Sure, I have some dollars. I have just what I need to pay my bills for the next few months. But not in my savings. Not in my portfolio. I just gotta wonder how confident these deflationists really are, that they have gone to 100% cash. 100% TOILET PAPER! Or are they just trying to conjure up some confidence through repetition? I suppose if you say it enough, it must be true! But I'll tell you, it sure feels good to know I'm holding real physical gold right now, not some silly piece of paper. Or worse, some quack's digital book entry that says I'm entitled to some silly paper!
What exactly is a dollar? And what value does it hold?
Of course a dollar holds the momentary value that producers and hoarders of real goods and services are willing to surrender for silly paper at any given point in time. The key is that value is determined by producers and hoarders of real stuff (not by printers and hoarders of paper stuff), and that their opinion of paper changes its value over time.
During the credit expansion phase of the system there are opposing forces that magically manage the value of a dollar. The first force is that credit creates many new plastic digits that bid on the same stock of real goods and services, putting upward pressure on prices. The second force is that the credit expansion process creates a paper Ponzi profit pyramid which lures producers and hoarders of real stuff into the paper world, putting upward pressure on paper. These opposing forces keep common prices in check. Another see-saw balancing act that makes price and value appear stable when it is most certainly not.
Then in the next phase, as the paper Ponzi profit pyramid pops, we see these forces play out in reverse! A flight from Ponzi paper and at the same time a disappearance of plastic phantom digits bidding on real stuff. More price and value stability! Well I'll be...
This economics thing can sure be confusing! By the way, please review my April post, The Judgment of Value to see who exactly sets the value of a dollar. It is this "judge" who is currently and temporarily dazed by these confusing forces!
What formerly made this "judge" want our worthless paper (the paper Ponzi profit pyramid) is no longer functioning properly. Yet he is still accepting our paper at the same previous rate. At least he is for the time being, probably because we are shoveling into his wheelbarrow a little slower now. But what is he going to do with all this paper now that it is paying 0% interest, and now that the paper Ponzi profit pyramid seems to have morphed into a black hole space vacuum monster?
It is true that we did hit him upside the head pretty hard with our shovel last September. And he may still be dazed and confused from the blow. Or maybe he is only pretending to be as he plans his escape.
About these "value judges", from The Judgement of Value:
The mechanism by which they pass this judgement [on our dollar] is an enormously complex concept. Our government tells us this concept is called "inflation" (or "deflation"). They tell us that these people of great control either "inflate" prices or "deflate" them. But in reality, these people are simply trying to balance the goods they can receive in the future against what they are willing to part with in the present. To do this, they weigh what they have in stock against what they need and want. And they pay close attention to the cost of those other things as well as the availability and time horizon for acquiring them.
So these "judges", these price-makers and value-setters are actually looking at the dollar's "store of value" function. And they are analyzing it relative to their own time horizon for purchases. Presently they cannot count on interest or the paper Ponzi profit pyramid to protect their paper holdings over time. They can only look at their own FUTURE JUDGEMENT as it pertains to and creates either future inflation or future deflation. They must judge the present based on a guess at their own FUTURE JUDGEMENT!
The problem right now is that these "value judges" are seeing the trend AGAINST future goods being offered in exchange for US dollars. Sure, the US will always offer its exports in exchange for dollars. But the main export of the US is paper Ponzi pyramids, which have fallen out of fashion. It is the rest of the world's "real stuff" exports being PRICED EXCLUSIVELY IN DOLLARS that gives this paper any value over time. And on this front, the future looks grim.
Of course we are now talking about the "medium of exchange" function of the dollar. And while this function will continue INSIDE the US, the only thing that matters to our "value judges" is if it will continue OUTSIDE the US. And remember, the dollar, like a drunken sailor, has sowed its seeds far and wide! But it is not the holders of those global dollars that determines their value, it is the holders of the real stuff they buy!
Of course, over time some of these producers have also become hoarders of US dollars in the form of Treasury debt! These dollar stockpiles are now stored in the central banks and sovereign wealth funds of some powerful judges. And based on this knowledge, we silly Americans tend to think, A-HA, we've got them! They are caught in our paper trap! They are in a Catch-22! They HAVE to keep shipping us their real stuff in exchange for our worthless paper! But do they? Is there really no escape from this "trap"?
There is no way these powerful judges could ever sell or unload all of those dollars they hold as US debt. But remember, it is held by their central banks, not private interests. So, the CB's would not be looking to "spend" these reserves in the usual way. They obtained them as their local economy generated excess sales to the US (for them a trade surplus) and their private citizens wanted to hold local currency assets, not dollars. So the CB's printed local currency and traded it with their citizens for these excess dollars. Then they traded the dollars for US debt so as to earn interest.
Now, exactly what good are these debt holdings as long as their country continues to run a trade surplus? Not much if the locals don't want to hold dollar Ponzi pyramids. In the end, if the CB's were to sell these Treasury holdings it would crater the US debt markets long before any real value was obtained. And, to further their problem, the real value could only come after spending the dollars to buy something real. Now what does a CB spend its reserves on, cars, TVs, other currencies?
No, the way CB's balance paper currency Ponzi value risk is through the age old asset of gold. Indeed, if a CB already has enough gold, all it needs to do to secure its net value is to use the medium in jeopardy, the dollar, to bid on its counterbalancing asset, gold. Then as dollar assets crash, gold rises in value to fill any void left by the dollars... and then some!
CB's deal in paper and gold. When the value of one starts to fail, they transfer that value to the other. This is what they do.
They certainly aren't done yet. But they have definitely started.
Central banks turn net buyers of gold in second quarter of 2009: WGC
19 Aug 2009, 1905 hrs IST, Devangi Joshi, ET Bureau
Another interesting development during the quarter was that Central banks were net buyers for the first time since at least 2000. They bought 14 tonnes of gold, more than what they sold.
And it appears that some judges have already ruled.
The Times of India
China world's 5th largest gold holder
Saibal Dasgupta, TNN 25 April 2009
BEIJING: Large scale hoarding of gold by China may have been partly responsible for the near tripling in prices of the yellow metal in the past six years. Figures released by the country’s State Administration of Foreign Exchange shows Beijing boosted its gold reserves by 76% since 2003 to become the 5th largest holder of gold in the world.
And others are taking notice.
Oil pulls Saudi economy down
By Vidya Diwakar, Staff Reporter
Published: August 19, 2009
"I think that eventually we are going to need to run an exchange rate more independent from the one fixed to the dollar, but this should best wait until there is a GCC currency," Dalton Garis, an Associate Professor of Economics and Market Behavior at The Petroleum Institute in Abu Dhabi, told Gulf News.
The dollar repudiation has begun!
China to Boost Yuan Swaps, Payments on Dollar Concern
By Bob Chen and Judy Chen
April 2 (Bloomberg) -- China’s leaders, increasingly concerned about the nation’s $740 billion of U.S. Treasuries, are making it easier for trading partners and consumers to do business in yuan.
The People’s Bank of China has agreed to provide 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency- swaps. More such arrangements are being planned so importers can avoid paying for Chinese goods with dollars, the central bank said. In Hong Kong, which has pegged the currency to its U.S. counterpart since 1983, stores from Park’n Shop supermarkets to jewelers accept yuan.
And the endgame may be sprung at any time.
How China Will Handle the Yuan
Aug 28, 2009
Lance Lewis: You notice the extra chunky volume in the Chinese Yuan ETF (CYB) yesterday at the same time that the dollar reversed violently?
Ryan Krueger: I do now. And the cash markets in beans are way above the futes even with this ramp job. Hmmm...
Lance: I’m telling ya. Something is up with China and the yuan. It would explain a lot. What if it were close to revaluing against the dollar?
Lance: Exactly! That’s my point. It’s the only thing that fits. If so, the dollar would get smoked, literally, “overnight” and gold would explode. Bonds would probably get crushed, too.
So what happens when a currency is repudiated by the world?
Let's take a look at what happened in Iceland ten months ago. Practically overnight the Krona lost more than half of its purchasing power. Luckily the Krona was a small fish in a big pond and a number of bigger fish came to its rescue including Germany, the Netherlands, the UK, Norway, Sweden, Finland, Denmark, Poland, Russia and the IMF. These big fish put a bottom under the Krona waterfall, but for the local Icelandic population, the damage was already done.
Call it a currency collapse, a hyperinflation, a devaluation or a repudiation; call it whatever you want. But the cost of everything people use and need in Iceland doubled or tripled in one month. And at the same time, the things they counted on as a store of value, the banks, real estate and the local financial industry collapsed. Hit from both sides! A brutal double whammy!
You see, in Iceland almost everything produced is an export, and almost everything needed is an import. And imports and exports are the hardest hit in local hyperinflations.
Local hyperinflations primarily affect imports and any domestic product that can be exported. In other words, if it can be sold somewhere else for better money then it EXPLODES in price. But locally produced and consumed products and services become quite cheap in real terms. And by real terms, I mean for those who have some gold! This includes real estate, which is difficult to import or export!
But who is going to come to the rescue of the biggest fish of all? Who is going to bail out the dollar and put in a bottom? The aliens? I have a sneaking suspicion that the dollar's collapse will be a little different (read: worse) than past recorded events. It will certainly be a sight to behold. Just think about it; Where will you be, what will you be doing, how will you react, and how will you be feeling when it starts? Gold delivers a LOT of peace of mind in this regard!
Where is your nest egg tonight? Is your portfolio all "in cash" right now, ready for the deflation? How nimble are you? Are you fast enough to swim up a waterfall?