aug. 24 of 257 basis points, higher than the 149 basis-point spike when Lehman Brothers collapsed in the fall of 2008, according to the Markit iTraxx Financial Index of credit default swaps. The banks aren’t required to mark down most of their holdings of government debt to market prices. If they did, some would be forced to default or seek a bailout.

Morgan Stanley (MS) estimates that Europe’s banks need to raise €80 billion by yearend. Their ability to raise capital has been sharply curbed by investor fears. Banks in the region hold €98.2 billion of Greek sovereign debt, €317 billion of Italian government debt, and about €280 billion of Spanish bonds, according to European Banking Authority data.

The Federal Reserve, which provided as much as $1.2 trillion of loans to banks in December 2008, wound down most of its emergency programs by early 2010. One of the few exceptions is the central bank liquidity swap lines that provide dollars to the ECB and other central banks, so they can auction off the dollars to banks in their own jurisdictions.

In contrast, the ECB and its president, Jean-Claude Trichet, are still in the bank-rescuing business. "The central bank is the only clearer left to settle funds between banks," says Christoph Rieger, head of fixed-income strategy at Commerzbank in Frankfurt. After increasing its benchmark rate twice this year to counter inflation, the ECB in August provided relief for banks by buying Italian and Spanish bonds for the first time, lending unlimited funds for six months and even providing one unnamed bank with badly needed dollars.

The ECB is maintaining a role it began in August 2007 when it injected cash into markets after they froze. The ECB’s balance sheet is now 73 percent bigger than in August 2007, and its latest round of bond buying has opened it to accusations that by rescuing profligate nations it’s breaking a rule of the euro’s founding treaty and undermining its credibility.

The central bank is acting in part because governments have yet to ratify a plan to extend the scope of a €440 billion rescue facility so it can buy sovereign bonds on the open market, which would allow governments to inject capital into the banks. Although the euro zone member governments are supposed to approve the new funding by fall, no one can say for sure.

The funding difficulties of Europe’s banks is one reason cited by Morgan Stanley economists on Aug. 17 for cutting their forecast for euro-area growth to 0.5 percent next year, less than half the 1.2 percent previously anticipated. Europe’s consumers and companies are more reliant on banks for funding than their U.S. counterparts, says Tobias Blattner, a former ECB economist now at Daiwa Capital Markets Europe in London.

Lena Komileva, Group of 10 strategy head at Brown Brothers Harriman in London, says the ECB may have no option but to extend the backstop role it is playing. Refusal to do so would risk a European bank default by the end of the year, she says: "Markets are back in uncharted territory. The crisis is a whole new story now."

The bottom line: Some European banks hold almost half a trillion euros in questionable government bonds. They’re relying on ECB funding to stay in business.

US funds show true state of eurozone banks
by Gillian Tett - FT

In any murder mystery film, it pays to watch the boring grey man (or woman) in the corner; quiet, unobtrusive characters can be deadly.

So, too, in finance. Four years ago, the giant US money market funds seemed some of the dullest actors in the global financial scene. But in 2007, they quietly helped to spark the crisis in the mortgage-backed securities world, when they silently stopped rolling over bonds. Then, in 2008, they furtively wielded the knife again, pulling funding from some American banks and the "repo" – repurchase – markets.

Now, their shadow looms again. As my colleagues Dan McCrum, Telis Demos and Jennifer Hughes have reported, in recent weeks these funds have been quietly backing away from European banks, either refusing to roll over loans, or slashing the maturities of the funds they provide. Fitch, for example, recently calculated that the largest US money market funds cut their exposure in absolute terms by $30bn in July, even before the latest turmoil.

Separately, bankers estimate that Italian banks lost the equivalent of €40bn-worth of money market funding in July. And while money market funds are still lending to French banks, the duration of deals has shrivelled dramatically, from several months to just a few weeks (at most). This matters, since French banks rely on money markets for about €200bn of funding.

Now, the good news is that these raw numbers are small compared to the total volume of money that eurozone banks raise in the wholesale and interbank markets, which is around €8,000bn. Better still, the European Central Bank has stepped into the gap to replace those vanishing funds. That has kept the system running, even as funding costs for eurozone banks have exploded to a level which are "massively prohibitive" – and thus unsustainable – for most banks, as Suki Mann, analyst at Société Générale says.

But it is worth watching what those money market funds do next. For one thing, their antics tend to have a powerful impact on market psychology, particularly given folk market memories of 2008. Secondly, this quiet exodus has reminded US and European investors alike of something that policymakers have hitherto tended to downplay: namely the rather surprising degree to which eurozone banks depend on short term financing.

Morgan Stanley, for example, calculates that of the €8,000bn funding that is currently in place for the largest 91 eurozone banks, some 58 per cent needs to be rolled over in the next two years. More startling still, some 47 per cent of this funding is less than a year in duration. Much of that is in euros.

However, as the saga of the money market funds shows, eurozone banks have been raising short-term dollar funds too, either to finance their portfolios of dollar assets, or to provide a cheap form of funding (which is then swapped back into euros.) The scale of this reliance is – thankfully – not nearly as large as it was in, say, 2007; back then eurozone banks had a vast network of dollar-funded mortgage vehicles, creating a funding mismatch that was about $800bn, according to the Bank for International Settlements. Nevertheless, some element of this mismatch remains; hence the current crunch.

Is there any solution? In the long term, some eurozone banks probably need to rethink some of their funding profile. In the short term, however, Huw van Steenis, an analyst at Morgan Stanley, has recently been promoting another interesting idea: eurozone authorities should offer joint guarantees for debt issued by banks, as a form of "circuit breaker" to counteract panic.

After all, the argument goes, the US offered such guarantees during its banking crisis, with considerable success. So did the UK. And if the eurozone authorities were to repeat this trick across the region – say by using funding from the European financial stability facility, supplemented with a fee recouped from banks – it might well tempt money market funds (and others) back. After all most US money market funds are frantic to find somewhere – anywhere – safe to stash their cash, other than US Treasuries.

Will this happen? Don’t bet on it soon. After all, the official line from the eurozone policy world is that nothing is really wrong with the eurozone banks; thus they do not want to introduce crisis measures that echo 2008. Nor do they want to start arguing about how to price or fund any such guarantees, since that might force them to state which banks – and national banking systems – look risky.

But if the unease stalking the eurozone banking system does not dissipate soon, the concept of such "circuit breakers" should certainly be put on the table. And in the meantime, better keep watching those money market funds like a hawk; if nothing else, they are a powerful litmus test of just how much (or little) "credit" those eurozone banks can still attract on the world stage. In both the Latin and English sense of the word.

Bank job cuts top 60,000
by Harry Wilson - Telegraph

ABN Amro has become the latest bank to announce thousands of staff cuts as the total number of jobs lost in the banking sector in recent months rose above 60,000.

The Dutch bank said it will cut 2,350 staff, or just under 10pc of its workforce, over the next three to four years as part of a wholesale restructuring of its business designed to saved hundreds of millions of euros in costs.

Taking the cuts announced by ABN into account, the total number of banking sector job losses announced in recent months now exceeds 60,000 or roughly 5pc of the industry headcount. ABN said 1,500 jobs would be cut through redundancies and a further 850 through natural attrition, costing the bank €200m (£176m) in restructuring costs, according to its financial results for the first half of the year published today.

Earlier this week, UBS confirmed speculation that it was to cut several thousand jobs, announcing the layoff of 3,500 staff, or which about 300 are expected to come from the bank’s London office. All of Britain’s major banks, with the exception of Standard Chartered, have already cut or are cutting thousands of staff. Barclays has already cut 1,400 staff this year and plans to cut as many as 3,000 more jobs within the next 18 months.

HSBC has announced the cull of about 30,000 staff by the end of 2013, or about one in 10 jobs, as part of its own cost drive, and state-backed lender Royal Bank of Scotland is expected to reduce the workforce in its investment banking division by 2,000 within the next year.

The largest cuts have come as Lloyds Banking Group, which announced 15,000 "role reductions" as part of its strategy review, which will take the total number of jobs lost at the lender since its taxpayer bailout to about 40,000 – roughly equal to the size of the entire workforce of engineering company Rolls Royce.

"When managements resort to headcount reductions, these are a powerful signal that firms think the revenue outlook has weakened beyond just normal volatility," said analysts at Barclays Capital in a note to clients published this month. Nearly all of Europe's major banks have announced year-on-year falls in revenues for the first half of the year as markets have deteriorated.

U.S. Banks Said to Seek Relief on Ratios, FDIC Fees After Rush of Deposits
by Dakin Campbell, Dawn Kopecki and Bradley Keoun - Bloomberg

U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks.

Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.

Regulators have asked banks to take the deposits anyway, three people said, with one lender accepting $100 billion. The regulators want lenders to take the deposits because it improves the stability of the financial system, according to one of the people, who said U.S. banks are viewed as places of strength.

Some of the largest ones have talked with regulators about softening rules for ratios that measure capital and assets, according to the people, who declined to be identified because talks are private. At least one asked for a waiver on paying higher premiums to the Federal Deposit Insurance Corp., which is less likely to be granted, one of the people said.

"If the helicopter comes raining money on your bank and it’s only temporarily there, it could be excessively costly and disruptive," said Robert Litan, a vice president of research and policy at the Kansas City, Missouri-based Kauffman Foundation, which promotes entrepreneurial business practices.

Cash Cache
Cash held by domestically chartered U.S. banks, which includes Federal Reserve balances, rose to a record $1.02 trillion earlier this month, up 27 percent from the end of July last year. Deposits held by the 25 largest lenders expanded to $4.69 trillion in the week ended Aug. 10, up 8.5 percent from the end of May. The Fed’s balances advanced to $1.61 trillion as of Aug. 24, from $1.05 trillion a year earlier.

The extra deposits are problematic because they’re subject to withdrawal, so banks have to park the money in low-yielding short-term investments, Litan said. With few other choices available, banks have stashed their excess deposits at the Fed, which means the cash gets counted as assets.

This expands their balance sheets and thus pushes down their leverage ratio, which measures Tier 1 capital divided by adjusted average total assets; the lower the ratio, the weaker the bank, at least in theory. In reality, regulators regard U.S. lenders as relatively strong with sufficient capital cushions, the people said.

Talks With Regulators
Lenders have held discussions with officials at the Fed, FDIC, Office of the Comptroller of the Currency and the Treasury Department, according to four of the people. Spokesmen for the four agencies declined to comment.

Regulators may decide, for example, to ease curbs on deposits swept in from brokerage affiliates as part of any forbearance, said James Chessen, chief economist at the Washington-based American Bankers Association. Under normal circumstances, those deposits could be restricted as part of an enforcement action by regulators, he said.

"You don’t want costly business decisions driven by these temporary flows and regulators are acknowledging that and acknowledging the limited risk," Chessen said in a phone interview. "Unusual situations naturally call for a discussion on both sides," he added in an e-mail.

While the Fed has been paying 0.25 percent interest on deposits placed with the central bank, known as interest on excess reserves, since late 2008, it may not be enough to erase the cost to banks of holding the deposits, said Robert Eisenbeis, a former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist for Sarasota, Florida-based Cumberland Advisors Inc.

Charging Depositors
At least one firm, Bank of New York Mellon Corp. , tried to recoup some of the costs by charging depositors 13 basis points, or 0.13 percent, for holding unusually high balances.

FDIC insurance fees for large banks typically average more than 0.1 percent, three of the people said. In addition, large banks also may apply an internal capital charge of at least 0.1 percent to such reserves, one bank executive estimated. Lenders likely reached out to regulators "after having watched what Bank of New York did," Litan said. "I’m sure the banks said there must be another way."

If the FDIC agreed to forgive some fees, it would have to give up some of the extra premiums that it’s counting upon to rebuild the Deposit Insurance Fund, which covers customers for $250,000 per account in the event of a failure. That makes the agency unlikely to grant a waiver, one of the people said, adding that the existence of the insurance is one of the reasons banks are able to attract the deposits.

Insurance Fund
The FDIC’s fund, which fell into a deficit of almost $21 billion after a wave of bank failures, turned positive during the second quarter for the first time in two years, the agency reported this week. On April 1, the FDIC changed its formula for assessing premiums, increasing the cost for most large banks and adding to their deposit expenses.

That’s adding to the pinch on bank profits as revenue shrinks and yields on assets decline. Net interest margins, the difference between what banks pay to borrow and what they make on loans and securities, declined in the second quarter, "reflecting growth in low-yielding balances at Federal Reserve banks," the FDIC said Aug. 23 in its quarterly report.

European Crisis
U.S. deposits may surge again if Europe’s sovereign-debt crisis escalates and the region’s lenders face a funding squeeze. Most of JPMorgan Chase & Co.’s almost $53 billion in new deposits in the second quarter were tied to Europe, according to Pri de Silva, a New York-based analyst at CreditSights Inc. "If you are a bank you don’t want to use excess capital for these hot-money deposits," de Silva said.

Shares of the 24 U.S. firms in the KBW Bank Index have declined 28 percent this year. The second-worst performer in the index, Charlotte, North Carolina-based Bank of America Corp., lost half its value in 2011 before rebounding this week. Most lenders already have capital cushions well above the minimum of 5 percent that would trigger an order from regulators for corrective action, according to one of the people.

The Tier 1 leverage ratio for Bank of America, the largest U.S. lender, was 6.86 percent at the end of June, while JPMorgan stood at 7 percent, according to second-quarter regulatory filings. Citigroup Inc.’s leverage ratio was 7.05 percent at the end of June, and San Francisco-based Wells Fargo & Co.’s was 9.43 percent. Citigroup and JPMorgan are based in New York.

Changing Assets
If Citigroup’s average total assets changed by $1 billion, it would alter the leverage ratio by 0.4 basis points, while a $100 million change in Tier 1 capital would affect the leverage ratio by half a basis point, according to the bank’s second- quarter filing.

Relaxing the rules or enforcement could be a slippery slope, said Lou Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based unit of London-based ICAP Plc, the world’s largest inter-dealer broker. "Asking for a free pass on the leverage ratio for bank deposits by itself isn’t something that regulators would consider," Crandall said. "The question is whether banks should be able to exclude reserve balances since they are a risk-free asset."

UBS may start to charge banks for holding Swiss francs
by Reuters

Bank clients that keep large balances in the safe-haven currency will pay for the privilege

Swiss bank UBS may charge client banks a fee on cash accounts they use to clear transactions, it said on Friday, in a move to discourage them from using the accounts to hoard safe-haven Swiss francs. "Should we see a continuation of the net inflow of francs in cash clearing accounts of our banking customers, we might have to take corrective action … by means of a temporary excess balance fee," it said.

After record demand for the franc, UBS said it was monitoring franc cash balances in the current accounts of its franc clearing customers. The news helped the euro climb more than 2% against the franc to a one-month high . "This is a way to make investors pay for the privilege of owning the currency," said David Miller, fund manager at Cheviot Asset Management in London.

The move came amid speculation that Switzerland might consider imposing negative interest rates on Swiss franc deposits as it fights a surge in the franc to record highs against the dollar and euro this month.

Banks face $340 billion state-backed bond refi hole
by Helene Durand - IFR/Reuters

* Tough new issue markets could curtail banks' pre-funding plans
* New investors likely needed to replace government-guaranteed debt holders
* Concentrated refinancing burden poses additional risks

Banks will struggle to refinance the upcoming mountain of government-guaranteed debt that is due to mature in the next two years unless the primary market fully thaws in the coming weeks, according to bankers and investors. Banks had planned to aggressively use the autumn period to get ahead of large refinancing requirements in 2012.

Thomson Reuters data show that the USD230bn equivalent of European bank government-guaranteed debt will mature in 2012 and US banks will have more than USD122bn maturing. Governments started guaranteeing banks' debt issuance in September 2008 as capital and money markets froze after the failure of Lehman Brothers on September 15th. Most of the guarantees had a three-year maturity, although Spain and France allowed banks to issue up to five years.

"The wall of upcoming maturing government-guaranteed debt is a concern, especially if the current market freeze goes on for much longer and spills over into 2012," said Martin Lukac, financials credit analyst at Principal Global Investors. "If you look back, the government-guaranteed schemes were all established around the same time and were limited in terms of maturities which means that a lot of them are coming up at the same time, making the banks' maturity profile very frontloaded," said Lukac.

Pressure has built up in the financial sector. In recent weeks, fears that the euro zone sovereign debt crisis will spill over into banks has seen U.S. money market funds start to rein back the maturities they are willing to lend to them. "Bank treasurers know that next year is a big year for government-guaranteed refinancing and part of the reason why some of the larger funders in the market did so much at the beginning of this year was because a lot of them wanted to pre-fund some of next year's maturities in the autumn," Robert Kendrick, financials credit analyst at L&G.

"This was to mitigate a concentrated refinancing burden over the next couple of years, brought on by most government-guaranteed issuance being limited to 2012 or 2013, rather than being more evenly spread," said David Loughran, debt syndicate at Lloyds Capital Markets. The two biggest bank funding avenues, senior debt and covered bond issuance, have been largely shut since early July. "The problem is, issuance has now ground to a halt, and even if they were ahead at the end of June, they might now struggle to complete this year's funding," said Kendrick.

Market Shut Down
According to Thomson Reuters data, a mere USD7bn equivalent of senior was raised by European banks in July while the tally for August is even lower at just over USD1bn equivalent. This compounded poor volumes in June when USD17.4bn was sold, well below May' s figure at USD41.2bn. It's a similar story for the normally resilient covered bond sector, where ING Bank's announcement on Wednesday that it was planning a 10-year euro offering was the first benchmark launched since early July when EUR8.1bn was raised. So far, the tally for the whole of August is a mere EUR1.2bn.

Financial indices have performed very poorly in recent weeks, according to Markit, its Senior Financial index hit a record wide of 260bp on Tuesday. It is not just a matter of the large refinancing size that will be a challenge. Another will be finding investors in bank debt.

"A problem that bank treasuries have been working to avoid is a number of the people who bought government-guaranteed debt won't buy anything else," said Lloyds's Loughran. "So it's not as if the market will get a liquidity event and have cash to put to work in bank paper. For some of these investors, even a Triple A RMBS or covered bond won't necessarily float their boat."

Banks' pursuit of new investors will be hindered by fears of haircuts on senior debt: the debate on senior bondholder bail-in will return in the autumn when the European Commission releases its legislative framework on banks' resolution and recovery.

Meanwhile, investors are likely to demand higher premiums in order to protect from volatility as good new issue performance is not guaranteed given the market backdrop and the lack of solution to the European sovereign crisis. "If we were to see a new issue from a bank, the issuer would have to offer a substantial new issue premium," said Lukac. "We would also expect demand for new deals to be diminished given that US-based accounts are currently not adding European risk and this can really be felt in the market."

L&G's Kendrick added that said that while some of the current concerns in the market were somewhat unjustified, he would be reluctant to put cash to work right now. "Selling a senior deal is very hard right now and in order to buy, we would need to have confidence that a deal will perform and not be 50bp wider the following week," he said.

While the refinancing numbers drop off dramatically in 2013 and 2014, European banks' still have USD41bn and more than USD94bn coming up to maturity in 2013 and 2014. Furthermore, as much as USD63.8bn of European government-guaranteed bank debt is maturing before year-end and USD49.5bn for US banks.

More Transparent Bank Stress Tests Are Needed
by Simon Johnson - New York Times

Europe and the United States both need to conduct another round of stress tests on their banks, with a model similar to what was done in the United States in 2009, but with a more negative downside scenario — in particular, assessing the effects of a major sovereign debt problem in the euro zone.

The point of such a scenario is to determine how much equity financing banks need to have if the world economy turns ugly. If the big banks raise more capital in advance, we are less likely to see economic downturn again become financial catastrophe.

The prevailing wisdom about Europe is that it faces primarily liquidity problems. In this view, a few of the larger countries have had trouble rolling over their debts, and some leading banks need help with short-term financing. The European Central Bank can assist with both by buying government bonds and lending to banks and, in the most optimistic interpretation, the consequent political discussions will help strengthen European Union integration.

There are two problems with this positive spin on recent events. The first is that sovereign debt problems can easily become solvency issues — that is, more about whether countries can afford to service their debts rather than whether they can raise enough cash at reasonable rates in any given week. The key issue is growth — if Italy, Spain and others can show they will grow reasonably quickly, then debt relative to gross domestic product will decline, and rosy projections will be back in fashion.

But if signs of growth do not return soon, perhaps over three to six months, the next downward revision to forecasts will spread deeper debt pessimism. And any markdown for global growth prospects, including for reasons outside Europe’s control (such as overheating in China’s residential property market), would also not be helpful over the coming year. My Peterson Institute policy paper with Peter Boone in July suggested some potential escape routes, but the summer so far has produced only further attempts to muddle through.

The more immediate Achilles heel is banking. The virtues of big European banks were extolled by some Congressional representatives during the Dodd-Frank legislation in spring 2010. What a difference a year makes; not many members of Congress would today endorse anything about European banking, given all the problems that have emerged.

The main immediate problem for Europe is that we still don’t know exactly the condition of its major financial institutions. The Europeans have run bank stress tests twice recently, in mid-2010 and again earlier this year. But in both cases the tests were far too lenient and banks were not required to raise enough capital.

They should have been compelled to increase their equity funding relative to their debt, in order to create a greater buffer against future losses.

The 2009 banking stress tests in the United States can also be criticized for not including a scenario that was sufficiently negative. In recent weeks the market has expressed great skepticism about Bank of America, its inherited liabilities, future business model and, most of all, the adequacy of its capital.

Most likely, Bank of America needs to be broken up, with the continuing businesses funded with equity to a level that could withstand adverse legal outcomes and a deep recession. Warren Buffett’s investment in the bank, announced this morning, may be in a step in the right direction. (For more background on how to think about bank equity, see the recent testimony of Paul Pfleiderer to the financial institutions subcommittee of the Senate Banking Committee; anyone working on banking policy in Europe or the United States should read this.)

Dodd-Frank created pre-emptive intervention powers, at the behest of Treasury and the Federal Reserve, with part of the rationale being that these could be used to prevent a megabank’s slow death spiral from becoming a market panic.

In “13 Bankers,” James Kwak and I expressed considerable skepticism that this could work — it just does not fit with the history and politics of regulation in the United States, within which even the Treasury secretary defers to what Bloomberg News calls the "Wall Street Aristocracy."

The American 2009 Supervisory Capital Assessment Program, known as SCap (pronounced ESS-cap), was designed to reveal potential stressed capital levels and, as a result, the 19 companies covered by SCap have since increased their common equity by more than $300 billion.

Unfortunately, weakness at Bank of America generates systemic risk, undermines overall market confidence and magnifies the risk of another recession; this is exactly what SCap is supposed to have avoided — but failed to do because it was not sufficiently tough.

The Comprehensive Capital Analysis and Review stress tests, known as CCar (pronounced SEE-car), concluded in April 2011, were even less helpful. These were much less transparent, focused more on companies’ internal capital planning processes. The Fed did sensitivity analysis of the companies’ own stress tests; this is not exactly reassuring, given how badly the industry’s own models have failed in the recent past — including in the events that led up to the Fed’s $1.2 trillion of emergency loans in 2008.

Yet the European stress tests to date must be rated a notch or three below even the CCar in terms of transparency and communication of information that allows market participants to make informed decisions. The latest round, conducted by the European Banking Authority through July 15, did not even examine what would happen if a sovereign borrower had to restructure its debts — exactly what Greece was working on during the same time frame. (To be precise, there was some "sovereign stress" in the tests but very little compared with what we have seen and could see.)

This is worse than embarrassing. It creates exactly the wrong kind of uncertainty around European megabanks, including their operations in the United States and potential spillover effects.

In part this happened because the European Banking Authority is new — it came into existence on Jan. 1 — and not sufficiently powerful relative to national bank supervisors, many of whom are stuck in an old mindset where transparency is bad and full disclosure of banks’ balance sheets is scary. (The low capital levels of European banks was described more fully this week in a Bloomberg article.)

But partial facts and distorted information flow are exactly what creates fear and instability, not just in Europe but much more broadly.

If euro-zone leaders want to make any progress on governance reform, they should immediately strengthen the banking authority and call for a new round of stress tests. These tests should include a deep recession scenario in Europe, as well as disruptions to sovereign debt financing. At the same time, the Federal Reserve should acknowledge that the CCar was not enough; it’s time for a new round of tough stress tests here, as well.

The notion that bank equity is socially expensive and should be minimized is an idea whose time has passed — as Anat Admati, Peter DeMarzo, Martin Hellwig and Professor Pfleiderer have argued. It is time to find ways to strengthen the equity funding of major financial institutions around the world, quickly, fairly and effectively — a point that was made clear in the recent hearings held by Senator Sherrod Brown, Democrat of Ohio.

Any further delay risks worsening the global slowdown.

Bernanke Is Signaling An Announcement On September 21
by Bruce Krasting - My Take On Financial Events

I went to play golf this morning rather than listen to the Bernankster. After all, I knew what he was going to say. I read about the speech in the Wall Street Journal a day before.

I (and many others) have made note of the fact that the WSJ’s crack reporter, Jon Hilsenrath, is the mouthpiece for Big Ben. This is what Jon said had to say last night. Do you think he talked to Bernanke before he wrote this? (15 hours before speech time)
Federal Reserve Chairman Ben Bernanke isn’t likely to break much new monetary-policy ground in his Jackson Hole speech Friday

To be sure, a number of others who have a public view on Fed policy also commented that the speech from the Chairman would bring nothing new. But the consistency of Hilsenrath’s words and Bernanke's actions is no coincidence.

If you believe that Hilsenrath gets the whisper from Ben, then you might want to consider what Jon had to say after the speech was delivered:

Fed policy makers will be discussing their options at a September policy meeting which has been expanded to two days instead of one to explore whether the Fed should do more.

Jon then quotes from the speech:
“The committee is prepared to employ its tools as appropriate to promote a stronger economic recovery.”

Then Jon tips Bernanke’s next move:
it is worth remembering, when the Fed has said it is prepared to act during this long-running economic crisis, it generally has acted.

Bernanke is tipping his hand (via Jon) in order to prepare the market for what is to come in a few weeks. This is a heads up to the insiders that more monetary gas is in the works. The stock market’s first reaction to today’s non-event was to sell off hard. But after the word got around that this was just a delay (and a short one at that) stocks caught a bid. Basically, the plan by Bernanke to leak his intentions worked.

I think there are two reasons that Bernanke chose not to announce policy changes at Jackson Hole:

I) He wants it to look to the world (and a few Republican politicians) as if the Fed’s actions are being done only after deep deliberation and discussion. That is why the next meeting has been changed to a two-day format.

There will be a two-day circus of Fed Governors looking very serious. But that is just for the TV audience. This is Ben’s show. He has the votes. He is steering the ship. The decisions have already been made. Ben’s going to do something on 9/21.

II) Ben had to put off announcing more monetary oomph today because there is something that has to happen first. There has to be something that comes out of the EU before Bernanke makes his next move.

I’m not sure what happens next in Europe. I’m of the opinion that something needs to be done, and it needs to be done quickly.

There are a number of things that the ECB could do. They could (1) significantly expand their effort at QE (the number starts at E 1 trillion). They could (2) drop official lending rates close to zero. They could (3) agree to issue E bonds.

Some combination of those actions would buy some more time. The problem is that all of those steps have been discussed and pretty much firmly rejected. There is a fourth option. The strong hands in the EU could give in to the markets and let some of the PIIGS (starting with Greece) float on their own. This option has also been previously rejected.

I think it is time for serious consideration for this. I can’t think of a single person who has a voice in these matters that actually believes that Greece can be saved with more debt. We shall see, possibly as soon as Sunday night.

Yet another option is to get the US Fed into the picture with dramatic draw-downs on existing USD swap lines (Starts with $500 Billion). This is another possibility for this weekend or next.

My last point is one that I have made many times before, but feel obligated to repeat.

I flat out hate that this Fed is conducting monetary policy through leaks, a wink and a nod and innuendo

There is far too much at stake to make a circus out of the process. It feels like we should just put up a tent, because a three-ring circus is what we are getting non-stop. And Bernanke is the strong man in the middle ring.

Big Asset Sale Near at Bank of America
by Nelson D. Schwartz - New York Times

Bank of America is completing plans to sell more than half of its stake in the China Construction Bank in a deal that could raise nearly $10 billion, just a day after Warren E. Buffett invested $5 billion in the beleaguered American financial giant.

A consortium of sovereign wealth funds in Asia and the Middle East as well as several private equity firms are in negotiations with bankers and could close a deal by early next week, two officials briefed on the talks said Friday. While Bank of America plans to sell at least half of its 10 percent stake in the Chinese bank, it is willing to unload much more than that for the right price, according to the officials, who spoke on the condition that they not be named because the sale was still being negotiated.

The sale would improve Bank of America’s capital position under international Basel III regulations. Bank of America’s stock fell by nearly 30 percent earlier this month on investor fears that it would have to sell more shares to raise more capital amid huge losses on soured mortgage securities and a weakening economy.

Mr. Buffett’s investment — and the likely sale of the Chinese stake — have helped allay those worries while reinforcing investor confidence in management, and Bank of America shares rose 1.4 percent to $7.76 a share on Friday. The stock jumped more than 9 percent Thursday on news of Mr. Buffett’s move. A Bank of America spokesman declined to comment.

But if a deal is completed soon, it would also defy speculation that deep-pocketed buyers would be hard to find at a time of intense volatility in the markets and uncertainty about the global economy.

The sale by Bank of America has also been complicated by the fact that other institutions have been selling shares in China Construction and other Chinese banks. In July, Singapore’s state investment fund, Temasek Holdings, sold more than $1 billion worth of shares in the China Construction Bank.

Unloading the Chinese shares represents one more step in reversing the legacy of Bank of America’s former chief executive, Kenneth D. Lewis, who made Bank of America the nation’s largest bank through a long series of acquisitions, some more profitable than others. One in particular, the 2008 purchase of Countrywide Financial, the subprime lender, has been disastrous, costing the bank more than $30 billion.

The investment in the China Construction Bank, which began in 2005, has been much more successful. In its latest filings with the Securities and Exchange Commission, Bank of America estimated the entire stake was worth almost $19.6 billion, about $10 billion more than it paid. Bank of America owns 25.6 billion shares of China Construction, of which 23.6 billion are covered by a lock-up preventing sales that expires on Monday. A lock-up on the remaining 2 billion shares expires next August.

For Bank of America, unloading the China Construction stake is also part of a broader effort by its chief executive, Brian T. Moynihan, to sell off noncore businesses, strengthen the bank’s capital position and focus on the company’s retail and investment banking operations. Since the start of 2010, Mr. Moynihan has sold more than $30 billion worth of assets, most recently unloading the bank’s Canadian credit card business and a portfolio of commercial real estate. The potential deal was first reported by CNBC.

While Mr. Buffett’s move and the potential sale of China Construction have been greeted positively by investors, the overhang from Countrywide still looms large. In June, Bank of America reached an $8.5 billion settlement with 22 major holders of soured mortgage securities to help cap future repurchase claims. That deal was set to be reviewed by a state court judge in November, but a group of other investors who oppose the settlement filed a notice Friday to move the case to federal court in Manhattan.

If that effort were to ultimately succeed, it could delay resolution of the settlement, but legal experts said permanently moving the venue would not be easy. The trustee for the 22 investors, Bank of New York Mellon, is expected to ask next week that the case be kept in state court. The state court had imposed a deadline of Tuesday for any objections to the agreement.

As Trade Volumes Soar, Exchanges Cash In
by Graham Bowley - New York Times

The latest financial market convulsions have been tough for almost everyone, including traders caught on the wrong side of another big swing and pained everyday investors watching their dwindling holdings go down and up — and down again.

But there is a silver lining to even this latest market horror show, at least for the exchanges where the financial instruments change hands. Businesses like the New York Stock Exchange and the Chicago Mercantile Exchange skim cents off each stock or contract bought or sold over their trading floors or computers. With the daily volumes of financial market contracts sent surging through their systems by nervous traders and investors up by billions, the latest trading rush is directly polishing their bottom line.

The effect, however, may be fleeting. The rising volumes have generally not translated into higher stock prices for the exchanges, and they and some analysts are worried that the volatility and downbeat economic news may frighten away investors in the long term. "Volume is positive on a short-term basis but because it is based on negative macroeconomic factors, these volumes are not necessarily sustainable," said Joseph M. Mecane, executive vice president for cash trading at NYSE Euronext, which operates the New York Stock Exchange.

The latest swings came Friday when the Standard & Poor’s 500-stock index fell 2 percent in the morning, but climbed back up in the afternoon to finish 1.5 percent higher, as investors digested remarks by Ben S. Bernanke, the Federal Reserve chairman, that left the door open to further support for the economy. The Dow Jones industrial average swung about 363 points during the day, closing up 1.2 percent, to 11,284.54.

Across United States stock markets — including the big electronic exchanges like Nasdaq, BATS and Direct Edge — trading volumes so far in the latest quarter are 17 percent ahead of the same period last year, according to figures from Credit Suisse. Volumes have been hitting levels almost double what they normally are at this usually quiet time of year, Mr. Mecane said.

Markets have been sent wild this summer amid a number of exceptional events, like the showdown over the debt ceiling in Washington, the downgrade by the credit rating agency Standard & Poor’s of the United States’ long-term debt on Aug. 5, the global fallout from Europe’s debt crisis and a raft of data pointing to a stalling United States economy. On a couple of days earlier in August, stock market volumes touched about 15 billion daily trades, although volumes are now back to about eight billion or nine billion daily.

The stock exchanges on average charge 3.5 cents for every 100 shares traded, according to Credit Suisse. That has declined in recent years with greater competition between the exchanges, so the pop in volumes is not delivering as much to them in increased profits as it would have just a few years ago. The exchanges have also diversified into other business like providing trading technology to banks. That means revenue from stock and derivatives trading accounts for a smaller proportion of overall income. In the case of Nasdaq, for example, it makes up a third of overall sales.

The exchanges, most of which are public companies, generally will not comment on the effect these increased volumes will have on profits. But analysts like Howard Chen, a financial analyst at Credit Suisse who watches the exchanges, said that because volumes were already tracking 15 to 20 percent above what he had been expecting, earnings should be up a similar amount.

It’s not just the stock market that is experiencing a lift. Traders have been busily betting on interest rates, commodities, currencies and even volatility itself. The Chicago Mercantile Exchange where these and other products like United States Treasury futures are in large part traded has recorded a big pick-up in trading volumes recently.

Aug. 9, for example, was a record day for the Chicago exchange, when nearly 25.7 million contracts were traded, beating the last record, which was during the so-called flash crash on May 6 last year, when 25.3 million contracts were traded, the exchange said. So far during the third quarter, volumes on the Chicago exchange are up 39 percent compared with the same period a year ago, Credit Suisse said.

Futures in gold, oil and the broad stock market index, the S.& P. E-Mini, are all up. In an era when volatility has become the new norm, another instrument that has had a surge in volumes is the Chicago Board Options Exchange Volatility Index. The VIX, as it is known, measures the short-term implied volatility of options on the S.& P. 500. Financial instruments based on the VIX are traded both electronically and in the exchange’s trading pits in Chicago — where there is a special VIX pit, and 60 dedicated VIX traders.

It is also called the fear index, and as the S.& P. 500 has spiraled down and up, VIX futures and options have become a popular tool for all sorts of fearful investors to protect themselves against the swings — and maybe even make a little money. "Volatility in itself is becoming a more popular and investable asset class for institutions and also for retail investors," Mr. Chen said.

Volume in VIX options is up 79 percent and trading in futures on the index soared 290 percent through Aug. 19. Futures trading this month is already a record, surpassing July, which was the next highest. The single busiest day on record was Friday, Aug. 5, when 1,194,468 options contracts were traded. "When volumes are up we do well," said William J. Brodsky, chairman and chief executive of CBOE Holdings.

Mr. Brodsky said the VIX was created with professional investors in mind but is increasingly being embraced by retail investors to protect against volatility. The VIX generally moves in a range of 15 to 50, although it reached 80 during the financial crisis in 2008. Investors worried that their stock holdings were vulnerable to a sell-off in the market, for example, might buy the VIX as protection because the VIX would most likely rise.

Mr. Brodsky said a couple of dozen VIX exchange-traded notes are now offered by banks like Barclays. They were linked to the VIX and aimed at providing easier access for ordinary investors. The strange thing is the heightened market volatility has not been particularly good for the exchanges’ own share prices.

Even as their volumes have rocketed, their own stock prices have languished. While CBOE’s shares are up 7 percent this year, the Chicago Mercantile Exchange’s stock price is down 22 percent. NYSE Euronext’s share price is down 9 percent for the year, and stock in Nasdaq is down 4 percent. "It’s a little odd," Mr. Chen said.

One reason might be that even though volumes have been picking up in recent years, the rates the exchanges charge at least for stock trading have come under pressure. Another reason, according to Mr. Chen, is the possibility — however distant — of a financial transaction tax raised by European policy makers, which would depress trading volumes. But perhaps the biggest reason is that the markets really think this is the "storm before the calm," he said — that soon all this volatility will go away and trading will be becalmed, perhaps even more so than before. That won’t be good news for the exchanges.

Other industry analysts agree. They fear that the big swings will hurt investors’ confidence in the markets and keep them away in the future. The same thing happened last year in the stock market. After the flash crash on May 6 — another time when Europe’s debt crisis was roiling world markets — May and June were busy months, but then volumes slowed markedly, partly because ordinary investors were frightened away, he said.

Stock market volumes increased for six consecutive years between 2004 and 2009 but then fell 13 percent between 2009 and 2010. This year, despite the latest bounce, volumes across the entire stock market are 7 percent lower compared with last year.

High street recession worst for 40 years, says Co-Op chief Peter Marks
by Louise Armitstead - Telegraph

The recession on Britain's high street is the worst for more than 40 years, the boss of the Co-operative Group has claimed, as shares in a trolley-full of retailers plunged.

Peter Marks said that for the first time people have been cutting food budgets - normally an area that is relied upon as "recession-proof". "People are spending less on food – that's a first," said the Co-op's chief executive. He added that he and other retailers are having to cut prices radically to shift stock. While normally around a quarter of products are on promotion, approximately 40pc are discounted at the moment, Mr Marks said. He added: "We're not into 'buy one, get one free' – we're into 'buy one, get two free'."

He added: "It has been a tough six months, the toughest I've ever experienced in my 40 years of retailing. I don't think we have come out of recession since 2008… I've operated through several recessions – this is by far the longest." The Co-Op, which is Britain's fifth biggest supermarket group, unveiled a fall in first-half pre-tax profits to £230.8m. Group sales fell from to 6.89bn in the six months to July, down from £6.95bn during the same period last year. Food sales were £3.7bn, 4.6pc lower than last year.

Mr Marks warned profits were unlikely to improve by the full year. "I really don't see any light at the end of the tunnel," he said. His gloom was reflected across the high street. Topps Tiles, the UK's biggest tile and wooden floor specialist, issued a profits warning, sending the shares plunging 13? - 29pc - to 33p. Matt Williams, chief executive, said he has seen a "step down in consumer confidence since the beginning of July".

Topps Tiles, which employs 1,600 people in the UK, said revenues dived by 10.4pc in the first seven weeks of its fourth quarter. Mr Williams warned that jobs could go: "With fewer sales in store, it's difficult to argue with the logic that we need fewer people to service those sales."

A range of retailers were punished on the stock market. Clinton Cards tumbled 10pc; JJB Sports was down 7pc; Marks & Spencer fell 4pc; and Kingfisher, the owner of B&Q, was off more than 3pc.

The CBI's latest quarterly Distributive Trades Survey found 46pc of retailers said sales had fallen in the two weeks to August 16th with only 13pc recording a rise. The trade body said that retail sales volumes had fallen at the fastest rate for a year. According to the survey, retailers are more negative now than at any time in the past 18 months about the immediate prospects for sales growth.

Judith McKenna, chairman of the CBI's survey panel and chief operating officer of Asda, said: "August was a tough month on the high street. Sales volumes fell at a pace not seen in more than a year, as consumers have continued to see their real incomes squeezed by a combination of inflation and weak wage growth."

The Kingdom of Magical Thinking
by Robin M. Mills -

Widely assumed to be a fabulously wealthy welfare state, Saudi Arabia is in fact an economic basket case waiting to happen.

In 1935, an oilman visiting the Middle East reported back to his headquarters, "The future leaves them cold. They want money now." Although the temptation of overspending has repeatedly undermined oil-rich governments from Caracas to Tehran, Saudi Arabia avoided this trap over the last decade through fiscal discipline that has kept its expenditures below its swelling oil receipts.

But in a recent report striking for the candor of its unpalatable conclusions, Saudi investment bank Jadwa laid out the kingdom's inexorable fiscal challenge: how to balance soaring government spending, rapidly rising domestic oil demand, and a world oil market that gives little room for further revenue increases. And that was before the recent economic turmoil knocked $20 per barrel off oil prices.

Saudi Arabia's government spending, flat since the last oil boom in the 1970s, is now rising at 10 percent or more annually. And it will rise faster still: The House of Saud's survival instinct in the wake of the initial Arab revolutions led King Abdullah to announce $130 billion of largesse in February and March. The resulting increases in government employment and salaries can be cut only at the cost of more discontent.

And that's only what the kingdom is spending on its "counterrevolution" at home. Saudi Arabia will pay the lion's share of the pledged $25 billion of Gulf Cooperation Council aid to Bahrain, Egypt, Jordan, and Oman. With Iraq, Syria, and Yemen likely flashpoints yet to come, the bill will only increase. Already, nearly a third of the Saudi budget goes toward defense, a proportion that could rise in the face of a perceived Iranian threat.

Meanwhile, fast-growing domestic demand poses a serious threat to oil-export revenues. The kingdom is one of the world's least energy-efficient economies: With prices fixed at $3 per barrel for power generation and $0.60 per gallon of gasoline, Saudi Arabia needs 10 times more energy than the global average to generate a dollar of output.

Subsidized natural gas, too, is in short supply, undermining an economic diversification drive focused on petrochemicals. As much as 1.2 million barrels per day (bpd) of oil are burned for electricity to meet summer air-conditioning demand, yet Jeddah, Saudi Arabia's second-largest city, still suffers frequent power cuts. By around 2026, Jadwa projects that domestic consumption will be over 5 million bpd, exceeding exports, which will never again reach their 2005 peak.

This combination of higher spending and lower exports shortens Saudi Arabia's time horizon. Usually considered, on shaky evidence, to be a "price moderate" within OPEC, the kingdom now requires $85 per barrel to balance its budget. That figure will rise to $320 by 2030, according to Jadwa. (Of course, just because the Saudis need a certain oil price to balance the budget does not mean they can get it. Higher prices today come at the inevitable cost of future revenues, as economic growth is reduced and consumers choose more efficient vehicles.)

Savings cushion the budget for now. But the experience of the last oil price cycle is likely to recur: $180 billion of assets in 1980 had become $176 billion of debt by the end of 2002, and despite the oil-price crash, Riyadh was able neither to cut spending nor to grow a viable non-petroleum economy. This time, Jadwa foresees that the Saudi Arabian Monetary Agency will be forced to draw down its $500 billion of foreign assets to the point where, by 2030, the country's fiscal position will be under severe strain.

So far, the kingdom has been fortunate. This decade's rapidly rising spending was enabled when Saudi Arabia's main OPEC rivals, Venezuela, and Iran, left the field clear due to underinvestment in and mismanagement of their oil industries. Along with the war in Libya, this has allowed Saudi production to increase to its highest level in 30 years while prices have remained strong. But the good times will soon come to an end.

Oil prices have again, as in 2008, been allowed to get too high, too fast. The renewed economic downturn, combined with fears of overheating in China and other emerging markets, has only sharpened this challenge. Growing efficiency, demographics, and alternatives mean that OECD oil demand is probably in a slow, long-term decline, while non-OPEC supply is proving more robust than expected, with strong growth in Brazilian pre-salt oil and North American unconventional shale oil and oil sands.

And, for the first time since Oil Minister Ahmed Zaki Yamani did battle with the Iranians in the 1970s, Saudi Arabia faces a real challenger within OPEC. Even if Iraq's ambitious plans are only half-realized, it will soak up more than half of global demand growth. Its vast, low-cost reserves make major production increases attractive even if they reduce prices. For its own reasons, Iran seeks to undermine Iraqi stability, but that would hardly be a palatable outcome for the Saudis either.

And that's not all: Angola also has room for further growth; Muammar al-Qaddafi's impending defeat may restore some of Libya's production; and, with Hugo Chávez suffering from cancer, Venezuela's oil policy may change after the 2012 election.

The Saudis' dilemma is this: They hold nearly all OPEC's spare capacity, their essential weapon for keeping the cartel in line. June's "worst meeting ever" was actually a victory for Saudi Oil Minister Ali al-Naimi. Opposition by Iran, Venezuela, Libya, and others to a production hike left him free to increase output as far as he chose. Yet Saudi Aramco, the country's monopoly state oil company, has few drill-ready development projects. Plans announced in 2008 to take Aramco's capacity to 15 million bpd have not been implemented, and the only big project under way, the giant Manifa heavy oil field, with about 900,000 bpd, will mostly serve domestic needs.

So what should the Saudis do? Setting a credible target, say $70 per barrel, and defending it by creating new spare capacity would reduce long-term prices. By enduring some pain themselves and drawing down their vast savings, they would burn off high-cost competition, punish OPEC rivals that are ignoring quotas, and damage archenemy Iran. Yet they are understandably reluctant to spend billions of dollars on new fields at a time of wavering demand.

Ambitious plans for nuclear and solar power are no panacea. Saudi Arabia has no competitive advantage over other countries in alternative energy. If it succeeds in reducing oil use in transportation, other countries can too -- so who will be buying Saudi oil?

The black hole in current policy discussions is improved energy efficiency. Raising domestic fuel prices would cut demand, allow development of higher-cost gas resources, and free up more oil for export. "Smart" subsidies or cash transfers could offset the price hikes for vulnerable groups.

A lower oil-price target would have to be combined with domestic spending restraint. The Saudi government cannot forever be the employer of last resort; reshaping education and labor policy to bring more Saudi citizens into the private sector would ease some social pressures. Between 2005 and 2009, 2.2 million private-sector jobs were created, but only 9 percent went to Saudi citizens.

Tinkering is not enough. Without radical reforms, Saudi leverage within OPEC will be increasingly constrained. The kingdom's regional power will weaken, precisely at the time when it is attempting to step up its role. And in the long term, its economic and social model will come under intolerable strain.

Yet the crisis is still too far away, the lure of easy oil money too strong -- and the policy changes required demand deft execution untypical of Saudi bureaucracy. As Machiavelli cautioned, "There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things."

Time to Get Angry, Europe
by Ulrich Beck - Spiegel

The European common currency is in trouble, several EU countries are facing mountains of debt and solidarity within the bloc is declining. It is European youth, in particular, who have drawn the short stick. Closer cooperation is the only way forward.

Germany's European policy is about to undergo a transformation as significant as Ostpolitik --the country's improvement of relations with the Soviet bloc -- was in the early 1970s. While that policy was characterized by the slogan "change through rapprochement," Berlin's new approach might be dubbed "more justice through more Europe."

In both cases, it is a question of overcoming a divide, between the East and the West in the 1970s and between north and south today . Politicians tirelessly insist that Europe is a community of fate. It has been that way since the establishment of the European Union. The EU is an idea that grew out of the physical and moral devastation following World War II. Ostpolitik was an idea devoted to defusing the Cold War and perforating the Iron Curtain.

Unlike earlier nations and empires that celebrated their origins in myths and heroic victories, the EU is a transnational governmental institution that emerged from the agony of defeat and consternation over the Holocaust. But now that war and peace is no longer the overriding issue, what does the European community of fate signify as a new generational experience? It is the existential threat posed by the financial and euro crisis that is making Europeans realize that they do not live in Germany or France, but in Europe.

For the first time, Europe's young people are experiencing their own "European fate." Better educated than ever and possessing high expectations, they are confronting a decline in the labor markets triggered by the threat of national bankruptcies and the economic crisis. Today one in five Europeans under 25 is unemployed.

A New Age of Risky Confusion
In those places where they have set up their tent cities and raised their voices, they are demanding social justice. In Spain and Portugal, as well as in Tunisia, Egypt and Israel (unlike Great Britain), they are voicing their demands in a way as nonviolent as it is powerful. Europe and its youth are united in their rage over politicians who are willing to spend unimaginable sums of money to rescue banks, even as they gamble away the futures of their countries' youth. If the hopes of Europe's young people fall victim to the euro crisis, what can the future hold for a Europe whose population is getting older and older?

News programs offer new visual material for the dawning of a new age of risky confusion -- the "world risk society" -- on an almost daily basis. The headlines have been interchangeable for some time: Insecurity Over the Future of the Global Economy, EU Bailout Fund in Jeopardy, Merkel Attends Crisis Meeting with Sarkozy, Rating Agency Announces Downgrade of US Debt. Does the global financial crisis signal the deterioration of the old center? Ironically, it is authoritarian China that is playing the moral apostle on the financial front, with its sharp criticism of both democratic America and the EU.

There is one thing the financial crisis has undoubtedly achieved: Everyone (experts and politicians included) has been catapulted into a world that no one understands anymore. As far as the political reactions are concerned, there are two extreme scenarios that can be juxtaposed. The first is a Hegelian scenario, in which, given the threats that global risk capitalism engenders, the "ruse of reason" is afforded an historic opportunity.

This is the cosmopolitan imperative: cooperate or fail, succeed together or fail individually. At the same time, the inability to control financial risks (along with climate change and migration movements) presents a Carl Schmitt scenario, a strategic power game, which opens the door to ethnic and nationalist policy.

Taking Europe for Granted
The community of fate is inescapable in both models, because, no matter what we do, global risk capitalism creates new existential divisions and bonds across national, ethnic, religious and political boundaries. How can Europe even prevail in this environment? Paradoxically, the success of the EU is also one of its biggest obstacles. People have come to take many of its achievements for granted, so much so that that perhaps they would only notice them if they ceased to exist.

One only need imagine an EU in which passport controls are reintroduced at borders, there are no longer reliable food safety regulations everywhere, freedom of speech and of the press no longer exist under today's standards (which Hungary is already violating, thereby exposing itself to strict scrutiny), and Europeans traveling to Budapest, Copenhagen or Prague, or even Paris, Madrid and Rome, are forced to exchange money and keep track of exchange rates. The notion of Europe as our home has become second nature to us. Perhaps this explains why we are prepared to jeopardize its existence so carelessly.

We must recognize and acknowledge the reality that Germany has become a part of the European community of fate -- in exactly the way former German Chancellor Willy Brandt described during the first session of parliament following German reunification: "Let us hope that being German and being European are now one and the same, today and forever."

Does the Hegelian idea that reason ultimately prevails throughout history, despite many diversions, still apply? Or is Carl Schmitt's belief that hostility among nations must invariably prevail more fitting to conditions in the world today?

Unlike the community of fate between two rivals that exists between the United States and China, Europe's community of fate is based on shared laws, a shared currency and shared borders, but also on a "never again!" principle. Instead of invoking a noble past, the EU attempts to ensure that the past will never repeat itself. Instead of becoming a super-state or a mechanism that represents enlightened national interests in the best of cases, the EU has taken on a third form.

Its most important role is to orchestrate. It facilitates the networking of commitments and entities that include sovereign states, as well as transnational organizations, municipal and regional governments and the organizations of civil society.

An Accumulation of Impositions
Within this framework, the bailout funds for southern European countries have engendered a logic of conflict between donor and debtor nations. The donor nations must implement domestic austerity programs and, for this reason, are exerting political pressure on the debtor nations at a level exceeding the pain threshold. In contrast, the debtor nations see themselves subject to an EU dictate that violates their national autonomy and dignity. Both stir up hatred of Europe, because everyone sees Europe as an accumulation of impositions.

And then there is the perceived external threat. Critics of Islam, which claim that Muslims are abusing the West's values of freedom, managed to connect xenophobia with enlightenment. Suddenly it was possible to be opposed to the encroachment of certain immigrants, all in the name of enlightenment. As a result, three destructive processes are overlapping and being reinforced in Europe: xenophobia, Islamophobia and anti-European sentiments.

Many envision the end of politics when they think about politics. How can anyone be so blind? In big and small ways, and at the national, European and especially the global level, Hegel, the believer in reason, and Schmitt, who sees enemies everywhere, are at odds.

When it comes to the eternal crisis called Europe, this conflict over the model of the future raises the following questions: To what extent does the revolution among outraged youth actually transcend national borders and promote solidarity? To what extent does the feeling of being left behind lead to a European generational experience and new European policy initiatives? How are workers, the unions and the center of European society behaving? Which of the major parties, in Germany, for example, has the courage to explain to citizens what Europe as a homeland is worth to them?

Merkel adheres to the Hegelian idea by preferring the detours of reason. To use the metaphor of dance: two steps backward, one step to the side, then a magical, lightning-quick about-face, softened by a tiny step forward -- in much the same way as the coalition government in Berlin is hopping, stumbling and tumbling its way forward, dancing to music that neither the Germans nor the other Europeans can hear or comprehend. While former Chancellor Helmut Kohl warned against a German Europe and sought a European Germany, Merkel advocates a German euro-nationalism, putting her faith in the ability of Berlin's regulatory and economic policy to heal Europe's wounds.

Time for More Hegel
But in light of the financial crisis, European policy today should play the same role as the Ostpolitik of the 1970s did in divided Germany: a unification policy without borders. Why was the enormously expensive reunification with East Germany self-evident, and why, on the other hand, is the economic integration of debtor nations like Greece and Portugal frowned upon? It isn't just a question of paying the piper. In fact, the real challenge is to rethink and reshape Europe's future and its position in the world.

The introduction of euro bonds would not be a betrayal of German interests. The road to a union characterized by solidarity, much like the recognition of the Oder-Neisse border between a unified Germany and Poland, is indeed in Germany's well-considered interest. It is an expression of European and German realpolitik. Why shouldn't Europe introduce a financial transaction tax, which would establish a financial scope for a social and environmental Europe, which in turn would promise workers security through Europe, and in doing so address the greatest concerns of young Europeans?

The concept of more justice through more Europe contains an appeal in terms of a transnational community of solidarity. "Be outraged, Europeans." Just as many demonized Brandt's talk of rapprochement with the communist bloc as treason, today's call for "more Europe!" is a blow in the face of national self-awareness.

Merkel's back-and-forth and forward-and-backward approach could also create an opportunity for a future project involving the Social Democrats and the Green Party. As soon as the SPD and the Greens have explained that a social Europe is more than an introverted tightwad, but rather -- using Hegel's argument -- an historic necessity, even the SPD will regain stature and win elections. This, of course, is predicated upon its having the courage to declare Europe to be its main project, just as Ostpolitik was more than 40 years ago.

Areas near Japan nuclear plant may be off limits for decades
by Osamu Tsukimori and Nathan Layne - Reuters

Areas surrounding Japan's crippled Fukushima nuclear plant could remain uninhabitable for decades due to high radiation, the government warned on Saturday as it struggles to clean up after the world's worst nuclear disaster since Chernobyl.

Japan faces the daunting task of decontaminating large areas of land around the Fukushima Daiichi nuclear complex, which is still leaking low levels of radiation nearly six months after an earthquake and tsunami triggered a nuclear meltdown.

In a meeting with local officials on Saturday, the government estimated it could take more than 20 years before residents could safely return to areas with current radiation readings of 200 millisieverts per year, and a decade for areas at 100 millisieverts per year. The estimates, which merely confirm what many experts have been saying for months, are based on the natural decline of radiation over time and do not account for the impact of decontamination steps such as removing affected soil. An vast area is still uninhabitable around the Chernobyl plant 25 years after that disaster.

The Japanese government unveiled guidelines this week with the aim of halving radiation in problem areas in two years, but for spots with very high readings it could take much longer to reach safe levels. "I can't deny the possibility that it could be a long time before people can return to and live in regions with high radiation levels," outgoing Prime Minister Naoto Kan was quoted by domestic media as telling Fukushima Governor Yuhei Sato.

Japan has banned people from entering within 20 km (12 miles) of the Fukushima plant, located 240 km northeast of Tokyo. Around 80,000 people have been evacuated since the March 11 quake and tsunami and many are living in shelters or temporary homes. The government's announcement follows the release of data this week showing radiation readings in 35 spots in the evacuation zone above the 20 millisieverts per year level deemed safe by the government. The highest reading was 508 millisieverts in the town of Okuma, about 3 km from the nuclear plant.

Kan, who resigned on Friday as leader of the ruling Democratic Party of Japan amid intense criticism of his handling of the nuclear crisis, also told Sato that the government planned to build a temporary storage facility in Fukushima for radioactive waste.

The accident at the Fukushima plant is likely to have released about 15 percent of the radiation released at Chernobyl in 1986, Japan's Nuclear and Industrial Safety Agency has estimated. But that is still more than seven times the amount of radiation produced by Three Mile Island accident in the United States in 1979, and experts have estimated Japan's decontamination efforts could cost as much as 10 trillion yen ($130 billion).


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Biologique Earl said...

D. Benton Smith said...

@ El G

"Regarding 'Goodnight Sweetheart' , I think you've got this guy's number alright. Looks a lot like a Troll, but harder than average to make a positive ID."

I called that shot a week or two ago when I asked her?) if she had, by chance, met Cheryl - she could easily recognize Cheryl by her big hat. It is clear she (?) is trying to force S et Il into definite statements for things too difficult for any body to call. It is a clever attempt to discredit them. It stank of troll from first post of 'Goodnight Sweetheart'

It is clear to me that this site is a thorn in the side of certain members of the elite. We know that they started a program of infiltrating certain blogs with troll entrees. It is an attempt to discredit those that point out all the games that are being played by the government, Fed Reserve, banksters and other gangsters.

I would urge people to stop feeding the barrage of trolls hitting on this site. Starve them and they will spend more effort on other sites.

Robert 1

Jack said...

It does appear as if from now until the end of this year a big sake-up in our financial system will take place.
Thanks to TAE for giving us advanced notice.

Jack said...

Stoneleigh: those with no bargaining power will get much less than the spot price if they are forced to sell into what is likely to be the ultimate buyers market during the next few years

I agree and thats how it is with diamonds, you try to sell a diamond and you cannot get a fraction of what you paid for it.
That is today
Same will happen to gold as Stoneleigh says

Ashvin said...

The Big Picture... that most frustrating yet critical perspective. Millions of people along the US East Coast are now finding out why front-running financial and environmental collapse via physical preparation is an invaluable thing to do, instead of waiting until the herd starts to panic. Neither stocks, gold nor 3-month T-bills will do you any good when Irene is up to bat, and Carol's new beachfront property isn't looking too valuable or secure either. Fellow East Coasters stay safe this weekend!

scandia said...

Thanks for this analysis Stoneleigh. I almost bought more silver but some intuitive feeling within said not to. It is so tempting to speculate when there are so many articles saying the price will be #100 or $500 an ounce by the end of the year.
Perhaps some can afford to speculate and risk a loss. I cannot.Your essay gave much needed support to my intuition.
I was feeling like I was caught in a crowd of panicking passengers rushing to one side of the ship, then rushing to the other, over and over again.

@board, Last year someone posted a formula /substitute for thyroid medication.
I can't recall who posted the information - a practitioner of alternative medicine? If someone did record the " recipe " please post it for me. Thanks in advance...

el gallinazo said...


"While Stoneleigh and ilargi may be perfectly correct that deflation will occur, I am still hedging my bets by holding both cash as well as precious metals. I also have a garden :)"

You are obviously a hyperinflationista from previous comments, and the input of people of your persuasion here has its value in aiding people in critical thinking of the issue. That said, let me correct a few points. First, I&S both agree that the dollar will **eventually** disappear into the black hole of HI, and your comments do not recognize this point. Stoneleigh says that this will not happen until the debt deleveraging is almost complete and she puts a minimum two year time frame on this. Many here, including Ash and myself, think that 5 years is more plausible as a minimum, but Stoneleigh wishes to be conservative in this regard to advise people to get out of all debt instruments, which would include FRN, and into hard productive assets on their own doomsteads, if possible. Additionally, Stoneleigh does not "bad mouth" gold. She just says that it is also now in a commodity type speculative bubble and she expects the price to fall back as deleveraging accelerates. She also says that gold will maintain value over the long run, but converting it into the necessities of life will be perilous. CHS also offers an excellent quantitative analysis on "gold hedging" in the last chapter of his new book. He also, like Stoneleigh, does an excellent analysis of its dangers. However, he made a serious error where he include "silver coins" in FDR's 1933 gold confiscation decree. I read the original and silver is nowhere to be found in the document. This would have been silly, as all US federally minted coins up to 1963? were 90% silver.

Second, using Weimar Germany as a model for US HI can be very misleading. I don't wish to get into a debate on this, though Ash would probably oblige you. But the Weimar HI was based, like Zimbabwe, on the actual printing of fiat paper with many zeros attached, which while the Fed has been doing is force feeding the taxpayer pissants additional credit whether we want it or not, and while credit and money act very similarly in an expansive phase, they act quite differently in a contractive phase.

You stated in the last thread that wages are going up. I would like to see those statistics linked. I wonder also what they would look like if the top 5% were weeded out or the average is a median instead of a mean. There is no doubt that the top 5-10% have benefitted from the Fed's policy of propping up "risk assets." Are these Canadian numbers, as the Canadian economic tends to lag the USA? My personal opinion is that the Fed is now going to pull the plug and leave it to O'bumma's jack boots to start to enforce austerity.

As to balancing the budget, Paul Craig Roberts stated in an interview with Alex Jones this week that even if Ron Paul were elected as the next president, his hands would be tied. There are three major power centers, the banksters, the MIC, and the security/intelligence network. The only chance that Paul would have of ending the wars would be if he could swing the last to his side, and that would be about an ice cube's chance in hell. Otherwise, he would meet an untimely end which would probably be more nebulous than that of JFK, who was basically "offed" by a consortium headed up by Allan Dulles who JFK had recently fired as Director of the CIA. Bush the Elder also had a cameo.

I think that the various panics we now see of the uber rich is due to the implosion of credit in the shadow banking system which is not to be found in most statistics. It's hard to quantify, and the Fed has eliminated M3 statistics which might catch a little of it.

el gallinazo said...

Jim Paplava of FSN has reported on several occasions that any consumer credit expansion is primarily fueled by student loans which cannot be shed through personal bankruptcy, even today, though one may expect bankruptcy to become far more Draconian in the near future. Student debt now exceeds all credit card debt. Now isn't that an interesting statistic? A lot of this is due to people with BA's and BS's not being able to find employment and still drinking the kool-aide that further education (while accruing great additional personal debt) is the key to their future. this was true 40 years ago. Unfortunately, many of them may soon be doing post doc research as cannon fodder around the world.

As to my own personal inconvenient experience with the Morgue unilaterally closing out all my accounts this week, I am reaching the conclusion that the giant banks are now trying to discourage depositors that do not hold high interest debt, and I was on the bleeding edge. With the Bank of NY Mellon now charging large depositors 14 bp to hold their money, the days of giving away toasters for depositors are over. Now they are giving away pink slips for their ironically termed "deadbeats" who pay off their credit cards automatically every month. They only want debt slaves. If I had been into them for 15 grand (my limit on their MC card) at 30%, I would doubt that they would have closed me out. Whatever. I have to go to FL around the turn of the year and sort it all out. Phuckem.

el gallinazo said...


It was Cheryl with the California beachfront property, the yellow Jag, hawking stocks, with her gardener and tomato specialist, Manuel, not Carol. Carol was hawking McMansions in Arizona and Looking for Mr. Goodbar. She also has a prurient interest in hamster sperm. However, both are probably endowed with a y chromosome and could well be the same troll living under the bridge. (Actually, the blog origin of "troll" is the fishing meaning, not Billy Goat Gruff." ) Speaking of goats, Stacy Herbert is really funny with the Carolina fainting goats on the latest Mad Max RT. These trolls are your tax dollars at work, courtesy of both the DOD and the great Constitutional professor lawyer, Cass Sunstein, husband of the infamous Samantha Powers, truly a dynamic duo. Gives you a nice warm moist feeling similar to peeing in your pants.

As to Irene, as a former Plumber of the Caribbean, a Cat 1 storm is just a pleasant zephyr.

Greenpa said...

El Gal; "As to Irene, as a former Plumber of the Caribbean, a Cat 1 storm is just a pleasant zephyr."

Well. You might notice it anyway. But basically, yeah; having lived through hurricanes that broke stuff in both NC and TX, in my distant youth; my impression is that "Hurricane Proof!" construction holds up fine for Cat 1s; but when you get to a Cat 3, the contractor will respond "Are you kidding? Nobody ever thought the wind would do THAT!" as your roof sails away. The existence of categories up to 5 (so far) notwithstanding.

I went so far as to pontifignosticate over on Causubon's Book that Irene is going to prove a wimp; I'm betting at the moment that it will hit NYC as a mere tropical storm, not hurricane. Leaving lots of evacuees pissed, swelling the ranks of the Pee Tarty, and massively increasing the damage when a real Cat 3 runs over NYC, since based on prior experience, they'll not bother to evacuate.

I like "pontifignosticate". Has poetential. Kind of rumbles around like a mouthful of marbles.

Franny said...

Thanks for the insightful post, Stoneleigh.

The thing that many people have difficulty wrapping their minds around is how the dollar can strengthen versus gold when the Fed is determined to weaken the dollar. For example, what creative things might the Fed do to "defeat" deflation? Buy up bad debt by the fistful? Buy up other assets at inflated prices? If the Fed really were willing to do anything, could they weaken the dollar in the face of the massive deleveraging that is coming? What if the Congress were willing to issue everyone with a SNAP card (foodstamps) or plain old debit card and load them with tens of thousands of dollars per month?

Lynford1933 said...

Here's another of the games played:

Draft said...

Stoneleigh - it's great to see you writing on this. The one question I have is about, not surprisingly, what timeframe you see going forward. Of course I understand your warning that a day late is worse than a year early. But nevertheless, it does make some difference.

By analogy, do you think right now is the equivalent of Fall 2007? Or are we at Summer 2008 right now? Or 2005-2006?

(In my thinking, the sovereign crunch will play the role of TBTF banks in this round of the crunch.)

Cloud Five said...

Just wondering...

In a deflationary environment, it is cash that is scarce, and cash that everyone, including central bankers, will be chasing. Selling gold to raise cash may well not be a matter of choice.

So, this would mean that a central bank is by some way restricted in the amount of worthless paper (money) they can create? And so the central bank will be out of money they used to create out of thin air up until today?

Cloud Five said...


When gold hit its low point eleven years ago, after a long and drawn out decline, central bankers were selling

Then, just when they stopped selling, the price of gold started to rise. Like magic. Even ran up harder since CB's have become more aggresive buyers.
Would it not be possible to assume the low price of gold 11 years ago was obtained just because of the selling by CB's?

Cause and effect seem to be reversed in this analysis, but that's just my point of view of course.

FrankSchoenburg said...


What if the Congress were willing to issue everyone with a SNAP card (foodstamps) or plain old debit card and load them with tens of thousands of dollars per month?

I used to think along the those lines. However, people with money (congressmen and women qualify) don't want to see hyperinflation.

If you have 1-2 million in cash and cash equivalents, the last thing your going to do is give away $20,000/citizen. That would debase your 1-2 million in a heartbeat. The elites like the system the way it is and will try to keep it that way.

The good news is if you have cash now, you can buy hard assets in a few years for pennies on the dollar. They may be pennies on 2006 prices, but still a way to ride out the storm. At least I hope so:)

Jack said...

The price of gold is virtual.
The Fed does not have to do anything it is inflated by speculation.

scrofulous said...

El G you say:
You stated in the last thread that wages are going up.

Actually I don't think so, what I did was post an article that suggested that the wage increases to, I believe, truckers was increasing and indicated a wage/price increase than could continue to spread.

Once the 9% or 16% unemployed are suitably marginalized and rendered impotent, could not the remaining ring fenced economy produce a hyper inflationary wage/price spiral? That is a question not an opinion. I am for the most part undecided as to what the H is going to happen and am preparing as best as I can for several possible events. That means too me that one would be wise in holding some gold long term whether that means one ton of gold or one tenth of an ounce. There may come a time when gold is not available at any reasonable price ... after or even during a deflationary event.

Stoneleigh do you have any thoughts on the possibility that central banks are stocking up on gold because they see that the future looks to gold as part of a world currency?

Jack said...

Gold will not be part of any currency because they tried it in the past and it failed because the people in control were corrupt.
People are not stupid and they dont want the same bullshit

Jack said...

When you say Central Bankers dont think that they are God

Jack said...

One big flood and they are wiped out.

Jack said...

All their gold is all over the place

Greg L said...

>>>As to my own personal inconvenient experience with the Morgue unilaterally closing out all my accounts this week, I am reaching the conclusion that the giant banks are now trying to discourage depositors that do not hold high interest debt, and I was on the bleeding edge. With the Bank of NY Mellon now charging large depositors 14 bp to hold their money, the days of giving away toasters for depositors are over. Now they are giving away pink slips for their ironically termed "deadbeats" who pay off their credit cards automatically every month. They only want debt slaves. If I had been into them for 15 grand (my limit on their MC card) at 30%, I would doubt that they would have closed me out. Whatever. I have to go to FL around the turn of the year and sort it all out.<<<

El G,

I followed this incident with much interest and I think anyone with cash and no debt is going to be a target. It's surprising how much information can be pulled about one's financial profile very quickly. Although this situation is unlike yours, there is someone I know who co-signed on a student loan for someone to go to medical school a few years back and unbeknownst to my fiend, this individual defaulted on the loan which resulted in the bank going after my friend. The bank offered to let him settle the matter for half of the outstanding balance and arrived at this in part by determining that "he could afford it". They determined this by pulling his credit and seeing that he had sufficient open lines of credit and getting a handle on his assets (he owns his home free and clear).

Details on our financial lives are readily available from a variety of sources to determine if we're profitable in some way for a some sort of fleecing. As this thing goes to hell, out and out theft will become the order of the day.

This sort of begs the question about how much of one's financial resources should be "on line".

I suspect that as more people attempt to move "off line" that a movement will commence to force everyone back on line with a complete virtual cash system. The likely justification for forcing this will probably revolve around shutting down terrorist networks.

el gallinazo said...


Great article and well timed. I disagree with one little point, but it is just a motivational thing on the part of the central bankers. The central bankers sell gold at its low and buy it at its high because they are corrupt. Since in most cases they are public institutions (and in the case of the Fed a private corporation that can still stick American taxpayers with their "mistakes"), I maintain that the central banks are just pulling the old retail clerk scam at a mega level. They undersell their inventory to their "valued customers" and then receive a little private, individual deposit for their efforts in the Grand Caymans. However, your statement that it is a contrarian indicator still holds.

It is obvious also that the elites are **trying** to engineer a global currency, and that currency would at least be partly gold based. As Bill Still pointed out in The Money Masters, a gold based currency is even easier for bankers to manipulate booms and busts than pure fiat based ones. That is exactly what they did from the Civil War onward. The bimetallic Grange Populist movement was the attempt of farmers and laborers to break the gold money cartel which was crushing them with deflation.

A moderator said...


Just for the sake of our good housekeeping here, we would ask you to try to consolidate your comments a little bit and try to steer away from multiple one sentence postings. One way to do this is to keep a file open in a word processor application, and add to it until it is ready to be born. Thank you for your consideration.

seychelles said...

Cass Sunstein was an unfamiliar name.
Wikipedia states about him

His 2001 book,, argued that the Internet may weaken democracy because it allows citizens to isolate themselves within groups that share their own views and experiences, and thus cut themselves off from any information that might challenge their beliefs, a phenomenon known as cyberbalkanization.


Superb TAE article by Stoneleigh today. Especially important is the concept that your portfolio of relatively illiquid assets must be insured by holding enough liquid (cash equivalent) assets so that you do not get yourself in a position of being forced to sell your illiquid assets in a down market.
This is called "having strong hands."
And sometimes these down markets, especially for PMs, can last for DECADES.

I agree with Russo that an ultimate power play by TPTB would be to do away with physical money completely. And force us to use something like centrally-controlled hand implanted chips as a wallet. In fact, I cannot imagine a greater body blow to human freedom and privacy. One thing that TPTB might attempt is to tax transactions in real money as a punitive measure. This is the flip side of the state confiscation of gold coin. There are many potential nightmare scenarios to consider. In the meantime, it behooves us to use cash for our day to day transactions as much as possible. Doing so takes some control away from the banksters, gives us a greater degree of personal privacy, and makes us consider our actions more carefully to avoid falling into debt slavery.

Jack said...

A moderator
I agree with that

FrankSchoenburg said...

@El G

As Bill Still pointed out in The Money Masters, a gold based currency is even easier for bankers to manipulate booms and busts than pure fiat based ones.

Yep. The key to a getting out the boom/bust cycle is capital requirements

As Karl Denninger has pointed out: No bank may be permitted, under any circumstances, to have outstanding more in unsecured lending than it has in actual excess capital.

Ilargi has pointed out numerous times that we are in a political crises, not a financial one. Gold backed currency is trying to fix a political crises with a financial solution. Besides being politically unfeasible, it won't work.

el gallinazo said...


If anyone here has ever found any of my links useful, I cannot recommend that you listen to Jim Paplava's interview of Paul Craig Roberts strongly enough. Who would have thunk that an arch nemesis of my 30's as a founding theoretician of the "Reagan Revolution" would have become a cognitive hero of my 60's. To say that life is strange doesn't do the thought justice.

Jim R said...

I suspect that the Sunstein brigade participates over at ZH as well, but tends to stand out more sharply here because ZH has such a riot of differing viewpoints. I had to look up Samantha Power. Thanks for mentioning the name, El G, I had not heard of her. Apparently she wants to start more wars in MENA and is an outspoken cheerleader for 0. And has a blog here on blogspot, woohoo!

And, splendid essay as usual, Stoneleigh. My impression is that the downslope of the bubble graph is marked not so much by smoothly declining prices as by wild swings and thin markets, where the upslope was characterized by well-behaved and predictable prices. At the logical downslope limit, there is a reversion to barter and that gold coin is simply worth whatever you can trade it for. The coin is probably more concentrated value than soap and canned ham, but still simply a trade item. Between you and Jesse, this macroeconomic stuff seems almost comprehensible. Used to put me right to sleep.

scrofulous said...

El gal, you say:
It is obvious also that the elites are **trying** to engineer a global currency, and that currency would at least be partly gold based. "

If so, then isn't that all the more reason to hold a bit, and before they gots it all?

You also say:"As Bill Still pointed out in The Money Masters, a gold based currency is even easier for bankers to manipulate booms and busts than pure fiat based ones"

Could you give a text refernce to the reasoning or mind explaining it yourself? On the face of it fiat seems a lot easier to manipulate fiat than something that is backed by a limited resource.

Jack said...

El G
I listened to that Paul Craig Roberts
and it is yet another story of how the people were fooled by these politicians and bankers.
We have endless amount of these things as proof in our archives and all over the internet but we cant get out of their claws that is destroying our lives.
Everyone is affected and there is not one group of people that is getting away with this unscaved so what are we supposed to do to teach these people a lesson.

Jack said...

It is about control of the system
you can have gold, no gold beans ,you name it if the people controlling that stuff are criminals than what is the difference

Skip Breakfast said...

Can TPTB buy gold at any price? $20K per ounce not a problem for them? If high gold prices ARE a problem for the biggest governments, would they eventually want a defaltion in all asset values, especially gold, so they can afford to move it from the weaker hands (who have to start selling even at lower and lower prices) to the stronger hands (the only hands left who have cash to pay for such an asset). Otherwise, it seems that the dispersal of gold is too "uncontrolled"--it's not in all the "right" hands at the moment...or is it? Truthfully, isn't most of the gold owned by major banks and governments? Gold bangles in India make up just a tiny fraction of proportional gold ownership, no?

Jim R said...

Apparently the Hofstra web server is down due to the hurricane. The bubble graph is also available on Wikipedia. Perhaps I should print it out for future reference.

ocmsrzr said...

Fantastic post. Thanks.

Anonymous said...

Why would anyone use a chart of M3 to see if we're in deflation or inflation?

M3 does not represent credit or money supply-it is a useless piece of crap-no wonder the Fed stopped publishing it--

Someone needs to explain how the transfer of (MZM)existing money from Savings/MMMF's/Time deposits/Traveler checks etc. represent money or credit supply--

Here are your M3 components which is what Shadow stats etc. used to rebuild current M3--

scrofulous said...


you got me with the gold beans bit. I have heard of Jack and the Beanstalk with magic beans , but gold beans?!

Skip Breakfast,

you got me even more than Jack with his 'gold beans'. I am pretty sure you are trying to say something but what it is truly eludes me. Can we try for some understanding by having a starting point like possibly having an agreement on this statement?:

Gold is relatively limited in quantity while fiat currency is only limited by the aims of those who can print it?

Jim R said...

If I understand Stoneleigh correctly, our current predicament is a result of the entire world economy, or as much of it as possible, being effectively under the control of a single set of management. The G7 or G20 or OECD or WTO or whatever you want to call it. It means that, as this enormous single economy goes through its business cycle, the bust phase hits literally everyone. The smaller economies of the past had shorter business cycles, and they weren't necessarily synchronous with the rest of the world. They weren't as "efficient".

The current bust is the result of the end of economic growth worldwide. Unless we can reach a trade agreement with the Alpha Centaurians we must deal with a lack of growth, and shrinkage...

And, as for the central bankers manipulating a gold-based currency, I think Mr. Still gives bankers way too much credit (pun intended) ... his alternative non-debt currency may be a good idea, but putting the control levers in the hands of Congress could be a recipe for chaos.


It is precisely because the gold supply is finite and limited that you see extreme booms and busts when it is used as money. Fiat money allows the central bankers much more latitude to manipulate the money supply, and blunt the effect of the busts. That's the theory, and it has worked for nearly a century now. Unfortunately in the global-bust phase, it degenerates into kleptocracy.

A gold standard just means the kleptocrats end up with all the gold.

Anonymous said...

I appreciate Stoneleigh's effort, but she's wrong.

That's actually alright. 99.9% of people who have studied and thought about what's going on have been wrong.

The only people who have been consistently right are the gold "bugs."

Ridicule them if you must, but record does count for something.

Gold and silver are like rocks, they show absolutely no sign of deflating.

scrofulous said...

Scandia, you say: "Perhaps some can afford to speculate and risk a loss. I cannot."

I quite agree with Stoneleigh that if you do not feel you can hold for some indefinite time then it would be unwise to hold PM's at all, there are So many better things to do with money in the here and now. This from one who has exposure in PM's! On a parallel theme, (I think you are Canadian?), then I hope that as well as not speculating in PM's you are not speculating in USD! :)

bosuncookie said...

Seychelles wrote:

I agree with Russo that an ultimate power play by TPTB would be to do away with physical money completely. And force us to use something like centrally-controlled hand implanted chips as a wallet. In fact, I cannot imagine a greater body blow to human freedom and privacy. One thing that TPTB might attempt is to tax transactions in real money as a punitive measure. This is the flip side of the state confiscation of gold coin. There are many potential nightmare scenarios to consider. In the meantime, it behooves us to use cash for our day to day transactions as much as possible. Doing so takes some control away from the banksters, gives us a greater degree of personal privacy, and makes us consider our actions more carefully to avoid falling into debt slavery.

Yesterday I received in the mail a replacement for my credit-union issued debit card. It has a chip embedded in it!

The accompanying explanation read:

Your debit card has been converted to a 'chip' card with an embedded computer chip to provide added security! With the migration to chip cards, SECU cardholders now have another layer of protection when performing debit card transactions. Blah, blah, blah.

My current card was set to expire in 2012. Usually a new card has a new number. This recent arrival had the same number as the old card and the expiration was set at 2014!

What do these chips record? Every aspect of the transaction? Does this mean that every time I use the card in a machine with a chip reader it extracts every bit of information about prior transactions?

Any ideas?

The Q said...

"As to Irene, as a former Plumber of the Caribbean, a Cat 1 storm is just a pleasant zephyr"

At least once or twice each winter, some of the roads over the sandbars connecting the islands in our area are washed out by non-hurricaine storms (relative sea level has been rising for at least 300 years measuring by old stone fortifications built at sea level).

Since more than a few here also follow Dimitry Orlov's blog, I thought I'd mention that I heard a report that a couple and their cat, who live on their boat, were rescued today off North Carolina by the Coast Guard. As much as I admire D Orlovs writing (Not saying I agree with his predictions of imminent US collapse though...A police state and command economy may keep something propped up a bit longer...), I don't plan to follow his example living on a boat. (Not saying it was Mr Orlovs boat that was wrecked, but....)

saif said...

At $680/Oz, TAE said Don't buy Gold, it is going to fall,
At $1000/Oz TAE said Don't buy Gold, it is going to fall,
At $1400/Oz, that astounding piece by Ashwin Pandurangi, Gold at $250/Oz
When it falls from $1900/oz to $1400/ will hear see we were right.
For you to be right Gold has to fall below $680/oz, no?

Jim R said...


If it makes you happy to have a gold coin in your pocket, by all means get one.

By the time the price is $680 again, if that happens, there will be so much else wrong that you probably won't care about the $680 OR the coin it will buy. And that is the point of these essays.

bosuncookie said...

On The Q's story, here's a link:

scrofulous said...

El Gal,

Here in Canada I have to think hard to remember if my credit card is Visa or Mastercard I use it that often. I don't know what card problems in you are coming up against, do you actually need a credit card in Mexico now, or will a debit card do? I would like to know more as wife and I are planing to revisit old haunts there this winter for a month or two. First spent time there in the 80's, and was very tempted to sell all in Canada and move there that is if they would have suffered me. Great people, it's just too bad their summer gets so damn hot!

scrofulous said...

DIYer, re saif.

Too true! LOL

The Q said...


Thanks for the link. Looks like the homeport was Portsmouth, Va, not Boston.

As much as I love the ocean, I am grateful I haven't had to make my living on it as most of my ancestors did. I do agree with D Orlov on the importance of sail power in the future though. It is amazing how in the 1700s some coastal peoples kept in touch with family members scattered thousands of miles away. The ocean can be almost like a science fiction transporter: Set sail from any beach, and you could potentially appear anywhere. This freedom will probably exist again, after the surveillance networks get too expensive to maintain, but I doubt I'll live long enough to see it.

--- said...

‎"When all the trees have been cut down, when all the animals have been hunted, when all the waters are polluted, when all the air is unsafe to breathe, only then will you discover you cannot eat money."
~ Cree Prophecy

Jim R said...


The chip in your credit card is probably a UICC. It has been developed to carry identity and authentication information in the mobile phone industry. It is capable of recording a smallish amount of "snooping" data such as which cell towers were used, and recent calls made and received. That data, as far as I know, is not yet accessible to the marketing weenies. Forensics, another matter...

The UICC's reason for existence is mainly to calculate authentication keys for secure networking. The possibilities are many, but of course the banks are concerned about their security and not yours.

Currently, the banks, smart-card vendors, and carriers are all wrangling over the "ownership" of the financial function of these cards. They could as easily be used as bitcoin wallets, of course. ... (like that'll ever happen)

seychelles said...

S&I and Prechter both envision a massive deflationary collapse over the next five years, followed by HI of fiat currencies.
The main difference between them lies in their assumptions about the functionality of societies following the "big" near-term deflationary perigee. S&I envisage severe social disruption that will threaten the survival of those who have not pre-arranged a degree of self-sufficiency. Prechter, on the other hand, seems to think that well-timed conversion of fiat currency into stocks, gold, productive assets or real estate at the deflationary bottom will generate fabulous wealth because the system will still be somewhat intact. More severe structural devastation will occur in wave c of grand supercyle IV, which the Ellioticians project to arrive after mid-century.

el gallinazo said...

GS said...
I appreciate Stoneleigh's effort, but she's wrong.

That's actually alright. 99.9% of people who have studied and thought about what's going on have been wrong.

I am envious of the assuredness and certainty with which you write about the future. Is there a dietary supplement or something of that nature I could buy to acquire that trait?


In his documentary, The Money Masters, a free download through youtube, Still goes into great detail as to how the banksters in the post Civil War period pushed the country into an intentional deflationary depression by curtailing the money supply through various ploys. The per capita money supply dropped by over 300%. Their motive was to buy up the best farm land for pennies and keep wages depressed. Of course it also had a terrible effect on small industrial entrepreneurs but aided the robber barons who were self financing. One can not even call it a conspiracy as they recruited and coordinated their efforts through the primary bankster trade publication. Still does a far better job than I can to document this, so if you are interested, you might view it from the civil war to the start of the Fed in 1913.

As to debit cards. I have only used them up to now to extract money from cash cows. I am about to learn their limitations until I return to the USA and straighten the thing out without the Morgue of course. I do see a lot of people using cards for retail purchases including food shopping here in Mexico and also in Costa Rica and Argentina, but as mentioned I like that fiat paper and only use it at ATM's. The truth is that I felt dirty having anything to do with the Morgue, but because of my geographical history I was sort of trapped. Someone commented here that the only thing you can't do with a debit card is rent a car. But then Georges Clemenceau said that the only thing you can't do with a bayonet is sit on it.

Greenpa said...

The queueue- "This freedom will probably exist again, after the surveillance networks get too expensive to maintain"

Just don't forget Johnny Depp is already out there and waiting. The pirates love it when the surveillance disappears, and they play keepsies.

scrofulous said...

El G

Thanks, I appreciate your effort and the info, one thing though, what is the 'Morgue', my present guess is a term for your bank?

My dark and vague impression, of roughly that period in US banking, was that there was a rather wild west style to it. Individual banks creating their own bank notes with no central authority to speak of. I will have to see that video to see if any light to my darkness occurs.

scandia said...

@Muchtooloose...Ha, I was thinking about speculating with the USD:)

scrofulous said...

Scandia, as long as you know you are speculating and not investing or preserving. Heh.

Jim R said...

Regarding "The Money Masters",

Mr. Still is describing the 1st Bank of the US, and says "the bank was given a charter to issue the currency" ... then later he says "the government put up $2 million to found the bank".

What did the government use for cash? Was it a self-referential $2 million in BUS cash? Or was it some pre-existing type of cash? Continental scrip?

And if there was a pre-existing currency, why did the US need a bank to issue currency? It all seems a little circular.

The Q said...

"Just don't forget Johnny Depp is already out there and waiting. The pirates love it when the surveillance disappears, and they play keepsies"

If you are interested in seeing a pirate film without the dancing Disney characters, check out the 1970 "Light at the end of the world" based on a Jules Verne story. (For fans of zombie-apocalypse movies, these pirates look astonishingly like the Mad Max bandits dear to the hearts of some)

Most of the piracy in my area was state-sponsored (privateers) or else focused on important trade routes. In most places, piracy was only an issue at times of state warfare. I admit I really know little of the history of piracy in the period before the European empires began expanding. Vikings? Perhaps some piratical traditions existed in the Indian Ocean?

--- said...

We've been soaking in it for a very long time...

Nassim said...

Someone commented here that the only thing you can't do with a debit card is rent a car.

I don't know where that urban myth comes from but, IMHO, it is just not so. I used international debit cards to rent cars in the USA as long ago as 1990.

Cards with chips can hold a lot of information, but only a fraction of their capability is being used at present. For example, it allows people to use the card for buying stuff even if the phone line between the till and the banks' computer network is not working. Lots of other functions and advantages - mostly to do with security.

France had cards with chips before anyone else (Carte Bleue) - perhaps 20 years before the UK. It cut fraud by 80-90% for banks that used it but the British banks were making so much money that they didn't care. Their conservatism is beyond belief.

Someone mentioned that it tracks your whereabouts using mobile telephony towers. I think there is some confusion here, debit cards with a chip are not the same as mobile telephony chips.

I never use credit cards - only debit cards. I don't have to pay any balance every month or whatever.

casamurphy said...

Ok, so let me get this right...prices of everything and wages will deflate when compared to necessities of life; thus making those who can hoard cash more and more wealthy towards the tail end of the deflation but then quickly poor as hyper inflation kicks in. Right?

During this cycle, gold will also deflate since it is not a necessity. So, therefore I can expect my silver bought at the relatively low price of $30oz NOT to deflate as much as gold, and maybe not deflate much at all since it IS an industrial necessity, and will grow more scare as the relative cost to mine it soars.

Also, if I am able to hold my silver, then I will also be a big winner later as its value pushes through the coming hyper-inflation. So, my plan to continue to hoard more silver as its price falls sounds like a good plan since I have no debts, very marketable skills and absolutely no ability to predictably time the swing from deflation to hyper-inflation.

So in the end maybe us silver bugs come out ahead after all. That will surely put a smile of the spirit of L. Frank Baum. (In the original Wizard of Oz, Dorothy wears silver, not ruby slippers.)

scrofulous said...


are the banks buying paper gold or actual bullion? As well how much of the paper that represents gold holdings is allocated and does not have multiple demands on it?

Nassim said...

I admit I really know little of the history of piracy in the period before the European empires began expanding. Vikings? Perhaps some piratical traditions existed in the Indian Ocean?

The Mediterranean was almost always a hotbed for piracy. The Romans tried to stamp it out and largely succeeded - while they were in ascendency. North West Africa was very active in piracy until quite recently. Check The Barbary coast: 16th - 20th century AD. Piracy and slavery went together - European prisoners became slaves. Venetians called the Turks pirates and vice-versa.

The Persian Gulf was another hotspot - check the stories of Sindbad the Sailor. Of course the Far East had piracy in spades for most of its history.

snuffy said...

A complete collapse of the current monetary system could be used by the powers that be as a excuse to implement a card"cashless" system..but I bet there would be a blackmarket with some kind of exchange rate"Off the books"the same day it started...people being who they are..
Sunstein,there is another one to keep an eye on.I wonder what other cute Ideas have crossed that creatures mind.

Really folks,I think whats going to sink the ship sooner than anything else is the fact we have a number of different power centers all trying their best to get a shrinking piece of pie..[going to be a lot of forks stabbing reaching hands soon]

El G..
That link,and that guys rap was one of the most interesting takes on the way things are I have ever listened to.Thank you

Its late,and I have work to do tommorow...

Bee good,or
Bee careful


Nassim said...

re: PM's

I think that it is worthwhile pointing out that in terms of gold, deflation has been present for over 10 years. Everything I&S have said has been proved correct - when the term "US dollar" is replaced with "gold".

Undeniably, fiat money is superior to gold for economic prosperity - provided that the creation of credit is tightly controlled. However, since that condition has not been satisfied for decades, gold seems to me to be the future. I suspect that in the forthcoming convulsion, capital controls will be instituted (which the banks certainly don't want) and international trade will have to be balanced by the use of gold. Of course, each country will be free to use what it likes internally.

Forcing people to use embedded-chips or whatever for all their purchases is the ultimate wet-dream of every tyrant, but I doubt if it will be feasible to do so as time is not on their side.

el gallinazo said...


The Morgue is to JP Morgan Chase as the Vampire Squid is to Goldman Sachs. They should put that on the GRE for MBA school.


Good questions. The simple answer is turtles all the way down. The First Bank of the US, as one might suppose because it was the brain child of Alexander Hamilton, was a scam from the get go. I worked on it for about an hour and the best I could come up with is:

The Wikipedia entry was pretty useless.

Since the US was broke at the time, the US bought its 20% share with virtual money IOU which the bank then promptly loaned back to the US Treasury, to be paid back in installments. So Hamilton got his whiskey tax to pay the bank back which, Americans being red blooded it at the time, went into an armed Whiskey Rebellion.

As to what constituted a dollar back then - (from Wikipedia US Dollar)

The U.S. dollar was created and defined by the Coinage Act of 1792. It specified a "dollar" to be based in the Mexican peso at 1 dollar per peso and between 371 and 416 grains (27.0 g) of silver (depending on purity) and an "eagle" to be between 247 and 270 grains (17 g) of gold (again depending on purity). The choice of the value 371 grains arose from Alexander Hamilton's decision to base the new American unit on the average weight of a selection of worn Spanish dollars (and later Mexican peso). Hamilton got the treasury to weigh a sample of Spanish dollars and the average weight came out to be 371 grains. A new Spanish dollar was usually about 377 grains in weight, and so the new U.S. dollar was at a slight discount in relation to the Spanish dollar.

The other thing that this brief article indicated was that the bank started out with $500,000 in "real" money which it would fraction into $10 million in loans. So we started out with 20 to one leverage.

This appears to be as obscure as the Fed is today. The bank was suppose to be capitalized with $10 million, with 80% raised by stock sales. The shares started out at $25 and rose as high as $300. I couldn't find a reference to the idea that Still made that the 80% private stock was purchased by loans from the bank, or as Gravity would say recursive. But Hamilton, being our first scumbag bankster, it is probably true. It is interesting enough to pursue further.

el gallinazo said...

Michael said...
During this cycle, gold will also deflate since it is not a necessity. So, therefore I can expect my silver bought at the relatively low price of $30oz NOT to deflate as much as gold, and maybe not deflate much at all since it IS an industrial necessity, and will grow more scare as the relative cost to mine it soars.


I disagree with your logic here. Since we are going to see a huge cutback in industrial production, the industrial component value of silver will virtually disappear. I hear though that there is 10 pounds of silver in every Tomahawk missile. I imagine that will be the remaining industrial necessity. Funny we should be raining precious metals on camels. Call it our foreign aid generosity.

However, I imagine it will still retain value as "middle class money."

NZSanctuary said...

Skip Breakfast said...
Here's the full article if interested:

The media here has definitely been sanguine since the worst of the 2008/2009 crunch eased through 2010. It'll be interesting to see if public optimism is high enough to push Xmas sales into acceptable territory this year.

I definitely get the "she'll be right, mate"/"no worries" attitude when talking to most people here, but there are a few who listen, and some who have read non-MSM sources widely enough to get what's going on.

The property market has still not taken much of a hit yet (except in volume of sales). I cannot tell if it is because our market is small and can/may be influenced by in-flows of capital from foreign investors, or if NZ/Australia was just cushioned enough by Asian markets, or some other market force is having a strong effect, or a combination of factors (likely). This makes it difficult to imagine what the next few years here will look like for the property market – and I am still looking for land . . .

NZSanctuary said...

Jack said...
When you say Central Bankers dont think that they are God

August 27, 2011 5:02 PM
Blogger Jack said...
One big flood and they are wiped out.

August 27, 2011 5:04 PM
Blogger Jack said...
All their gold is all over the place

Reminds me a lot of one of our previous posters who used to post runs of single line comments . . .

dan_y44 said...

1550$ breakout is not bearish on gold (i also thought we could go back to 1000$ after 1550$, but for the moment, the movement is accelerating).

gold/s&p500 ratio is lower than 2.0
it was 3.0 in 1974 and 6.5 in 1980. gold is not expensive compared to all other assets.

the trend may end next year, with a low in USD index (55).

gold will rise with US tresuries as the long term interest rates collapses (->from 2.0% to 0.5%). ->hoarding.

i agree with a deflationnist scenario, but if you look at the $ index with a graphic analysis, you can see the $ as a big problem today and it is not time to sell your monetary metals (gold and silver).

i recommend both cash and precious metals. cash in Yen/Swiss Franc is better than $ for the moment. we broke some trend lines :

bosuncookie said...

DIYer, thanks for the info on UICC!

The Q, I've longed been fascinated by sail transport. The Golden Age of Sail--especially transport of cargo by sail--culminated with the arrival of steam-driven cargo vessels. But just before that, around the turn of the century, sail-driven cargo ships took advantage of a new invention to decrease the number of crew and increase the safety of the crew. The Jarvis Halliard Winch made the handling of halliards and braces much easier. It's a fascinating blend of simple and complex technology.

Here's the patent for the Jarvis Winch!

here's an article on the most successful line of cargo ships to employ that
winch at the turn of the century.

bluebird said...

Jerod = Goodnight Sweetheart

NZSanctuary said...

Call for revolution

Greenpa said...

re: pirates: quote from Marco Polo, noted on his return to Europe by sea, with huge imperial Chinese escort ships:

"And you must know that from this Kingdom of Melibar, and from another near it called Gozurat, there go forth every year more than a hundred corsair vessels on cruize. These pirates take with them their wives and children, and stay out the whole summer. Their method is to join in fleets of 20 or 30 of these pirate vessels together, and then they form what they call a sea cordon, that is, they drop off till there is an interval of 5 or 6 miles between ship and ship, so that they cover something like a hundred miles of sea, and no merchant ship can escape them. For when any one corsair sights a vessel a signal is made by fire or smoke, and then the whole of them make for this, and seize the merchants and plunder them. After they have plundered they let them go, saying, 'Go along with you and get more gain, and that mayhap will fall to us also!' But now the merchants are aware of this, and go so well manned and armed, and with such great ships, that they don't fear the corsairs. Still mishaps do befal them at times."

The word pirate is of course a pejorative, and open to interpretation on all sides. The reality; the same freedom of the sea that makes it so attractive for freedom seekers- makes it wonderfully easy for bad guys to appear and disappear; so- it's been around forever. And as Polo noted- they can become highly organized, as the Somalis have re-learned recently.

Greenpa said...

Dear Jerod/Carol/Bob/Anonymous/Cheryl/etc:

My favorite insult from 5th grade:

I hope when you get home, your mother runs out from underneath the porch, and bites you on the leg.

Jim R said...

Oh, and a further thought about mobile phones, the internet, privacy, and marketing weenies ...

If you are on the internet, Google can locate you with astonishing accuracy. Their map database includes wifi SSIDs, cell tower identities, and IP addresses. So the marketing weenies do not need the info from your smart chip. Listening to the local "pirate radio" station, a privacy advocate yesterday was advising her listeners not to "log on" to Google Maps. Pffft -- everybody's got an IP address, including the next generation of cell phones, and quite a few of the current generation.

El G, thanks for responding to the Money Masters question. I'm glad I hung onto some pesos from my vacation visit to Mexico a few years ago :p -- maybe I should start a bank, eh?

Greenpa said...

bosuncookie- very cool winch.

There's a shipload of new sail technology that few know about, and I'm convinced far more sail development is possible; just waiting for sensible developers.

My most recent honeymoon was spent on a ship in the Star Clipper line; the square rig sails are entirely machine deployed and handled; they roll up inside the steel yards like a window shade. Works. The fore and aft sails need a little human intervention; usually as recreation for the passengers.

I think kite sails are just beginning their development- google kite sail if you want to spend a few hour day dreaming. They've already built a cargo vessel; not sure how it's doing though.

Jim R said...


I didn't mean to say that the bank cards track mobile tower info. What I was trying to say is, it's the same type of card. I work in the mobile phone industry -- and know a bit about the cards.

They are miniature computers with a little bit of nonvolatile memory. In the 1970s they would have been really-cool hobby computers.

In both the banking and mobile industries, the chips are used to store and handle authentication data -- the cards are almost impossible to 'clone'. So the presence of a card verifies that this is, indeed, your mobile phone. Or that this is, indeed, your bank card. And they generate the keys for secure communication.

There is some discussion amongst the various stakeholders about combining the functions and putting the bank card application and the mobile phone application into the same cards. Whether this is a good idea or not, is still up for debate.

The cards have the -potential- to store some limited amount of transaction data. I don't think they do so, however.

Oh, and one other thing: the little computers in the cards are turned off when the contacts are not supplied with power. In the NFC versions of the cards, they are powered off if not near an RFID reader.

The card in your mobile phone is in a powered-on-but-idle condition most of the time. It springs to life for a couple milliseconds every now and then -- when you make a call or every few minutes to update the tower ID. This information is useful when trying to find a tower after the phone has been powered off, lost service, or the battery has been removed/replaced. Or when trying to figure out the best tower to use to set up a call.

Erin Winthrope said...
This comment has been removed by the author.
p01 said...

Sure you can eat gold.

Jim R said...


Peakoil dot com may welcome newcomers, but most everyone here has already digested that bit of information years ago.

D. Benton Smith said...


you wrote : " Maybe I was wrong. Maybe many readers were wrong about this place."

Let me take up your queries one at a time.

1. "Maybe I was wrong."

Correct. You were, and remain, 'wrong', as in, "Mom, is there something wrong with this milk ? It's kind of lumpy and tastes funny."

2. "Maybe many readers were wrong... "

Incorrect. YOU, being a single individual, do not constitute "many" in any accepted sense of the word.
I do understand how someone as lonely ( and wrong ) as yourself might want to be mistaken as representing the views of many others, but sadly that is not the case. It's only you, and you're just wrong.

3.) " ... about this place. "

This is probably just a simple error on your part.
Perhaps you were wrong ( which does ... you have to admit ... seem to be a recurrent problem with you ) about the 'place' you think you've come to ?
This place is the Verbal Abuse Office. Perhaps you were looking for the Argumentitive Trolls Department. They're located in another blog. Just down the hall a bit, then out that door labeled EXIT.

Anonymous said...


We have of late been visited by a number of folks clearly trolling and their pattern is characterized by the following: they make debatable observations for no good reason (such as yours regarding regional climate), ask silly questions (such as yours regarding buying 10 years worth of freeze dried food), post several times in a row, reiterating one or more of their points/questions, then get combative when they don't get the kind of "bites" they are looking for. If you are indeed not a troll, perhaps you should stop posting like one.

scrofulous said...


About buying 23,000 freeze dried food. It is hard to say anything to that, I do not know if you have access to or the ability and a small amount of time necessary to grow a major part of your food.

Instead I will say that I live on a city lot of aprox one quarter of an acre and grow my own fruit and vegetables as well as ducks for eggs. I have bought a few bags of rice for gross carbs storage. If you were to spend less than an hour a day in the garden instead of, for instance, watching TV I think you will be able to save most of that 23,000 dollars, at least 22,000 of it. Besideds the ability to garden is a very portable asset if a situation dictates ... and so is gold,(Heh!) ... lots of talk on this site lately about the pro's and cons of that hard asset. (more Hehs!)

bosuncookie said...


With my old debit card--magnetic strip and no chip--I could use the card in a card-driven photocopier at FedExKinkos then go to a stand-alone kiosk across the store and get a printed receipt for the transaction that occurred at the photocopier. Not sure if they were networked. Any idea how that works?

p01 said...

Jerod said... welcomes newcomers.

Is that site "more boomers trying to make amends with yet another internet presence instead of a powerpoint presentation?."
Yeah, I know this comment will not please many here, but all that gold discussion really got to me; it shows precisely why we're really doomed.

scrofulous said...


HO! You had me going until you mentioned Matt Savinor ... you surely have all the information about freeze dried, you need if you were reading his site ... is it still around in any form and if so what is he selling now?

jal said...

Demonstrated major impact and effects of Irene

First responders need more federal income and resources to cover operating costs of this exercise.

Do not cut future budgets of first responders.

In the event of a real emergency, first responders will need more budgets to be able to effectively implement their new and improved emergency response plans.


scrofulous said...

Courtesy (I guess?) of Max Kaiser here is a bit of bubble gum protest. Well okay, it does not make the gorge rise as much as that old standby Yummy but strangly it links my memory to those days now passed and where Hunter Thompson has his San Francisco wave moment, for me, sadly, I had 'Yummy' and in that transendental moment, I too knew the wave had finally broken. :)

scrofulous said...


I take it you are of the current misgeneration? The boomers acted in ignorance and greed. The current generation has full knowledge and the result is the same. Phooey to you both!

scrofulous said...

El Gal 14 of mine(not counting this one) to eight (if the count is right) of yours.

But then who is counting ... maybe ilargi? LOL What is that thing about simple things and their minds?

Anonymous said...


During the 2008/early 2009 collapse, silver dropped to $8.

TAE's view is that was just a "warm up" for what is coming.


I don't get the "gold isn't appreciating, the dollar is depreciating crowd."

Couldn't the same have been said about tech stocks during the tech bubble?

Or housing during the housing bubble?

Neither of those was true - they were assets bid up during a credit bubble.

How, exactly does anyone know that gold is "different this time?"

It is trivial to prove the "gold isn't going up" crowd - look at everything else. If dollars were truly going debased at the rate that gold is rising, then the prices of EVERYTHING in dollars should be under similar price increase to gold (allowing for individual item dynamics).

I think I&S have it right. Gold will hold long term value and it is good because it is out of the system.

But spend your fiatscos buying resilience before buying gold.

BTW, I find it bizarre that the vast majority of people think the mega-banks are lending at 4% 30 tyear fixed rates ahead of hyperinflation that they, themselves will cause.

I have though short paper and long physical gold is a good play so long as the counter party is able to pay off on the short paper - which is not a gimme.

@Jared, I think your location analysis is pretty good in a general sense. I think you can get storable food for much less than $23k - check out I agree with TAE, learn to garden and start building community.

Without community, you are one bad apple away from having your 10 years of food looted - poof, gone.

I understand intensity, but you did come off as crass and demanding - I recommend toning it down a bit and learning some patience, too.

walker said...


I think 23k invested in future food is too much.
Bag of beans, rice..etc will be fine.
I have stock two year rice for family of 4 about $1,500.
If deflation comes, $1,500 will buy more rice. So cash is the king. Of cause, rice is not only for dinners,is for trade or barter. I wonder how long a can of Spam will last. That will be great for protein and barter.
In famine,protein is most important factor. We ate rats when we were a child to get protein. Without protein, human will consume 2-3 times more rice daily. I keep remind myself that rice is cheaper than a bag of cow compost in Home Depot by the LB.It means that you generate profit by stock up rice.

el gallinazo said...

Regarding discussions of gold and PM's on TAE

TAE is a macro-economic and financial blog. It's primary goal is to give its readership enough real information, while the corporate held MSM is disseminating disinformation, to increase the odds of its readership for survival and avoidance of intense suffering. Gold and silver has been a primary form of money in most cultures from city state to empire for the last 3000 years at least. It formed the basis of the USD in the forex market until Nixon closed the gold window in 1971. Its price has skyrocketed in the last 10 years in terms of USD. Some argue that it is in a bubble, and others argue this exponential increase in price is in its infancy - that you ain't seen nuttin yet! Those who make the latter arguments are in the hyperinflationista camp, and many are very intelligent with thoughtful arguments. Many regard PM's as a magic bullet to survive the collapse and respond with a religious ferocity to those who might question it. This is simply indicative of repressed and projected fear of emotionally underdeveloped people. They tend to be libertarians and can be found on the Zero Hedge comment section. Even non Ayn Randers, like Max Keiser and Stacy Herbert, and C.A. Fitts, argue that PM's are a virtual panacea of protection.

I&S as well as CHS, while not being anti PM's, do not have this religious fervor. While they argue that if you have substantial assets, hedging with gold will have its value, the primary eventual goal for the readership would be to prepare for self-suffiency in a cooperative neighborhood environment and to get the hardware tools necessary while they are still freely available.

All the regular readers here are probably asleep at this point of reading my comment, so I will get to the point. Since PM's, and gold in particular, forms such an important component of collapse preparation discussion groups, and because there is certainly a lack of consensus in this area, it is not untoward that it form a meaningful part of the discussion here, though not an overwhelming part. Much of Stoneleigh's current piece deals with it. As Ilargi would like to see more postings dealing directly with the content of the blog site, some discussion of gold in this thread is just good manners :-) If some people find this really objectionable and want to talk strictly about vegetables, there are great sites for this like Sharon Astyk's.

scrofulous said...

El Gal I think you suggest we chat up gold on this occasion? Sounds fun to me! :)

I refered the following comment to Stoneleigh, but it looks like she is not about. so does anyone else want to play with it?

Are the banks buying paper gold or actual bullion? As well how much of the paper that represents gold holdings is allocated and does not have multiple demands on it?

My thought is that if a credit collapse occurs that the multiple demands on gold will collapse as well and tend to increase the value of bullion or physical gold. Also I think countries are buying the real stuff currently and not just merely trading in paper.

scrofulous said...

Walker, tell me more!

"We ate rats when we were a child to get protein"

Like where do you hail from and do you mean common rats and not something like muskrats?

seychelles said...

You may be able to get a better deal on 25 year freeze-dried food from Gary North, but the production stamp will be
1998 or 1999. What the hell? It still has
a 12 or 13 year life span, which easily gets you 4 years past 2015. There should be lots available at 5-10 cents on the dollar; nobody wants to eat this stuff unless they have to. Hope this is of some assistance.

Jack said...

About gold
If I understand this correctly for the next 2 years we will have deflation and maybe 5 years
So price of things will fall.
The most noticeable from all things are homes.
We are told that if we get the timing right than we will buy a home just before the currency collapse or other things.
Than we should wait 2- 5 years before making a purchase because than the price will rise after the collapse because currency will be
If this is the case than why should we buy gold now instead of waiting 2-5 years.
This is my opinion and maybe I am wrong and if I am someone could fix this.

Jim R said...

They were networked. 100% no doubt.

And I'm not a fan of freeze-dried food. I do have some freeze-dried ice cream from the gift shop at NASA's now-museum, the Johnson Space Center at Clear Lake, TX. More of a laboratory curiosity than anything.

I wonder if there's a really good discussion of food preservation on the 'net? A realistic look at it. I'm pretty sure that the time-honored techniques are best. Canning, for example -- things to pay attention to in home canning like temperature, air-tightness, oxygen exclusion. And things like ham and corned beef. Salt-based and fermentation-based preservation techniques. Etc.

El G, thanks for the reference on the 1st US Bank. It was a good one. I think Hugh Hendry has it about right -- in a recent (to me) interview, he said that the "finance sector" would decline over the next few years from 25% of the economy or whatever, back down to the insignificant fraction it traditionally has been. Bankers will not be the rock stars they are now by 2020.

Ilargi said...


you're banned. bye.

and I will become more active in this section again, so don't bother showing up in another dress


Ka said...


I said (to El G) that car rental with a debit card involves hassles, not that it couldn't be done. The hassles come from the rental companies being worried about whether you have enough in your bank account to cover additional expenses, like if you are in an accident or keep the car longer. Different companies have different policies.

Robert LeRoy Parker said...

Israel Oil

According to Bartov and other IEI geologists, oil-shale deposits in Israel could produce as much as 250 billion barrels of crude. That's roughly equal to the total reserves of Saudi Arabia.

walker said...

When people hungry they will eat anything it moves,trust me.
In 1960 there were more than 300 millions people die in hunger in China.( can we imagine 300 million bodies on the floor?)
My family survived, because of a can of pork fat. I don't want to talk about what else we ate besides rats since it will upset your dinner.
65% of American families don't have $1,000 rainy money. That means there is no purchasing power on main street. If deflation comes, it will be very bad.

walker said...

sorry, "300 millions people die " should be 30 million die.

el gallinazo said...

Robert LeRoy Parker said...
Israel Oil

According to Bartov and other IEI geologists, oil-shale deposits in Israel could produce as much as 250 billion barrels of crude.


And according to my dog, I can bench press up to 1200 pounds (but no more).

"A coalition of Israeli environmental groups has filed a lawsuit calling the project potentially hazardous, even though IEI's process is nothing like the oil-shale "fracking" that has riled U.S. environmentalists."

What is shale oil fracking anyone? Is it related to natural gas fracking? Is this something I should protest? Where is the water going to come for this process? Alberta shows it needs huge amounts of water. Could they use sea (salt) water? I guess they will just dump the residue on top of the Gazans, but Israel would still just be a big hole in the ground when they are done.

D. Benton Smith said...

@Robert LeRoy Parker

" ... oil-shale deposits in Israel could produce as much as 250 billion barrels of crude. "

And that diamond planet the astronomers just discovered could make one hell of an engagement ring.

Now it's just a matter of gettng the goods from where they are, to where you can use them.

D. Benton Smith said...

@ El G

Your dog is a lot smarter than mine. My dog can only count to 6, the number of hours between lunch and dinner, but in his favor I gotta say that he's really accurate.

TAE Summary said...

* Big shake up coming in the financial system; TAE is a thorn in the side of the power elite; It is hard for them to kick against the pricks; Trolls thrive on responses; Trolls are supported by the DOD; Trolls want to hook you, not eat you

* Gold:
- WIll soon be a buyers market
- Golden houses will be hit worst
- In terms of gold everything has been deflating for 10 years
- Unless gold corrects below $680/oz TAE has steered you wrong
- Irene won't be influenced by gold
- FDR confiscated gold but not silver
- Global currency will be partly gold based
- Gold is easier to manipulate than bits and bytes
- When gold rules only rulers will have gold
- Gold never deflates
- Buy gold if it makes you happy
- Don't buy gold unless you can afford to never sell it
- You will win big if you can hold onto your gold until you die

* Listen to your inner voice and don't buy silver now; The crowd rushes from one side of the ship to the other; Missiles use 10 lbs of silver

* Bet hedgers are closet hyperinflationistas; I&S predict hyperinflation but only after deflation; First the soup, then the salad; The US isn't Weimar Germany; Most Americans can't even pronounce Einsturz

*Ron Paul couldn't fix things even if he were President; Instead he would be fixed; Credit collapse causes the ueber-rich to panic

* Student debt exceeds credit card debt; Worthless BS+no job = double down to to MS; College education: $200K; Lifetime of debt servitude: Priceless

* Is the median wage going up or just the mean? Banks wan't borrowers, not depositors; Solvency is un-American; Using cash starves the beast

* One line comments suck

* How can the dollar strengthen when the Fed wants to weaken it; The dollar is dead, long live the dollar;

* Capital requirements break the boom bust cycle; As we age villains become heroes; Bubbles grow smoothly but pop raggedly; Bankers and politicians will scathe everyone

* Chips cut fraud; Moore's corollary on embedded microprocessors: mainframe, desktop, laptop, phone, creditcard, hand, cerebral cortex;

* Our problems are due to the end of growth; 99.9% are wrong; What you believe about the economy says more about you that it does about the economy

* Collapse favors the Pacific NW; The north will become a deep freeze; The south an oven; Maybe they can work together freeze-drying food

* Boomers were greedy but ignorant; TAE comprehends peakoil. Peakoil does not comprehend TAE; The revolution is coming: Treasuré, Geographé, Dehydré

Ric said...

Two stories that may interest. One is humorous in a rather dark way about the danger of painting a bank: An artist's incendiary painting is his bank statement

The other is much darker, but relevant to living with danger: Two deaths in Joshua Tree park A couple weeks before they died, I was running solo in this park for several hours through similar conditions. What was a wonderful day for me of R&R was their death. What's the difference? I was prepared for serious heat and brutal exertion--it's fun. This seems pertinent to the collapse we're now undergoing. We can prepare as best we can and enjoy the beauties and dignities of being alive amidst hardship; or we despair.

BTW--Nicole, they died about 15 miles from where we were on your visit. But we also had several days of supplies in the car in case the worst happened. :-)

scrofulous said...

walker said...

When people hungry they will eat anything it moves,trust me.

Walker, I don't doubt what you say, I was just curious where you would have had that experience. So far too much food on this continent for anyone to think of eating rat.

Lynford1933 said...

Many here are aware of Enery In vs Energy Out. This is the problem with our vast shale oil resources ... EI:EO is about 1:1 or less. In addition to the vast amount of water ir required to further refine the Kerogen. The environmental distruction of moving a mountain of shale is hugh. I hope the Isrealies are able to do it but I wouldn't bet a lot of it being profitable unless it is a much higher hydrocarbon concentration like the Canadian oil sands.

Jack said...

Here is the way I look at things and I have a formula for it
whatever we touch=we destroy

walker said...

Hello muchtooloose,
"So far too much food on this continent for anyone to think of eating rat."
10% of people own 80% of the wealth in America. The bottom 10% does not own anything. They are the candidate to eat "****", isn't it?
80% of China's food are imported now. I used to joke with my Chinese friends that they have no rats to eat but they will eat concrete and steel wires.(since there are only buildings,cities,highways and no more farmland left)
For the crisis, the key is not out run the bear,.... The key is how you see the crisis as an opportunity to out run others. I think that cash flow is the key, not gardening, solar panels..etc.

Jack said...

Most of the plants around us are edible
Trees ,scrubs,weeds,etc
Hi walker
You say

I think that cash flow is the key, not gardening, solar panels..etc.

Can you give some ideas for cash flow and why is gardening and solar not good

Anonymous said...

Where I live we eat bears. Well, I haven't eaten a bear (yet), but I know where to find them if I ever get desperate. For now I hope I'll be raising chickens by this coming spring (then I may have to shoot the bear if he/she harasses my chickens).

The question for me regarding fiat vs PM's is to what extent will the "normal" processes of manufacturing and commerce still be functioning. I understand that regardless of how the coming crisis unfolds, we won't find ourselves transported to 19th century America, but I can only imagine (depending on the speed of collapse) that there will be a period of time where some aspects of modern commerce just quit working for varying periods of time depending on how necessary and complex they may be. Will the grocery stores run out of food? For how long? How long will the existing stock of vital implements (like tools, etc) mostly made in China now last if there is an interruption in intercontinental trade of such goods? How long will it take to replace production of such things in a severely depressed environment? If millions of unemployed people suddenly need to rely (wholly or in part) on the food that they can grow themselves, we will very quickly find ourselves experiencing a shortage of shovels, rakes and hoes.

My point in all this, and I'm sure several of you can back me up (DIYer, Lynford1933, Snuffy), making stuff is hard work. It takes time, tools, skill, and effort. Money today is a stand-in for these things. If I have enough of it, there is very little that I can't pay to have done for me, and precious few material things that I cannot purchase. However, today the price that we pay for many things, particularly material goods does not by any stretch reflect the value of the labor, tools, skill, raw materials and time that would be required to replace such an item without recourse to industrial manufacturing, global trade, and big box retail. Cash makes all this possible (whether it is fiat, or some kind of gold/silver certificate).

I know how to make a shovel, I could carve you a handle with a drawknife or turn one on the lathe, I could cut and shape some steel, harden and temper it. Working hard, I could probably make 1 or even 2 shovels in a single day (and that's assuming I have electricity)- or I could go Home Depot and buy one for $10. Now my shovel would be prettier, but that's besides the point.

Anonymous said...

We have grown so accustomed to using money as a stand-in for the things that we can't or won't make or do for ourselves that I think we've lost any real understanding of what is involved in making and doing things. Money can buy you lot's of stuff that is cheaply made, and cheaply priced. But will we find ourselves once again living (much as our forebears did) in a world where things were made to last, because they could not be made cheaply. It has been said many times over the years, but I think was never truer said than in this day and age, "...people today know the price of everything and the value of nothing."

So if in fact we are going to "outrun that bear", how do we give weight to the value of cash and gold versus the value of tools, skills, muscle, fertile soil and knowledge? And yet of course I can't help but recognize that my own hopes/expectations are colored by the simple fact that unlike some of you, I have almost no money and no silver or gold...

scrofulous said...

Hi Walker,

I am afraid you will have to give me some sort of reference before I can accept your statement that 80% of Chinese food is imported.

walker said...

(It is my opinion only.)
Indeed we can eat leaves,scrubs and saw dusts, but you need lot of fat or oil to cook with them. Otherwise it can get in but it can't get out. Many people die due to digest problem.
Few weeks ago,I spoke to a technician from the electric company when we met in the broken meter room. He told me thieves rip the copper wire in many shopping centers in our city. Our wire is too short to be ripped. When SHTF comes,any food in the fields, expensive solar panels,even a swimming pool filter will be targeted. As matter of fact, I had a small farm before. Small farm and back yard gardens are very ineffective to produce food comparing how much money and labor putting in. Take a look at post Argentina crisis,what will we do with our cash before crisis come? Will spending limited capital for gardening and putting up solar panels be a good idea? or try to save every penny, reserve our strength and prepare to reinvest our capital when others selling everything pennies on the dollar?

That is why I try to refinance my house and get much cash out as long as keep same amount of monthly payment.

walker said...

"I am afraid you will have to give me some sort of reference before I can accept your statement that 80% of Chinese food is imported."

It is an semi Chinese official data.
Or you can calculate for your self.
Chinese consume about 100lb meat/yr per capita. And look at the data, how many tons wheat, soy, corn..etc China imported listed at websites. And divided by 2.5 for chicken, 5.0 for pork, see if it matches 80% of its total consumtion?
In China, peasants don't make money as much working in the factory. So most young left the villages and work in the cities. But China now find itself with labor crunch due to 30 years of one child policy. If the cities are short of labors,will there be enough peasants?
Plus China uses 4 times more fertilizer and pesticides than U.S farms. Obviously it is cheaper to import food than produce their own.
The U.S is an agricultural super power. It export a lot of food to the world. So Americans will not be hungry that easy like other people. Producing our food in our back yard should be secondary consideration.
(My personal opinion only)

Chas said...

Prechter argues that historically, all bubbles end the same way: They retrace to below the price where the bubble started. The bubble graph supports that.

That suggests that we will see sub 1000 on the DOW.

To all: What is your prediction on the DOWs low?

D. Benton Smith said...


Your perspective and logical pragmatic thinking are a fresh ingredient to the discussion.

I do not necessarily agree that all of your strategies are correct , but they have already caused me to earnestly reinspect some of my own ideas ( that I now see were rather unproven assumptions ) about how people will actually respond when food and other shortages become more severe, after so many decades of plenty.

I very much appreciate your contributions to the conversation and lookforwrd to hearing more on the whole range of topics that are sure to arise.

John Day said...

A very good essay by Stoneleigh! El G. and others have said much of what I would conjecture on gold.
I do feel that this round of central bank gold acquisition points to a future gold standard, which can be manipulated as in the post-Civil-War era to simply take ownership of all the stuff.
A model where government and banks own all the houses and farms is a viable model for banks and governments.
Owning everyone who borrowed money for college is also a viable model. 20 years of indentured servitude was the rule back in the day. If you lived all 20, you were free to be useless to yourself and others, to die a free pauper.
I don't mean to be negative, but we have seen so much of the inflationary game, that it is hard to see how harsh the deflationary game can be. It's worse.
Electronic systems are useless when the power goes out.
The power goes out sometimes. Really big solar coronal mass discharges may knock out a lot of the power in areas north of Washington DC in 2013.
Physical currency of any kind is better than bits in such a setting. I wonder if all those fancy next-generation, gold-embossed hundred dollar bills, in storage due to "printing defects", are a backup for internet/telcom collapse.
The time is just extremely ripe for total loss of faith in the current global monetary system.
Faith will be restored by collapsing to the next level of order which proves to be stable. I think that will involve gold.
This is my speculative gamble on gold overtly becoming The Money again, not just "money".
The thing about silver is that it is worth a lot more when it is money, than when it is not money. 90% of the silver got used up by industry after it got taken out of circulation.
I don't think there is enough to widely use it as coinage again. I could be wrong.
Tungsten would make great coinage, lasts forever, outlawed in light bulbs...

Chas said...

I moved a few years ago for a job change. We sold our house which I owned outright and bought another one in our new community. (I would have rented but my wife wouldn't hear of it). I could have bought it in cash but put about 20% down and financed the rest for 15 years at 3.7% fixed. I have about 12 yrs left. Selling isn't an option, so do I pay it off, accelerate the payments, or stay on the scheduled payment plan?

Alan2102 said...

saif said...
"At $1400/Oz, that astounding piece by Ashwin Pandurangi, Gold at $250/Oz"

Did he call for $250 gold? Where? When? Seriously?

Skip Breakfast said...
"Truthfully, isn't most of the gold owned by major banks and governments? Gold bangles in India make up just a tiny fraction of proportional gold ownership, no?"

No. In fact, gigantic quantities of gold -- 10s of thousands of tons -- is owned by Indian (and Chinese, and middle eastern, and SE asian, and etc.) peasants and others of very modest means. They are also now accumulating it at a rapid rate -- more rapid than past years. Most of them, wisely, do not trust banks and fiat currencies. In any case, the idea that gold is owned almost entirely by rich people and banks is false. Though it is true that they, too, own a lot of it; probably most, but the margin is not large.

GS said...
"The only people who have been consistently right are the gold "bugs."
Ridicule them if you must, but record does count for something.
Gold and silver are like rocks, they show absolutely no sign of deflating."

Yes, but a deflationary meltdown could supervene at any moment, taking gold back to Prechter's old $180 target (abandoned, it seems, sometime in the mid-2000s; at least it is not mentioned anymore).

Nevertheless, you're right that record counts for something:

gold versus major Indexes since 2001:
GOLD.................... + 616%
Shanghai, China......... + 20%
Dow, USA................ + 10%
DAX, Germany............ - 7%
FTSE, UK................ - 9%
Nikkei, Japan........... - 33%

gold bull history:
August 1999 - gold bottoms at $252
February 8, 2002 - gold above $300
December 1, 2003 - gold above $400
December 1, 2005 - gold above $500
April 17, 2006 - gold above $600
May 9, 2006 - gold above $700
November 2, 2007 - gold above $800
January 14, 2008 - gold above $900
March 17, 2008 - gold above $1000
November 9, 2009 - gold above $1100
December 1, 2009 - gold above $1200
September 28, 2010 - gold above $1300
November 9, 2010 - gold above $1400
April 20, 2011 - gold above $1500
July 19, 2011 - gold above $1600
August 8, 2011 - gold above $1700
August 17, 2011 - gold above $1800

Alan2102 said...

Nassim said...
"I think that it is worthwhile pointing out that in terms of gold, deflation has been present for over 10 years. Everything I&S have said has been proved correct - when the term 'US dollar' is replaced with 'gold'."

That's what FOFOA said, somewhere: that he agrees with the deflationists about everything, with the exception that the deflation will be in terms of gold. Cute reframe. He is likely to be right, on that call at least. (Some of his other ideas -- about "freegold", and gold at $50K -- are a bit far-fetched, however.)

el g said:
"Many regard PM's as a magic bullet to survive the collapse..."

Magic bullet: yeah, pretty close. I long ago realized that the Mad Maxian collapse scenarios -- in which "gold won't be worth anything!" (as the breathless doomer line goes) -- were either not realistically survivable, or else survival in them would be undesirable. Either way, a moot point for me, especially since my assessment of things is that the collapse (which is indeed underway) will not go anywhere close to Mad Max. At least not in the U.S. or developed world. Of course there are no true magic bullets, just like there are no fairies, but PMs come pretty close as a hedge against what is coming. They are the best investment opportunity of our generation, much better than the alternatives for the last 11 years, and getting better all the time, and will soon -- very likely -- get much much better. This is an easy call, really, based on study of the fundamentals. It was an easy call 10 years ago, and it has gotten easier over time. It will be a wild, volatile ride from here on out, however -- unlike the early days. (I remember when gold moving 10 bucks in a MONTH was a big deal! Now it moves $50 in an afternoon.) Eventually, at much higher prices, the bull will max-out, but we are years away from that. The PMs still offer common people a life-raft -- a way to stay afloat and avoid poverty in the coming difficult times.

el g said:
"prepare for self-suffiency in a cooperative neighborhood environment and to get the hardware tools necessary while they are still freely available."

You think that hardware and tools will become unavailable? Why?

scrofulous said...


See Here For this document:

China's Agricultural Trade: Competitive
Conditions and Effects on U.S. Exports


"China is a major global producer of agricultural products, especially fruits, vegetables,
rice, cotton, and pork. Overall, China is largely self-sufficient, with the exception of a
few key commodities which it imports.

So sorry to quote from the devil, but in the light of that document, I do not think your 80% figure of Chinese food being imported is really very accurate.

Anonymous said...


I paid off my home and I'm glad I did. You know why? It is going to be much harder to steal the home I live in than just about anything else - and they will try and steal it all.

Let's say I refi. I stick my money in the bank and wait for the collapse.

Whoops, the bank collapses right along with everything else, now I don't have any money with which to pay off my home and now I lose it to someone else with cash.

Or I stock all my cash in in my mattress and get robbed - BY THE POLICE.

Yes, they confiscate cash now - no evidence of a crime committed.

Do you think that will get worse as the crunch hits?


On paper, what you say is right. But you have to SERIOUSLY consider how hard it is to protect your "cash flow."

In my view, it will be EXTREMELY difficult to do.

Anonymous said...


"I long ago realized that the Mad Maxian collapse scenarios -- in which "gold won't be worth anything!" (as the breathless doomer line goes) -- were either not realistically survivable, or else survival in them would be undesirable."

You long ago realized something about the future. How does that work epistemologically? I've definitely had the experience where I realized something regarding an event that happened long ago, but never the other way around.

"...the collapse (which is indeed underway) will not go anywhere close to Mad Max."

Dang, I'm going to have to get a whole new wardrobe then. Oh well, I was kind of hoping for the French Revolution anyway. They had a much better fashion sense.

This reminds me of something Voltaire said, "Doubt is not a pleasant condition, but certainty is absurd." He probably said it in French though.

walker said...

@Benton Smith,
There were many horrible stories in China's 1960 famine.I recall one of them. There were a mom and her little son in a village. During the famine no one had anything to eat. One day an escaped skinny little pig run into her house.She hit it with a stick and bury it in the ground quickly. Every midnight she woke up and dig the ground having a bite (the pig). She won't give any to her little son while the little one calling mom hungry and dying. So the little one die shortly and she survived. Why could she feed her son? If she fed the little child, the whole village knew the truth that she had food (the little one could not keep his mouth shut). The whole village would eat her alive. When people in hunger,much human logic are no longer valid.

Therefore I won't dig my backyard and grow food to make myself a target. But I still mess around with my "compost tea". One day when dust settle,I will buy farmland for my kids. In post peak oil,I think to buy a small five acre land is better to "invest" my kids college for a doctor degree, don't you think that way?

el gallinazo said...

Alan2102 said...
You think that hardware and tools will become unavailable? Why?

Because I think Stoneleigh has things pegged really well, And as no one, and particularly I, can write clearer than she can, if you want to know, read her primers.


It's kind of a tough call, particularly with a "conventional" spouse, and as you are probably getting really good tax benefits right now from the mortgage. OTOH, when the deflationary collapse really starts to the point that even your village idiot will recognize it, then I would pay it off ASAP. I think the Fed is pulling the plug right now but the markets are in disbelief that Daddy could do such a thing.


If you want to have any credibility here, you just can't pull percentages out your butt like you were Rush Limbaugh. 80% of Chinese food, a country of close to 1.5 billion people, is imported is totally absurd. I didn't even have to check it though Muchtooloose did for the record. I thought at first you were a Chinese immigrant with your rat eating starvation stories, but apparently now you are not. Care to fill us in on the time and place?

For the record, here in NW Mexico, locust the size of sparrows have made there appearance. Thinking of dipping them in honey and starting to baptist heathen. Maybe start with myself.

Jim R said...


I'm thinking steam punk. Not quite Mad Max, but with a certain Edwardian flair. Like that old TV show "The Wild Wild West".

As for making your own tools and such, I can't really advise. I suspect some vestiges of industry will continue for quite a while, even if the financial world goes the way of Argentina.

walker said...

Thank you for your insight. We need more input about refinancing our homes or pay it off. I am still in a cross road.
One thing is sure if deflation comes, I bet at least 50% of people won't be able to pay their mortgages(it means people live for free since no way they can be foreclosure). It will be too late to pull equity out. Whoever pull cash out early who will be ahead of the "game". I have no doubt gov. will do anything possible but mess things up and kick us into hyperinflation. In hyperinflation, fixed interest home loans will be wipe out in matter of weeks. And savers get punished.
(I could be wrong)

jal said...

Is it easier to break two rotten sticks together or separately?

Everything goes to avoid a default and loses by the lenders.

Alpha Bank SA, Greece’s second and third-biggest banks, plan to merge in a bid to bolster their assets and ride out a deepening recession and the country’s sovereign debt crisis.

Anonymous said...


i believe the facts prove beyond a reasonable doubt that Big Finance Capital is sovereign, not government.

Damon explains it more thoroughly than I could in Renaissance 2.0...

Big Finance Capital sits atop the mega banks, the mega corporations, the media and even government.

When you realize it takes $30 million every 2-6 years to win a Congressional seat and $500 million to win as President, it is easy to understand how "the money powers" game the political system and put their puppets into power to do their bidding.

In addition, the government bureaucracy is staffed with Big Finance capital corporate minions, so the government bureaucracy is controlled by Big Finance Capital, too.

So, what is Big Finance Capital doing?

1. Giving 30 year mortgages out at 4%.
2. Piling their trillions into Treasuries at a fraction of a percent.
3. Sending the media out touting hyperinflation - so everyone can get inside information and make a killing - off of Big Finance Capital?

There will be a massive inflation, if not hyperinflation.

But it is naive, IMHO, to think that this eventual hyper/inflation will benefit anyone other than Big Finance Capital.

That means they have a wicked societal asset stripping operation (a spiked deflationary depression pit as Stoneleigh called it) planned to hurt people like you and I very badly in advance of the eventual hyper/inflation.

IMHO, the eventual hyper/inflation is all about balancing the Big Finance Capital books after they've sucked society dry of assets.

They don't play fair, either. they lie, cheat, steal and murder.

For fun.

So if you leverage up and gamble, IMHO, you better be 110% sure that your "cash flow" is safe from all manner of theft.

If not, they will take your "cash flow" and then your home.

That's their plan, anyway.

NZSanctuary said...

Another good interview by Jim Puplava – this time on the Bilderberg Group (and others). Of particular interest is the idea that they would move on an economic coup of Europe by 2013 and form a European government, just in time to address the worst of the debt roll-over for some of the peripheral countries, and essentially kick the can a bit further.

Skip Breakfast said...

@Alan 2102

Thanks for your thoughts about the questions I posed re: gold. And if that is indeed true--that the majority of gold is held by ordinary people--then wouldn't it make sense that TPTB would definitely want massive deflation to flush this gold out of those hands, so TPTB can buy it all up at realistic prices?


I'm intrigued that you're looking for land in NZ. Given that the property market has not yet been hit hard, I'm surprised you're not going to wait. Because I think the big house-price bubble in NZ is going to pop too. It's massive.

Anonymous said...

El G,

Doctor Roberts, you're a new and better man,
He helps you to understand
He does everything he can, Doctor Roberts

Great interview with Jim Puplava. Worth the listen.

Jack said...

Whenever gold bugs talk about the rise in price there is one thing that they never mention and that is the speculative factor and how these metals are manipulated by a group.
How many people were buying homes and than buying more and more.
They were hoarding.
This is what gold bugs are doing and we will just have to wait until
the scene unfolds.

Greenpa said...

El Gal - my first guess regarding walker - 80% it's Cheryl/Bob/Jerod. An established way astroturfers use to build a persona is to add another who responds to the first- with a substantially different writing style. The typos and language errors are a great way to make most folks accept #2 as different; and someone takes #1 seriously and writes a superficially thoughtful response to him- it builds belief.
I could be wrong. :-) Another good line to build credibility.

Jack said...

If someone came up to you and said look you can double triple your investment in a matter of few months
I would start getting suspicous of this this person
Is he a con artist

If something is too good to be true than you should star becoming carfefull

Hmmm sounds a bit fishy.

Our financial system has not collapsed yet.

jb said...

my husband thinks that the US and Europe are in decline in comparison the rest of the world but no matter what issue I bring up, he thinks this creates opporunities for other countries such as china, brazil and india. Any suggestions on how I respond to this particular opnion? Sorry if this has already been discussed.

Jack said...

I think they are a linked together.
Here in Canada things are better but we are also suffering and its only a matter of time before we are like the USA and Europe.
Our biggest trading partner is USA and we probably sell a lot of things to Europe.

scandia said...

RE imported food in China, I recall reading an article that shocked me a few years back about Hong Kong and the dependency on food imports. That article said the primary local food production was eggs. Alas I can't retrieve that article for you.

Greenpa said...

another object lesson for people contemplating a boat as a way of life-

It's very self-reliant, and free- but you are in direct contact with forces that will crush you quickly if you are incompetent or foolish. You are betting your life; and unlike video games; you don't get another one.

Jack said...

Having said all that about gold I think when the panic hits the market people are going to run to gold for safe haven and the Central Bankers know this and they are going to take advantage of this situation.
So if the price goes higher dont be surprised

el gallinazo said...


Hong Kong is a tiny city state that was independent politically from China until 12 years ago.

"A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea,[12] it is renowned for its expansive skyline and deep natural harbour. With a land mass of 1,104 km2 (426 sq mi) and a population of seven million people, Hong Kong is one of the most densely populated areas in the world."

If you learned that the City of NY had to import its food from neighboring NJ, CT, and upstate NY, would you find that statistic shocking?

jal said...

The best way “to make” money is to own a bank.

W. Buffett is not the only one that wants “to make” money.

"Qatar Investment Authority (QIA), which is already an Alpha shareholder, is expected to take a bigger stake in the new bank. QIA holds 5% of Alpha and is expected to take 15% of the merged entity."

In case you didn't get it "to make" means "to print"


Jack said...

Hi jal
That makes sense about banks but they are also going bankrupt.
The larger ones are going to take over the smaller ones.
I am getting confused.

el gallinazo said...

Second NZSanctuary recommendation to listen to the Jim Puplava Bilderberg interview, another extra base hit for Puplava. His guest from is calm, analytical, and in full command of his facts. What I found most interesting was his analysis of the difficulties they were having offering enough to Russia and China to co-opt them to the agenda while still maintaining the American -Western European hegemony of the financial world.

Jal - the best way to rob a bank is to own it.

Alan2102 said...

progressivepopulist said...
"You long ago realized something about the future."

Yes! I do it all the time. I assign probabilities to things, and act on them. Works for me.

For example, in 1999, with silver at $5-6, Jim Dines (pundit) quipped: "adjusted for inflation, silver is essentially FREE". At that moment, after a bunch of reading on the subject, I had an mini-epiphany. I realized something about the future: that much higher silver prices were a near-certainty (as near as it is possible for an investment to get). That's close to being true even today, at $40, though the fire-sale 10-for-1 deals are now over. Much higher prices are a high probability.

For another example, in 2006, contemplating (glumly) the accretion of bodyfat that I've suffered in recent years, I decided that I must become an athlete. I realized something about the future: that if I don't change, I'm headed for metabolic syndrome, heart disease, type 2 diabetes, and probably impotence and terminal frumpyness/unsexyness. Those things were not certain, but very likely -- plenty likely enough to justify action. And so, I started to act. Still working on it.

"This reminds me of something Voltaire said, 'Doubt is not a pleasant condition, but certainty is absurd.' He probably said it in French though."

Hey, did I say I was ABSOLUTELY certain about anything? FYI, I am Mr Skeptic, perpetually questioning everything, especially my own biases. But skeptical or no, I do come to conclusions, (at least working ones, if not permanent ones), and assign probabilities to things, and if the probabilities are very high or low (like north of 95% or south of 5%) then I usually speak of them confidently, AS THOUGH they were certainties -- which they are for most practical purposes, even if technically, or absolutely, they're not. Clear? I suspect Voltaire would approve, though I'm not certain, and I think it a point deserving skeptical inquiry.

scandia said...

@El G...yes I was shocked to comprehend how vulnerable millions of people are to a system. Not so much now but I was a few years back.
Of course I, too, am dependent on the current system of trade and transport.

Stoneleigh said...


The thing that many people have difficulty wrapping their minds around is how the dollar can strengthen versus gold when the Fed is determined to weaken the dollar. For example, what creative things might the Fed do to "defeat" deflation? Buy up bad debt by the fistful? Buy up other assets at inflated prices? If the Fed really were willing to do anything, could they weaken the dollar in the face of the massive deleveraging that is coming? What if the Congress were willing to issue everyone with a SNAP card (foodstamps) or plain old debit card and load them with tens of thousands of dollars per month?

The Fed doesn't have the power that people think it does. The value of the dollar will be what the market decides. As dollars become scarce (being sought after on a flight to safety, to pay down dollar-denominated debt and to purchase everyday necessities) their value increases. People will sell gold for cash when they have no other choice, which pushes down the price of gold in terms of dollars.

There isn't going to be a major handout for the little guy in any form. There simply never is. There may be enough issued to keep him from starving or reaching for his pitchfork, but that's about it. The little guy has no bargaining power sadly.

Stoneleigh said...


The one question I have is about, not surprisingly, what timeframe you see going forward. Of course I understand your warning that a day late is worse than a year early. But nevertheless, it does make some difference.

I think the larger trend in the markets is likely to be down for a long time, with momentum building in the new direction as the move proceeds. The instability in Europe is building up dangerously quickly, and could easily lead to a liquidity crisis within a few months. The financials have been under considerable pressure and are leading the way down. Something will break eventually.

By analogy, do you think right now is the equivalent of Fall 2007? Or are we at Summer 2008 right now? Or 2005-2006?

About 1937/8. The implications are significant.

Stoneleigh said...

Cloud Five,

So, this would mean that a central bank is by some way restricted in the amount of worthless paper (money) they can create? And so the central bank will be out of money they used to create out of thin air up until today?

Yes they are restricted, as debt junkies, by the power of the bond market. Also, they do not print money, but lend it into thin air. They can only do that if there are willing, and able, borrowers and lenders. In a liquidity crunch no one will be borrowing or lending.

Jack said...

By analogy, do you think right now is the equivalent of Fall 2007? Or are we at Summer 2008 right now? Or 2005-2006?

About 1937/8. The implications are significant.

Can someone simplify this

Stoneleigh said...

Cloud Five,

Then, just when they stopped selling, the price of gold started to rise. Like magic. Even ran up harder since CB's have become more aggresive buyers.

Would it not be possible to assume the low price of gold 11 years ago was obtained just because of the selling by CB's?

Partly. CBs sold at a bottom they helped to create by their actions. When everyone who was bearish had acted upon their opinion, there was no one left to act to carry the trend any further in that direction, so the market reversed. If you do the opposite of what the herd is doing at any given time, you will be right far more often than wrong.

Cause and effect seem to be reversed in this analysis, but that's just my point of view of course.

Indeed. Cause and effect are the opposite of what most people believe. The fundamentals do not move markets. Market psychology determines how the fundamentals are perceived and acted upon.

Stoneleigh said...


Stoneleigh do you have any thoughts on the possibility that central banks are stocking up on gold because they see that the future looks to gold as part of a world currency?

The truly wealthy like the idea of a gold standard, because they would end up owning all the gold. It would be very powerfully deflationary, as the money supply would be very severely restricted.

Central bankers are mostly buying gold because it has been going up and they are chasing momentum, as they always do.

jal said...

The EU is in meetings trying to find a way/level, (EU bonds), of creating another level of “printing money” to save their banks. This would kick the can down the road even more while waiting, hoping, praying, that the economy will grow. Growth that will be required to repair the excess “printing of money”/debt will be unachievable.
With the EU banks being able to transfer their bad loans of their books it would give them the same flexibility of the USA having freddy and fanny and the same flexibility as Canada having CMHC.

In case you did not hear Obama’s speech on the appointment of his new economic advisor, ( I’m paraphrasing, like Karl does), what is best for the USA is to prevent the financial sector from collapsing and Alan is the right insider to advise me on what to do/pass laws to prevent the banks and financial sector from collapsing.

I see it again ... the solution ... gotofind growth to avoid a jubilee.


Stoneleigh said...


Especially important is the concept that your portfolio of relatively illiquid assets must be insured by holding enough liquid (cash equivalent) assets so that you do not get yourself in a position of being forced to sell your illiquid assets in a down market.
This is called "having strong hands."

And sometimes these down markets, especially for PMs, can last for DECADES.

True, but I don't expect a major long term bear market in PMs. For those who can sit on PMs for a long time, they don't have to care about temporary set backs, even large ones, as I think this will be. For them, all that matters is that PMs will be a long term store of value, albeit a potentially dangerous one in many ways.

We write for ordinary people here at TAE, which is one reason our perspective is different. Many ordinary people who are buying gold are doing so while leaving themselves very vulnerable because of debt or lack of liquidity. For them gold makes little or no sense, even though it is money and will hold value over the long term. Very few people are going to have the luxury of the long term. Too many will end up cornered and have to sell at the worst possible time at far less than even a falling spot price. For them, cash (or various kinds of hard goods) would be a better option.

As you say, a strong hand makes all the difference. If you are vulnerable to being forced to act, you will have to act to your disadvantage. We try to strengthen people's hands, so they will be much less vulnerable to being forced into anything.

At the end of the day, strong hands will own virtually all the gold. In a deflation, strong hands strengthen and weak hands weaken. When there is not enough to go around, those with bargaining power and freedom of action will be free to press their advantage.

I agree with Russo that an ultimate power play by TPTB would be to do away with physical money completely. And force us to use something like centrally-controlled hand implanted chips as a wallet. In fact, I cannot imagine a greater body blow to human freedom and privacy. One thing that TPTB might attempt is to tax transactions in real money as a punitive measure. This is the flip side of the state confiscation of gold coin.

True. I doubt if chip systems will work, although I agree they will likely be tried in places. The chip solution amounts to an intensification of complexity at a time when the ability to sustain complexity will be decreasing. IMO all such attempts are doomed to fail, but perhaps not immediately. I do expect many attempts at increased central control, and far less freedom or privacy for the vast majority.

There will be many risks to cash, and these will increase over time. This is why we point out that cash is a short term means to ride out deleveraging, and that people need to contemplate a transition to hard goods at the point when they can personally do so with no debt. The risks to cash will be lower than the risk associated with almost everything else for a while, and this is the best anything can offer.

In the meantime, it behooves us to use cash for our day to day transactions as much as possible. Doing so takes some control away from the banksters, gives us a greater degree of personal privacy, and makes us consider our actions more carefully to avoid falling into debt slavery.


Stoneleigh said...


My impression is that the downslope of the bubble graph is marked not so much by smoothly declining prices as by wild swings and thin markets, where the upslope was characterized by well-behaved and predictable prices. At the logical downslope limit, there is a reversion to barter and that gold coin is simply worth whatever you can trade it for. The coin is probably more concentrated value than soap and canned ham, but still simply a trade item.

Declines are indeed typically marked by major volatility. We can expect very large swings in both directions.

I agree that gold will be worth what one can trade for it, and that will depend on one's bargaining power and broader circumstances. Desperate people looking for scarce cash will have no bargaining power at all. They can expect to be robbed blind. They won't get anywhere near what their gold should have been worth, and will be worth to whomever takes it off their hands in exchange for the needed pieces of paper.

People in rural areas where there are no black markets, or on isolated islands, may find gold virtually worthless, as opportunities to trade it could be almost non-existent. In cities opportunities to trade would be better, but threats would be more acute as well.

Stoneleigh said...


Why would anyone use a chart of M3 to see if we're in deflation or inflation?

The graph is M3 plus total credit market debt. Credit makes up the vast majority of the effective money supply, and it is credit that is tightening. That is deflation by definition.

Alan2102 said...

Skip Breakfast said...
"Thanks for your thoughts about the questions I posed re: gold. And if that is indeed true--that the majority of gold is held by ordinary people"

I didn't say that. I said large amounts are held by ordinary people, probably NOT most. Please read my words.

"--then wouldn't it make sense that TPTB would definitely want massive deflation to flush this gold out of those hands, so TPTB can buy it all up at realistic prices?"

I think, first, that there is more than one "PTB". There are competing interests at the top, and it is unwise to think in terms of perfectly unitary objectives of "TPTB". Second, IMO it is wrong to think of TPTB as all-powerful and capable of doing ANYTHING they want. Not quite. They are very powerful indeed, but not all-powerful, and not all-seeing either.

That said, it is safe to say that they all want more money (gold) and power, and that they would like to pick up gold on the cheap, in dollar terms, while the dollar still has value. And many of them are now picking up gold on the cheap. $1800/oz is cheap. And many of them have been picking up gold on the even-more-cheap, over the last 10 years. (And some of us ants have been copying them, quite successfully.)

There is a good deal of evidence (much documentation at to the effect that gold has been manipulated lower in price for many years, the primary purpose of which is to maintain a strong dollar. There may be a secondary purpose of allowing some parties to accumulate physical gold at a lower price (plausible). No one can say for absolute certain that that is true, but if you read the relevant materials, I think you'll see that it is very likely.

All of them (the smart ones, anyway) are aware that the dollar endgame is underway, and that they must transition out of dollars and into money ASAP. The problem is, if you are a large player (e.g. China), you cannot simply go buy a few hundred billion or a trillion dollars worth of gold. Even a paltry TEN billion purchase is enough to throw the thinly-traded gold market into a tizzy, at these low prices ($1800/oz), since the physical amounts are so large. Larger orders would lock-limit-up the whole market for weeks or months, and would telegraph to the world that THE END of the dollar had either arrived or was nigh -- thereby intensifying buying pressure (as well as the tendency to hoard), goosing the price even further. And it is even worse with silver. It will be different once prices rise to a more realistic level; say, $8K/oz gold and $200/oz silver. Meanwhile, large-scale accumulation has to proceed very carefully, gingerly, not to blow the whole thing up before the accumulation is complete.

Furthermore, some players (notably China) have benefitted from the strong-dollar/fake-wealth game, and have used it to great advantage, building up their infrastructure and productive capacities. They are not in a big hurry for that era to end. On the other hand, it clearly IS in the process of ending, now -- by smallish degrees, so far, but accelerating. The epochal multi-hundred-billion-dollar order for physical gold is coming, but not quite here yet. They are smart enough to ramp up slowly, so as not to kill the goose laying the golden eggs.

[...continued, next post...]

Alan2102 said...

[... continued from previous...] --- "Not Dollar, Not Euro, But Gold, Jul 20, 2011: Xia Bin, an adviser to China’s Central Bank, said [that]...Instead of buying government debt from the West, China should invest in strategic assets and accumulate gold by 'buying the dips'.... So far Beijing has admitted to have doubled its gold reserves to 1,054 tonnes or 54 billion dollars, and said it has plans to raise it to 8,000 tonnes." Right! That is what they put out for public consumption. Their real ambitions are surely for some multiple of 8,000; say, 20-40% of the global reserve of circa 160,000. But again, must be modest in public statements and verifiable actions, so as not to spook the market. Must let Western idiots continue to suicidally suppress the gold price, making accumulation cheaper. "Buy the dips", yes! $1800 IS a dip. Anything under five grand is a dip.

China, as a matter of state policy, is accumulating gold, silver, and other important metals such as rare earths. This is a very smart move, of great strategic value. Further, the Chinese people own vast amounts of silver; silver money is traditional in China (even if their silver standard officially ended in the 1930s). This will prove to be of great significance in the future, when (at last!) the silver price rises to reflect the stark realities of supply and demand (and drawdown of what were vast reserves, and gigantic amounts lost in unrecoverable forms, and steadily diminishing geologic supply -- think "peak silver"). Silver will save the asses of the Chinese people, in the world that is coming. It is the same in India, except that they are accumulators of much more gold than silver. Gold will save their asses, and will even cause some of them to become rich, or at least middle-class.

Oddly, (or is it odd?), only in brainwashed, dollar-besotted America do people continue to believe that real money is a "bubble", and that debt is wealth! The ceaseless propaganda of the paper-bugs, dollar-pimps and debt-hucksters has succeeded. And in our arrogance and blindness, imbued with a preening American exceptionalism, we think that our failure will be THEIR failure, as well; that as the U.S. (and E.U./OECD) collapses in bankruptcy and ignominy, so will everyone and everywhere else. False, as we will soon learn.

Suppression of the price of silver and gold is a game played by the West, or by a certain faction of TPTB of the West, to support dollar dominance and the global hegemony of the West. It worked for a good long while. It will not work for much longer. It is faltering and failing as we speak.

The center of gravity is shifting, from West to East. That's the story of the 21st century, in a nutshell.

Alan2102 said...

PS: Here's a few recent items on gold suppression, for background (there's much more):
Murray Pollitt: End price suppression and let gold rise to reliquify world
Monday, July 25, 2011
Chris Powell: Who will put the gold questions to central banks?
Fri, 2011-08-05

Beyond a Reasonable Doubt
By Adrian Douglas
"By 1999 the Gold Cartel was well on its way to success. The price was driven to a low of $253 in that year by the announcement of the BOE that it would dump half its gold hoard. The timing of the BOE gold sales together with the type of auction were probably designed to be the finishing death blow for gold as an asset, which, had it been successful, would have made Gordon Brown look like an investment guru instead of a buffoon! The 'Strong Dollar Policy' was like the opposite of the James Bond Goldfinger plot…a sort of 'Dollarfinger'! A scheme designed to end the millennia of Gold Wars, a scheme to banish gold from intelligent financial investment options. Exhibit 3 also reveals that the scheme failed. In 2001 supply started to decline, the price started to rise and demand picked up sharply. The Gold Cartel miscalculated...."

jal said...

Keeping things in prospective.

While the USA is busy navel gazing with Irene, a real typhoon/hurricane named Nanmadol went through the Philippines and is now a tropical storm going to China.

On August 26, Nanmadol reached a peak intensity with winds of 135 knots (250 km/h; 155 mph) (1-minute sustained) reaching almost category 5 status on the SSHS. The typhoon developed a large eye with a diameter of 18 nautical miles (33 km; 21 mi) with highly symmetric deep convective bands wrapped into it.[11]
Nanmadol continued to drift north east and made landfall over Gonzaga, Cagayan, Philippines with strong winds of over 95 knots (176 km/h; 109 mph).

Gravity said...

Off topic.

The fanatic Al Gore has now equated climate scepticism to the criminal act of racism in an astonishingly libelous comment intented to incite discrimination and political persecution of sceptics.
Gore proposes the elimination of open scientific discourse by coercion of concensus orthodoxy, and assaults climate sceptics' civil rights by publicly inciting discrimination towards them, slandering sceptics as a political group by equating [the political expression of] climate scepticism to criminal racism. This format of demagogy is evidently politically extremist and may well be criminally offensible.

In similar defamatory context, one might say that Gore is this generations Goebbels, when so spitefully applying tools of propaganda to sow discord. Equating all climate believers, whether moderate or fanatic, to mass-murdering propagandists, would be equally debilitating to civil discourse, as illustrated.

He's a buffoon for speaking such derisive nonsense and damages the legitimacy of moderate believers to no end.

Stoneleigh said...


Gold and silver are like rocks, they show absolutely no sign of deflating.

Silver peaked at $50/oz and is in decline, counter-trend rally notwithstanding. Gold has begun to follow to the downside.

I would be surprised if silver ended up at more than $5/oz once economic collapse removes much of its industrial value. It will still be useful, but it would be very expensive to buy now. I would say holding some bought at a much lower price would be a good insurance policy.

I expect gold to hold its value much better than silver, but for silver to make more sense for ordinary people in a position to own PMs (ie no debt, enough cash on hand and some control over the essentials of their own existence) due to its greater flexibility. It may not need to be converted to cash in order to be used for trade, and that would be a major advantage.

I think gold will fall back hundreds of dollars, at least temporarily, but not back to the previous low of $250/oz. Those who can ride out the setback will see new highs, but many will not be able to ride it out. That is really the crux of my argument. Long term value only matters if you can hang on to it for the long term.

Stoneleigh said...


I agree with Prechter that we will see sub 1000 on the DJIA before the market reaches some kind of lasting bottom (lasting a few years perhaps). Deflation knocks the support out from under all prices, while simultaneously making things less affordable.

Stoneleigh said...


For you to be right Gold has to fall below $680/oz, no?

The spot price might well do that, but what matters more for most people is that the prospect of getting anywhere near the spot price is vanishingly small. And they would be taking a risk in even trying to sell in really hard times. Who knows who might follow one home to see if there's any more where that came from?

bluebird said...

I can see stashing lots of twenty dollar bills in a safe spot for future small purchases and expenses. But what about large expenses, such as property taxes. Does it really make more sense to pay $2000 property taxes with 100 twentys vs 20 hundreds? Those 100 twentys take up a lot more room in the 'safe' too.

On the other hand, if there came to be a cashless society and that property tax bill could only be made electronically, that would be ok, as long as there are the Internets to submit the payments.

I think once the tipping point is reached, it probably isn't going to make much difference after a few years anyway.

el gallinazo said...


Your probability analysis for silver over the near term is firmly planted in a near term hyperinflationary outcome. If Stoneleigh is right, you are wrong. Grab your beer and popcorn and watch the show..


"Yes they are restricted, as debt junkies, by the power of the bond market. Also, they do not print money, but lend it into thin air. They can only do that if there are willing, and able, borrowers and lenders. In a liquidity crunch no one will be borrowing or lending."

Well the Treasury and the Fed have been playing this goofy game where the Fed invents money and buys the Treasury debt. At one point, I believe, that the Fed was buying over half the treasuries with monopoly money. There is no doubt that this process is inflationary. One can only argue that the inflation produced by it is more than superseded by the collapse of the shadow banking system, and soon the traditional banking system. There are many who would argue that this makes the USG-Fed Complex independent of the bond market. I think the real problem to this continuing is that exporters of commodities, particularly oil, will refuse to export for dollars. Others argue back, just let them try. There is a reason that the USG spends as much for guns and bombs as the rest of the world combined. Others answer back that the Owners plan is to slaughter the USA calf anyway, to usher in a global government and currency. USA hegemony has become inconvenient. Its only use now that it has been industrially gutted is to supply and operate the Owners' thug military as long as it marches to the right drummer.

"Can someone simplify this "

I think that Stoneleigh was implying that the political and economic crisis will usher in a world war greater than the 5 American theaters currently in operation. The European start of WWII was in 1939. The US military and CIA have now gone wild. They are going after Syria next, though they are trying to get Turkey, a member of NATO, to do the dying. They are now operating on the sociopathic Brzezinski world strategy, which is far more subtle than the neocon strategy. The overall plan is to surround Russia and China with USA military bases and antagonistic client states. Russia's natural resources are one of the delicious plums and they are pissed that they mishandled the Oligarch rape of Russia under the corrupt drunkard and allowed a shrewd nationalist chess player to gain power and reverse much of it. Whenever you see an article by the "progressive," Jeffrey Sachs, remember that he was the theoretician in charge of the 1990's neoliberal rape of Russia.


Your response to seychelles was great. I saved it to my hard drive. However, I think the police state will have a bit of time, measured in years, to increase the complexity of their response, since the bulk of remaining USG assets will go into propping it up.

Jack said...

Hi El G
Thanks very much for your help
I agree with you about Turkey and they are dying to start something there.
The Kurds will be used for this and the Armenian's are going to get caught in the middle as usual and I hope that it will not be world war 3

Stoneleigh said...


S&I envisage severe social disruption that will threaten the survival of those who have not pre-arranged a degree of self-sufficiency. Prechter, on the other hand, seems to think that well-timed conversion of fiat currency into stocks, gold, productive assets or real estate at the deflationary bottom will generate fabulous wealth because the system will still be somewhat intact.

To some extent the difference is in who our audience is. We write for ordinary people, and the middle class will likely be decimated. Those higher up the financial food chain are more likely to have opportunities and to be cushioned from the worst of the disruption. Some of them will make fabulous wealth, as the seeds of the great fortunes are sown in times like these. In the longer term they will face adverse consequences as well, as they will have to work harder and harder to protect their wealth from the rest. The more you have, the more you have to worry about losing.

More severe structural devastation will occur in wave c of grand supercyle IV, which the Ellioticians project to arrive after mid-century.

I also think this depression is the first part of something larger, and that the consequences of the bubble bursting will last for decades, as is typical for very large bubbles. I don't generally write about the longer term as there's so much uncertainty, and besides, we have enough to worry about getting through the next few years. If people are distracted by the really long term, they may not pay enough attention to getting through the short term, in which case they won't have a long term to worry about.

walker said...

There were a few Chinese discussions of "Chinese national security for food". people take their own path figured that would be 80% food imported since the Commies hold that data as a national secret.So I said it was a semi official data. A peasant works in a factory 3 month will be make more money than works in a rice fields a year under the Sun. It is the major cause that majority of the arable land abandoned in China. In last five years, drought and flood happened every year almost everywhere that created an huge gap in food supply.("food" in Chinese here translated as major crops, vegie and fruits don't count). That makes China the #1 food importer in the world.

TAE discussions basically fall into two categories,one is how to out runs the bear, the second is how to out runs the rest. If we focus on the second, I had a radical idea to refinance our homes in order to generate enough cash (cushion) for coming deflation. And we should not spend too much now for resilience, such as backyard gardening,buying expensive solar panels...etc. Stocking up food is fine but keep the cost low. What do you think?

I don't have good English, sorry.

Stoneleigh said...

El G,

I think the police state will have a bit of time, measured in years, to increase the complexity of their response, since the bulk of remaining USG assets will go into propping it up.

Agreed. I think money and energy will be focused on repression, which may make it work for a while, probably all too well.

It would take time to implement a complex scheme like society-wide ration cards though, so holding cash in the short term is still the best option IMO. There's no way they could remove it quickly, although it is clear that the risks to cash will rise over time. The price of hard goods will be falling at the same time. When one makes the transition will depend on personal circumstances and what risks one can live with.

Lynford1933 said...

Thank you again Stoneleigh for answering so many PM questions/assertions. I like the idea TAE is for ordinary people and not the ones wondering what to do with their $200K in the markets.

I was young but I remember the depression and "We had everything but money." People who had money were not so bad off. Fortunately my father had a job the entire time and though he didn't make much, it didn't cost much to live. I think the next one will be worse because of more people and fewer resources. No debt and even a few dollars may be the difference between a good and bad life.

Here in the high desert water is most important, then land for gardening, and then all the rest. We have a good start with a well and some solar. We have been following the "Lifeboat" plan and I am a woodworker.

inbetweeenispain said...

You've been wrong about gold as long as you've been writing this blog. What will it take for you to admit defeat? Gold at $2000? $2500? All you naysayers fail to appreciate the simple relationship between money printing and the price of gold. Gary Dorsch has shown that for about each trillion increase in U.S. debt, the price of gold goes up $150. When the Bernank stops printing, I'll start to sell.

Stoneleigh said...

El G,

The bimetallic Grange Populist movement was the attempt of farmers and laborers to break the gold money cartel which was crushing them with deflation.

Indeed. A gold standard maintained as an economy is trying to expand for a growing population is highly deflationary. It constrains growth very strongly. There is pressure from the bottom-up to expand the money supply in order to allow the economy to grow. First it was to add silver, then paper, then electronic digits etc. Expanding the money in so many ways was a necessary condition for our hyper-growth global bubble. It will not be necessary in contractionary times, so all manner of more esoteric forms of money will disappear. I wrote about this in The Infinite Elasticity of Credit.

Alan2102 said...

el gallinazo said...
Your probability analysis for silver over the near term is firmly planted in a near term hyperinflationary outcome"

Not at all. My near term analysis is not for dollar collapse, but dollar deterioration (as well as other fundamentals, propelling silver and gold). In a true hyperinflationary dollar collapse, name your number: silver could go to 10s or 100s of thousands per ounce. $200 per ounce is chickenfeed relative to hyperinflationary numbers.

Longer term, the dollar might collapse completely... OR it might hang in at some shadow of its former (now) self. I really don't know.

el gallinazo said...


Al Gore is a tool of the Owners who also wishes to become a billionaire. The Owners wish to install a global carbon tax to finance the UN and the IMF which would then morph into a true world government and currency. Gore has bet a lot of personal marbles on this outcome.

Interesting how the Nobel and faux Nobel committees are facilitating the agenda. Economics to an idiot savant like Krugman. Peace to a war mongerer with no track record (Barry) and an apparatchuk of global government (Gore).

Stoneleigh said...


There is no genuine printing. It's all a smoke and mirrors game designed to reignite confidence, and it's critically dependent on the rapidly disappearing ability to midwife credit. There won't be any more QE. Confidence is evaporating, and liquidity will go with it. Deflation will unfold far more quickly than any central authority can respond once it reaches a kind of critical mass. Bernanke and the rest will be overtaken by events.

Stoneleigh said...

muchtooloose, long as you know you are speculating and not investing or preserving...

Whatever view you take you are speculating. It merely means acting on your understanding of the future, whether you are optimistic or pessimistic.

el gallinazo said...


OK. Fair enough. I accept your definition of severe inflation as opposed to hyperinflation, as it is also my own, and I was sloppy in that regard with my comment toward you. But if we substitute severe inflation for HI, nothing else in the arguments has changed.

Furthermore, I agree with you that there has been a conspiracy by the world banking cartel to suppress the price of gold and silver. But this was during the expansionary phase. In the contractive phase, this conspiracy will no longer be necessary.

Alan2102 said...

Lynford1933 said...
"I like the idea TAE is for ordinary people and not the ones wondering what to do with their $200K in the markets."

Ditto. Which is why I took care to emphasize the way in which gold and silver really are the wealth reserves of ordinary people -- as much as of rich people and banks.

Dirt-poor Indian peasants reject banks and paper money, and buy gold, and they are smart to do so.

Strangely enough, it is only the "educated" middle classes of the West that Don't Get It about gold and silver. The "ignorant" (?) rural hicks in the third world get it, but we don't! Amazing.

walker said...

Although I am a gold bug,I think gold has more chance going down than going up. One of gold's character that many people hardly mentioned: gold price is determined by paper gold not by physical gold. In other words, gold is a stock or a derivative.
Basically we can't trade our gold in public since most people don't know gold. It is a very illiquid "money". However,after QE1,QE2, gold price did go up. What if there will be QE3,QEx, gold goes up again, how will you explain such in deflation thesises?

Alan2102 said...

El G: "I agree with you that there has been a conspiracy by the world banking cartel to suppress the price of gold and silver. But this was during the expansionary phase. In the contractive phase, this conspiracy will no longer be necessary."

Strangely enough, you sound like FOFOA, who thinks that "it will no longer be necessary", and that gold will then find its true price, naturally (and a fantastic number it will be, in his view).

I'm not so sure. I think it might continue to be "necessary" by the lights of the relevant faction of TPTB, but might simply become impossible -- that their hand will be forced.

Time will reveal all.

Should be interesting.

With beer and popcorn firmly in hand, I venture bravely into each day that comes.....


inbetweeenispain said...

<> Stonleigh

With all due respect, I'm not clear how you can say that. What were QE1 and QE2? The national debt and debt-to-GDP ratio is increasing rapidly every year. The cost of just about everything, with the exception of real estate and housing, is increasing. We are most likely on the precipice of some kind of QE3 and some grand subsidy of housing mortgages. Europe is doing their own QE. The world is awash in money printing. While you might argue that it won't be enough to stem the tide of deflationary forces, I ask what makes you so certain?

dan_y44 said...

you're all talking about inflation vs deflation but it's not a problem today. the long term interest rates are collapsing so IT IS A DEFINITION OF DEFLATION. prices in commodities and stock markets are stabilized since 2008 but no inflation on productive side and no increase in money supply M3 (small contraction or stable..M3-M2 is decreasing and it is due to private debt been paid and increased cash hoarding). what is not artificial is the trend in GOLD and in US Tnote, wich are both bullish. it is the increase in cash and gold hoarding AGAINST the productive ASSETS.

sorry for my french accent ;-)

Alan2102 said...

El G: "the Treasury and the Fed have been playing this goofy game where the Fed invents money and buys the Treasury debt. At one point, I believe, that the Fed was buying over half the treasuries with monopoly money. There is no doubt that this process is inflationary. One can only argue that the inflation produced by it is more than superseded by the collapse of the shadow banking system, and soon the traditional banking system."

Right. And the dollar will become much stronger in (then-worthless) derivatives and other paper drek proferred by the bankers and high-finance hucksters. In that sense, or sector, and a few other (related) sectors, we will have deflation. But in practice it won't matter much, because prices of commodities and essentials will be ascending rapidly, or exploding.

"Deflation in everything you WANT; inflation in everything you NEED" -- as someone, somewhere, put it, quite well.

Yes, a buck will buy you 10 times more CDOs, tony real estate and luxury goods than it used to. But 1/10th as much gas, food, basic clothing and silver than it used to. Whole new world. Your dollars will be much stronger in terms of the things you wanted (or that your ego thought you wanted), but you won't be able to buy them because of the ridiculous prices on the things you really DO need.

El G: "The overall plan is to surround Russia and China with USA military bases and antagonistic client states."

Yes, but it is too late. It won't work. We're too far gone.

These are the last days of the U.S./U.K./Israel/etc. empire -- the empire of the West.

dan_y44 said...

"There is no doubt that this process is inflationary"

As the Japanese process ?

careful because if we have a last QE all the people will think inflation is now, and it will be the liquidity trap for 4 years...after that i don't know, i think the monetary system is collapsing progressively and that inflation will come at the end, but no one knows when...

SecularAnimist said...

"These are the last days of the U.S./U.K./Israel/etc. empire -- the empire of the West."

I think a more appropriate way to describe it - is the core of the capitalist world-system is attempting to shift to to east. Meaning they will be skimming of the surpluses of the rest of the world instead of the other way around.

The gravity of capital is the logic of the system no policy or party can stop this attempted transition. It's not from poor policies or conspiracies just the natural flow of capital.

While the US has Imperial qualities the empire analogy is not sufficient. The capitalist world system has distinct differences from empire models - though the capital growth necessitation and reproduction is akin to imperial conquest - kind of turned it into a systemic necessity.

The new world system differed from earlier empire systems because it was not a single political unit. Empires depended upon a system of government which, through commercial monopolies combined with the use of force, directed the flow of economic goods from the periphery to the center. Empires maintained specific political boundaries, within which they maintained control through an extensive bureaucracy and a standing army. Only the techniques of modern capitalism enabled the modern world economy, unlike earlier attempts, to extend beyond the political boundaries of any one empire.

The question is whether capital can push the transition without the entire system breaking down - on top of peak oil dynamics on global ponzi-economic collapse I find it doubtful.

The east may get a decade or two as the new core of the capitalist world system but they are a little late in the game due to the structural crisis the world is in as well as the blossoming belief system crisis. Two conditions that ended feudalism.

Franny said...

Stoneleigh, I appreciate all the time you took answering everyone's questions. I also applaud your efforts to get ordinary people to think more clearly about getting prepared.
It is truly amazing to me to see how many people are completely unprepared for an event like a hurricane, let alone for a protracted economic disaster. I found out that a close relative (who owns some silver) had no water, very little extra food, and no backup light or cooking fuel in the house. Another aquaintance lost electric power, and (despite having young children) has no alternate cooking fuel, not even natural gas. For most people, thinking about gold and silver should be way back in line. Buy some propane or charcoal, people!

Re the Federal Reserve, their power is certainly a lot more limited that the public assumes. I did have the impression, though, that they could buy assets as well as lend money. Thus my question about the Fed injecting money into the system by buying assets at inflated prices (e.g. bad debts). I never underestimate how creative they might get in their efforts to defeat deflation.

bosuncookie said...


What readings do you recommend about the structural crisis and the belief system crisis that "ended feudalism."

I'd like to learn more.


el gallinazo said...


I would say that the only place that FOFOA and I are on the same page is the agreement that the price of gold in dollars will become a more honest price discovery than in the past 12 years. I had to read FOFOA fairly carefully while Ash and I were kicking around his ideas, though Ash was a lot more involved than I was. FOFOA is certainly a hyperinflationista in the near term. He posits that we will reach this state because the central bankers will not leave a bad debt behind and will monetize each and every one and drop the proceeds by helicopter on our front yards. He posits that this will happen because he builds up a rather involved theory that this is the most profitable path for the Owners. Once fiat is destroyed, Jesus will descend from the heavens, bless gold backed money, and we will have a 1000 years of heaven on earth.

I do not want to argue about FOFOA's ideas though I suspect that Ash would oblige you with enthusiasm. However, Ash's arguments reside in his miniseries lead essays here on gold which go back a few months.

Both Stoneleigh and I agree with you heartily that luxuries will drop far faster in price than necessities. And also that necessities will be far dearer in terms of the average debt serf's purchasing power than they are today. Where we disagree, with the exception of crude oil energy derivatives down the road, is in the nominal set points. Stoneleigh and I find it very unlikely that even necessities will increase in price from today's pricing in "nominal" terms, once the deflationary avalanche gets really rolling, despite their increase in terms of debt slave purchasing power. If this does happen, which is unlikely, it would probably be quite modest. Who is going to have the money to pay for HI food in the midst of a depression with sky high real, non Bureau of Lying Statistics unemployment, and monthly wage and salary reductions by those lucky or canny enough to still hold a job or a business? As Stoneleigh loves to write, "Demand is not want people want, it is what they are able to pay for." The Lord Blankfeins of the world, despite their swinish habits and appearances, can only pig out so much in strictly alimentary terms.

As to "paper wealth," it will fly into that alternative universe, to be used by Paul Krugman's aliens to build their armada against us. And don't minimize the drop in real estate and housing in terms of deflationary debt destruction. As the pundit idiots love to say, it is the largest purchase that the average debt slave will ever make. And then they used it like a broken piggy bank. Furthermore, if the TBTF assets in terms of RE were marked to reality today, they would also disappear into that alternate universe in nanoseconds. The central banks such as the Fed have only bought up a smallish percentage of the toxic land fill. Fanny and Freddy bought up a lot more, but when TSHTF, we will see just how much Hankenstein's bazooka is primed and whether the Treasury will honor that debt. It really boils down to a real politik decision vis-a-vis China.

As to "NATO's" failure in their wars to surround Russia and China, we are there already and these guys are crazy. They are willing to double down on a nuclear exchange. They don't even have to kill the president to get their way. It's part of their code of manly toughness. All these economic arguments may become quite moot as we all are terminally muted.

Dan Y44

Well you didn't include my next sentence which read, "One can only argue that the inflation produced by it is more than superseded by the collapse of the shadow banking system, and soon the traditional banking system." I do think that it is quite obvious that this monetizing process is inflationary, but as in the Japanese example, it was more than offset by the deflationary aspects of the zombie banks and leaving the bad debt like a sword of Damocles hanging over the entire economy.

Ka said...

@walker et al,

This article from China Daily says that in 2010, grain (including soybeans) production in China was 546 million metric tons, and 67 million were imported. So that gives 67/(546 + 67) = 11% of grains being imported, and I doubt if other food categories would change this much.

Jack said...

What a hero this guy is
Not a hidden character like me and most people here.

scrofulous said...

Hi Stoneleigh,

Thanks for your response. I guess two out of three is not bad but the one I particularly wanted your thoughts on is this one:

Are the banks buying paper gold or actual bullion? As well, how much of the paper that represents gold holdings is allocated and does not have multiple demands on it?

On that can you see in a crisis situation that there may be a call by holders for delivery of their physical bullion, held in bullion banks, thereby putting pressure on those banks through any multiple claims?

BTW on this

' long as you know you are speculating and not investing or preserving...'

"Whatever view you take you are speculating. It merely means acting on your understanding of the future, whether you are optimistic or pessimistic."

How about it if we define each something like this:

Saving is like throwing mud on an outward sloping wall, investing is like throwing the mud on a vertical wall and speculating is throwing mud at the ceiling while taking a drink of rye and calling out "Here is mud in your eye!"?

Ashvin said...


"Strangely enough, you sound like FOFOA, who thinks that "it will no longer be necessary", and that gold will then find its true price, naturally (and a fantastic number it will be, in his view)."

The stark difference is that FOFOA believes it won't be necessary because the the financial PTB (namely central banking institutions in Europe and Asia, and ME oil giants) actually want HI of the dollar and a transition towards a new gold-based reserve system. Sure, a lot of powerful people are Fed up with the USD reserve system, but that's where the huge discrepancy between theory and practice comes into play. This is best illustrated by the EMU situation right now, where officials continue to sell out their people to stay in the debt-dollar system. FGAs would say that they are simply drawing out the string for now, until the big paper gold crash that you describe occurs. I say, the free market mechanism that would allow such a "stop on a dime reversal manuever" has never existed in this system, despite how much we love to romanticize its existence.

I understand you don't really agree with Freegold or imminent HI of the dollar, which brings me to my next point. There is a clear difference between prolonged high inflation and HI. It is difficult to imagine many scenarios in which the former occurs in such a precarious global economic environmental. Even if we limit the price increases to food and energy, while financial assets deflate, it is difficult to reason that such a trend would persist without a fundamental loss of confidence in the dollar occurring as well. Neither manufacturers, consumers nor anyone in between can aborb steadily increasing energy costs right now, so something must give. The cost will be forced to come down sharply either in terms of paper (USD) or real hard assets. So pick your measure of severe deflation, but these goldilocks arguments just don't cut it IMO.

NZSanctuary said...

Skip Breakfast said...
I'm intrigued that you're looking for land in NZ. Given that the property market has not yet been hit hard, I'm surprised you're not going to wait. Because I think the big house-price bubble in NZ is going to pop too. It's massive.

Indeed it is, but I do have some money, so I'll buy if I find something affordable that suits. I am not in a rush though – just aware that it cannot be left too long. It takes time to turn land to the productive means of choice – most land is/has been used for cattle/sheep grazing, which is not what I want it for.

SecularAnimist said...


I'd start with Immanuel Wallerstein's works on World-system theory. You can find numerous papers he has written on line. He is the first one to call it a structural crisis in Feudalism as he calls capitalism being in a structural crisis. You can also find a lot of different sites that go over the fall of feudalism and the different problems it had and you can kind of see it. Wallerstein's language kind of helps you see things in a different light.

Then, Karl Polyani's "The Great Transformation" goes into detail the transition from a feudal system to the current market society. He fills in a lot of the details regarding structural problems.

As for the "belief" system - that is something I observed. As feudalism was having technical problems coupled with increasing peasant revolts see: london riots, it was also being attacked as a belief system by the new capitalist class as well as the scientific community. You can go back to Copernicus to see this challenge of authority which seriously eroded it's legitimacy. We went from divine right of kings to divine right of capital.

Now, divine right of capital is being challenged from multiple angles. This goes deeper than loss of faith in fiat.

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