Antal Fekete: Dress rehearsal for the last contango

Final paragraphs (as a spoiler):

Interesting? I do own some precious metals and I feel all this same anxiety the rest of us do but I am always wary of the articles like this written by folks with a vested interest in our purchasing their particular product. I do anticipate that we are circling the bowl and we have been blessed/cursed to live in these interesting times... Keep your eyes peeled as we have apparently put the resession behind us now and I suspect that this will mean something worse right around the corner...

Prepper

An interesting read, thank you for posting it.  I believe that he is correct to an extent.  I believe that the US dollar is going to become worth less as time goes on.  He believes that at some point it will not be possible to buy gold with it (I read this as him believing it will have no value at all).  I do not disagree with this portion of his statement.  What I think he is ignoring is the US government does have access to value.  Not as an institution in it's self, but as a holder of natural resources and land.  How or what it will choose to value the new currency will depend on what value the government can keep (from the states?, from private individuals?, from foreign countries?) others from taking.

In my opinion, I believe the government backing of the dollar will stop in time.  It will be the easiest way for the government to regain control of their unmanageable debt situation.  I believe some "trade in" value will be allowed for dollars in US citizens possession, and they will be able to exchange dollars for whatever new currency the Govt. produces.  A side benefit to the government of course is they will know exactly how much everyone has.  Foreign investors and governments will not receive much if any value (after all, they don't vote in US elections).  There will be talk of the foreign "swindlers" harming the dollar, or some other foolishness, as a result and most of the US citizens will support this - You don't think so, look at who won the last election after making impossible, illogical  promises.  They will support it because they want to believe it.  They want to believe it because it is less painful to do this than to blame them selves for the government they elected.  Also, because they are lazy and stupid.

This again in my opinion, will lead to a trade war of which we have never seen the like.  I do not believe that other governments will take open violent action against the US initially, but they will openly support our opponents such as terrorists.  Later, after we are weakened will come the threats of open violence.

And we (as a country) will deserve it.

Edited to say, I hope I am wrong, because that sure sounds depressing.

I thought that the gold that was collected by FDR, & was/is stored in Ft Knox, was being held by as collateral for our debtors by the fed?  How could this be if all gold is hoarded by privated entities & unavailable at any price?

Foreign gold is stored in NYC.  Even the Soviet Union trusted us to store gold for them... not that we'd have agreed to give the pile up for transfer anywhere in general, mind you, as our policy on that has been "no" for ages.  When nations transfer gold, sometimes it is simply a matter of dudes shuffling ingots from one cage to another in NYC.

OUR gold is in Fort Knox.  Or, rather, a lot of our gold WAS in Fort Knox.  Gov't leases it to, say, Goldman Sachs...   GS sells that gold, but we still "have" gold on paper as GS is obligated to return that amount of gold at some point.  Our gov't swaps gold with another nation (any number of reasons to do this), so they get our gold on paper, and we get their physical gold, even if we (the US) don't actually take delivery of it.  Gov't leases it to GS again...  GS sells that too..  now everyone only has gold on paper.  x1000.  Now there is far, far more gold on paper than actually exists.

Hold that thought.

Now, on another front, at COMEX, we find more claims for serialized gold bars then there actually are... serialized gold bars.  COMEX cannot deliver all gold bars that people have claim to within its vaults.

Hold that thought as well.

On the market for gold, for a while now people have been able to trade "gold backed securities" - paper, claiming that some guy somewhere has gold (or more likely, saw it once, or heard of it, or likes pie.  or whatever) - in leiu of actual gold on the general market.  But... it turns out these issuing companies don't actually have all the gold to back all these things.

Same deal... hold that thought...

Now look at Barrick; gold hedge fund.  They've essentially been called out, and are now in the position of actually having to scrabble up a zillion tons of actual gold, not just a ledger "saying so".  IIRC, the Chinese had something to do with that shennanigan.

So....  Look at all those things.  Now tell me, what happens when the music stops?  China must have a pretty good idea, seeing the VAST quantity of physical gold that they are demanding actual, no-shit delivery of.  The more astute readers will note that all but the last thing I noted above - and the most recent - has served to depress gold prices since long before I was even born.  We're probably going to see a pretty drastic reversal of that.

....the Clive Report................


www.clivemaund.com
September 24th, 2009

The general public, who never understood the global financial crisis in the first place, have been hoodwinked into thinking it’s over. It’s not. None of the underlying structural abnormalities, distortions and excesses within the global financial system have been addressed and rectified, because to do so in a meaningful way would involve allowing a constructive depression to purge the system of dross and parasitic elements (like much of government itself) in what would amount to a teardown and rebuild. Instead, the same crew who got us into this mess are still in charge, and their “solution” to the global financial crisis has been even more extravagant helpings of what created the mess in the first place - namely money and credit creation. This shameless procrastination has not and will not fix anything - all it has done is postpone the day of reckoning and guaranteed an even worse crisis later.

Recession, depression and deflation have their rightful place in the scheme of things, which is to straighten the system out after a prolonged period of profligacy. The willful obstruction of these forces is ultimately counterproductive and futile. Almost all of you will be aware of the longstanding inflation versus deflation arguments, which still rage. What happened last year is that the deflationary forces that had built up to explosive proportions suddenly burst into the open. However, instead of allowing these cleansing forces to do their grim work, The US Fed and government and then Central Banks worldwide decided to beat them back with a massive inflationary frontal assault of money and credit creation. There should by rights have been many more bloated carcasses like Lehman Brothers floating down the river, but instead we have the legacy of an army of zombie corporations, hopelessly corrupt and mismanaged, lurching towards us like the figures in the The Night of the Living Dead. The same rotten management with their crony connections in government, the same leeching off shareholders and the public purse, and the same soaking of gullible foreigners with share and bond issues. However, there is a limit to everything, and as made clear by Karl Denninger in his recent article “WARNING: Deflationary Collapse Dead Ahead“, the US debt is continuing to accelerate into the stratosphere, racing way ahead of GDP so that it is effectively unserviceable already. Any significant increase in interest rates would make it blatantly obvious that it is unserviceable and lead to default - this is why interest rates have been held at such an artificially low level for so long, but this itself is creating massive problems. For a start it is undermining the dollar which is threatened with collapse, and extremely low rates and inflation of the money supply are also encouraging another carry trade boom in commodities and other assets. Another big danger is that the US can no longer count on dull-witted foreigners to keep buying increasingly large tranches of Treasuries to keep the party going. Foreigners are slowly wising up and refusing to fall for it, which means that in order to meet its funding requirements the US Fed and government are having to buy their own garbage, which is of course hugely inflationary. So what we have is a bizarre stagflationary situation, where an attempt is being made to beat back massive deflationary forces by means of further money and credit creation. This continues to ramp up the national debt to astronomic levels requiring a continuance of zero interest rates to avoid default. The zero interest rates and continued expansion of the money supply threaten to destroy the dollar, but if rates are raised significantly default will rapidly ensue. This is a classic Catch 22 situation and it is quite clear that the United States is on its way to becoming a third world country. If default occurs and the banks in the US close their doors things could get ugly really fast, with the prospect of 100 million people with guns going on the rampage looking for food and essentials - and someone to blame. Martial Law and a curfew with a “shoot to kill” policy would have to be declared instantly - fortunately this has been catered for by the provisions of the Patriot Acts.

There is however one escape route that might enable the US to avoid the indignity of ending up like Zimbabwe, and that is for it to “surrender” to its creditors and submit to being economically carved up by them. In effect sovereignty would be lost, but face-saving measures might be permitted such as allowing the inhabitants to continue to celebrate Independence Day, and to fantasize that the Constitution of the US still applies and to plaster flags everywhere, provided that the "Made in China" reference in the corner of the flag is clear to see. On the plus side the paranoid nonsense at airports will probably be curbed and meals may even be reintroduced on flights, with curries and sushi as an option. The creditors will call the shots and the US military machine will be neutered, so that there will be no more military adventures on the other side of the planet to secure geopolitical objectives. US military bases will all be closed down or maybe refurbished as schools. Israel could find itself with a sudden severe funding crisis. Major US corporations will effectively be run by foreigners who will restructure them as they see fit - which could be good news for US waistlines as workers start their day with Tai Chi and a session on the treadmill. Large tracts of Real Estate and other assets will be taken over in lieu of debt repayment. The Hamptons may be largely peopled by Asian entrepreneurs. There will be work for Americans in their own country, however, with plenty of vacancies bagging groceries and stacking shelves in supermarkets at decidedly modest rates of pay and plenty of other service opportunities for their new masters such as gardening and window cleaning. “Green cards” may even be permitted for the lucky few - not to enter the country but to leave.

Since those in control of the US have demonstrated their unwillingness to allow recessionary forces to do their necessary work of correcting the extreme imbalances within the economy, there are only two options left - default and deflationary implosion - ruin, or a comprehensive takeover of the country by its creditors, both of which options probably occurring after a period of runaway inflation as the Fed and government desperately try to stop the inevitable. If the former occurs the shockwaves will reverberate around the world, like last year, and we can expect a collapse in commodity and stock markets. Until that happens it will be case of inflate and inflate, to forestall rising rates and liquidity problems, which will make gold and silver probably the best investments around, but you sure don’t want to be around once the music stops. It is therefore to be hoped for the common good that the US authorities make the right decision and surrender to the mercy of their creditors before it’s too late. Either way the American Empire is finished.

Clive Maund

I thought it was Fandango

Why?

Despite the obvious sell off of our manufacturing, we still make a lot of stuff here. We have surplus food production and could probably get by on our own energy production if we stopped idling SUV's in the fast food drive thru.

We have the foreign made TV's, cars, etc. and they have a piece of paper saying we own them. So what? Who is in the power position? We got the stuff!

The US Navy is a huge factor in keeping international trade flowing around the world. Maybe we should pull out or charge for our services and see who-owes-who.

I don't think any country is going to try to collect by force any time soon.

As much as I respect KD, he and this fellow Clive are failing to put the whole can of worms in perspective.

There are a lot more factors at play than a few Trillion $$$ of US debt.

Instead, think the entire USA Republic and its Constitution.

Ever increasing control of the USA , its government, and all its Sheeple is the PRIZE that KD and most of the others are too distracted to see.

The Trillions, debt, and default  are just distractions and mostly irrelevant.

And I don't see many catching on anytime soon.

Sheeplez, yumz...

Time for our fav TV horsecrap...

Boltcatch,
so basically the way that fractional reserve banking and the whole system creates  ca 100x as much dollars as there really is cash in the system, the various gold exchanges have done something analogous w/ gold & gold notes.  

in a way, these notes were sort of taking the role of traditional money, money that represents some real wealth, but the money changers basically pulled the same scheme that they did w/ money, w/ the only difference being that there is a small germ of real wealth still in the center of the gold market.  

And you are saying that the notes & bars are supposed to be in a serialized pair but there are still more notes than bars?  Thats messed up.

Anyway, you are saying that the chineese are demanding real delivery of actual gold to them and that if it becomes apparent to others that there is not enough gold to meet the obligations there will be a "run on bank" so to speak which will have significant reverberations through the economy.  Most notably, the realization that gold is not available for any amount of dollars will destroy confidence in the dollar & cause people to race to dump there dollars (T bills) on the open market in a positive feedback cycle.

Wouldn't that be inflationary, too many dollars chasing too few goods.  

But then if the banking system collapses & deleveraging occurs & the flow of money through the economy stops & economic production grinds to a halt that would be deflationary.  Of course more than that, it would be deflationary...

How Can you monetize debt w/ a central banking system?

If a government is directly responsible for creating money, it could just "run the printing presses" so to speak so it can pay off its debt on the cheap w/ inflated dollars.  But w/ our central bank scheme, increases in the money supply are made as loans, not as pure no-strings-attached fiat money, which has to be paid back to someone at interest.  So how could we ever monetize our way out of the debt when we would have to be putting ourself in debt in the process of creating the money???

It is my understanding, that besides the mechanism of fractional reserve banking, liquidity is created when the Fed facillitates the sale of T-Notes/Bonds/Bills to investors, which could be private or public entities in US or abroad.  This is to whom we owe the national debt.  So how can we just make more money to make inflation to monetize the debt w/o an "investor" from whom to borrow?  

I have heard the Fed is the "lender of last resort" and that they can & have been buying treasuries of late, but there we would be indebted to the Fed instead of whoever else, so what is the difference?


Ultimately, isn't the national debt just a ponzi scheme where older lenders are paid back w/ the money of new lenders forever requiring an ever increasing base of borrowers, similar to social security etc.  But there aren't any new borrowers lining up.  Ultimately, no ponzi scheme is sustainable.  Even if it theoretically could be, circumstances are sometimes chaotic & deviate from the model from time to time to interrupt the scheme.

Agree this fantasy that countries are going to split up the country when they ask for repayment is B.S. The Chinese are worried that we will destroy our currency then they will be stuck holding 2 trillion dollars that might buy a loaf of bread.  When we pay back the Chinese we will print whatever we owe them.

So besides my last reply,
lets assume we can monetize the debt in a way to get out from under it.  Here the holders of TNotes, mostly other countries, will be loosing there ass and will not be happy.  

To get back at us, they could dump their dollars & cause inflation, enact trade wars, act against us through proxies or even directly in a military fashion.

What that Clive guy in that posted article is saying is that they will want us to give them some real goods in exchange for their crappy T-Notes, like for example federal land holdings out west?  If we don't give something real to them then they will let us collapse into social chaos as caused by either deflation or hyper inflation.  

As long as there isn't something to cause a banking system collapse, there would be hyper inflation as the gov "monetizes the debt" and then we are like wienmar germany w/ all those social calamaties.

Or, if there was banking system collappse & de-leveraging then we would be in a delationary deppression similar to the 30's where cash is king and all those social calamities.  

you can either:
-pay the debt w/ money that is worth something or w/ some form of real wealth
-monetize the debt (at least if the gov issues currency directly by fiat)
-repudiate the debt like russia did in 1918
-default

When you default on a mortgage, you loose the hose that was collateral.  What is the collateral of the national debt???  Is there one?