Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

[ddn3f]

Re: Bugs are the enemy, not Gold!

I agree with Rogermexico and FOFOA regarding confiscation or heavy punitive taxation. That would just drive gold into the black market into the hands of other countries or it will be passed on from generation to generation. The defeats the purpose of going back to some sort of a gold standard as there will not be a lot of gold to back the currency.

Re: Bugs are the enemy, not Gold!

I think that's silly, Mark. If people lose confidence in the dollar, money will flow OUT of the country, not in. In the 70s people lined up to buy gold and dump USD for CHF. Hyperinflation begins with capital outflows

[Slimprofits]

Re: Bugs are the enemy, not Gold!

http://www.bloomberg.com/news/2012-0...-reversal.html

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said battling unemployment may mean keeping interest rates close to zero for four years, reversing his view that borrowing costs might have to rise as soon as this year.

As long as inflation doesn’t exceed 2.25 percent, the Fed “should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent,” Kocherlakota said. The comment aligns him with the Federal Open Market Committee’s decision last week to continue purchasing bonds until labor markets “improve substantially.” Kocherlakota is one of the first Fed officials to specify what he considers improvement in the labor market.

http://www.statesman.com/business/fe...e-2465810.html

Last week, Dennis Lockhart, president of the Atlanta Federal Reserve Bank, stressed that the new round of bond purchases would continue until the job market improves, and "if we do not see improvement, more action may be taken."

In a speech last week, Eric Rosengren, president of the Boston Federal Reserve Bank, said he was pleased that the Fed's policy committee was "willing to take difficult actions like these rather than accept the possibility of a long, slow recovery turning into a stagnation that someday earns the dubious title of ‘Great.'"

Laurence Meyer, a former Fed board member and now an economist with Macroeconomic Advisors, said in a research note that Kocherlakota's statement was "one of the most dramatic shifts in policy positions" in Fed history.

http://www.washingtonpost.com/busine...190_story.html

Zachary Goldfarb:

Bernanke [is] studying the idea of declaring that the Fed will boost the economy until unemployment reaches a specific target or until inflation takes off. Some Fed officials have suggested that the central bank keep on stimulating until unemployment reaches 7 percent or inflation rises to 3 percent; others have proposed Fed action until unemployment reaches 5.5 percent or inflation rises to 2.25 percent.

[Mn_Mark]

Re: Bugs are the enemy, not Gold!

That is why I think an optimization equation dictates the peg. USG wants gold to be valuable enough in dollars that all dollars do not come home instantly (high price in dollars) in exchange for gold, but ROW will demand a price in dollars that is low enough that they stop dumping dollars and are willing to hold (newly issued or exchanged for existing?) UST. There must be a balance between these, and a peg that is 3x the most recent market price would not satisfy this requirement.

My guess is the peg might be $6,000 or $7,000 if the market price were $5,000. The peg must be higher than market, but not much higher.....

Let me toss into this discussion the FOFOA hypothesis (http://fofoa.blogspot.com), as I understand it.

Let's say we agree there is going to be a dollar currency crisis and that the government is going to be forced to restore domestic and international faith in the dollar by giving it some sort of gold backing.

There seems to be an assumption that there are only two ways for a government to relate its currency to gold: by not making the currency redeemable in gold at all (what we've had since 1933, and since 1971 with respect to other countries), or by having a gold standard where the dollar is pegged to gold at a fixed rate.

The discussion here has been assuming there will be a fixed peg to gold and we've been figiuring out the implications of that: how will the government get the gold that it will peg the dollar to? Will they confiscate all of the citizens' gold? Will they buy the gold from the citizens, encouraging them to sell with tax incentives? Will they punish citizens who try to hold on to their gold by implementing a 90% windfall profits tax? How will they decide what the exact dollar peg will be? Will they set it above the price they expect the market to demand? How much higher?

Well, what if there is a third alternative besides no backing and a fixed peg, and between the government having no interest in gold at all and the government confiscating all the gold and punishing citizens for holding it? What if, instead, the government simply puts gold back in the asset column of the balance sheet at the fed, marked to the market value of gold each quarter, as the European Central Bank does with the Euro? As the dollar value of gold rises, the asset side of the fed balance sheet rises, offsetting the currency on the liability side. This provides balance and stability to the value of the dollar without fixing it to a specific amount of gold. The Fed can then buy or sell gold on the market to strengthen or weaken the currency as they please, without being tied to a fixed peg.

When a government pegs the value of the fiat to a specific amount of gold, you eventually end up with gold being drained away from the treasury and you get shenanigans like 1933 where the government has to outlaw private possession of gold so it can devalue it. Why go to the trouble of starting that cycle again with another fixed peg as in pre-1933?

What is important is that foreigners know they are able to exchange their dollars for gold if they want to. They don't have to do that at the treasury via a peg. They can buy gold from any American private holder on the free market as long as the dollar price of gold is high enough to convince that private citizen to sell their physical gold. The gold is then flowing, which is what the market requires to trust the dollar. The market needs to know it can get gold for its dollars in order to trust those dollars. It doesn't have to be gold from the Fed.

So there is no need for the government to confiscate or even to buy the gold of private U.S. citizens. All the government needs is for people to know that they can always exchange dollars for gold on the free market. The government doesn't need more gold; it just needs a high enough price of gold. And as FOFOA has pointed out numerous times, gold can absorb any amount of fiat - it can be priced at any amount in dollars without harming the economy because it has no other significant economic purpose. Gold isn't used for anything else vital. It can be priced at $50,000 or $100,000 an ounce without upsetting any other part of the economy. No other "commodity" could do that.

The FOFOA argument is the best I've seen yet. So this is the scenario I think is most likely (based on my understanding of the FOFOA scenario):

• Faith in the dollar as international reserve currency evaporates.
• Dollars come flooding back into the U.S. as people around the world try to buy something real with them before they lose any more value.
• Super-hyperinflation in the US begins.
• The government, through whatever technical mechanism is necessary, puts the treasury's gold on the fed's balance sheet marked to some very high dollar price, announcing it will revalue it to the market price each month or quarter.
• To encourage gold in private U.S. citizens' hands to flow unimpeded, thus providing an ideal way to soak up those massive amounts of internationally-held dollars flowing into the U.S., the government stops treating gold as a commodity and treats it as a special kind of international currency, which dollars can be changed into and out of without tax or other penality. I.e., no capital gains tax, no windfall profits tax, no sales tax. This encourages maximum free flow of gold from private hands, restoring international confidence that they will be able to get their hands on gold for those dollars...and thus no need to panic out of them.
• The marked-to-market gold on the fed balance sheet gives the fed a way to manage the gold value of the dollar in a free-floating way without a fixed peg that always results in runs on the treasury gold. This gives them flexibility without the complete lack of gold backing that the international markets won't accept anymore.
• The dollar price of gold "reverse waterfalls" up to the $10,000-$100,000/ounce level, drops briefly while people who think it is ending a "bubble" run sell, then rises and stabilizes around $50,000 (or some similar high price) and over time very gradually rises against the dollar as the government sees the need to devalue for political or economic reasons.

[vinoveri]

Re: Bugs are the enemy, not Gold!

You're mixing terms: the US was officially off the gold standard - at least for everyone not a central bank - as of 1934.

The US dollar lost any relationship whatsoever to gold in 1973, even for central bankers.

But if you're going to talk about gold confiscation as an individual, the reality is still the same as I noted in my previous post on this thread.

As for the future - we're not going to have a 'true' gold standard no matter what, i.e. you can freely interchange gold for dollars at a fixed rate. We will almost certainly have a gold backed standard - i.e. the US dollar is backed by some volume of gold in the US central bank.

Not the same things at all.

Sorry if I wasn't clear; not sure which terms you think I'm mixing; Bretton Woods was a gold standard reinstituted post WW2; then off in 1971-73 when gold window closed by nixon. Now we're preparing to go back on one. If you bothered to read the rest of my post (the part you didn't quote) perhaps this would have been clear:
"When ready, Fed and other government announce new global currency system gold valued at $15,000/oz. System allows governments to excahnge gold but not citizenry, similiar to Bretton Woods."

[c1ue]

Re: Bugs are the enemy, not Gold!

Again would turn to history; Bretton Woods, where modified Gold standard reimposed. On gold, off gold, on gold, off gold. At least we are likely to agree that the world will be returning to some sort of gold standard.

You're mixing terms: the US was officially off the gold standard - at least for everyone not a central bank - as of 1934.

The US dollar lost any relationship whatsoever to gold in 1973, even for central bankers.

But if you're going to talk about gold confiscation as an individual, the reality is still the same as I noted in my previous post on this thread.

As for the future - we're not going to have a 'true' gold standard no matter what, i.e. you can freely interchange gold for dollars at a fixed rate. We will almost certainly have a gold backed standard - i.e. the US dollar is backed by some volume of gold in the US central bank.

Not the same things at all.

[Slimprofits]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

http://money.cnn.com/2012/09/24/news...ldman-fed-qe3/

The Federal Reserve's QE3 bond buying program announced earlier this month could last until the middle of 2015 and eventually reach $2 trillion, according to an estimate from economists at Goldman Sachs.

The Goldman economists also wrote in a report that they believe the Fed will not raise the federal funds rate until 2016. This rate, which is used as a benchmark for a wide variety of consumer and business loans, has been near 0% since December 2008. The Fed said in its last statement that it expected rates would remain low until mid-2015.

Goldman's $2 trillion estimate also includes the buying of long-term Treasuries planned by the Fed under an extension of what is popularly known "Operation Twist." In that program, the Fed is selling short-term Treasuries to fund those purchases.

The Goldman economists also said they think the Fed wants to see the nation's unemployment rate in the 7% to 7.5% range before it ends its bond purchases, and in the 6.5% to 7% range before it starts raising interest rates again.

The Fed's own forecasts call for the unemployment rate to be in the range of 6.7% to 7.3% in 2014. If that actually happens, Goldman said the Fed could end QE3 in the middle of that year. At that point, the bond purchases would have reached $1.2 trillion. But Goldman's own forecasts call for a slower recovery in the job market and overall economy.

"If the recovery continues to disappoint, additional steps are possible," the Goldman economists said. "These include an increase in the pace of asset purchases as well as further changes in Fed communications."

[rogermexico]

Re: Bugs are the enemy, not Gold!

Again would turn to history; Bretton Woods, where modified Gold standard reimposed. On gold, off gold, on gold, off gold. At least we are likely to agree that the world will be returning to some sort of gold standard.

And I would turn to paying attention to how history differs from the present. Bretton woods was a partial or pseudo- gold standard that relied on USA military and monetary hegemony more than any thing else. The premise of Ka-Poom theory, which presumably most of us here ascribe to, is that this dollar hegemony is becoming untenable in a way that makes unilateral imposition of the dollar/UST as the world's reference currency the way it has been since then impossible. The event that makes the gold window necessary is going to require actual gold backing the dollar because nothing else will be acceptable to the other parties. Parties whom we can no longer arbitrarily dictate to the way we have ever since the dollar replaced the pound sterling.

Here's how it could happen:
So, we have a run on the dollar; gold spikes say to $5000;
Feds ban gold sales and calls in gold (pays "fair compensation") - and ideally do this in conjunction and coordination with other countries, which makes it more difficult to transfer gold to other territories. All this in anticipation of re-opening the gold window or returning to some form of gold standard.

When ready, Fed and other government announce new global currency system gold valued at $15,000/oz. System allows governments to excahnge gold but not citizenry, similiar to Bretton Woods.

I don't disagree that the USG could pay fair compensation, and then devalue the dollars tendered by two thirds. They could do that in the sense that it is obviously mechanically possible to do so. Indeed, if you re-read my original scenario, it calls for the government buying the gold at some discount to the intended peg, yet incentivizing this by waiving taxes on it for those who tender their gold. I also hold that the peg will be set above the market price of gold at the time, but not likely 3 times higher. So it is unlikely that if your tender your gold, you will suffer a punitive tax via a two thirds devaluation.

Why not?

For one thing, this very objection you have raised is in the minds of every significant gold holder. So part of the tender offer will be that you have some assurance that your new dollars are not instantly replaced with a new, new dollar. They are not going to offer old dollars, as who would take that when the dollar is crashing and gold is going up? I think there will have to be some assurance that the dollars you are paid with are as good as gold or near to it. You will have to know what the future value of the dollars tendered will be in order to accede to this exchange. I know I would rather take my chances on the black market than risk this outcome by taking "old dollars" with no assurance that the dollar will stabilize. I suggest that the backing and the peg will be announced before they tender for your gold. That way the dollar price to the world is instantly fixed, and they can tender a discounted price to you that is tax-free, and everyone wins, including the government, whose reserves grow at a discount.

There is another way to think about this scenario, though, of "stealing" the gold and then revaluing, aside from the obvious one of who will tender their gold without some guarantee of the what the offered dollars are worth. The gold will be made as valuable as possible. Perhaps as valuable as they can "get away with". So what determines what they can get away with? What is the purpose of the gold window? It is to stop the decline in the dollar and UST market, right?

If the dollar is crashing, and interest rates are 12% and the market value of gold is at $5000, what precisely is the effect of offering our gold as our new money are a rate of $15,000 to the ounce of gold. What would the reception be? What would the price of bonds do in response to this and what would the happen to the governments' borrowing costs? Is it not obvious this would do nothing to stop the slide of the dollar and rising interest rates, and in fact exacerbate them severely?

That is why I think an optimization equation dictates the peg. USG wants gold to be valuable enough in dollars that all dollars do not come home instantly (high price in dollars) in exchange for gold, but ROW will demand a price in dollars that is low enough that they stop dumping dollars and are willing to hold (newly issued or exchanged for existing?) UST. There must be a balance between these, and a peg that is 3x the most recent market price would not satisfy this requirement.

My guess is the peg might be $6,000 or $7,000 if the market price were $5,000. The peg must be higher than market, but not much higher.....

[rogermexico]

Re: Bugs are the enemy, not Gold!

FWIW (which is admittedly not much) I agree with you; your scenario is what should happen. But the pessimistic part of me thinks raja's argument is more likely what will happen. If the gov't always did what should happen, we wouldn't be in the mess we're in now. Only time will tell.

"The United States invariably does the right thing, after having exhausted every other alternative."
-- Winston Churchill

But this is not what the government should do. What they should do is not wait until there is a currency crisis and are forced into it. What I am predicting is simply what they will find to be in their interest when that is what they see they have to do. Accordingly, I still have heard no argument here explaining why if it is stipulated that they want to acquire gold to avert a currency slide that they would choose methods to get gold that get them less of it or that are at cross purposes to the point of acquiring the gold.

[Chris]

Re: Bugs are the enemy, not Gold!

under the rickards scenario, a windfall profits tax serves a political purpose, not an economic one.

That makes the most sense. Although as mentioned previously, with gold at a fixed revalued price, gold owners would have no incentive to sell with a tax rate at 90%. This outcome is unlikely, in my view. Gold confiscation is more likely if there was populist pressure on governments to punish the evil speculators.

[vinoveri]

Re: Bugs are the enemy, not Gold!

More goldbug logic. The government is mean and will be mean to us once again, even if it is against the interest of the government itself and what it is trying to accomplish. The current situation is the polar opposite of 1933 monetarily. Deflation spiral vs sudden stop catastrophe in the exchange value of dollar/ UST.

Explain how acquiring gold to STOP devaluation means the goverment will do the same thing it did when it wanted to CAUSE devaluation? The trashing of the dollars in your pocket it happening right now and will accelerate. There is no need to appropriate gold to effect this. The situation will be exactly the opposite. Why devalue when you have just returned to a gold standard to stop devaluation? In 1933 inflation was needed. This time the inflation will have already occurred and will need to be stopped.



You have not, as far as I can see, offered any reason for the government doing what you propose other than that the government is going to be mean to gold holders because they were in 1933. I've explained why, if the government is going back on the gold standard, it makes sense from their perspective to maximize how much of it they get. Please explain how there is a better way for them to get more gold, or what the motivation would be behind devaluing a new dollar after opening the window specifically to arrest the falling value of the dollar internationally.

Again would turn to history; Bretton Woods, where modified Gold standard reimposed. On gold, off gold, on gold, off gold. At least we are likely to agree that the world will be returning to some sort of gold standard.

Here's how it could happen:
So, we have a run on the dollar; gold spikes say to $5000;
Feds ban gold sales and calls in gold (pays "fair compensation") - and ideally do this in conjunction and coordination with other countries, which makes it more difficult to transfer gold to other territories. All this in anticipation of re-opening the gold window or returning to some form of gold standard.

When ready, Fed and other government announce new global currency system gold valued at $15,000/oz. System allows governments to excahnge gold but not citizenry, similiar to Bretton Woods.

[jk]

Re: Bugs are the enemy, not Gold!

under the rickards scenario, a windfall profits tax serves a political purpose, not an economic one.

[astonas]

Re: Bugs are the enemy, not Gold!

Rickards did not elaborate on why the windfall profits tax will be imposed, and how it would be possible to carry it off. I would like to know his reasoning, but can only speculate at this point:

Isn't this precisely the point that requires elaboration (without speculation) for Rickards' views on the matter to be taken seriously?

[c1ue]

Re: Bugs are the enemy, not Gold!

Gold was money in 1933. Thus devaluation of the dollar necessitated recovery of as much 'free' gold as was possible, otherwise the devaluation would have had much less effect.

Gold is not money today. As noted - all that is necessary for the government to acquire American gold would be some form of tax incentive. One quick example: making profits on gold sales subject to the same investment taxation rates as other passive investments if sold the the US government.

Then devalue.

Note however that the purpose of acquiring gold today is not the same as the purpose of acquiring gold in 1933. In 1933 it was to bring as much of the physical money supply back into government control in order to facilitate the impending devaluation. Today the purpose of the US government acquiring gold is to mitigate against the effects of an impending/ongoing devaluation in the minds of foreign dollar holders. I say only foreign dollar holders because the US residents are screwed anyway.

Confiscation simply makes no sense given this, though of course irrational behavior can always happen.

[raja]

Re: Bugs are the enemy, not Gold!

Here's another scenario to throw in the stew . . . .

I just finished the last section of James Rickards "Currency Wars" . . . what a great book.
I rank Rickards #1 of all the economic pundits I follow, not only for his recent prediction accuracy, but for his real world experience, such as advising the military on financial warfare, his use of systems theory, his frequenting of the university lecture circuit and his 35 years experience working in capital markets. I like his approach to economics in "Currency Wars": he gives the history, the current situation, and his predictions on the outcome -- all well explained. As a lawyer, he presents his "case" in a rational and orderly fashion.

With that intro, let me tell you my understanding of what he predicts as one of three possible future scenarios:

A run on the dollar will occur suddenly and without warning. It will be like an avalanche, where one snowflake too many starts the inevitable catastrophe. (This is reasonable, since the crash will be caused by a crisis of confidence -- a psyhcological phenonmon -- and move at the speed of thought and communication.)

In a matter of only two days, after the Fed and Treasury have tried and failed to stem the selling of dollars, and the stock markets worldwide have closed, the government will step in and impose draconian measures to stop the fall into chaos by invoking the IEEPA act (similar to the one used by FDR). This will include many actions, such as: banning UST sales, closing all exchanges until further notice, no exporting gold, confiscating all private and international gold in the Fed's NYC depository and couple of other NYC depositories (former gold owners to received "suitable" compensation at a future time). This confiscation gives the US over 17,000 tons, about what it held in 1945 before Bretton Woods, making the US the top dog. This majority gold hoard will allow the US to issue a new, gold-based dollar, at 10x the value of the old dollar. A 90% windfall profits tax will be imposed on anyone selling gold to profit from the revaluation.

Under this scenario, you will have about one day to sell your gold in order to profit from the initial mania and avoid the windfall profits tax. Good Luck!
In its timing, Rickards' scenario differs greatly with EJ's. EJ predicts much more time to sell gold prior to the crash. Obviously, these two scenarios require greatly different strategies . . . .

Rickards did not elaborate on why the windfall profits tax will be imposed, and how it would be possible to carry it off. I would like to know his reasoning, but can only speculate at this point:

After revauation, gold would be worth 10x its price before the crash, so gold owners would profit immensely in relation to the rest of the citizenry, who would be suffering as a result of the crash. It would therefore be politically popular to punish those "profiteers", and divert some of the anger that would be generated by the ensuing poverty.
And . . . the government likes money . . . so the windfall tax would provide more moolah to lavish on themselves and their buddies.

By the way, Rickards thinks the scenario described above is the best possible outcome. His other two possible outcomes are chaos, and greater chaos.