Reader Thoughts On "A Tale Of Two Metrics" By JC Collins
George Harry Walkeär I’m still trying to figure out whether the partially Gold backed SDR will not raise the value of Gold in the retail world, because the wholesale amounts sold behind the scenes (in tonnes) between banks is not at the same price as the retail price us plebs pay out here. Which would mean i’m lost for knowing where to hedge is such an environment.
Ozymandias 3 Will ‘QE’ by the FR ever really come to an end before the $USD totally collapses? I strong believe is, NO!
Bullion Baron (@BullionBaron) You drive a compelling narrative JC Collins. But not sure I agree with your implication that Gold & Silver are being driven explicitly by the money creation process (and so will be driven lower as deflation sets in). You wrote:
“QE, through the liquidity swap described above, has reduced the regular money supply which is why gold and silver have been coming down for the last few years.
This is also why interest rates have been kept low. The central banks have been holding back rampant deflation by doing so.”
How I see it, precious metals rose over late 2008 to late 2011 due to financial instability and the perception that central banks had lost control and we’d see financial catastrophe.
That perception changed over several years as QE settled markets, partially offset debt deleveraging in the private sector and gave the impression of all powerful central banks guiding the markets and economy.
So while precious metals might still face a short term spike down with other assets in a deflationary spin, I’d expect the instability that causes to ultimately send them much higher.
JC Collins PMs have been going down because there’s been no money creation. QE is not the traditional money creation as it doesn’t end up in the money supply. And I do agree that PMs will increase again, along with the money supply.
Bullion Baron (@BullionBaron) Precious metal prices are driven by the exchange of contracts in markets such as the Comex, so are at the whim of a price where buyers and sellers meet. Money supply may be an influencing factor, but I don’t see it as having the direct relationship that you suggest.
I would liken it to credit availability in the property market. Easy lending may be available and is an enabler of higher property prices, but that doesn’t mean that there aren’t other narratives or factors that drive the short term prices of property.
Having the credit available doesn’t imply house prices will immediately adjust to a specific price level, likewise the size of the money supply doesn’t imply precious metals will automatically rise or fall based on it’s availability.
If the price of precious metals was as easy to predict as you suggest, based on the money supply, then it shouldn’t be hard to put a chart up which shows the direct relationship.
JC Collins It isn’t my position that money supply is the only determining factor. I’ve used the example because, as you stated, there is a relationship there or influencing factor.
The reality is that with a decrease in the money supply there will be less money to invest in PM’s. Values decrease in times of broad deflation. Analysts promoting increases in PM’s haven’t been correct in years. Why is that? Perhaps its because they have the fundamentals wrong.
We can debate the validity of metrics forever, which I won’t, but in this debate so far this year I’ve been correct. I said PM values would continue to go down and they have.
And your scenario of “easing lending” does not apply to my example of a deflationary period. When the money supply is expanding money is flowing everywhere and there’s all sorts of doorways and injection points. But in a deflation period everyone is running for the same doorway.
Those are two profoundly different situations. The world has been ruled for centuries by the simple acts of expanding and contracting the money supply, while the disorganized masses blindly argue about useless metrics. Ah, the complexity of ignorance. And yet it is the simplicity which we cannot see.
Bullion Baron (@BullionBaron) “Analysts promoting increases in PM’s haven’t been correct in years. Why is that?”
Because they’ve expected QE to drive prices, when rather it’s been a narrative of central bank control/lack of control (& instability) which has been the driver, evidenced by lower a VIX over the last few years. I see money supply as an enabler of higher or lower prices, not the driver.
Deflation has the potential to increase instability and increase the perception that central bankers will lose control, so expect that the price may rise as a result.
Cramley Hyperinflation is not the expansion of the money supply. It’s when the time axis of the currency/bond unit collapses to zero. HI is not a lot of inflation or expansion of the money supply. It occurs when systemic debt fails to perform.
If banks made loans using money parked as XS reserves it would lead to inflation if the marginal utility of debt is greater than zero. Not HI. Hyperinflation is when nobody wants to be a creditor.
” As standard metrics, higher interest rates lead to inflation and a depreciation of currency. Lower interest rates lead to deflation and an increase in the value of currency.”
It’s more complicated than just interest rates. The rate of change in the general price level or CPI figures into it. Also the state of the debt market. If the debt reservoir is half empty then a high positive real rate may strengthen a currency/bond market.
If the debt reservoir is soaked as a sponge then a real positive rate may be trapped within the Schwarzschild radius even as rates rise.
You see the money in bonds will be leaving the financial plane for store of value in the physical plane. Even a 30% yield might not be enough to overcome price inflation as money/bonds loses the ability to function as a SoV.
Lack of confidence…Deflation…is what makes gold fly. Not inflation of monetary aggregates. Money supply only matters to gold at the onset of a new monetary regime.
After that as monetary aggs inflate it’s the Oklahoma Land Rush as liquidity rushes up Exter’s Inverse Liquidity Pyramid leaving gold strictly as an underperforming asset functioning only as systemic insurance.
Gold and silver went down the last 3 years b/c QE allowed banks to levitate the stock and junk bond markets. QE inflation went into yielding assets.
Watch what happens when real serious deleveraging begins with QE gone. Gold will go up, not down. It will be a rush for the most liquid assets and highest quality collateral.
If the new SDR is successful in supply liquidity then gold would actually not go up in real terms. But not to worry gold fans. That won’t happen because we are debt saturated.
No matter how much they try to push SDR credit down our throats the real productive economy won’t want it. It wants to delever, pay down debt, heal its balance sheet.
Even if they roll all this sovereign debt into SDR bonds, guess what? The real rate on those bonds will be negative. And if that is the case guess what asset in the SDR allocation will have to go up to compensate?
JC Collins Reference my response to Bullion Baron, especially the part about the complexity of ignorance. The pictures showing wheel barrels full of money and money being swept into gutters would strongly suggest that an expansion of the money supply directly contributes to hyperinflation. Sure, you can dress it up, but its still fundamentally an expansion of the money supply.
Cramley The increase in money during a HI is not a cause, it’s a symptom. The pathology is in the breakdown of the debt/credit markets. Monetary aggs collapse to MZM. There are no time deposits.
If you look at the collapse of the higher order monetary aggs during a HI you can see that HI is actually a deflationary event. Debt deflation.
JC Collins From Wikipedia: “Hyperinflations are usually caused by large persistent government deficits financed primarily by money creation (rather than taxation or borrowing).”
“There are a number of theories on the causes of high and/or hyper inflation. But nearly all hyperinflations have been caused by government budget deficits financed by money creation.
After an analysis of 29 hyperinflations (following Cagan’s definition) Bernholz concludes that at least 25 of them have been caused in this way.”
“The price increases that result from the rapid money creation creates a vicious circle, requiring ever growing amounts of new money creation to fund government deficits.
Hence both monetary inflation and price inflation proceed at a rapid pace. Such rapidly increasing prices cause widespread unwillingness of the local population to hold the local currency as it rapidly loses its buying power.
Instead they quickly spend any money they receive, which increases the velocity of money flow; this in turn causes further acceleration in prices.”
It certainly appears that money supply has everything to do with hyperinflation. We’re dealing with the complexity of ignorance again. Keep it simply friend.
JC Collins You said: “The increase in money during a HI is not a cause, it’s a symptom.”
This would imply that hyperinflation could happen without an increase in the money supply. I seriously doubt that.
Gustavsaure “The big question for Americans to ask is what will happen to the Federal Reserve when another institution exchanges the low liquidity assets on their books for SDR bonds?”
A massive devaluation for the US dollar as the it is devalued against SDR, perhaps even a loss of confidence in the currency, who knows, as SDR will be the currency in which commodities are priced. So in the end QE will cause hyperinflation. How is this avoided?
JC Collins Personally I wouldn’t consider a 50% devaluation in the dollar to be hyperinflation, more of a correction. At least I certainly hope its not more than that. Some adjustments have already been made.
Gustavsaure I don’t know how to come up with a percentage, but if the 50% correction in the USD from 1976 to 1980 was any measure, it took 20% interest rates and petrodollar recycling to stop it. What kind of interest rate do you think it will take this time when the USD is just another currency?
JC Collins There will be less stress on the dollar when its just another currency. I’d hate to speculate on where interest rates go between now and 2018. Perhaps a top of 10%, but could linger around 6%. But I’m just guessing friend.
Macdundas Love your work Mr Collins. In a just world, you would be classified as an international treasure.
matt (@speedspirit42) Could you clear up a bit of confusion on weather the ending of QE, impending deflation, the eventual raising of taxes which would cause less revenue generated in a shrinking economy will effect SDRs’s being seen as a rescue and not a death sentence.
Martin Armstrong recent post shortened.The International Monetary Fund has been forced to change the calculation of its most important interest rate after aggressive monetary easing around the world threatened to turn it negative.
Late on Friday, the IMF said it is introducing a floor of 0.05 percent for the interest rate on Special Drawing Rights. The IMF’s move illustrates the fear of DEFLATION
After staying positive throughout the financial crisis, that SDR basket has NOW threatened to turn negative in recent weeks, as both the euro and yen rates have fallen below zero.
The SDR rate is what the IMF pays to its lending nations for the use of their funds. It then adds a margin to calculate the rate on its loans to Greece and other countries.
The change will ensure lenders get a small positive return and fractionally raise costs to borrowers while setting in motion its own demise as capital eventually is needed as tax revenue declines. Could you explain this please, Thanks.
JC Collins I see the IMF rate of 0.05% as necessary scripting to make cause for an SDR peg. The low and zero rates of the Funds members, specifically the ones which make up the SDR basket composition, are dragging down the rate of the SDR itself.
The solution will be to have the SDR as the peg and not the US dollar, or other reserve currencies. Everything else is just window dressing. Does that help Matt?
Beth Newman So the SDR are just some more words for “nothing left to lose…?
JC Collins The past and current financial problems have been specifically engineered to facilitate the implementation of the SDR.
Mark Schoenfelt JC, I have a humble request… would it be possible for you to draw a possible timeline as you perceive the transition to the SDR to play out?
I’ve read all your posts but I have trouble figuring out the order of these events taking place. As a visual learner I know that this would help me and others understand your thought process… Thank you for all you do.
JC Collins Mark, I’ve actually been thinking about that. Give me a bit and I’ll see what I can do.
Toknowyourenemy I must say, thank you – your tighter writing style of recent will only win you more readers and lively discussion. Keep up the great work.
matt (@speedspirit42) Yes. Now about Hyperinflation, This occurs when no one will lend to a nation primarily a insignificant secondary nation but a major reserve currency nation like the US this is not the case.
World debt is $158 Trillion and US debt is only $17 Trillion (only, lol) which for Institutions is still the only game in town to park money. Also Hyperinflation means those in Government would do the right thing and admit mistakes and default, that will never happen.
As Europe and Japan implode, capital rushes from one currency to the next and that pushes the dollar higher. As the dollar soars, currency wars and trade wars will follow.
The rise in the dollar will reverse the trend on the debt and it will appreciate in “real terms”.
Greece cracked because the Euro rose from 80 cents to $1.60 so the past debt was NOT being paid back with cheaper currency, but DOUBLED in value.
This is what a dollar rise will do to the US national debt and that will add even more pressure to raise taxes. Yes or no?
Roger Parness To give control of the US currency and ultimately the US economy to a BIS ruled privately owned central bank is treason.
JC Collins Roger, they already control it.
Roger Parness Yes unfortunately I know, started in 1913 or earlier. A reminder of the greed, treason and inherent evil that informs this whole system of pernicious usury. Free men must not forget the simple original truth.
Perhaps the absolute banning of usury by Sharia law is the reason for the war on Islam.
Jack Jackson (@hugovictor54) Dear J.C. Where in the hell did you get the new art work? Are you fixin’ to lower the boom on us? Look J.C. I love you like a brother. You are forwarding my agenda. Are you sure about the deflationary collapse thing? As it fits into your view of reality? Pdog
JC Collins Jack, the art work is a painting by Fransisco Goya. I put it up as the banner for Halloween only. The ape congress banner will go back up on Sat. No hammer dropping my friend.
Though I’m not sure what you meant by it. I’m fairly certain about the deflation. It is the next logical step.
Dripfood JC, thanks for clearing up this issue in a very understandable way.
The picture that comes to mind after reading your article, is that of the construction of an extra edifice on top of the old global financial structure; an attic if you will. And this ‘attic’ is being used to park the illiquid toxic assets that came out of the system as toxic waste.
The SDR is sort of a vehicle designed to transport the toxic illiquid assets up to the attic, thereby creating empty space waiting to be filled with new instruments of debt on the floors below the attic.
To carry the extra weight of the added edifice, the base of the buidling had to be widened to strengthen the structural integrity of the GFS. The multilateralization is in fact the strengthening of this base.
Would this picture be kind of accurate or am I misinterpreting parts of your article? Regards, DF
Roger Parness What base? Like the old World Trade Center buildings the structure is swaying in the wind. I don’t see how you can strengthen structural integrity when there is no integrity to begin with.
Building an attic to park toxic waste on a house of cards is not solving anything. Just makes a more widespread toxic mess when it falls.
The foundation should be a free market which does not and perhaps never did exist.
JC: yes bring back the monkey parliament.
mag51 It all seems to be coming together JC; great article. With the Fed announcing the ‘end’ of QE, the CSI operations are in full swing from the mainstream media and also a former Fed chairman.
I have attached a link to a web audio, not for the opinion of the commentator, but for the references to statements made by the media regarding the absolute success of QE. Wow.
Also in the audio are recent Greenspan conference statements regarding QE and such.
Of note: “Greenspan has admitted that the Fed is not independent from the government at all.”
and also “Greenspan said that a gold standard is inconsistent with the welfare state, because it prevents politicians from acting recklessly and irresponsibly.”
These appear to be ‘conflicting’ statements; the first false and the second true.
Mr. Greenspan is part of the Bretton Woods Committee, so one has to wonder what their role is in all of this. Reading into the CSI elements for me was interesting while the commentary regarding inflation, deflation and PM prices was simple enough for me to understand: http://schiffgold.com/commentaries/qe-dead-long-live-qe-audio/
Comments may be made at the end of Part 2 Thank You