Financial topics

[vincecate]

If any state declares gold to be "state money", then that state is in rebellion and we fight the civil war all over again. Moreover, what state has gold reserves?

The US constitution says:

"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts"

The US mint actually makes gold and silver coins. So what the states are doing is saying, "gold and silver coins made by the US mint are legal tender in this state". They are not trying to say Federal Reserve Notes are not legal tender, just that gold and silver are legal tender. Given that the constitution says states can not make anything other than gold and silver legal tender it is hard to argue that making gold and silver legal tender is contrary to the highest law in the land, let alone an act of war.

Bad money results in an inflation tax and taxes on fake capital gains. Given fair legal standing, good money drives out bad. Legalizing gold as money is not a small thing. It will be interesting.

http://www.usmint.gov/mint_programs/?ac ... can_eagles

http://www.usconstitution.net/xconst_A1Sec10.html

http://en.wikipedia.org/wiki/Inflation_tax

As for the deflation claim, a real time price index from online prices in the US has gone up almost 1% per month the last 2 months. At what point is it fair to laugh at deflationists? When we get to 2% per month? Or 3%? Or 4%? Or 5%? Because 5% per month is 80% per year and hyperinflation. Will there still be deflationists when we have hyperinflation? There was a bit of deflation in the last quarter of 2008, but that is about it. In the Great Depression prices were down about 40% by 3 years after the crash. No sign of such a thing now.

http://bpp.mit.edu/daily-price-indexes/?country=USA

For the real reason for deflation from 1929 to 1933 see:

http://howfiatdies.blogspot.com/2010/11 ... ndard.html

As for 0% interest rates forcing people into risky investments, there are other options. If cans of Tuna are going up 8% per year you can do well just by buying cans of Tuna (or whatever canned food you eat). At some point people will realize this. At that point canned food will go up more than 8% per year and be a really good investment.

[Higgenbotham]

As for the deflation claim, a real time price index from online prices in the US has gone up almost 1% per month the last 2 months. At what point is it fair to laugh at deflationists? When we get to 2% per month? Or 3%? Or 4%? Or 5%? Because 5% per month is 80% per year and hyperinflation. Will there still be deflationists when we have hyperinflation? There was a bit of deflation in the last quarter of 2008, but that is about it. In the Great Depression prices were down about 40% by 3 years after the crash. No sign of such a thing now.

http://bpp.mit.edu/daily-price-indexes/?country=USA

That's a great index because it is showing exactly what I suspected is happening, but hadn't seen any reliable corroborating evidence. Until December 24, prices were unchanged for over 2 years (since the spike in 2008). The little spike down at the end of 2010 was about the time I mentioned prices of 5 out of 10 items at the grocery store had suddenly fallen, and I was expecting deflation to resume. Not too long after that most of the prices went back up.

A couple observations and the first one will probably surprise anyone who is under age 35. First, in 1980, there was a bad inflation and I was working a summer job at a large corporation. One day we got our paychecks and a small note inside said that due to the rising prices the company was giving an automatic across the board 3 percent pay increase to all employees. Can anyone imagine that happening today? Second, my sister runs a small business and she buys parts from overseas. One item she buys is a magnet made in China. About 2 weeks ago, I mentioned to her that there might be some supply disruptions and maybe she should keep some extra inventory. I asked her how much the magnets cost. She said they were 9 cents and then they went to 11 cents and now they are 14 cents. This was all recently. She was not concerned about that because it's a small part of her total cost. I was focusing on the huge percentage increase in a short amount of time. If these items can't be made in the US anymore and China puts the screws to us because we put the screws to them with QE2, there isn't anything that can be done to stop them until we start making our own stuff. And it will cost us more to make our own stuff because the US is not an efficient producer.

I don't think the US economy is strong enough to take these price increases. A little time may have been bought with QE2 but now the piper is going to be paid a bigger sum as no stock market collapse and "double dip" will be avoided and now the horror of losing reserve currency status is the additional price that will probably be paid for Bernanke's incompetence and immorality. That price is a minimum immediate 10% markdown on the dollar, supply chain disruptions, fuel and food shortages, and other chaos. Also, I saw in the online Wall St Journal last night that a university professor stated Wednesday that 20% is the likely markdown:

http://online.wsj.com/article/SB1000142 ... stpop_read

[Higgenbotham]

Ron Paul shows that Ben Bernanke doesn't know what the definition of a dollar is:

http://www.nysun.com/editorials/the-ecl ... nke/87250/

http://www.youtube.com/watch?v=Fh0kNS6r ... ure=relmfu

It's messy because any semblance of the Constitutional definition of a dollar was taken away long ago, so even though Ron Paul pecks at that idea, it's probably not fair to expect Bernanke to delve into that. After the breakdown of Bretton Woods and the advent of floating exchange, it's become the standard vernacular to speak of the value of the dollar as the Dollar Index, which is the weighted basket of exchange traded currencies. I don't think it's right to give the Fed Chairman a mandate of price stability because it gives the Fed an incentive to fudge the price numbers and claim price stability, as Bernanke does in this exchange. Wild monetary policy and its consequences can be the result as long as the claim of price stability can be fudged and spun. Paul makes a good point about the symbiotic relationship between the Congress and the Fed.

I guess I would define a dollar as an internationally floating unit of account which is based on a corresponding unit of US government debt. Although now that mortgage backed securities have been taken onto the Fed's balance sheet and supposedly collateralized for Federal Reserve Notes, that definition no longer works either. I suppose if I were Bernanke and had that definition in my head I'd be inclined not to verbalize it. It shows the ridiculousness of what our monetary system has become and what the Fed mandate has become, especially given the crisis period we seem to entering into. I don't know how the citizenry and their representatives can possibly understand this mess well enough to sort it out.

[OLD1953]

If any state declares gold to be "state money", then that state is in rebellion and we fight the civil war all over again. Moreover, what state has gold reserves?

The US constitution says:

"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts"

The US mint actually makes gold and silver coins. So what the states are doing is saying, "gold and silver coins made by the US mint are legal tender in this state". They are not trying to say Federal Reserve Notes are not legal tender, just that gold and silver are legal tender. Given that the constitution says states can not make anything other than gold and silver legal tender it is hard to argue that making gold and silver legal tender is contrary to the highest law in the land, let alone an act of war.

Bad money results in an inflation tax and taxes on fake capital gains. Given fair legal standing, good money drives out bad. Legalizing gold as money is not a small thing. It will be interesting.

http://www.usmint.gov/mint_programs/?ac ... can_eagles

http://www.usconstitution.net/xconst_A1Sec10.html

http://en.wikipedia.org/wiki/Inflation_tax

As for the deflation claim, a real time price index from online prices in the US has gone up almost 1% per month the last 2 months. At what point is it fair to laugh at deflationists? When we get to 2% per month? Or 3%? Or 4%? Or 5%? Because 5% per month is 80% per year and hyperinflation. Will there still be deflationists when we have hyperinflation? There was a bit of deflation in the last quarter of 2008, but that is about it. In the Great Depression prices were down about 40% by 3 years after the crash. No sign of such a thing now.

http://bpp.mit.edu/daily-price-indexes/?country=USA

For the real reason for deflation from 1929 to 1933 see:

http://howfiatdies.blogspot.com/2010/11 ... ndard.html

As for 0% interest rates forcing people into risky investments, there are other options. If cans of Tuna are going up 8% per year you can do well just by buying cans of Tuna (or whatever canned food you eat). At some point people will realize this. At that point canned food will go up more than 8% per year and be a really good investment.

Vince, it's not going to happen. States forcing themselves to a gold standard means they are essentially cutting themselves off from all federal funds - which just is not going to happen, short of the balkanization of the US into 50 separate countries. What happens to military pensions in such a state? You think a bankrupt state will take over the military functions inside that state, or declare the money the soldiers are paid with to be valueless in that state? In either case, they just went into rebellion. Not to mention the riots at the military posts, and these are the people with the guns, lets remember that. And that money the National Guard they could call out to restore order, that just became unspendable inside the state as well. The Federal govt is NOT going to start paying in gold because Utah decided to demand it.

As for that bit of the Constitution, this is relevant (though nothing except what the SCOTUS has ruled is actually relevant, and they've ruled our money is fine, further discussion is totally moot)
********
Section. 8.The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow Money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;
********

Federal Reserve notes are securities for that purpose, and are mandated as legal tender. Says so on the front of them. SCOTUS says that is in accordance with the Constitution.

As for the tuna standard, that's part of deflation. We are entering the hoarding phase, shortly that will end, and then it's going to be interesting. In the not very distant future, expect the resurrection of the 40's laws against hoarding.

[vincecate]

It shows the ridiculousness of what our monetary system has become and what the Fed mandate has become, especially given the crisis period we seem to entering into. I don't know how the citizenry and their representatives can possibly understand this mess well enough to sort it out.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

As far as really understanding hyperinflation, that 1 in a million may not be much of an exaggeration. The citizenry and their representatives don't understand hyperinflation well enough to prevent it.

The generation after it happens will fear it well enough to prevent it while they are alive. America has really had "debauching of the currency" about every 80 years. The Revolutionary War, the Civil War, and the Great Depression (the bankrupt Fed and their paper money was only saved by outlawing gold to hide their bankruptcy). The people alive in America today not only don't understand it, but they also don't fear it enough to prevent it. This is when it hits. It is about time.

It was searching for info on this generational nature of hyperinflation that led me to this web site. To me it is kind of Ironic that even John does not even see the generational nature of "debauching the currency".

[vincecate]

Vince, it's not going to happen. States forcing themselves to a gold standard means they are essentially cutting themselves off from all federal funds - which just is not going to happen, short of the balkanization of the US into 50 separate countries. What happens to military pensions in such a state? You think a bankrupt state will take over the military functions inside that state, or declare the money the soldiers are paid with to be valueless in that state? In either case, they just went into rebellion. Not to mention the riots at the military posts, and these are the people with the guns, lets remember that. And that money the National Guard they could call out to restore order, that just became unspendable inside the state as well. The Federal govt is NOT going to start paying in gold because Utah decided to demand it.

You are missing the subtlety of how this works. They are not "forcing themselves to a gold standard" or "declaring the money soldiers are paid to be valueless in that state", nor demanding gold from the Federal govt. What they are doing is just giving citizens in their state the option to use a type of money that does not have an inflation tax nor result in taxes on fake capital gains.

As for that bit of the Constitution, this is relevant (though nothing except what the SCOTUS has ruled is actually relevant, and they've ruled our money is fine, further discussion is totally moot)

Again, you miss the subtlety. The states are not claiming that paper money is against the constitution, just that gold is ok money by the constitution. There is no need to outlaw paper money, just legalizing gold money is enough that the market incentives (less taxes when using gold money) will take it from there.

As for the tuna standard, that's part of deflation. We are entering the hoarding phase, shortly that will end, and then it's going to be interesting. In the not very distant future, expect the resurrection of the 40's laws against hoarding.

Hoarding would not make sense if there was deflation. We don't have deflation. It makes sense to invest in canned goods because they are safe and their value is going up faster than other safe investments you can make. Yes, we probably will see laws to try to prevent hoarding. All the more reason to get your tuna before laws limiting purchases to 10 cans and such come about. The "hoarding phase" is when hyperinflation is. When interest rates are going up fast you don't want to be invested bonds, stocks, or real estate, so "hoarding commodities" is your best investment. But it will really only end after the death of the dollar.

[Lily]

Vince - you've convinced me about hyperinflation, but I'm not so sure about your security preparations.

If we're talking about the dollar falling from its position as the world reserve currency, I think we can predict safely that the economic chaos in the US will also result in massive social chaos. It doesn't help things that the US's largest cities will all be running out of water right around the same time (summer to autumn 2012). There are a number of man-made and natural disasters that will be very possible right around this time, as well. For instance, it seems as if natural gas drilling activity in Arkansas is producing increasingly big earthquakes, right now, and if the enormous fault right next to the drilling - the New Madrid fault - goes off, the resulting earthquake is predicted to be likely to destroy 60% of the buildings in Memphis, a major US transportation hub. Geomagnetic solar storms are also very likely in the next few years, and one good one could easily take out almost the entire US electric grid by itself. As global warming continues, hurricanes and blizzards will grow dramatically in severity, so it isn't unthinkable that we could have another Katrina or five. Given how poor everyone will be and how distant and idiotic the government, there are some real social vulnerabilities opening up soon.

Realistically, I think to be honest about this we have to expect the US, or at least wide swaths of it (especially the southern half) to fall into a condition of semi-anarchy. Most likely there will be a condition of persistent, widespread low-level conflict over diminishing resources. I think we can suspect that existing social infrastructure won't be able or willing to handle this at all. Outside of the occasional brutal crackdown with troops or contractors, and round-ups by FEMA, I don't think we can expect much help.

All of which points to the extreme danger of living on an island without a sustainable food source. Buying food is great, but what happens when your year runs out?

If we have a stock market crash by this Christmas, then the dollar finishes falling later in the next year and we get a hyperinflationary pulse during the second half of 2012 or early 2013, do you think that conditions would be such that order would be restored within a year? My forcasts look more like at LEAST 2-4 years of chaos, frighteningly high prices, and violent social disorder. What will you do in the meantime on an infertile chunk of rock in the middle of the ocean? Could you escape the island quickly if needed? In the time it will take for order to re-emerge, there is a quite good chance that the island could get hit by a hurricane. That is not such a big deal for an affluent first world society, but for a small island surrounded by hungry, armed, and desperate neighbors, during a global breakdown, it's another thing entirely. Would your dwelling survive a hurricane?

Plus, if food is in desperate shortage, which it is and will be, is your dwelling in Anguilla secure enough that you could fight off *all* the nearby hungry people with your existing skills, personel, resources, and weapons? Perhaps it would be more advisable to be further away from populated areas.

The other governments in the Caribean would scarcely be able to retain their own security in the face of decaying US power. If nothing else, we should see the Mexican cartels and perhaps desperate people from Haiti and elsewhere turn to piracy within a few years of the hyperinflationary collapse, if not sooner. What else CAN they do? With no native security forces on Anguilla, I doubt it would be able to repel a determined group of raiders, and it seems rich enough that attacks would be worth it.

To be honest, my guess is that if shit goes down the way you're predicting, you are toast on that island.

Perhaps the first thing to do in order to figure out a more realistic security plan would be a more precise mapping of how the different economic/political/environmental/social scenarios could play out. It seems to me like some of the cleverst, most thoughtful people on the internet right now are starting to find this site; if we could come to a consensus on different scenario outcomes, we might be able to collectively plan more effectively - and help others plan.

[Higgenbotham]

A quote and a link from 2 traders who I consider to be very astute observers of markets. The first uses a system dynamics approach and the second uses a trend approach. Common to both of these approaches and mine is the observation that system limits that should have been containing the market were slightly exceeded. However, both have come out this weekend with a view that global markets should in all probability turn toward deflation. The second doesn't explicitly say that here but it's been stated in earlier posts.

In another development, the S&P 500 has just moved under 1310 as I have been typing this. If it can get under there and stay under, the stock market is indicating that deflation is winning out in my opinion.

Clearly, the central bankers have stated they intend to inflate the debt away, but Mr. Market, by the rally in US 30-Year bond, is suggesting that deflation is still in the wind, and that the better option is for the U.S. and Europe to implement austerity and clean up their fiscal houses and manage their budgets, as required of the citizens of the globe. Those that bought bad debt should suffer the consequences and take haircuts. The U.S. long bond is the single biggest force on the planet that will determine the outcome of inflation or deflation. U.S. deficits can be fixed if U.S. leadership has the guts to do it. It won’t be easy. If the U.S. long bond keeps rallying in price, those betting on global inflation better have a plan B. One way or another, Mr. Market is very close to playing his hand.

I think it's important to recognize that Germany will be a major player (and in my view a very positive force) in determining the fate of the global economy. Note that he says the long bond is the most important determinant of inflation/deflation whereas I stated it is the US dollar, followed by the long bond. I'll need to think about that more.

http://www.xtrenders.com/2011/02/life-time-setups.html#

Note the use of the term "generational".

[Higgenbotham]

It shows the ridiculousness of what our monetary system has become and what the Fed mandate has become, especially given the crisis period we seem to entering into. I don't know how the citizenry and their representatives can possibly understand this mess well enough to sort it out.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

As far as really understanding hyperinflation, that 1 in a million may not be much of an exaggeration. The citizenry and their representatives don't understand hyperinflation well enough to prevent it.

That's certainly an interesting connection you've made and I'm not familiar enough with Keynes to have seen that connection. Let's try to go a couple layers deeper. Lenin was in a relatively well isolated environment. The 1917 revolution took the rest of the world by surprise. As close as Europe was, they were occupied with other things and few saw it coming. While I'm not a historian, that's my best recollection. Others can elaborate if necessary.

By contrast, the entire world is focused on Bernanke and the fate of the US dollar. The Chinese have a huge stake in the outcome and they are not powerless and clueless like the citizenry of an isolated country. They have hacked into US government computers and stolen data and are probably mining Internet sites for information on a constant basis, maybe even including this site. Also, it was reported very recently that the stock exchange computers have been hacked. Other foreign governments also have huge stakes and are not powerless and clueless either. So one highly relevant question could be: What do the Chinese (and other countries) want - do they want the dollar to hyperinflate now?, and a second could be: Can they get what they want? Related to that: Who (if anyone) was responsible for the flash crash? And if someone was responsible, why did they do it?

http://www.navytimes.com/news/2011/02/i ... ks-021611/

[at99sy]

Realistically, I think to be honest about this we have to expect the US, or at least wide swaths of it (especially the southern half) to fall into a condition of semi-anarchy. Most likely there will be a condition of persistent, widespread low-level conflict over diminishing resources. I think we can suspect that existing social infrastructure won't be able or willing to handle this at all. Outside of the occasional brutal crackdown with troops or contractors, and round-ups by FEMA, I don't think we can expect much help.

One need no look to far to the past (Hurricane Katrina-New Orleans) to see how quickly society can become totally non-functioning. With the vast numbers of
plebeians on the government payroll, all it takes is a slow down or a failure to deliver those checks for a week or two, coupled with a disaster of some sort and all
hell breaks loose. The smart people haul ass as fast as they can. The rest wait around for someone to come rescue/help them (handouts). Once the inevitability of the situation dawns on them, then they start hunting each other. I'm not sure an island is the best place to be but a rural location with lots of good working class people wit plenty of resources and the means to protect it and acquire more should do the trick.

A question for the more knowing posters here. What is preventing the SEC and the government at large from banning the speculative trading in oil? It seems to me that if a trader is required to take delivery that would solve the problems of irrational trading. Or tax the capital gains on speculative trading on strategic commodities at a ridiculous level say 95%. If the administration can force every American citizen to buy health insurance for the god of the country, why can't they do something that would actually benefit the country? I know the answers to these questions, I would just like to hear from others and their opinions.

I think we're toast, it's just a matter of time. I read the other day that Americans are currently paying off credit cards much slower than in the past 12-24 months. Ideas on the reasons ranged from people giving up, hoarding cash, preparing to max them out when the SHTF with no intention of paying it back later.

My brother just moved to AZ. he said the Wally world in Kingman is selling cases of all types of ammo from pallets set up in the aisles, and they have a 20' long aisle shelf stacked with survival rations and long term storage food stuffs. He said he has never seen anything like it and he was a "survivalist" in the late 70's.
Seems like we've come back to Jimmy Carter, a really really BAD version of Groundhog Day.

sy