Tuesday, 26 February 2013

Timeline : Geopolitics in motion

(Click for a larger image)

All this while the accumulated leverage pumped into the "gold" market over the 80s and 90s, in structural support of the dollar until the euro was launched, is still present.

With regard to the price of gold, the Central Banks are not about to just allow the market to collapse the value of their own primary reserve asset. Unlike Western traders, the Central Banks will not be content to buy paper in place of gold. In my opinion.

What real world value will gold ultimately have,
once it is free of this leverage?

  1. Nixon shock (Wikipedia)
  2. Germans evidence their swap/leasing programs (Bundesbank)
  3. The euro was launched on 1 January 1999 (ECB)
  4. Washington Agreement on gold (Wikipedia)
  5. Gold AM fix prices & CPI-AllUrban courtesy of
    FRED at St Louis Fed

The long and the short of it

(Click for a larger image)
While the world still wants long bonds, it's all good.

Monday, 25 February 2013

Put your money where my mouth is

The one economic zone in the world today where you are still, relatively, safe to hold the currency, is the Eurozone. It presents an oasis of monetary dominance, in an otherwise-endless world of blossoming fiscal dominance.

Politicians will always prioritise short term expediency over the soundness, longer term, of the monetary system.

#CurrencyWars? Your cash is expendable.

Tuesday, 19 February 2013

Incomplete models produce inaccurate results

Armstrong: Markets decline BECAUSE everyone who has EVER thought about buying has bought. There is no more reservoir of potential buyers to pick up the ball and take to the goal post. Consequently, the market falls because it has lost the momentum to sustain the rally.

With every Central Bank in the world today having a remit for price stability, and with every aspect of the global economy underwritten by the free-flow of cheap and abundant fossil fuel, Martin appears to be overlooking (at the very least) two premises that are apparently not in his model for some reason?

  • The reservoir of potential buyers to pick up the ball cannot and will not dry up, if and while there is an environment consisting of (1) a fiat currency system and (2) a Central Bank with an overriding political will to achieve some specific goal (e.g.: act to counteract price inflation or deflation — AKA "price stability"). Strangely enough, given it would appear to be overlooked by just about every analyst, today presents just such an environment. This is not an insignificant detail in modelling the future of finance, IMO. It seems to be accepted wisdom that inflation was never willingly tolerated by any Central Bank and their intolerance was expressed through the market for gold, which then had regressive effect in other markets. Deflation is no less intolerable to a Central Bank today.
  • While the world remains thirsty for energy commodities, beyond the capacity to consume of the energy exporting nations, there is still always at least one large potential buyer, luxuriating in the reservoir and ready to pick up the ball any time it gets tossed their way.
There is, however, a qualitative difference among the residents of the reservoir of potential buyers. Many private Western traders are entirely happy to speculate in the gold market using any of the many "derivatives of physical gold" (forward contracts, options, spreadbets, ETFs, silver, miner shares, and other "goldish investments" too numerous to list). Others entities are meanwhile content just to work with the real thing and the real thing only. There may be trouble ahead…

Come in, the water is lovely! Just make sure you have your swim shorts on and firmly tied at the waist — you never know, the tide may go out.

Such progress! All financed by mountainous, unpayable debt, now due.
No default possible. No deflation tolerated.

It's a pickle alright!


Bonne journée

Friday, 8 February 2013

Credible Threats

If the cost to government of servicing its debts is lower than the tax income extracted from the private sector, they can deleverage their debts, given sufficient time. (Assuming the government is able to continue issuing the required debt at sufficiently low rates of interest.)

In the days of yore, when there was a gold standard of some sort, this would be a protracted and painful process to pull off successfully. But it was done.

Fortunately, today, the government doesn't have to rely on the free market to supply the necessary credit (as in the good old days). It can issue credit to itself, in effectively unlimited quantities (but in reality limited by the credulity of the market). In so doing, it is able to suppress the interest rate that it must pay (and also receives the interest paid back as income - so the true cost of debt service is effectively 0%), ensuring that it is able to get the credit on economic terms.

The only way the system of today cannot be deleveraged in this way, more rapidly and painlessly than in past examples, is if the free market significantly rejects the governments currency in payment for goods/services, requiring the government to issue ever-larger quantities of debt to itself in order to cover its expenditures on goods/services, outpacing its ability to service the debts from the tax income it can expect to receive from its citizens over the requisite timeframe. The holders of existing debt instruments may also choose to liquidate and flood the market with these assets, outrunning the governments ability and/or willingness to absorb it all - exceeding their ability to contain the interest rate required in the market and thereby blowing their scheme to deleverage out of the water. Oh my!

It could never happen here!

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