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Sunday, June 20, 2010

Shelby Moore's Thoughts on the Gekko-Denninger Debate

Shelby H. Moore of has some excellent comments with regard to the points raised in the recent Gekko-Denninger debate on Gold. He has kindly agreed to share his thoughts on this blog:

Denninger loses 17 points

Denninger has attempted to rebut Gordon Gekko's latest article, but he did not rebut my comments here (nor my comments in the prior Gekko article here). Readers might want to challenge him to debate me. I can handle Denninger easily.
Denninger fails on numerous points in his latest diatribe:

1) Denninger butchered his own credibility in his prior rebuttal, see #8 in the comments about Denninger's prior rebuttal:

He proved he doesn't even know what credit is, and does not understand the basics of economics.

2) Denninger argues that discussions that use the word "gold" have no relevance to the big picture, because he apparently doesn't understand that gold is the Ultimate Market Regulator:

Thus, since most of what Denninger writes about is fraud and lack of regulation, it is difficult to have an intelligently meaningful discussion in his forums without mentioning gold and getting banned.  The Dewey Decimal system has nothing to do with it.  Denninger invents straw-men arguments to defend censorship.  As for the religious dogma, he could create a forum for that, and send all such posts there.   Many of us want
to discuss gold's critical role in regulating fraud and other economics, without adding religious dogma to every post we make.  I for one, do also have an orthogonal Biblical view, but I am able to separate my gold arguments from my Biblical arguments, and do so at my forum,

3) Denninger clearly does not understand that hyper-inflation in an across the board rejection of fiat, where the masses toss fiat in exchange for any tangible asset they can get.  It is characterized by DOUBLE-DIGIT percentage DAILY price rises, even Net 30 credit terms for receivables is not offered during hyper-inflation, and all such commerce ceases.

4) Denninger again flunks Economics 101, because he does not understand that if gold is unavailable for any fiat price, it does not mean that gold is unavailable in trade for some real goods.  Thus gold at that point has a near infinite value relative to fiat, but a more stable value relative to real goods.  This is a defacto return to a gold standard, which is in
effect what hyper-inflation means.  Serious economists understand that gold has tracked oil within a range since 1970s, because the Arabs demand to be paid in gold:
(note the mention of FOFOA at link above, I have refuted one aspect of FOFOA's free gold thesis here:

5) Denninger again correctly argues that government (society) will attempt to steal (tax) gold:

However, that is no argument for LEAPS, because the government will steal those first, as they are easier to steal.  The only way the government will stop a black-market from flourishing, is if they offer a new fiat redeemable for a fixed price in gold and are able to supply all redemptions (which will be few if interest rates paid are high enough). And in that case, yes we gold investors could lose some due to taxation if we want to participate in the high interest rate compounding (a theft from society of capital), but we will not lose as much as those who are wiped out in LEAPS and other paper investments.  And for those who want to be clever, just buy silver instead.  Silver should outpace gold appreciation by several times, and I don't see the government will be able to make a
higher tax on silver capital gains, because they won't be backing the new fiat currency(ies) with it and thus such a differential tax on silver vs. gold would cause a flourishing black-market for silver.

6) The dollar has performed horribly in the past year relative to potatoes and other fresh produce where I am.  Potatoes have nearly doubled in price in past year, and are 20% higher than they were at the peak in early 2008. Ditto for meat, fish, and nearly every fresh food product, except not for price (because it is subsidized by the Philippine government).

7) Denninger again fails to understand that gold is a hedge against negative REAL interest rates (which must remain negative until end game of hyper-inflation per #4 in my comments to the prior rebuttal from Denninger), not inflation nor deflation:

8) Regarding crossing the border with gold, Denninger doesn't seem to realize that some have advocated moving your gold now to other locations where you might want to flee.  Also there may be other ways to cross borders, e.g. small plane, boat, submarine, diving, tunnels, horse, hot air balloon painted same color as sky, etc..  And if your gold (preferably silver!) is already well hidden where you want to ride out the crisis, then no need to move it until the crisis is over and you are ready to pay the capital gains tax and join the repaired fiat system again.

9) Denninger does not understand that no shooting has to take place if 79% of people buy silver and just hide it well.  The fraud fiat system would collapse over night (due to silver's tiny $10 billion annual global supply), and the government wouldn't even be able to back a new fiat system with gold, because the citizens would be holding and demanding
silver to be money.  This ideal won't likely happen (because we can't educate the masses fast enough and TPTB would shut down the availability of silver by war or other means if threatened), which is why there will be lots of shooting unfortunately.  And those who lost everything in LEAPS will be lacking resources to protect and survive repeated waves of

10) I disagree with Denninger that USA citizens will be more safe in USA than in every other country.  There is going to be a lot shooting going on in the USA, until the system recapitalizes with a new fiat redeemable for a fixed gold price.  I am glad that I am 10,000 miles away from what looks to be a 3 million barrels per month oil gusher that can NEVER be stopped, short of a dangerous nuclear device which could potentially fracture the seabed even worse.  Valdez spill was 257,000 barrels, and Nigeria wasteland is 13 million barrels total over decades.  BP gusher is 4 - 6 million already.  How convenient an "accident" to be enable blaming the already coming implosion of the US economy on BP instead of on the central banks.

11) Denninger argues that investment in secular turns in markets is not profitable (calls it "curve fitting").  Does he even realize he wrote that?  Amazing.  Secular shift investing is not speculation.

12) Denninger is correct that Gekko had an incorrect statement about CPI being "flat to down".  What Gekko should have said is that REAL interest rates have been "flat to negative":

13) Denninger argues against himself, where he agrees that there is no way to operate a viable business without being paid in the debt money fiat currency.

14) Denninger apparently is not aware that the Constitution granted only limited enumerated powers to the Federal govt, and thus the Feds have no right to print currency for use in the States, only in territories ceded by the States to the Feds:

15) Denninger is again correct TPTB want gold standard without silver, as I explained my comments to his prior rebuttal, that both gold and silver are legal tender in the Constitution in order to regulate the manipulation of either one (the free market trades the gold-silver ratio).  Indeed the banksters want a gold standard because they can control gold more easily than silver, but they also were able to manipulate silver in the past too:

So that is why we need both.  Hard for them to manipulate both simultaneously, as there is nothing else in the world (other than silver and gold) that have sufficient NATURAL stocks-to-flows ratio to be used as store-of-value.

16) Denninger is correct that wild swings in inflation and deflation result when the predominant money is gold and silver, as was case in 1800s.  But what he fails to mention is this only affects those who are doing the borrowing ("debtor is slave to the lender" wisdom in Bible), as it manifests in bank runs on banks that created "gold promises" (i.e.
loans) without 100% reserve.  But those who hold gold and silver (both!) are immune from this effect.  And those who saved in Treasuries under a gold standard, got 33,900% more REAL purchasing power than those who saved in fiat in the 1900s:

So we already have historical proof that Denninger's socialist mantra of "enforce the law" and "The Quantity Theory of Money" (MV=PQ) fails miserably.  In fact, go back 1000s of years for more proof.  Why do we bother to debate this idiot?  He doesn't understand economics nor history. I could detail all the reasons that MV=PQ is a useless abstraction (for starters,, but why bother when the historic proof exists.

17) Decling prices does not accompany wages that decline more than prices in deflation, only during inflation.  Deflation is rising real wages, inflation is declining real wages:

This incorrect understanding about what is deflation is really screwing up most of the "anal-ysis" I see out there.  I also debated Mish about this and I think he understood:
(read the several posts at link above)

Denninger has most of the facts correct, but he makes the wrong conclusion, expecting deflation, because he only looks at the demand destruction. He forgets that all of this is mis-allocation of capital and so supply will also be destroyed. Actually supply of some things (e.g. houses and a slow form of euthanasia "health care") will be too much and
other things that depend on credit, energy and their long-term investment, will go into shortages, i.e. food:

18) Denninger is correct that gold does not regulate socialism evenly, but rather in rapid bursts called hyper-inflation.  All his politicking won't protect him from being wiped out by the Ultimate Regulator (which will never fail, it just waits to act when the most people can be obliterated for their sin of debt and credit):

Good luck to all fools.

Shelby H. Moore III is the sole or contributing programmer of numerous (some million+ user) commercial software applications, such as Corel Painter, Cool Page, WordUp, Art-O-Matic, etc. He has an education in engineering and math. He is also the programmer and owner of, a site that  was the first social network with million+ users in 2000, before friendster, myspace, and facebook existed.

For more articles by Shelby, please refer to the links below:

Friday, June 18, 2010

FOFOA's Take on the Gekko-Denninger Debate

FOFOA has just written an excellent article expressing his Thoughts on some of the points brought up in the recent debate between your's truly and Mr. Denninger. Here are some excerpts:

I would like to thank Karl Denninger and Gordon Gekko for providing the backdrop I was looking for in order to present a few concepts and Thoughts.

Karl to Gordon Gekko: You can no more provide evidence that "gold is the only real money" any more than I can prove there is a Christian God.

What I can provide is evidence that gold is the only real wealth reserve accepted by those that create our money. Debt instruments, like Treasury Bonds, have a strange parity relationship with the value of the currency. They don't quite float, making them a poor wealth reserve. If/when the dollar collapses, so does the debt denominated in it. Gold, on the other hand, when marked to market, floats quite well, even in a currency collapse.

As for gold being the only one with this specific characteristic, just have a look.

Karl to Gekko: But to believe that gold will offer you sanctity, you must believe several things:

1. The currency you have now (dollars, in the case of the US) will collapse. Again, if you're going to predict this, you must both predict an event and a time or your prediction is not actionable.

Not true. In some cases throughout history it was best to prepare for the normal event of currency collapse as soon as its possibility became apparent. Currency collapse is a normal event, even if it is extremely rare. Just like death, it only comes once; but it does come once to everybody. And the logical implications and extremely high impact of this event are great enough that it is well worth preparing for without knowing an "actionable time".

In fact, those that took Another's and FOA's advice "too early", back between 1997 and 2001, have had to "suffer" through a 500% increase in the marked to market value of their wealth reserves while waiting. Sometimes it is best to be early.

2. Gold (or whatever) must maintain it's value in real terms. That is, I must continue to be able to buy and sell it in exchange for other things. But you already claimed there would be none on the market at any price - that is, there would be no trade in it at all. If this is the case then it is worthless, not priceless.

What is referred to here is the chaotic transition period between the failure of the fractionally reserved paper gold markets and the emergence of a physical-only free gold market. During this rocky transition any former parity between "the price of gold" and the price of actual physical pieces will be broken. This is when no physical will be available at the published price.

As for the physical price, it will be unknown as it rockets in the background to new heights. So yes, any paper gold will be worthless during this time, and any physical gold will be priceless. Congratulations, you are both right!

3. Government cannot steal it, or you won't have it. But history says that government will steal it. And they don't have to do so by outright confiscation either - they can whack you with a 90% tax on it at the point of sale and demand that all dealers register and report. Oops - they already did the latter after 9/11!

What Karl says here is technically possible as long as continuity is maintained in the official pricing of gold. But what I write about here is a functional change for physical gold. And in this new function governments will find it in their best interest to encourage citizens to hold gold for the purpose of decentralized clearing. This will be preferable to the alternative which will be holding your trading partner's currency.

Gold will not be a transactional currency. That will be the dollar or other fiat currencies around the world. But gold will replace the centralized function of the US Treasury bond and other debt instruments, in a decentralized way.
We will transition from this:
 Into this:
I will not go into great detail here, but logical deduction is the best proof that it will not be plausible for governments to track and tax the capital gains realized by physical gold holders who ride out the fire of change. I am talking about discrete, disconnected and discontinuous pricing before and after.

And I am warning of the chaos that paper gold holders and paper gold price-trackers will realize as their price goes to zero. This is the price governments track for capital gains purposes. Most Western gold investors will be wiped out when this price ultimately proceeds from $1,250 today to $0 at some point in the future.

I have also collected logical evidence and arguments as to why a physical gold confiscation is nothing to worry about this time around. Please see: Confiscation Anatomy - A Different View

And lastly, on this subject of confiscation through taxes, the governments of the world will find their softest and most sensible target in the mining operations that they license. Not in the small percentage of Western gold bugs that had the foresight to buy physical coins instead of shares.

Karl to Gekko: Then your base claim - that gold is a inflation hedge - that is, it will hold value - is false.

This is true under today's semi-free gold trade. The paper market automatically suppresses the price of physical gold through physical parity with inflating paper gold. The same as gold was suppressed at $35 in 1970. This is true even if you don't believe GATA that the Fed actively suppresses it.

It was also true under the fixed parity of the gold exchange standard. But just like physical gold holders in 1933 and 1971 profited from revaluation, so today physical holders will profit when parity is broken between paper contract gold and physical gold in hand.

And once this separation is complete and physical gold finds its natural equilibrium as a wealth asset parallel to fiat currencies, then and only then will gold be the inflation hedge par excellence. This future stasis is what I call Free Gold.

Karl to Gekko: Indeed, your position is nothing other than a speculative bet - a gamble.

What isn't a gamble today? We are on the brink of a major discontinuity. Are stocks not a gamble? Perhaps they are the best gamble if you expect normal inflation and economic recovery. Are bonds not a gamble? Perhaps they are the best gamble if you expect deflation of the type that perpetually increases the value of the dollar, even in the face of unsustainable debt.

But how do each of these investments fare in the opposite situation? How are stocks in a deflation? How are bonds when the dollar is falling? How do derivatives fare when counterparties cop to insolvency?

And what happens to all of the above when the currency collapses? No, it's not the dollar bills in your wallet nor the quarters in your pants pocket that threaten the system. It is all the contractual debt that requires payment in those things. If that debt can't be paid to the satisfaction of the creditors that earned what he loaned with real labor, then that dollar in your wallet will fail. The mountain of debt is inextricably linked to the currency itself.

Sure, foreign debt can cause a currency collapse quickly. But what about domestic debt? What about the biggest debt in the world being owed by the biggest printer in the world? How long does that take to collapse? 30 years? 40 years? And when should we start counting?

So which is the bigger gamble with your life's savings, your family nest egg, you children's inheritance at this particular time in history? Is it a bigger gamble to keep it denominated in a precarious piece of paper printed by the global debtor par excellence? Or is it the solid, private, physical wealth reserve with a 6,000 year track record that, incidentally, the central banks and sovereign wealth funds hold as their wealth reserve?

The health of your nest egg is a very private matter, just like the health of your body. Do not entrust it to the opinion of others who will not lose a penny if you lose. Do not blindly follow the advice of anyone. Answer the questions above yourself. Think it through. Understand! Then decide for yourself.

This is no cult as Karl thinks it is. Some people here lost a lot of money in stocks, bonds and real estate before they started thinking it all through. Others here made a lot of money in these same schemes, and then went in search of the best way to consolidate that wealth before the coming discontinuity that anyone with eyes can see coming. Yet others, some that I have received generous support from, have family money, old money, and they thank me for sharing publicly what they already understand.

I recommend you read the article in its entirety here.

Wednesday, June 16, 2010

Mr. Denninger and Gold – Part Deux or: A Rebuttal to All Fiat Money Apologists

The last post saw almost a holy war break out between the opposing camps of paper-bugs and the gold bugs (truth-bugs, really) resulting in a record number of comments (1) (645 at last count) the highest for any post on ZH – ever (pending Marla’s confirmation of course. Where are you, Marla?). I wish to thank everybody who participated in the discussion for their insightful comments and feedback.

In his rebuttal to my previous article - eloquently titled "Listen to the Hucksters, Lose Your A**" - Mr. Denninger raised certain points - ill-informed as they may be (not to mention classic fiat money apologists' arguments)- to which I wanted to respond. I hope that this response will dispel some of the myths and misinformation surrounding hyperinflation, Gold and our paper money system. I must warn you though: it’s going to be a bit longish read (although interesting, I hope), so sit down with your favorite cup of coffee and without further ado let’s get started.

On Anonymity

It appears that Mr. Denninger has an issue with anonymity, perhaps being irritated at not getting the opportunity to engage in ad hominem attacks, as is his custom. Karl conveniently forgets the fact that one of the websites he has frequently referred to, quoted and even praised ever since its inception – ZeroHedge – has the principle of anonymous speech at its very core. In ZH’s own words:

Though often maligned (typically by those frustrated by an inability to engage in ad hominem attacks) anonymous speech has a long and storied history in the United States. Used by the likes of Mark Twain (aka Samuel Langhorne Clemens) to criticize common ignorance, and perhaps most famously by Alexander Hamilton, James Madison and John Jay (aka Publius) to write the federalist papers, we think ourselves in good company in using one or another nom de plume. Particularly in light of an emerging trend against vocalizing public dissent in the United States, we believe in the critical importance of anonymity and its role in dissident speech. Like the economist magazine, we also believe that keeping authorship anonymous moves the focus of discussion to the content of speech and away from the speaker- as it should be. We believe not only that you should be comfortable with anonymous speech in such an environment, but that you should be suspicious of any speech that isn't.
(All emphasis mine)

Indeed, anonymous speech is protected by the First Amendment to The United States Constitution, as has also been affirmed by the Supreme Court of the United States (McIntyre v. Ohio Elections Commission 514 U.S. 334 (1995)) – and with good reason:

Protections for anonymous speech are vital to democratic discourse. Allowing dissenters to shield their identities frees them to express critical, minority views . . . Anonymity is a shield from the tyranny of the majority. . . . It thus exemplifies the purpose behind the Bill of Rights, and of the First Amendment in particular: to protect unpopular individuals from retaliation . . . and their ideas from suppression… at the hand of an intolerant society.

(Emphasis mine)

The fact of the matter is that people care more for the ideas expressed rather than who is expressing them. Are you afraid to contest on the strength of ideas and facts alone, Mr. Denninger?

The Metals Forum

Specifically, I got tired (fast) of the incessant and mentally-deficient spamming of my forum with goldbug crap and thus have deemed it off-topic everywhere except in.... surprise.... the metals forum.
That's right, I have a specific place for all such discussions where they're perfectly welcome - even if I believe the people running their particular beliefs are wrong (or worse.) 

(Emphasis mine)

Just because you have a specific forum for the “metals” does not mean that you promote an open discussion regarding them or do not ban people who dare to have ideas different than yours. This is what one of the commenter’s on my blog (and, apparently, a former participant of your "metals forum") “George K” had to say about your “metal forum”:

I would like to note that I am one of the people who got banned from Denninger's forum for daring to question his judgment on gold. Although Karl has a subforum for metals, that does NOT change the fact that he created it precisely so that he could force "gold bugs" into his little gold ghetto, and so that Karl could point to it as a justification for banning anyone who dared to question his judgment on gold when he makes comments denigrating it in his "tickers" or elsewhere on the forum.

“Perfectly welcome”. Right.

On Hyperinflation

Worthless currency eh?  Hmmm... all I have to do is be able to obtain a return that exceeds the devaluation of the currency in question, assuming it does in fact devaluate.

Also, first you say:

Of course what really happened was that gold's price collapsed and the promised hyperinflation didn't occur.

But then you say:

Those who are looking for hyperinflation are about 20 years too late. We already had it. First in stock prices, and then in houses.  Anyone who cares to argue that taking the SPX from 100 to 1500 over a period of 20 years is not "hyperinflation" has rocks in their head.

(Emphasis mine)

Well, what is it Karl? Did the hyperinflation occur or not? Of course, it would help if you actually knew what hyperinflation is which clearly you don’t, or perhaps you deliberately choose to define terms according to your convenience.

Seriously, I mean that has to be the first “hyperinflation” in history where only two asset classes rose. Not only that, these were financial assets (or investments) and they rose much higher than the commodities and goods needed for everyday living. I mean this has to be the most prosperous “hyperinflation” in the history of mankind! If this is what “hyperinflation” looks like, then I think every country should have one. I mean Zimbabwe should be a freakin’ world superpower right now! Yeah, somebody definitely has rocks in their head.

Clearly, this is NOT what hyperinflation is. Many people tend to think that hyperinflation is simply a higher rate of inflation. Not so. The only similarity between your everyday government-theft enabling inflation and hyperinflation is in the name. There is a phase transition that occurs going from simple inflation to hyperinflation, namely, a “crisis of confidence” which eventually renders the currency worthless. In a hyperinflation we are not dealing with linear functions anymore, but exponential ones. Now I’m not going to go into a detailed explanation of how and why a hyperinflation occurs, in general, and why it will occur in the US, in particular, because excellent discussions regarding both of these topics can be found on Wikipedia and FOFOA respectively, and I’m sure Mr. Denninger will be interested in going through them. Suffice to say that hyperinflation is a currency collapse which occurs when people lose confidence in the currency, i.e. people are not willing to hold the currency for any length of time and rush to exchange it for real goods as soon as they receive it. This results in not only a high inflation rate, but an exponentially increasing one where prices double every few weeks, days or – during the end stages of the currency - even hours.  The inflation rate is reported monthly, even daily, instead of annually.

In real terms, a hyperinflation is, in fact, a deflationary depression, as even though the nominal amount of currency in circulation might reach multi-trillions, its real value is depreciating exponentially due to the high velocity and subsequent high (and increasing) inflation rate. Indeed, there is a shortage of currency in a hyperinflation as the demand for currency outstrips ability of the Central Bank (2) to create it. Did you realize what just happened!? No matter how fast the CB prints (or digitally creates) currency, people are always one step ahead of the Central Bank2. So even though the CB can print currency, it can no longer steal! The people have finally realized the scam and will have no more of it.

To give you an idea about what a hyperinflation looks like, here are some excerpts from The Nightmare German Inflation:

By 1923, the wildest inflation in history was raging. Often prices doubled in a few hours. A wild stampede developed to buy goods and get rid of money. By late 1923 it took 200 billion marks to buy a loaf of bread….Millions of the hard-working, thrifty German people found that their life's savings would not buy a postage stamp. They were penniless….By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. The economy was collapsing….Meanwhile, middle-class people who depended on any sort of fixed income found themselves destitute. They sold furniture, clothing, jewelry and works of art to buy food. Little shops became crowded with such merchandise. Hospitals, literary and art societies, charitable and religious institutions closed down as their funds disappeared.

And to give an example as to what kind of inflation to expect during a “currency collapse” a.k.a. hyperinflation, here are inflation rates from some of the worst hyperinflations in history (via Wikipedia):

Is that what happened in the United States in the 20 year period that Mr. Denninger is referring to? No. But it sure as hell IS what’s in store.

Seriously, I would love for Karl to explain how he intends to outrun the exponential devaluation of the currency when prices are doubling every few days or even hours with…umm…LEAP Calls. Even if, for arguments sake, we assume that the rise in the value of your LEAP calls outpaces the devaluation of the currency, at some point you are going to have to cash out to realize the “gain” - assuming, of course, that the counterparty who wrote the calls is still solvent and is actually able to pay up (more likely the exchange will declare a force majure as counterparties go bust left and right due to the exponential increase in price, so now you are left with nothing instead of the rosy profits you had been dreaming about)- you’re still stuck with the damn currency - toilet-paper! What is your “out”? That which the government cannot create at will out of thin air - real goods and commodities, or whatever’s left of them for sale at that point. And what is the best “real good” to hold in a hyperinflation? The one which is the “most marketable” (3) of them all - Gold! – which unfortunately won’t be available for sale anymore then. So you would have been better off if you just swallowed your hubris, bought Gold at the outset and gotten with the program [of protecting your savings].

Karl’s LEAP Call Profits - Now tell me this is something you [will] want more of!

(Courtesy Wikipedia)

Moreover, each and every hyperinflation in history – and there have been many, with the US itself having experienced one - has occurred simultaneously with a gold corner, i.e., Gold stopped being quoted in that currency – there was no Gold available at ANY price in the hyperinflating currency, whereas many other goods were (or whatever was left of them). Quite an interesting coincidence, don’t you think? Well, only if you don’t know (or refuse to accept) the fact that Gold is the only real money there is – a fact people quickly come to realize when the fire of hyperinflation starts burning.

Why You Should Stay OUT of the Stock Market in a Hyperinflation

Let’s take a look at what happened in the Weimar Stock Market:

We can say that those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital. However, there were many pitfalls along the wayside for the greedy, the fearful and the over-clever. Those who did best were investors with a certain unemotional, stolid character, a basic confidence that strong, well-managed companies would come through, and an immunity to excitement, anxiety and speculative temptations.

Many very sharp but brief advances and declines in the market led to widespread speculation, and well-intentioned investors often wound up as traders. Naturally most of them did as badly as amateur speculators generally do. Many decided that speculation was the only sensible approach; when the entire economy and financial structure was visibly crumbling, who could wait patiently with confidence in the long-range value of anything?

So to be sure, the stock market may rise tremendously during a hyperinflation but is not as straightforward as it seems. There is a lot of accompanying volatility – before the system finally becomes unhinged and collapses [into hyperinflation]- as is occurring in the US Stock Market right now –where one wrong move can destroy your life savings. We've already had two spectacular rises followed by two equally spectacular crashes (2000 and 2008) followed by another spectacular rise in 2009 – how many people were able to successfully trade around that? Very few. Buying “protection” with LEAP calls or any other instrument attached to the stock market during a hyperinflation is simply GAMBLING, and we all know how all gambling endeavors end up. Yes, you can buy and hold companies you think are solid, but you don’t know which companies will survive the hyperinflationary storm. Even worse, during times of economic distress when its own revenues are collapsing (again, in real terms), the government can confiscate any company it wants to – often the ones which are most profitable thus rendering your stock holdings in that company worthless. I really don’t understand is why you would risk your life savings gambling in the stock market CASINO when you have a much safer and better alternative which will not only preserve but increase your purchasing power when the government currency falls apart, as has been CONCLUSIVELY demonstrated throughout the various hyperinflations that have occurred in human history so far.

The Dollar, Gold and Exter’s Pyramid

Then Mr. Denninger points to the DXY chart which does not present a very accurate picture in my opinion as it simply reflects the different rates at which various fiat currencies are sinking in terms of real purchasing power. Moreover it is easily manipulated as Central Banks can and do intervene in currency markets all the time. But yes, the dollar has risen in terms of real purchasing power against a lot of things, although not all. Still, both of these phenomena are easily explained as the dollar is still the world reserve currency and is considered to be the most liquid asset i.e. “money” (for the time being anyways) by many people. As I already said:

Initially, of course, many people (such as Mr. Denninger) – mistakenly thinking the dollar to be “money” – will rush to its perceived safety causing the dollar to rise.

Which is what has happened “since the financial crisis in 2007”. But here is the thing – Gold has risen much more in terms of purchasing power than the dollar, i.e., you can buy a lot more real goods, commodities and services including “actual hard productive assets” - ounce for ounce - with Gold than with the dollar - dollar for dollar - since 2007. And this is not simply a coincidence. The model that best describes, in my opinion, what will happen – and is indeed happening - as we move along this [Gold] deflationary depression is Exter’s Pyramid.

Exter’s pyramid

As the higher layers are liquidated – indeed, evaporate (h/t Trace) as the market for them simply stops existing -  in search of the “most marketable good” or the most liquid asset, initially everything will fall against the dollar and Gold. In fact, as I’ve said before, this pyramid is the reason why - as capital accelerates its flow down the pyramid - we can expect more and more instances of the dollar and Gold going up together. Indeed, a final spectacular rise in the dollar – lulling many dollar-deflationists into a false sense of complacency - will be our signal that the show is about to end. It is this collapse of the second-last layer – the dollar or the “Federal Reserve Note” layer - that will manifest as hyperinflation. Many dollar deflationists who realize the truth about Gold think they can time this, trade around it and switch to Gold when the time comes. However, there is no guarantee that Gold will be available at anywhere near today’s prices – or indeed available at all – at that point. Much of it will happen too quickly for many people to even comprehend what hit them.

Many people will go through the different layers of the pyramid losing chunks of their capital along the way, before they come to the conclusion that Gold is the ultimate “go to” asset – at which point they may not have anything left to preserve. Trading in the rigged paper markets casino will virtually assure that outcome. But those who know what’s really happening will go directly to Gold. They will be the ones who really hit it out of the park.

On “Lawbreaking”

Oh, so now "Gordon" advocates lawbreaking as a means of "safeguarding wealth"?

As far as “lawbreaking” is concerned, somehow I don’t think the people who fled Hitler’s Germany would appreciate your lecturing very much. I mean, after all discrimination against and even killing off certain sections of society was “the law” there, so you would be “lawbreaking” if you helped anybody flee. And guess what they used to hide and preserve whatever was left of their wealth – surprise! - Gold. (In fact, many of them were only able to flee by bribing officials with Gold as that was the only thing they would accept as payment). Slavery too was legal at one time right here in the US. Price controls are also legally enforced. How do those turn out? Empty shelves! You cannot decree people to sell below the cost of production. The point is that just because something is legal does not mean it’s right, neither does it mean that “the market” will accept its fiat as such. When the government’s greed and tyranny reaches a point where people are forced to choose between their own survival and the governments’, people almost always choose their own. This is how and why “black markets” (which are really “free markets” in disguise) arise, as they WILL in the US at some point.

Legalized persecution was the very reason that the Founders fled Europe and their Central Banks and established this nation. They were also aware that governments can get tyrannical, which is precisely why the Second Amendment protects the right to keep and bear arms:

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

If it were up to “obedient” people like Karl running scared of “getting boffed in a prison cell”, America would never have been founded. Rest assured, if the present state of affairs continues where only 21% of the people believe that the US Government has the consent of the governed, we WILL reach a point – if we’re not there already – where “lawbreaking” will be the ONLY means left for “safeguarding wealth”, liberty and perhaps even our lives.

You're awfully presumptive there "Mr. Gekko"

Am I? Time and again governments throughout history and in many different countries have shown that they will happily loot and pillage their citizens in order to ensure their own survival. You need look no farther than our own shores where FDR forcibly STOLE US Citizens’ Gold and then devoured half their wealth in a step devaluation of the currency. Or just look to the latest legalized daylight ROBBERY that was TARP where the government FORCIBLY took our money and gave to the banksters. Even today the government is considering STEALING retirement monies of American citizens by forcing them to invest in Government bonds and suspending mutual fund redemptions. So no, I’m definitely not being presumptive.

And as for "moving to another country", which one would that be, exactly?  It would certainly appear that the United States for all it's faults is better-situated than the alternatives reasonably available to most of us.  Certainly you cannot believe that any of the so-called "Western Nations" in the EU, for example, are a better choice, yes?

Looks like you don’t get out much Karl.

Gold is, however, a damn good geopolitical instability hedge.

And exactly why is that Karl? Have you thought about it? Why not platinum or silver or any other precious metal? I mean what difference does it make? I’ll tell you why – it is because of what you refuse to accept – that Gold IS Money – the ultimate wealth preserver.

Perhaps that is why you conveniently ignore the high stocks to flow ratio phenomenon of Gold and the fact that the Central Banks of the world are one of the biggest hoarders of Gold. And to those with selective memories who say that, “Well, they are just part of the herd buying the top”, I will say that CB’s have been hoarding Gold ever since they came into existence. They continued hoarding it even when the dollar’s Gold backing was removed and – even though their overall holdings might have fluctuated over time - they continue to hoard large quantities of it TODAY. And the high stocks to flow ratio is not a recent phenomenon, neither is it solely on account of Central Bank hoarding. It is held by many people throughout the world (except, of course, the brainwashed populace in the US), i.e. it is a market phenomenon, and it has been that way for thousands of years. It was that way when Gold was confiscated in 1933; it was that way when the dollar was “delinked” from Gold (basically a euphemism for DEFAULTING on Gold obligations to other countries); it was that way when Gold “bottomed” in 2001; and it IS this way TODAY when, according to some misinformed people, it is a “bubble”.

You have to be simply naïve to believe that that these “geopolitical instabilities” have nothing to do with our monetary system.

Prove it.  You conspiracy theorists on this topic have been ranting for three decades about the same tired song - that it's all "price suppression", that "the gold doesn't really exist", and on and on and on.

Prove what? I was simply pointing out the flaw in your reasoning there, not alleging anything – not in that sentence anyways. Perhaps you should actually bother to read/understand what you are responding to.

Well, when is it going to happen?  Investment forecasts, to be actionable, must include both a price and a time or they are worthless - indeed, often worse than worthless.

Well, in case you didn’t notice, “it” is happening right now! In fact, it has been happening for the past decade. You would have been better off holding simply Gold than any other “investment” during the past ten years. And as time passes I can assure that “it” will continue to happen, only at an accelerating pace. The emperor will soon be fully naked for all to see.

I also remember the people who were bankrupted by believing that gold was "money" and nothing else was…

Only if you were a casino patron who practiced “buy and hold” using leverage. Even if you bought the very peak, you lost only about 50%, considering the average price over the ensuing 20 years, and were not “bankrupted” as Karl claims. But if you had even half a brain and could see the massive inflation that what was coming down the line - what with the US Government spending money like a drunken sailor on the Vietnam war and the subsequent default on its Gold obligations – you bought Gold as soon as you saw Nixon LYING on national television. How did that turn out? Well, not only did Gold rise 24x during the ensuing decade, it remained levitated 11x (even after the “collapse” in 1980) for the next 20 years, and today is 34x that level, whereas the SPX is only 14x its 1970 level! Even if you go with the “market price” since 1974, Gold has risen 12x till date whereas stocks have risen only 8x.

The 20 Year Argument

Basically, the point Karl seems to be making is this:

The historical precedent is what it is… gold is not a particularly good hedge against inflation…during a period of serious inflation - from 1982 to 2002…gold's price was flat to down. It is thus a massive fail at it's claimed purpose.

First, aren’t you being a tad biased when your “historical precedent” consists of only the recent 20 year period while conveniently ignoring the “historical precedent” of thousands of years of fiat currency failures and of Gold’s acceptance as money? Second, there was a lot of inflation during the 1970-80 period with the CPI rocketing to 16% by 1980, but Gold performed extremely well during that period, whereas stocks essentially went nowhere. So you really can’t make generalized statements such as “gold is not a particularly good hedge against inflation”. But the question remains, what happened after 1980? Why did Gold do nothing while stocks rocketed? Two things: first, the US exported a lot of its inflation to other countries via the reserve currency mechanism. CPI remained flat to down after 1980, as exemplified in the following chart:


Here is the gold price in Chinese Yuan and Indian rupee – two of Asia’s (and the world’s) largest economies. As you can see, they were experiencing a bull market in Gold even as the dollar price remained “flat to down”:

Second: outright manipulation. They started to gimmick the CPI massively in the 90’s at which point the “strong dollar” policy was instituted, i.e. manipulation of Gold prices (via massive naked shorting of futures as well as fractional reserve selling of bullion by the LBMA) in order to hide the true rate of monetary inflation. It is this manipulation which has started to unravel since the beginning of this decade resulting in rising Gold prices.

On Manipulation

Yes, I know, it's all manipulation.

Is that really so hard to believe? You yourself, along with many others, have extensively documented the shenanigans occurring in various markets today. I mean the Fed is now OPENLY manipulating the Treasury market via “QE”.  But the one market they decide to let trade “freely” – the one most important to maintain the illusion of a “strong dollar” no less - is the Gold market. Do you really expect us to believe that? Indeed, organizations like GATA have extensively documented the US Government/Fed supported long-term Gold price suppression. Alan Greenspan even admitted openly in 1998 that Central Banks intervene in the market to suppress Gold’s price:

Nor can private counterparties restrict supplies of gold…where central banks stand ready to lease gold in increasing quantities should the price rise.

The evidence is out there, if only you choose to look at it.

However, there is a fly in the ointment. The manipulation cannot last forever. In fact, the longer and more persistent the manipulation, the more spectacular the eventual opposing move will be. It is a testament to the sheer force of the market that despite record naked short position of the bullion banks against Gold, it continues to rise. The real rise will be witnessed when the bullion banks and the LBMA go bust. To put it another way, if you were patient enough to hold Gold through the period it went “sideways to down”, rest assured, you will be well rewarded.

Let's define our terms.  "Money" is a convenient catch-all but it's also a bullshit term because it lacks precision.

I already did - precisely. I can’t help it if you choose not to understand it.

Karl then – instead of looking at the simple facts staring him right in the face - goes into a confused and disjointed theory about money with subjective terms like “wealth”, “credit”, “intrinsic value”, “speculative premium”, “value” etc. and ultimately ends up justifying that “money is debt” (or credit – after all, one man’s credit is another man’s debt); that you need credit (or debt) in order to trade. This is the very same propaganda that the banksters have sold us that “money is debt” – the way it is created in our system today – and Karl seems to have bought it hook, line and sinker.

The hell it is. Every man has the ability to create wealth and most can create credit, which is the essence of money. When Wimpy promises to pay for that hamburger next Tuesday he has created, in point of fact, both credit and (by common definition) money.

We can? Have the legal tender laws been repealed? Phew! Good thing– I guess we can get rid of all the banks now. Who the hell needs “loans” from Fed-controlled banks when you can pay off stuff with a promise to pay it off tomorrow? Sweet. Seriously though, unless you are telling me that you can print Legal Tender (or dollars) out of your basement, you are WRONG. Every man can create “wealth”, but needs to bend over in front of the banksters to obtain the legal tender denominated “credit”.

But only government has the authority to use force to extract both from you - that is, to force you not only to turn over current production but to compel you to produce in the future as well.

So what you’re essentially saying is that we are all born indentured SLAVES to the government. And here I was thinking slavery had been abolished in America. BTW, did you think about who controls our government today – that’s right – the banksters. So, in other words, we are all slaves to the banksters. Which is EXACTLY what I meant when I said “ultimate power”.

The convertibility by law was disposed of by Richard Nixon.  The dollar did not "instantly collapse" (although many said it would.)  In addition there was no right of exchange during the period after FDR's confiscation through the repeal of those regulations and laws, and again, the dollar did not "instantly collapse."  This claim is utter and pure horsecrap as the dollar was maintained through forty years of being non-convertible.

First of all, as long as Gold was/is available on the open market in exchange for dollars, it was/is “convertible”. Period. It doesn’t matter if it’s a fixed or floating rate. Sure, the government tried to “dispose of convertibility” (and pretended it was in charge in order to hide the fact that they were defaulting on their Gold obligations), but really it was the market that forced their hand. They simply could not afford to redeem all the flood of dollars coming in Gold at the artificial fixed price! Indeed, if Gold was only money by government decree then it should have collapsed instantly, as many paper-money apologists claimed even then. Instead it rose 24x over the next decade and even after “the collapse” in 1980, it remained almost 11x its decreed price in 1970. The market showed everybody which one was the real money. Also, you conveniently “forget” the fact that even though US citizens were not allowed to own Gold or redeem their dollars for Gold, internationally the dollar remained redeemable which is why it did not collapse. Yes, somebody is definitely spewing “horsecrap” and it is you, sir.

The founders based our monetary system on silver, not gold.

Umm…No.  They based it on both Gold and Silver. Perhaps it’s time you took a look at the US Constitution:

Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

(Emphasis mine)

Even today the banksters would love a gold standard, as it would play directly into their hands.  With the vast majority of production being tied to a handful of suppliers absolute control would vest in just a few easily-bribed persons and corporations.  By being able to control gold supply through such a corrupt system they could easily cause deflationary collapses any time they wished, thus escheating all property carrying debt to themselves literally on demand.  Such was common practice prior to the abandonment of gold-backed currencies.

Gold-backed currency is a banking cartel member's wet dream.

So why don’t we have it now? I mean the banksters practically control Congress and the White House right now and they literally OWN the Federal Reserve – would you agree? So what’s there to stop them? I mean if they can get a law like TARP passed – they can get ANY law passed. Clearly the people of the United States cannot stop them. Or are they just not doing it out of the goodness of their hearts?

Do you really believe that the bankers would want something that is limited in supply by nature to be money over something they fully control the issuance of i.e. paper money? Not only that, Gold’s above ground stockpile is extremely large (compared to its annual production) and distributed widely enough that controlling a “handful of suppliers” would not amount to controlling much. This is the very reason why they engage in all sorts of frauds and misinformation campaigns against Gold. As Ayn Rand said:

“Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.'”

If you think they want Gold so they need to cause a “deflationary collapse” to own everything, I suggest you take a look around – they ALREADY own EVERYTHING. I mean the level of ignorance you display here is actually quite astounding. I guess that is what happens when you surround yourself with sycophantic “yes-men” and instantly “banning” anybody who dares to have a shred of different opinion. Why even bother having a “forum” when all you want is listen to your own voice. At least try to do some independent thinking and research before blindly accepting anti-Gold propaganda.

Gecko then presents the following outright fraudulent chart. Why is it fraudulent?  Look at his starting point - the end of Kondratieff Autumn in 2000!

Perhaps you should actually read what you are responding to. I clearly mentioned the period I was referring to when I presented that chart. Moreover, is the Kondratieff Cycle an exact science? No! What is exact are the facts and I was simply observing them.

The goldbugs are after a laudable goal - the ability to simply save money (production) over time, take zero risk and wind up with the sum of the purchasing power saved.

That's the goal that the bugs have, but the goal is unachievable through hard-backed money.  The bugs often point to the period before the 1930s as one where over time purchasing power didn't change much, but they ignore the outrageous swings that took place in the interim, often resulting in 30-50% price changes in the space of just a year or two's time - in both directions!  Catch that wrong and you're bankrupted.

I am not advocating any sort of “backed” money as backed money is always some sort of fraudulent fractional-reserve scheme used by the government/banksters to engage in stealth confiscation - which is also the reason why you get the violent swings you are referring to (even so, I don’t see how losing 99% of your purchasing power over a 100 years is preferable to a short lived violent swing, where if you simply sat it out, you’d still be preserving all your purchasing power!). Gold in the hands of the public freely circulating as money is sufficient to achieve the “laudable goal”, without any interference from the government. I mean I already took the risk when I engaged in my particular occupation and earned that money. Why should I have to take risk it all again simply to preserve my purchasing power?

In fact, Gold doesn’t only preserve your purchasing power, but increases it over time. Let me explain. Contrary to what paper money advocates will have you believe, deflation in itself is not “bad”. In fact, in a society with increasing productivity this will be the de-facto state of affairs because as the production of goods and services in the economy increases and the money supply remains relatively constant – a feature of Gold as it cannot be created out of thin air unlike paper money – the purchasing power of your existing savings increases, which is what matters ultimately. Most people focus on the nominal amount of Gold or currency in their possession. It simply does not matter! The purchasing power of what you hold does.

Inflation is not the “natural” state of affairs as the statists would like everyone to believe. Imagine not having to gamble in the paper market casinos just to keep even, and instead spending your time and increased purchasing power on doing what you do best further enhancing the overall productivity of the society. This, in fact, would be the de facto state of affairs in the absence of disguised looting and pillaging (via the inflation tax) by the government/banksters in a fiat money system.

So yes Mr. Denninger, we’re not only after that “laudable” goal, but one better.

On the Federal Reserve System

Also, Mr. Denninger also appears to be an ardent fan of The Federal Reserve System, which is neither Federal nor a Reserve but a private banking cartel monopoly. If it is such a great and beneficial law why was it passed stealthily through Congress in the middle of the night after a secret meeting between the bankster kingpins of those days on Jekyll Island? Indeed, the video “The Creature From Jekyll Island” by G. Edward Griffin explains the truth behind the Federal Reserve.

He then goes on to quote the Federal Reserve Act:

The Federal Reserve Act says:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Really? How about Unicorns s**tting Gold bars (or dollars, if you prefer) while we’re at it? If central planning worked, the Soviet Union would be the wealthiest country on earth right now. The fact of the matter is that central planning has never worked. The Fed does not – indeed cannot – know what “the economy’s long run potential” is and therefore it cannot “maintain long run growth of the monetary and credit aggregates commensurate” with it. In fact, nobody can know what this “optimal” rate of growth of economy or the money supply is; only the market does. The fallacy that Karl (and whoever wrote this idiotic law) is engaging in is that we need “stable prices”, therefore we need a money supply that increases with the growth of the economy. We don’t need “stable prices”; falling ones – as I explained above - are better!

This [the Federal Reserve Act], if followed defacto, results in zero inflation (stable prices) across the intermediate term…

A law which has not been followed once since its inception, can be argued, was not meant to be followed (not to mention, the way it is written, cannot be followed). They wrote a bunch of BS platitudes in there to fool the public but, like they say - watch what they do, not what they say. This is what has happened throughout the entirety of the period that the Fed has been in existence:

US Dollar Purchasing Power Since the Creation of the Federal Reserve in 1913

Theft via inflation was their intention from the very beginning and that is, in fact, what they did. 

The failure is not in the structure of the system, but rather is found in the corruption thereof and the utter refusal of the people to hold those elected and appointed officials to account under their black letter legal responsibilities.

So how do you suggest we fix this? By putting everybody in prison? You’ve already blamed everyone – everyone except yourself, that is. Perhaps we should make you in charge of the whole shebang, right? The fact of the matter is that shouting online and elsewhere that corrupt politicians, regulators and law-enforcement personnel be prosecuted and jailed while at the same time promoting the very system that is at the root of the corruption is ignorance at best, and hypocrisy at worst. You want government appropriation that funds your social security checks to continue, yet you want the looting to stop. You simply can’t have it both ways Karl.

Of course, I realize that no matter what I say or what evidence I present, it will never be good enough – especially those who believe in paper money enabled wealth-redistribution schemes. Or perhaps people like Karl are simply envious that those they derided and opposed so vehemently are being proven right by the market.

The proof of any hypothesis/theory is in what actually transpires in the real world. Events will eventually prove who is right. As Another said:

Time will prove all things.


1. H/t Akak
2. Now many will say, “But currency is created digitally today”. So what? If the CB can print digitally, the people can spend digitally!
3. For an explanation of the “most marketable good” please refer to my previous article.

Monday, June 14, 2010

Important Update: Gordon Gekko's Blog is Moving

Dear Readers,

Gordon Gekko's Blog is moving to its own separate brand new domain name. The new blog address is . Please update your links accordingly. A few things:

1. For now, the blog is still hosted on and therefore this new address will simply redirect to the blogger website. This may change in the near future if/when I move off Blogger.

2. The old blog address will continue to redirect to my blog as long as I am hosted on Blogger. Again, this will not be the case if/when I decide to move off Blogger, so it's best just to start using the new address right now i.e.

3. All older posts will continue to be available on Blogger (i.e. ) as well as the new blog address.

4. New posts will  be available only on the new blog address i.e.

Blog Feed URL (RSS/Atom):

Please make sure that you are using either of the two feed URL's below so that you continue to receive new posts (the first one is preferred):


Or you can just click on the "Subscribe in a reader" link on the right hand side.

Please make sure that you are NOT using the feed URL below as the availability of new posts on it is not guaranteed (although older posts will be - forever):

If you have any questions, please post them in the comment section below and I'll answer them as soon as I can.

Thank you,

Gordon Gekko

Friday, June 4, 2010

Guest Post: The BP Mess Is A Natural Punishment

A lot of things that are wrong in today’s society can be traced back to the fraudulent monetary system. Controlling the money supply is a way to control society and today that control lies in extremely corrupt hands. The monetary system is the blood stream of the living organism known as the economy. It has been corrupted and the organism is now dying. The cancer of the fiat money system has resulted in various tumors in the body economic, many of which are now simply exploding. The latest tumor to explode has been the BP Gulf of Mexico disaster. The “causes” behind this disaster being listed in the mainstream media are merely symptoms of the disease that is the fiat money system. 

Trace Mayer, J.D. of and author of The Great Credit Contraction has penned an excellent article explaining how the Gulf of Mexico is natural outcome – a natural punishment, if you will – of running such a diseased and corrupt system. Without further ado, I present to you:


The entire system around which daily life is organized in the United States, undergirded by the Federal Reserve Note dollar, is crumbling. Both long-term trends and externalities, like the BP mess, are natural and predictable consequences. Inertia is such a strong force that the avoidable often becomes, in the macro, unavoidable. But individually you can starve the vampire squid institutions and organizations and in doing so likely increase your health, wealth and happiness.


The Founding Fathers were a particularly contentious lot during the Constitutional Convention. A major point of disagreement was slavery and the slave-trade compromise hinged on a clause found in the United States Constitution Article I Section 9 Clause 1 which contained an interesting word: dollar. Obviously, if the term dollar did not have a commonly accepted definition then this slave-trade compromise would not have been agreed to in the convention. But now the question What Is A Dollar? has no intelligible answer under federal law.

George Mason, a slaveowner, famous American Revolutionary Statesman, Delegate from Virginia to the Constitutional Convention and the “Father of the Bill of Rights” said,

Every master of slaves is born a petty tyrant. They bring the judgement of heaven upon a country. As nations cannot be rewarded or punished in the next world, they must be in this. By an inevitable chain of causes and effects, Providence punishes national sins, by national calamities.

The slavery issue, which could have been addressed and settled at the Founding, was instead, because of inertia, postponed until it erupted in a bloody crisis led by America’s greatest despot. The monetary issue, in contrast, was settled at the Founding and has been steadily eroded since until the United States and the world now finds itself in a very difficult and dangerous predicament.

Individuals, cities, counties and States are using Federal Reserve Note Dollars as legal tender and this is unconstitutional. Of course, the United States Supreme Court has not and most likely will never address the issue and so it is left to fester and boil until an avoidable crisis becomes unavoidable. Dr. Edwin Vieira in Pieces of Eight foresaw, chronicled and forewarned about all of this. It seems Seth Lipsky of the Wall Street Journal, like most in the Establishment, is a little late, ignorantly or deliberately? Inertia.


Since Henry Ford refined the assembly line into an efficient factory the United States has been favoring oil through tax policy which has artificially stimulated demand. Now the entire American infrastructure has been built around this premise and as Dick Cheney says, “The American way of life is not negotiable.” Just ask Saddam, Obama or Ron Paul.

Of course, a couple natural byproducts of this favorable tax policy for both supply and demand of oil, ranging from highway funding or the public school transportation system to the primary residence interest tax deduction or municipal bond tax exemption, is lower cost resulting in increased demand and the rise of special interest groups such as Big Oil. Then supply which would most likely not ordinarily be produced is sought for production instead of substitute or alternative goods which often encounter legislative barriers to entry. Special legislation is enacted to protect suppliers against externalities so that the commodity can be provided at a lower cost which further feeds demand. The governmental intervention changes the economics; the economics guide the culture and ultimately impacts behavior.

Then, BAM! An externality black swan lands like the Exxon Valdez mess or BP’s massive pollution of the Gulf of Mexico. Sure, Exxon probably does not intend to wreck the oil tanker but if they can privatize the gains and socialize the losses then it would create shareholder value.

While Exxon polluted Valdez on 24 March 1989 the case was finally heard on appeal to the United States Supreme Court on 27 February 2008, about 19 years later and the decision merely remanded the case back down to the 9th Circuit Court of Appeals and limited the punitive damages to the compensatory damages of $507.5M even though Exxon’s behavior was ‘worse than negligent but less than malicious’. In the meantime, after the first verdict JP Morgan Chase created the first CDS for Exxon in 1994 because of the initial $5B punitive damage award and inflation has since eroded the vast majority of the value of 507.5M Federal Reserve Note Dollars. Thus began the rise of the derivative industry.

While President Obama is strutting around browbeating BP the outcome will likely be similar to Exxon’s which is still unresolved even though three United States Presidents have completed five terms. For example, Exxon posted record profits of $45.2B in 2008. This is an example of privatizing the gains and socializing the losses. Likewise BP will probably privatize the gains with their average net income for the last three years of $21.316B while socializing most of the losses resulting from this massive corporate defecation in the Gulf. Inertia at work to sustain the unsustainable system which had its genesis decades ago.


BP’s massive pollution of the Gulf of Mexico will have a tremendous negative impact on millions and millions of people. But BP, like the investment banks they are intertwined with, will likely be able to privatize the gains from oil production and socialize many of the losses. This is just a single example of ‘an inevitable chain of causes and effects’ that are driven by physical and economic law.

But if you think the pollution in the Gulf of Mexico is tremendous then I doubt you understand the scale of the damaging externalities resulting from the current worldwide monetary system. In the grand picture this BP mess in the Gulf of Mexico is a tiny and immaterial result from using a fiat currency and fractional reserve banking system. Exxon Valdez, BP Gulf of Mexico, Chernobyl, Soylent Green, Union Carbide’s Bhopal, the American military, the Health Care Bill, Monsanto’s Food Inc, and etc.

Using a sound money system as demanded by the United States Constitution while boycotting fractional reserve banking, in other words starving the vampire squid, is one way to protect and preserve both your personal health and the environment. In other words, stop paying these institutions and organizations to kill you and destroy the environment! To the extent possible, move your money, support HR 4248, alter your habits, change your buying patterns, cancel your cable, buy gold, and boycott unethical, immoral and damaging companies. You will likely be healthier, wealthier and happier if you do.

DISCLOSURE: Long physical gold, silver and platinum with no interest the XOM, BP, the problematic SLV or GLD ETFs or the platinum ETFs.

Sunday, May 30, 2010

Mr. Denninger and Gold or Why the Dollar-Deflationists Are Wrong

Those who know Mr. Denninger know that he, well, for lack of a better word, hates Gold. It only goes to show the level of disinformation and ignorance prevalent in our society when even smart people like Karl fail to get it. From what I hear anybody even mentioning the word Gold runs the risk of being permanently banned from one of his "forums". In a recent commentary entitled "Ten Things for 2010" he was at it again bashing Gold. Here is what he had to say:

We're not looking at hyperinflation folks, in my view - we're looking at a deflationary collapse…If you fear hyperinflation do not look to Gold, instead buy a small (5% of your total portfolio) position in far out of the money LEAP CALLS on the major indices, spread across them.  Why?  Because (1) the tax structure on gold is unfavorable, (2) gold has never performed well on a contemporary basis .vs. inflation and (3) you can't eat it.  If you try to get around the tax man structure you're going to get creamed; governments can and WILL prevent that from working.  My recommendation thus is to buy insurance against a hyperinflationary event using instruments that do not try to evade the formal financial structure, are levered (to get around the tax hit) and are defined risk (so as to avoid losing your ass if you're wrong.)

Really Karl? LEAP Calls? In a hyperinflation? That’s a good way to lose 5% your portfolio. I’m assuming you know what hyperinflation is - in a hyperinflation the currency becomes worthless, as in toilet-paper. Why would anyone want to get paid their "winnings" in a worthless currency, assuming there are stock indices and counterparties left who can pay off these worthless winnings when countries collapse?

And the tax structure is FAR more favorable for Gold than ANYTHING else, if only you are not in the habit of bending over. Buy cash and keep your mouth shut – it’s very simple – or just move to another country where the government is not as intent on raping its citizens. I know privacy is a foreign concept in America these days, but still. All your other assets, including stock market profits, are fully open to the government and there is nothing stopping them from taxing them to the hilt. Trust me, when it all hits the fan Gold in your personal possession will be your best friend.

Which brings me to my favorite part:

gold has never performed well on a contemporary basis .vs. inflation

Poor Gold. The thing gave an instant 75% profit when Roosevelt confiscated it in 1933 and rose 24x (yes, that’s 24 TIMES) from $35 to about $850 in a space of 10 years from 1970 to 1980. And even during the past decade from 2000-2010 it has risen 5x outperforming ALL asset classes. Overall, from 1933 till date it has risen about 60x. That is, if you simply held Gold since 1933 you would be now 60 times richer, at least in nominal terms. Yet nobody remembers all that. All they remember is the lousy 20 years from 1980-2000 when the full force of the derivatives market was brought to bear upon it to suppress it’s price (well, that’s a topic for another post), as is being done even now absent which it would have easily crossed 10x (from the 2000 low) by now – which it will at some point in the future as the market cannot be suppressed forever. Indeed, the longer the suppression, the more forceful the eventual price rise as happened when the London Gold Pool collapsed during the late sixties soon after which Gold shot up 24x during the next decade. If you’re not that devoted a disciple of Karl I suggest you hang on to your Gold for a little while longer. In my humble opinion, it will outpace all gains in all other asset classes since the creation of the dollar – in not only nominal, but real purchasing power terms.

And then there was this again:

The last time I checked they didn't take 100oz bars at WalMart, but they sure do take $100 bills

And the last time I checked Karl, they weren’t taking stock certificates and bonds either. Also, there was a funny thing I noticed: there was NOTHING stopping me from getting dollar bills, euros, yen – you name it – for my Gold. In fact, everytime I sold some Gold I got even more paper tickets than the last time – which meant that I could buy even more stuff with the same amount of Gold. How surprising, no?

Well, Karl was definitely surprised:

Precious metals will not be a safe haven: Clean miss.  Gold and silver have both performed well.

And talk about reaching wrong conclusions:

Discovery that the metals market has been "polluted" to the point of irrelevance would mean that those around the world who had bought and were holding alleged gold bars that in fact aren't gold had tendered good money for nothing.  This would be a monstrous deflationary event - after all, the definition of deflation is the destruction of money, and that's exactly what would have happened, just as if you took a stack of $100 bills and burned them in your back yard.

No Karl, the bills still exist – in the bank account of whoever was paid to obtain the said Gold. It is the Gold which is discovered to be no longer existing, thus causing the apparent supply to be further reduced and spiking the price.

Karl thinks he’ll be safe watching these “fireworks” from the sidelines. Not so Karl. By not buying Gold (and holding dollars), you are smack in the middle of them. You are not simply “missing out” on some investment gain but stand to lose everything as the purchasing power of the dollar is decimated. This is why those advocating holding only paper cash as a “safe alternative” are in fact harming those who listen to them.

Now don’t get me wrong - I agree with a lot of what he says in general – he’s a good reporter (which is why I keep him on my “must read” list) - but when it comes to Gold, Karl simply doesn’t “get it”. First of all, when you talk about deflation you have to ask the question, “In terms of what?”.  Most people ala Mish, Prechter, Karl et. al. when they talk about deflation are referring to deflation in terms of the dollar, i.e. they are, in fact, “dollar-deflationists”*. One can’t really blame them since the dollar is considered by most people as “money” today and is therefore their frame of reference. But this is a critical error of perception that will prove fatal to those who hold their life’s savings in dollars when it all finally implodes.  The dollar today is just another fiat currency created at will out of thin air by bankrupt and corrupt governments and their Central Banks. It is an illusion of money, not money; which brings us to the question of:

What is money?
This is a topic which can fill an entire book, but I’ll just quote the best one I found (Mises):

In the marketability of the various commodities and services there prevail considerable differences. There are goods for which it is not difficult to find applicants ready to disburse the highest recompense which, under the given state of affairs, can possibly be obtained, or a recompense only slightly smaller. There are other goods for which it is very hard to find a customer quickly, even if the vendor is ready to be content with a compensation much smaller than he could reap if he could find another aspirant whose demand is more intense. It is these differences in the marketability of the various commodities and services which created indirect exchange. A man who at the instant cannot acquire what he wants to get for the conduct of his own household or business, or who does not yet know what kind of goods he will need in the uncertain future, comes nearer to his ultimate goal if he exchanges a less marketable good he wants to trade against a more marketable one. It may also happen that the physical properties of the merchandise he wants to give away (as, for instance, its perishability or the costs incurred by its storage or similar circumstances) impel him not to wait longer. Sometimes he may be prompted to hurry in giving away the good concerned because he is afraid of a deterioration of its market value. In all such cases he improves his own situation in acquiring a more marketable good, even if this good is not suitable to satisfy directly any of his own needs.

A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production.

Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange...

(All emphasis mine)

Money was created by the markets; by humans trading goods and services amongst themselves; by the need for indirect exchange. This is one of the major misconceptions of the dollar-deflationists - that money is what the government says it is. Although Governments do their best to convince people otherwise, including putting a gun to their collective heads via legal tender laws, they cannot dictate what money is – not for long periods of time anyways – which is why whereas Gold has been money for thousands of years, you’d be hard pressed to find a fiat currency that has existed past a few decades. The present period is one such short period of mass delusion where the majority has been convinced – including, apparently, Mr. Denninger - that the colored pieces of paper being printed by various men behind the curtains is, in fact, money.

Gold is the commodity that humans chose to be “money”- the most marketable good. It didn’t happen overnight, but over thousands of years of evolution. Billions of trading decisions over centuries made by free men of their own volition – the collective wisdom – installed Gold as money. It needs no government violence to enforce as money because the force of nature that is the market chose it to be money. Indeed, it was the governments who hijacked the free-market commodity money of Gold into “backing” their various fraudulent paper money scams using fractional reserve systems. Why? Because the power to create money is the ultimate power. It is not for no reason that Mayer Amschel Rothschild said:

“Give me control of a nation's money and I care not who makes her laws.”

And why do we know Gold is still money today? It’s simple – Gold has the highest stocks to flow ratio of any commodity i.e. its total above ground stockpile is very large compared to its annual production which is NOT the case for other commodities. The reason for this is that while other commodities are primarily mined for consumption, Gold is not consumed but hoarded. Its primary function is that of a store of value – a wealth reserve. Why do you think the Central Banks keep Gold on their balance sheet even today? Right. Even the Gold jewellery demand in countries like India is, in fact, investment demand in disguise – hidden firmly behind veils of religion and culture to protect their real wealth from the depredations of various rulers and governments that have pillaged her over the many thousands of years of her existence.

Moreover, even though most people don’t realize it, even today the dollar is only acceptable as money because it is indirectly “backed” by Gold (via the derivatives market) i.e. you can get Gold in exchange for paper dollars on the open market. The proof of this lies in the fact that were, for some reason, the convertibility of Gold into dollars suspended today [on the open market], the dollar would instantly collapse.

Gold IS Money – not the dollar, not ANY fiat currency. Period.

As the king of banksters J.P. Morgan himself testified before the Pujo Committee in 1913:

“Gold is money and nothing else”.

The Fiat Money Scam

Throughout history no fiat currency has survived – ever. There is a reason for it. Paper money is inherently a scam – a scheme to loot the people who actually produce the goods and services in the economy. Just because it is legalized and its perpetrators hold fancy government titles does not mean it is not a fraud. The issuer can create unlimited pieces of paper – or computer bits today – at essentially no cost and use them to appropriate real goods and services in the economy. So whereas you and I have to actually do real work to procure it, the printers of the currency can basically print whatever they need. This is why there is a constant inflation of money supply under a fiat money regime as has been the case since the Federal Reserve was established in the US in 1913, as constant theft requires constant creation of new money. The evidence of this inflation is the annihilation of the dollar’s purchasing power since then:

The Dollar's Purchasing Power Since the Creation of the Federal Reserve in 1913

This is why we have legal tender laws making the unconstitutional Federal Reserve Notes legal tender with the monopoly of the private banking cartel (i.e. the Federal Reserve) enforced by the courts enabling the banks and the government to essentially enslave the populace. This is also exactly why the founders of America prohibited anything except Gold and Silver to be used as money, and why the governments go to great lengths to suppress their price. Indeed, America today is the very antithesis of what its founders intended.

The fraudulent money system today is the source of all the rottenness. The various scams in progress today - the entrenched corruption - can be all be traced back to it. The rot is at the very top of the pyramid from which the fountain of fiat money emanates. It is indeed telling that the two World Wars occurred right after creation of the Federal Reserve. Further, no amount of prosecution will fix the system because the prosecutors themselves have been corrupted. As Ayn Rand said:

"When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world? You are.”

It is too lucrative a scam to be given up voluntarily by those owning the printing press while the going is still good. It is like expecting a thief to stop stealing while not only being immune from any sort of legal prosecution, but actually having the power to create laws. The system cannot be fixed - the only way this will stop is a collapse of the existing system so that a new one can be built – and we are in the middle of it right now.

Deflation in Terms of Gold, Hyperinflation in Terms of the Dollar

By its very nature, due to economic control being concentrated in a few hands and fraudulent creation of money out of thin air, the fiat money system creates massive misallocations of capital and resources throughout the economy. The economy under a fiat money system is no different than a centrally planned one, such as the Soviet Union.  Moreover, since the entire world is on a fiat money standard today – with the various fiat currencies themselves being “backed” by the fiat dollar - misallocations of capital have occurred throughout the world resulting in malinvestments. These misallocations are both material and human, as exemplified by the skyrocketing unemployment rate. The malinvestments now need to be liquidated i.e. converted to the most liquid form – “the most marketable good” or money - so that the capital can be reallocated to more productive uses. Loans are called in as they can no longer be serviced. This results in deflation, i.e. rising demand for money in relation to everything else, and consequently falling prices and increasing purchasing power of money. Moreover, economic uncertainty means that more and more people want to hold “the most marketable good” i.e. money thus further increasing the demand for money.

Now normally – since a lot of debt-money is destroyed in the process and there is a rising demand for money - this would lead to a rising dollar (in terms of purchasing power, not the meaningless DXY), but that would mean that the whole “theft-via-inflation” scam would fall apart. The government can’t tax a rising purchasing power! They simply CANNOT allow deflation in a fiat money regime as it would defeat its very purpose – that of allowing them to appropriate resources from the rest of the economy. This would threaten their very existence.  This is why holes created on the banks’ balance sheets by defaulting loans – which would normally create deflation - are being eagerly filled by the Central Banks. This is why the Fed is now simply printing money out of thin air – both overtly and covertly, with the derivatives market being cleverly used to absorb the excess money creation (so you were wondering why the derivatives monster is increasing exponentially in size?) - to fund the government’s operations as there is not enough money in the market to lend to the government. Hiding under esoteric nonsense terms like “quantitative easing” does not change the fact that it is simply creating money via ledger entries and outright STEALING.

Whether they “allow” it or not deflation WILL take place – not in terms of dollars, but in terms of Gold. It’s simply forces of nature – the market – at work. The dollar deflationists expect the dollar to suddenly reverse its 100 year long drop in purchasing power. Ain’t gonna happen. What the government is doing now – i.e. spending raw printed money into a contracting economy - assures us that we will end up with the hyperinflation of the dollar. The only thing they can do is prolong its demise with intermittent bouts of induced apparent “deflation” to keep the inflationary scam going a little bit longer - remember 2008? (h/t Gary). Initially, of course, many people (such as Mr. Denninger) – mistakenly thinking the dollar to be “money” – will rush to its perceived safety causing the dollar to rise.  But ultimately, as more and more people realize that the government will not – indeed, cannot – stop inflating the currency into oblivion, will choose to hold the ultimate “marketable good”, i.e. Gold. This is the reason why Gold is the only asset class at new all time highs. Rest assured, even the big boys are holding Gold in their private vaults, not dollars. Is there any sense in holding something you can create at will?

Ultimately, there can only be deflation in terms of commodity based money such as Gold since it cannot be created out of thin air. Indeed, we have already been deflating in terms of Gold for the past decade. Just look at the various commodities, the stock market, real estate – pretty much anything - priced in Gold – it’s all going down:

 SPX priced in Gold (2000-2010)

As capital goes down the liquidity pyramid in search of the most marketable good, all the money derivatives – including the dollar – will collapse returning all capital to where it came from: Gold; a global reset, if you will, with only holders of Gold left standing when the dust settles:

 Exter's Liquidity Pyramid


You Cannot Eat Gold, But You Can’t Eat Dollars Either

That has to be one of the lamest arguments against Gold – ever. It is the sign of a closed mind. It shows that you don't know ANYTHING about human history, which is not surprising considering the sorry state of our government controlled "education system". You cannot eat FRN’s either – why not just burn them? The function of money is not to be eaten but to be used as a medium of exchange and store of wealth i.e. to get what you want to eat at an indefinite time in the future. And while with Gold you are assured of getting at least something in return in the future, whether it is an edible product or not, it is not so with dollars. Fiat money has a problem in that it lasts only as long as the government enforcing its use does. In times of economic uncertainty, such as today, when the very survival of various governments is at stake (yes, that includes the US Government) do you want to hold Gold or their worthless colored paper tickets? Gold is the only money that has outlasted empires and governments - no fiat currency has. Think about it - what will your dollars be worth when there is no government to enforce it as legal tender? Yup – zip, zilch, ZERO. And to those who say that we will not need Gold (but something else like food or guns) in such extreme circumstances, I say that empires and governments have constantly collapsed throughout history but it did not mean the end of the world. As long as you believe that human society will exist and there will be division of labor, you need money (i.e. Gold) – because:

a)    You cannot store indefinitely all your needs especially perishable items such as food.
b)    You do not know with 100% certainty what you will need in the future.
c)    You cannot produce/manufacture everything that you will need today or in the future by yourself.

Even if the government does not collapse there is nothing stopping it from devaluing the currency at will in a step function thereby instantly appropriating a vast amount of your savings, as has already happened not once but twice with the dollar since the creation of the Federal Reserve. I mean really, the facts are so obvious that you have to be either be in total and complete denial (perhaps due to having already put all your eggs in the dollar basket) or in collusion with the people promoting the paper money scam.

Gold is the currency beyond Governments. It is the most liquid form of money accepted throughout the world – the true reserve currency of the world - whereas Dollars, Yuans and Euros etc. are only guaranteed to be accepted within their own respective countries, and as long as their respective governments last. Why would you want to tie yourself down to the paper currency of a particular nation, especially in times of such turbulence? It points to a very limited sphere of thinking when you advocate that holding only dollars is the best strategy. It is a fallacy to believe that there is no refuge outside the system; that you have to be trading paper tickets all the time to “keep up” with the dilution of your purchasing power or just stand by idly holding dollars while the government rapes you. Gold is your refuge outside the system.

Got Gold, Mr. Denninger?


*In general we can state that they are “fiat-money deflationists” since the process of money creation is same in all the countries i.e. money is created as debt and the collapse will follow a similar route. The only caveat in my opinion is that since the dollar backs all the other fiat currencies, it *might* collapse last. Also, to keep things simple, for the rest of the discussion, we’ll simply use the term “dollars” with the understanding that it can be used interchangeably with the general terms “fiat currency” or “fiat money” since it is one itself.

For an excellent discussion refuting the dollar-deflation theory and why the dollar WILL eventually hyperinflate, please refer to "No Free Lunch".