Cramer Says to Buy Gold

"I view gold as money."

That's the problem. It's not money. It pays no interest or dividend, it does not have the backing of the government, its supply can't be controlled. It's nothing at all like the modern concept of money.

In fact, adjusted for inflation, gold has not recovered to the 1969 price, when the gold standard was abandoned.

http://66.38.218.33/scripts/hist_charts/yearly_graphs.plx

i know. Thats where we disagree. I dont need to know these fcats. I know them. We are at now now. Lehman used to pay a divident. Not anymore though

Steve says, "I view gold as money.": That's the problem. It's not money. It pays no interest or dividend, it does not have the backing of the government, its supply can't be controlled. It's nothing at all like the modern concept of money.

But, money pays no interest or dividend. The U.S. Dollar doesn't have the backing of the government either. Go bring your dollar over to the Fed to get your value back, and they'll hand you a dollar.

The supply of gold is controlled by nature. The supply of money was "controlled" by a man for 18 years who today admitted that his beliefs of the last 40 years were incorrect.

Your choice

Steve also says, In fact, adjusted for inflation, gold has not recovered to the 1969 price, when the gold standard was abandoned.

Except that, adjusted unadjusted for inflation, money hasn't recovered to the 1969 price. In 1969, one dollar was worth a heck of a lot more than it is worth today. Whereas if you had a piece of gold back in 1969 and held it to today, you'd still have a piece of gold.

Me & Steve have been on the same deflationary page for about the past 8-10 months now publicly on this forum. Our views are very similar. This is one area we disagree.

I dont view gold as a currency in the sense that it will replace dollars, that is missing the point. I view it as money in the sense that it has all the good characteristics of money, without the influence of central banking, derivatives, micro managing interest rates, etc.. Dollars were once backed by gold. They may be so in some capacity again in the future. Gold serves as a unit of value. It has held its purchasing power very well since the end of the gold standard.

I dont expect gold to be used to pay taxes or buy loaves of bread. In a fiat system, there is too much intervention and financial innovation that ultimately may lead to its debasement. Not so with gold. On this level, I consider it 'money'. Clearly the fiat system is facing its biggest challenge right now. With central bank cartels attempting to inflate us out of this deflationary spiral, I want to hold gold.

For now, the markets are trading on fear, panic, margin calls, forced liquidations/deleveraging. Everything is being sold to take down leverage, plain & simple. Who knows how long it will last or how deep down the rabbit hole it takes us. Paper gold is along for the deleveraging ride. Physical gold however is trading at a different level.

"Physical gold however is trading at a different level."

THat may be the case but isn't that usually the case when you have a very liquid market and a not so liquid market? Look at corporate CDS and the underlying reference bonds. There is always a difference in price driven by liquidity.

Anyways, i've looked a little more into this and I don't think the drop in gold is purely deleveraging. There are many out there making a deflation bet. think about components of CPI, from owner equivalent rents to energy to consumer discretionary categories. all those prices are dropping. couple that with a strong dollar, and import costs are falling as well.

"I dont expect gold to be used to pay taxes or buy loaves of bread. In a fiat system, there is too much intervention and financial innovation that ultimately may lead to its debasement. Not so with gold. On this level, I consider it 'money'. Clearly the fiat system is facing its biggest challenge right now. With central bank cartels attempting to inflate us out of this deflationary spiral, I want to hold gold."

You buy gold because you don't trust the central banks... yet the central banks hold a ridiculously large quantity of gold, and if they started selling just some of that, the price would crash. I don't see how buying gold diversifies away from central-bank-cartel risk.

central banks know this and will all never sell because it'll destroy all their holdings. Thats why they set the limit on what they cold sell and in fact, CB's are NO LONGER SELLING or SLOWING DOWN PREVIOUS SALES! If fiat fails, they have their reserves of physical gold because its money to them!

"But, money pays no interest or dividend."

What?

"The U.S. Dollar doesn't have the backing of the government either."

What?

"Go bring your dollar over to the Fed to get your value back, and they'll hand you a dollar."

What?

"In 1969, one dollar was worth a heck of a lot more than it is worth today."

What?

In all, what are you going to do with that piece of gold you bought in 1969? Fill your back teeth?

"I don't see how buying gold diversifies away from central-bank-cartel risk."

Because it doesn't. Nothing can. That is the danger of deflation. Gold is no protection against it UNLESS everyone thinks it is.

There was actually a very insightful "Lost in Space" episode where the Robinsons met a space pirate who was searching the galaxy for PIG IRON. Why? Because on his planet it was in short supply, whereas gold was abundant, and therefore worthless.

One of the shrewdest changes in economic policy was the realization that money need not be worth something in and of itself - it is merely a medium of exchange. Let's say now that we were on the gold standard (unsustainable with floating currencies, but that's besides the point): how could the Fed flood the market with liquidity? It couldn't because it doesn't have any. All it has is gold.

Money is fake. That's the brilliance of it.

urbandigs: You don't view that as a horribly unstable equilibrium? Gold only has value because CB's choose not to sell it. They choose not to sell it because they know doing so will kill the value. In other words, CB's know it is really worthless.

If they already determined that its worthless, they no longer consider it money. They're just scared to sell it because the public will perceive them as losing money - they already know that yellow crap is really worth less than the vaults they store it in.

While they can maintain this scarcity in good times, you say you're buying it for bad times. Its exactly in the bad times that the cartel breaks down. CB's aren't going to buy up someone else's gold when their own economy is about to falter. Worse, they're going to decide maybe they should sell some of that yellow crap and buy something useful, something that can help their own economy.

Worse, they know the first person to blink will make out like a bandit. They can sell at the bubble's peak prices, and cause the bubble to pop. Everyone else will be selling at a huge loss.

You guys see MIsh's take...the guy has been spot on so far from the beginning!

http://globaleconomicanalysis.blogspot.com/2008/11/i-like-gold-here.html

"The action in gold, gold miners, and the stock market yesterday suggests the bottom is in for gold. Seasonally, gold is favorable through January although seasonal trends in gold have not panned out well this year.

I have often said that gold would decline in the initial stages of deflation as leverage was wiped out everywhere. If that leverage has been wiped out, gold miners have a lot of catching up to do with the price of physical gold.

Finally, gold itself is now free to rise in deflation given its true role as money, even as those in gold for the wrong reason (as an inflation hedge), bail."

noah, don't bother bantering with those who don't believe or understand the austrian/mises monetary perspective on money supply. these people will not believe that gold will rise no matter what you tell them. in fact, even when the 5th elliot wave cycle hits and it blows past the old highs, these same people will find reasons to explain why the rise in unjustified even as they miss out on the opportunity to make money (or in actuality, to preserve their wealth).

but for those who do, such as yourself, couple of interesting things:

1. gold actually went into backwardation a couple of days ago before the most recent bounce. think carefully here- when was the last time gold was in backwardation? that's right =)

2. discrepancy between CME paper market for gold and physical prices is so blatant right now that arbigatreurs are stepping in. take a look at this simple chart- you'll see that ETF holdings have skyrocketed even as the share price has fallen (if you understand how ETF's work for commodities, you'll understand why this is a huge signal):

https://admin.minyanville.com/assets/FCK_Aug2007/File/Nico/spdr%20vs%20price.jpg

Look at that chart carefully.

=D

I missed this important post.
"gold is money. And nothing else is" J.P.Morgan
Mmafia u r right on the money. I'm in my early 40s and don't think the dollar will be around when I retire:it may keep its name but will be a zombie (amero?).I buy gold cost averaging like Malraux. This is insurance for me. If you can't find physical gold try bullionvault.com
This year I went to Argentina and Thailand. To this day everybody there remebers the sharp currency devaluations they went thru. The middle/upper middle class(less than $5mil)got WIPED out instantaneously (in a matter of days) unless they owned gold (the ultimate currency).Europeans are loading up and they know why (they still teach history there).Americans have been deluded that the USD is real (it is 100% fiat since 1972).
stevejhx: gold is the best edge in deflation.
tech-guy: FYI central banks list their gold as.....reserve currency. that's right.
Gold is money. and nothing else is. Buy some insurance

If you want to buy physical gold here is a trustworthy individual to deal with. Perhaps a few bags of 90% silver coins stashed in the closet may not be a bad idea? http://the-moneychanger.com/entry.phtml
In a worst case scenario you will be able to buy fuel and food with some silver coins when others are backing up pick-up trucks filed with "paper'.lol.

Fact is, if the end of forced liquidation is in fact the reason for the surge in gold, that bodes well for all other oversold assets as well. To use Mish's own logic, the inflation argument doesn't work for gold in this environment. At all. So, let's forget about gold's surge and focus on the reason for it - if, in fact, we're looking at the tail end of the hedge fund and commodity market dry heaves, this could very well be a turning point for equity markets as well.

Obviously, fundamentals still argue against equities (and gold, for that matter), but fundamentals have only been a small driver of the selloffs.

Look at what is happening in Zimbabwe in pictures:

http://www.boncherry.com/blog/2008/10/26/global-crisis-this-is-the-real-crisis/

$100 billion notes and $1 billion dinners.

Humans never learn and always repeat the same mistakes over and over again.

Let's see, here are some of the more interesting episodes:

Rome -> Hyperinflation after they debased currency by using cheaper metals instead of gold/silver (they didn't have the technology of paper printing presses yet =)

French Revolution -> livres/mandat debased (they did have printing press and paper technology at this time) until hyperinflation collapse forced them back to the gold standard

American Revolution -> "ain't worth a Continental" as the Continental was debased by printing press and replaced by a new currency called the US Dollar which went back to the gold standard. Similar episode occurred during the Civil War later on as well.

World War 1 -> The infamous "Weimar Republic" - we all know what happened there in the end

Goes on and and on... too many to list.

What many Americans don't realize is how many times this country itself have been on/off the Gold standard:

1785-1861 - FIXED Gold standard 76 years
This is important as the Founding Fathers (Coinage Act invoked the death penalty for anyone found to be debasing money) all agreed when creating the constitution that the money supply should not be controlled by Banks (aka creating credit out of thin air):

Thomas Jefferson warned of the damage that would be caused if the people assigned control of the money supply to the banking sector, "I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country" Thomas Jefferson, 1791

Now, almost 220 years later, we still have not learned.

Then...
1862-1879 - FLOATING fiat currency 7 years (Civil war, printed money to pay for it)
1880-1914 - FIXED Gold standard 34 years
1915-1925 - FLOATING Fiat currency 10 years (World War I, again printed money to pay for it)
1926-1931 - FIXED Gold standard, 5 years
1931-1945 - FLOATING Fiat currency, 14 years (World War II, yet again, printed money to pay for it)
1945-1968 - FIXED - Gold standard, 26 years (Bretton Woods)
1971 - FLOATING - Fiat currency, 5 months (Vietnam war, and YET AGAIN, printed money to pay for thank you Nixon)
1971-1973 - FIXED - Dollar standard, 2 years
1973- PRESENT - FLOATING - Fiat currency, 35 years

So, here we are today.

Except NOW, the sums of money we are now printing is not even to pay for a war- this time, we're trying to pay for our overconsumption and underproduction debt. And the amount is STAGGERINGLY HUGE!!!! As in, never before in history HUGE!

Trust me, it's NOT different this time around people. This will end in the same way as it always has ended in the past. This is not something new. We have gone down this path MANY MANY times already. Even Jefferson and the founding father knew over 200 years ago.

This will end in the same way as it has always ended in human history.

=D

But of course, monetarists will have you believe otherwise. Just like the DotBust cheerleaders tried to make you believe in the "NEW ECONOMY".

Don't take the bait. It's NOT different this time around. You can count on it.

faustas - except gold is nobodys liabilities. Companies are engaged by managers, decisions, buyout decisions, pay levels, dividen payouts, derivative exposure, counterparty exposure, and on and on. Gold, this is not the case. This is why you need to buy actual gold, or an etf that physically owns gold in a vault, and not the gold miners.

Look at a chart of gold vs the gold miners. I had a conversation with a guy about this in my office, and I told him to buy gold, and he said I did I own Barrick Gold. Not the same.

PS: I bought a 100g PAMP Swiss gold bar when spot was 744, I paid 754 for it with commission, about a month ago, from Manfra, Tordella & Brooks, Inc..I put what I bought on UD, when I did it. Its cool. I look at it everyday. I kinda want an old Rothschild gold bar. I was hoping gold delevered to 650 or so, so I can buy more physical gold; not tons, but maybe 10K or so worth in addition to the 45K or so I have in ETF holdings. MMafia and I explained here in detail the reason we have the gold trade on, and the reason we believe their will be a wave down from deleveraging first. I still think its 2009/2010's trade and I do think it will get parabolic, and outright silly, kina like what oil did from early 2007 to mid 2008, rising from 50 to 150. If gold does that, it could go from 700 to 2100. Who knows. Everyone is printing, everyone is bailing out, everyone is debasing their currency, and its not over. Gold is money and is endgame here.

http://www.urbandigs.com/2008/11/get_out_vote_gold_advice_anyon.html

http://finance.yahoo.com/echarts?s=GLD#chart1:symbol=gld;range=1y;compare=abx;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

1 YR CHART comparing GLD VS BARRICK GOLD

IN short

GLD - 0%, flat, considering markets are down 45%, that is very good.
ABX - -35%, was -50% a week ago.

Just to use to support my last comment.

MMafia - yes thanks for chart, its amazing the discrepancy there between paper gold and physical markets. If you can buy physical, at paper spot price, well, good for you right? So GLD sold off in this very last moments as physical held from the rebound

MMafia - how much gold, gold positions via etfs do you own? Im very upset at myself for not buying more when it dipped a few weeks ago..I thought the deleveraging would bring it to mid 600s...so I was waiting. I did get out of 50% of my puts though that expire in DEC.

MMafia/Digs - I know you guys are staunch goldbugs, but what we are now witnessing is:

1. Asset and now CPI deflation
2. Reduced consumer spending / tightened budgets
3. Declining wages
4. Expectation of declining wages
5. Inventory build-ups

In short, we have a situation in which too little money is chasing too many goods. Again, that is the opposite of inflation.

I understand that people will rush to gold in a time of crisis. But if you're going to make statements like "the sums of money we are now printing "... well, you need to demonstrate how the central governments are "printing money". You haven't done it.

I'm not saying that there isn't a compelling argument out there that shows how we'll have all this inflation you speak of. You just haven't made the case. Saying "the Weimar Republic happened" is not very persuasive. I could say "Japan in the 90s happened" - there you go! Just tell me why we're looking at the Weimar Republic and NOT a 90s Japan.

Please, for those of us who are too slow to understand, first demonstrate to us that all the governments in the world are "running the printing presses". It shouldn't be hard. Then please also demonstrate how all this "new money" is more than compensating for the vast destruction of money (credit, wealth, assets) that we've just experienced.

there is a chart showing the money supply from fed actions, Ill look for it.

I'm telling you guys - just average in. Keep buying a modest amount every month, month in and month out. I don't like it as a big money play. I just like the inherent comfort gained by having gold in my overall portfolio.

Plus, fondling Kruggerands calms me (like repeating "serenity now, serenity now, serenity now"). But that was probably more information than you nice folks needed to know....

here is one, but its not the chart I want to show you...ugh, for life of me I cant find it..the chart I want to show you is a straight line for like 20 yrs, and then a HUGE SPIKE UP. Ill find it.

http://www.shadowstats.com/alternate_data/money-supply?

Look at M1,M2, and then the destruction of shadow banking system that is included in M3...

M1: http://bigpicture.typepad.com/photos/uncategorized/2008/10/23/m1.png

Now these measures are intended to stop a deflationary spiral. I dont see inflation being a concern, but it does show what the fed is doing. But clearly the fed will print and inflate, and worry about inflation later cause they know how to cure that. Now, velocity of money is plunging, telling us that cash is being hoarded, and the dollar value is swelling; symptoms of deflation. The spike in M1 is being absorbed by destruction of wealth in shadow banking system. Im no expert on this, but I think the fed is printing here to stop the deflationary spiral. Please correct me if I am wrong on this. Thanks.

PS: Im not holding gold because of hyperinflation, Im holding gold because of the coming destruction of the US dollar, and global currencies as the race to debase fiat currency is on. The innovation and use of complex Derivatives are turbo charging this race to the finish line.

Noah, I've been sitting on 25% in GLD, accumulating in the 700s. The rest is in cash for now, but will slowly be dollar cost avg in to short the long-term T-Bills probably sometime next year as the end-game or what I like to call 'the main entree' approaches.

I suck at market timing, so I don't make too many transactions anymore.

Faustus:

http://www.shadowstats.com/imgs/sgs-m3.gif

M1 shows how the gov't is increasing the money supply as you can see the spike.

M3 shows what you are focusing on (wealth destruction) as M3 includes institutional/long-term assets.

So, to put simply, the Fed is pumping away, and trust me, it will end up succeeding in reflating the markets. It won't happen overnight, but it will happen sooner than you think.

Remember Ben Bernanke's famous words:

" I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief. …

The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

Don't fight the Fed, even if the Fed is making the same mistakes humans have made since the Roman times.

Hahaha, nice Noah, u beat me to it.

lol..no worries..I think we have been on same page for a while now! Except I got into TBT/PSt way too early. Stupid me. I sold them both at losses as they fell past my initial buy in point..didnt buy them back yet, but it was a stupid entry point to begin with when I knew a market selloff was coming, just didnt know when.

As far as the Japan in the 90s is concerned, there are two huge differences:

1. Japan had a massive amount of money in savings that it used to finance its quantitative easing policies. The US has a massive amount of DEBT, so it either has to get into MORE DEBT (unlikely) or to inflate ("print money" metaphorically speaking) to finance its quantitative easing policies. For example, how is the US going to pay for the TARP? By raising taxes? By borrowing even more from the Chinese etc? or by "printing money"? You know the answer to that.

2. The US Dollar is the world's reserve currency. The Yen was never the world's reserve currency. Every other country in the world has to sweat and produce goods/services to export to the US to 'earn' US Dollars to do global transactions since it is the Reserve Currency, whereas the US has the luxury of just "printing" more of it.

Honestly, I actually WISH this could be like Japan in the 90s... but we are broke already to begin with. The US Gov't realizes that it is down to it's last ammo- the ultimate backstop, the trump card, the 'game over' solution, the ultimate safety net, the "technology" that Ben Bernanke has been famously quoted for called the "printing press".

Thinking of gold, too. Any one deal with the Perth Mine Certificate Program? It's recommended by Peter Schiff (Analyst who predicted much of today's problems)
Thanks,

I'm going to play devil's advocate here.

I understand that the U.S. is borrowing a ton more money. That in and of itself is not inflationary in the near term. What would have been inflationary in the near-term is to have the government simply print money today to cover its obligations. Again, that is not what it is doing. It is borrowing.

Which is to say that it is *delaying* the time of reckoning until the debt comes due. If at THAT time (perhaps 10/20 years down the road) the government elects to print its way out of its debt obligations, yes that would be inflationary. However, we are not there yet. It very well could happen. It might not.

So let's look at the near term. In the near term, the government has borrowed tremendously, but for what? Answer: to shore up the balance sheets of institutions that have experienced massive asset deterioration. That is not inflationary in and of itself. It would only be inflationary if those cash infusions made their way into the economy in the form of credit, which at some point they will - BUT, bear in mind the following: (1) that additional credit will be available to the extent it did over the past 5 years did given that lending standards will be forever changed (in our lifetimes) (i.e., velocity is lower) and (2) the lending institutions, which included I banks/insurance cos/etc., will have to maintain lower levels of leverage going forward (again, this reduces the multiplier effect, i.e. the velocity of money). Simply put: during this period of hoarding, zero inflationary effect. After this period of hoarding, still lower money velocity than 2001-2007.

Finally Noah/MMafia, with regard to the charts, the element not incorporated is CREDIT. You may disagree, but I am of the firm belief that when looking at inflation, M1, M2 and M3 aren't enough to consider. You need to incorporate credit. Whether you do that in terms of velocity (as I discussed above) or in terms of some additional incremental money supply proxy, I don't care. Point is, money supply should include credit, which has been destroyed in the past year and will take a long time to reemerge. The graphs unfortunately don't speak to that.

Here are some comments by Mish himself that you guys should read. Mish and I essentially agree:

"... let's first consider a real world example: Japan 1982-2004. Some argue that Japan never went through deflation. One basis for that argument is that "money supply" as measured by M1 never contracted over a sustained period. The other argument is that prices as measured by the CPI never fell much. Once again we have a flawed argument about consumer prices and a flawed argument that only looks at money and not credit.

Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed. Those are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark."

http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-is-it.html

sorry, meant to say:

"(1) that additional credit will *NOT* be available to the extent it did over the past 5 years given that lending standards will be forever changed (in our lifetimes) (i.e., velocity is lower)"

MMafia how does this story end you have me on the edge of my seat...But it doesn't seem likely to have a happy ending? I guess one place you and digs diverge would be in investing in Manhattan real estate? Will the treasury secretary announce a force majore take the US dollar out and hand us the amero? MMafia I would like to hear what you think of current price levels of Manhattan real estate/shares and what you would consider an acceptable buy in level? I have some anarcho capitalist friends that have packed up and headed to sustainable farms in Costa Rica silver and gold in hand/vaults waiting for the big fall. As a practicing zen/Buddhist I try and just stay focused on the moment at hand and take some solace in the fact that the sun will rise, oceans churn regardless of what these feckless CB's/cartels do.And have the option of retreating to my beautiful property in Costa Rica where for about a $1000 "dollars" a month I can live a truly tranquil life. But I am fascinated by these conversations of total demise, failing currency's and the like-although I do find it all a little hard to digest sometimes. What do you guys/gals think about oil-where it going? I just got my ass handed to me on a very poor trade.

Noah - looking at the charts, M1 spikes massively in 2H 2008. M1, of course, is the basics - cash, checking accounts, etc. M1 spikes because as people sell off their stocks, bonds and other assets, it all goes into their checking accounts and immediately available funds. In a period of unprecedented liquidation, one would expect that.

So I think you're only showing part of the puzzle. M1 goes up while other asset liquid classes representing wealth go down. Again, how is this evidence that the government is printing money? Help me out here, what am I missing?

should read "liquid asset classes"

well there are alot of misconceptions on what PRINTING actually means. Its not as simple as printing like most think of printing by pushing a button on a press and printing more dollar bills. When I say printing, I mean the whole arsenal that the fed is doing to inject money into the system; perhaps there is the missing piece.

BTW, Im no expert on fed open market operations or money supply theory, etc.. I dig learning, and I dig researching, but its not easy digesting every avenue of finance and becoming an expert on each dynamic.

So, let me tell you what I think of as 'printing' when I say it. Most of the money that flows is electronic, not physical; this is an important part of the process. Some of the simplest ways the fed injects money into the system, and correct me if I am wrong here, is:

1) Open market transactions/Repo - Buying Treasuries (using newly created printed notes) from primary dealers, thereby exchanging 'dollars' for treasuries and injecting 'new money' into the system - in this case buying treasuries injects money into the economy, raising reserves
2) lowering target funds rate - cheaper money usually means more is taken out and put into the economy
3) raising or lowering reserves that are required by banks (similar to #1) - in this case, lowering reserves allows more money to flow into the economy; The fed buying securities makes the reserves go up, and thus is called a quantitative ease as the banks supply of reserves rises. Reserves are either in bank vaults or on deposit at the federal reserve. The rise in reserves are then used as a base for mutlipled credit expansion except now it is not being used like it was
4) printing press - you can simply print more dollars to buy the treasuries/securities

The fed has been conducting credit facilities like there is no tomorrow, I think 17 or 18 in all in which they are using newly created money to temporarily exchange money for risky securities. These are short term operations. Feds balance sheet went from 800Bln to about 2Trln during the past 12 months or so using these facilities and backing of Bear Stearns, etc..

This is how I look at it. I could be wrong.

deflation first as of now.(M1 way up but M3 way down:shadowstats.com).Then (hyper)inflation as in 2-5 years.
Gold/silver should do well in both environments THOUGH NOT NECESSARILY NOMINALLY. Hence forget ETFs/futures and only focus on the physical (as first step). Physical should be held outside the jurisdiction of residence(outside the US).after the first 1M in physical, ALLOCATED and SECURED,should one play with GLD, SLV and other toys.

dmf 13 : the Perth Mint has stopped taking orders until Jan 09 due to unprecedented demand and inability to cope.

faustus, i appreciate your point of view- especially since the construction of your argument shows that you have an understanding unlike many here on this board.

as such, i do believe you have the capacity to understand the content in the following link:

http://web.mit.edu/krugman/www/deflator.html

this is an excellent article that is pertinent to the issue you are focused with regards to Japan's situation.

near the end of the article, you will read about what then, could actually defeat deflation- these are the two most important paragraphs:

"As a temporary measure, monetary policy could be effective even in a liquidity trap if the central bank were to undertake open-market operations in assets other than short-term government debt. By increasing the demand for, say, long-term Japanese government bonds the Bank of Japan could surely have a positive impact on the economy even now. But while such measures would probably have a substantial short-run impact, they would only be effective in the longer term if the central bank were actually to acquire a substantial share of the relevant assets outstanding - which would raise some uncomfortable questions about the nature of the central bank's role. "

- and -

"And this is where I get nervous. This nervousness is not because the idea of fighting deflation by promising inflation is crazy: it is in fact a straightforward conclusion from quite standard models. Indeed, once one admits that deflationary pressures come from the persistence of a savings-investment gap even at a zero interest rate, it is hard to see how this conclusion can be avoided. But the idea sounds crazy, and that is a problem. How can we get finance ministers and central bankers, who have spent their whole careers preaching the evils of inflation and the virtues of price stability, to accept the idea that price stability may not be an available option?"

Now think about the radical measures the US has taken, including the TARP and other radical direct open market operations that were synthesized by Bernanke, who is of course a scholar of the deflation, the Great Depression, and absolutely understands why Japan is in its current situations.

Add to that, the nomination of Geithner who is a "shoot/inflate now, deal with the problems later" proponent and you will see why, unlike Japan in the 90s, the current situation will play out differently.

They all know what happened in the Great Depression. They also all know what happened to Japan in the "lost decade". They are academic scholars who lived and breathed all the details of policy failures and they know that massive and radical reflation is what needs to executed in this crisis to avert "true" deflation.

So, as I always say, time will tell, but in my opinion, given what we have learned, and the radical measures already taken (we will have even more radical measures coming our way soon), that the Fed and Treasury will indeed succeed in reflation. This won't happen overnight, but it is my opinion that it will happen much sooner than you think, as in within 1-2 years.

theburkhardtgroup, real estate in Manhattan is unquestionably going to drift lower over the next 1-3 years. we are witnessing the same order of events that occurred in the rest of the country here now. as always, first comes the precipitous drop in sales transactions (we just saw a 75% drop in Manhattan). then, as the demand curve adjusts over time (as we know, real estate is relatively illiquid, hence the "pause"), so will prices.

As far as oil goes, it has dropped precipitously already. The long-term fundamentals still support a bullish outcome, especially given the IEA's most recent report confirming the declining output. If you have the luxury of a long-term position, then the current price is a good entry point. But only if you have a long-term horizon for that investment, as in 5-10 years.

Noah - of course I understand that by "printing" we don't mean the actual printing presses. What we're focused on is the creation of money supply, electronic or otherwise. I also agree with you that it's a lot to get our hands around (even with a degree in econ). I dig learning too, and having this discussion is great and important.

Your understanding of how the govt controls the money supply is the same as mine. Bear in mind that open market purchases are "temporary" to the extent that if the govt issues debt now (reduces the money supply) it still must repay it later (increase the money supply). The Fed Funds rate is the real tool by which *inflation* is actually tweaked.

Like open market purchases, I don't view the establishment of the TARP or other programs as necessarily inflationary. They have taken the form of either investments or loans (that are secured by assets). So, you're adding to both sides of the Fed's balance sheet. Just like a company that borrows to invest in new assets, both sides of the balance sheet go up. It's only dilutive (in the Fed's case, dilution=destructive to the dollar) if those assets lose value. That of course, is likely the case here to some extent but the degree has yet to be determined.

To the extent the TARP and other credit facilities result in write-downs to Fed, they are dilutive (hurt the dollar). To the extent the Fed makes money, it's accretive and strengthens the dollar. But I don't think the mere existence of these facilities is inflationary.

I tend to use the Fed/Treasury interchangeably with regard to these credit facilities, but the point is the same.

This has been an informative thread. I am encouraged by MMAfaia's assesment of Geithner and what he may plan to do. The funny thing is, and this is how my timing has been in the markets lately, I actually thought about buying GLD on Thursday just to have as a hedge. I have not sold any of my positions, nor have I added to them either over the past week. Anyway, I decided against it, and sure enough it rallied in a big way on Friday. That being said, I have a decent position in FCX that I started at 31 and have added to at 25, and I will probably buy some GLD on the next decent dip. This week, if we have another big selloff, I will be adding to AA and to DD, and CAT, and of course I did not start my posiition in DIS on last Wednesday as I thought I would, so I will have to wait for the next dip to start building in that company.
I like the team Obama is putting together, and he is now striking me as a pragmatist. Hopefully he will do as MMAfia suggests.

This is a very interesting argument, and on the one hand you have the people who think gold is less valuable than fiat money, and on the other hand you have people who think that gold has no value and paper money is what is worthwhile.

But really what this all shows is that real property is the only asset form that retains perpetual value. Property isn't fungible. Property doesn't get created and property doesn't disappear ... even accountants know property doesn't depreciate.

Trade dollars and gold for property, it is forever.

MMafia - agree with you on Geithner. That's my sense of him also.

The link was very interesting. Thanks. Krugman's point is that in order to defeat deflation we may need to proceed with a sense of near abandon in terms of reinflation. That may or may not occur (it hasn't yet), but what is still undetermined is whether, even given such wild reinflationary efforts (which would have to be coordinated globally to ensure exchange rates remain somewhat stable), the result will be "hyperinflation". Bottom line on your thinking: it may ultimately be necessary to overshoot on the inflationary side merely to eliminate a deflationary mindset. No doubt deflation is a dangerous beast.

"Trade dollars and gold for property, it is forever."

True, but it is illiquid. And it is also declining in value at the moment.

yes, faustus, you got it- that's my belief. my money's on Bernanke and Geithner. only time will tell.

"yes, faustus, you got it- that's my belief. my money's on Bernanke and Geithner. only time will tell"

I understand that that is your belief. But to be clear, that has NOT been what the Fed/Treasury have been doing so far. It is merely what you think will happen.

No, the Fed/Treasury has already STARTED to do so far.

For example, on 9/17, the Treasury supplementary financing account was created. Basically, the Fed ran out of money, what with the TAF, the term securities lending facility, the commercial paper funding facility and all the bailouts including AIG et al.

The Treasury had to step in and create the Treasury supplementary financing account, which increased the Fed's balance sheet, but also for which the bookings are kept off the balance sheet (btw, this account began winding down as the debt matured and the Fed had to start paying interest on it).

Trust me, the Fed/Treasury have been already implemented and will continue to be implemented- the effect of its actions take some time.

If you are focused on WHEN the effect of all this unprecedented (ingenious?) inflationary actions (and more to come) will kick in, the answer to that, is still in the future- but that doesn't change the proposition that there will be an effect.

You guys are all smarter than me but I would look to platinum for any type of hedge in precious metals. It is almost the same price right now as gold and at least 10x more scarce.

MMafia I hope you are right, because I was packing for Costa Rica. Yes "Time will tell". From a layman's perspective this all sounds like a big ponzi scheme as far as fiat currency is concerned. Wasn't JFK just about to do something with gold not to long before he was assassinated? What will it take to have a system that really works, that takes out the so called "Business cycle" of whip saw events that mostly hurt the middle class/working class. It seems a lot of this action started when Nixon took us off the gold standard? Who wants this? Home prices/stocks go from 0-60 in 5 years then back to 0, millions get screwed we all forget and do it all over again. Sounds awfully suspicious to me like maybe this is very well orchestrated dance lead by a few elites? At times like this some of the anarcho libertarian conspiracy stuff doesn't sound so far fetched.

MMafia - To my earlier point, the Treasury Supplementary Financing Account is merely a mechanism for open market purchases. In other words, the TSFA sells short-term debt (which actually reduces cash in the near term) then buys it back and pays interest (increasing cash, happening now). Part of the ongoing borrowing of the US Govt.

The big unknown is down the road, when we have to pay back all this debt as well as other obligations such as entitlements, etc. But the liabilities associated with those entitlements have been well-known for some time now.

That's simply not "printing money." Sorry. No, that doesn't rule out the possibility of printing money in the future, but we're not there yet.

MMafia - think of it this way. Follow the money.

Step 1. Treasury issue $100B of debt under TSFA. Money in circulation goes down $100B, US Debt up $100B.
Step 2. Treasury loans $100B to Fed. Fed lends $100B to AIG. Fed liabilities up $100B (debt owed to Treasury), assets up $100B (AIG receivables). $100B liquidity returned to "circulation" via AIG investment.

If we lose money on the AIG loan, then that is potentially inflationary since we need to generate the $$ necessary to repay the $100B debt to Treasury (potentially by printing money). Conversely, if we make $$ on the AIG loan, it's actually deflationary.

Again, the mere growth of the Fed's balance sheet is NOT in and of itself inflationary.

Faustas - Mish defines 'printing money' as "For purposes of this discussion we choose to define "printing money" as an expansion of monetary base money."

http://globaleconomicanalysis.blogspot.com/2007/09/is-us-printing-money-like-mad.html

So, lets look at two charts I found:

Here is St. Louis Fed's Board of Governors Monetary Base, Adjusted for Changes in Reserve Requirements:

http://research.stlouisfed.org/fred2/series/BOGAMBNS?cid=124
*look at that spike up!

Here is the St. Louis Fed Adjusted Monetary Base

http://research.stlouisfed.org/fred2/series/AMBNS?cid=124
*same spike up!

You wouldn't call this printing? Im asking constructively, cause Im no expert here. Great thread by the way, lovin this conversation

faustus
about 12 hours ago
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"Trade dollars and gold for property, it is forever."

True, but it is illiquid. And it is also declining in value at the moment.

-
and you miss the point. real property has value and use. dollars or gold are just traded for other things, including for property. America's wealth was initially measured in property. The King gave vast swaths of new land to people like William Penn ... Penn's woods are Pennsylvania. America's great growth was our expansion of our land base ... Louisiana Purchase, etc. Only landowners were initially allowed to vote.

So illiquid - if I have a nice piece of property, why do I need to liquidate it?

Declining in value - don't you really mean that a dollar, as measured by how much valuable land it can be traded for, is increasing in land purchasing power? A dollar has no value, its only quality is that it can be traded for other goods and services, the most permanent of which is land. So yes, you can time your property purchase, but you are just timing if the ultimate goal is to own property, a real asset.

Change your point of view.

DaBulls - it's not changing a point of view, it's semantics. If you want to call declining land values by another name, knock yourself out.

No, there are no semantics in my statement.

The value of land does not decline. I challenge you to go find a piece of land today, even a small one. Then check back in 3 or six months and let me know if the land has grown smaller or less usable (I'm setting aside coastal areas or the probability that a hurricane, tornado or flood will encounter the land).

DaBulls - "So illiquid - if I have a nice piece of property, why do I need to liquidate it?"

Umm, cause you lost your job, or lost 50% of your wealth in the stock market selloff, or you cashed out all the equity in your home and cant make ends meet, or some other personal distress situation that causes people to sell their largest asset.

This is a severe economic crisis, and there are going to be victims. Lets face reality, people spent outside their means, didnt save, used their property as an ATM for consumption, bought houses more than they can afford, and generally didnt count on the party being over or their job being at risk. The after effects of all this will show who is overexposed, overleveraged. Peak credit is behind us, no lending standards is behind us, securitization is dead, 30:1 leverage is gone forever, ultra low rates is behind us (unless you have a ARM that will adjust downwards with LIBOR coming in so hard, to the cap level), and the system just will not have the capacity to repeat what happened with housing from 20002-2006 for a long long time.

So the old rules for housing cycles will have to be re-written in this new world; at least for the next 7-10 years.

Noah - I agree this is a good discussion.

With regard to "printing money", I'm not sure what Mish's definition of the "monetary base" is, but the mere increase in M1 does not necessarily mean the Fed is printing money. As I mentioned above, since M1 includes demand deposits (checking accounts) and cash, wouldn't it stand to reason that it would shoot up during a period of massive liquidations? We all know that everyone is flocking to cash, so I would think that M1 and M2 (which includes savings accounts, time deposits and most money markets) would have increased dramatically during this period. I haven't looked into it in depth, but is seems intuitive.

Noah - I need to understand this one a bit more. Trying to get my hands around the actual net effect of liquidations on the monetary base.

yes it would. You are bringing up great points! I think the adjusted monetary base is the way to look into this. Im researching more and doing a post for UD at the same time on the topic.

faustus, of course we are going to lose money in AIG. That's the reason why we had to bail them out- we didn't bail AIG out because it's business model was so profitable that it was going to make loads of money.

on the flip side of the coin,

"Again, the mere growth of the Fed's balance sheet is NOT in and of itself inflationary."

That much is true and is a statement I agree with. The question is, HOW did the balance sheet grow? What "fed" it?

Currently, the SFP is being wound down because the Treasury is going to attempt to take on more massive debt to finance the TARP et al (i hope the buyers are still willing).

Too much $$$ to create and too much debt to create to finance it. Now they are being forced to "pick their debt generation machine" as they can't have the SFP running at the same time they are trying to finance the TARP and other spending programs.

The most DIRECT form of "printing money", the one that you are looking for is not here faustus, but it is coming very soon. we won't be able to create enough debt to pay for our bailouts and spending programs because there won't be enough buyers. our old buyers, like the Chinese, have already resorted to SPENDING its reserves of Treasuries to finance its own stimulus package.

Already, back in September, S&P warned that the US may lose its AAA rating.

And that was just with the AIG bailout triggering that comment. Watch what happens when all the other expenditures that need to be financed come home to roost.

If US loses its AAA rating, the treasury bubble will burst, and burst hard. This could be the 5th leg to this severe downturn, and is part of endgame if it occurs.

Just put a discussion up on UrbanDigs, would love all your comments on UD if you have time!!

here is the discussion on UD

http://www.urbandigs.com/2008/11/is_ben_printing_money_or_not.html

Regarding real estate William Penn didn't have to pay exorbitant property taxes and if you own an apartment in Manhattan we are probably talking about shares not real property. I own property outside the US my taxes are $.25 of the declared value. I have fruit trees, water etc it could be very useful someday and I don't need an education in macroeconomics to know this. Without generating a substantial income your property here in the US will be seized by your government or bank.

Hey guys, this is a good discussion- one of the best ones I've been involved with on StreetEasy

=D

Listen to this (recorded just this weekend)- similar discussion to what we are talking about over here- fast forward to 10 minutes:

http://www.netcastdaily.com/broadcast/fsn2008-1122-2.asx

urbandigs
about 2 hours ago
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DaBulls - "So illiquid - if I have a nice piece of property, why do I need to liquidate it?"

Umm, cause you lost your job, or lost 50% of your wealth in the stock market selloff, or you cashed out all the equity in your home and cant make ends meet, or some other personal distress situation that causes people to sell their largest asset.

means they own with leverage. I'm talking about property. I dind't say you should buy property with leverage.

Here's some commentary I read. The big bump in the Monetary Base looks like it's from the member bank cash injections out of the TARP, which are still held in reserve.

"As you can see from the chart, the monetary base has skyrocketed in recent weeks. In essence, banks have more cash at hand, which they could potentially put into circulation by extending loans and other forms of credit to their customers. Despite this, the broader U.S. money supply is still expanding relatively slowly. Based on the "M2" definition of money supply, which counts cash in circulation, checking and savings account deposits, and non-institutional money market funds, the money supply has grown year over year by only about 7 percent, compared to the nearly 50 percent year-over-year growth of the monetary base. See chart of M2 Money Stock. While growth of the broader M2 money supply does not always correlate with that of the monetary base, a divergence of this magnitude is unusual. Why is it happening? It is happening because the banks are mostly sitting on their bulging reserves rather than making new loans."

So this would imply that Monetary Base (which is different from M1, M2) includes bank reserves (with the Fed). And the reserves haven't been lent out yet.

So that explains the spike, and makes sense. But is that printing money? Well, no I don't believe so, if the US borrows to fund the TARP. Down the road when our debts come due, that's another story.

"So this would imply that Monetary Base (which is different from M1, M2) includes bank reserves (with the Fed). And the reserves haven't been lent out yet."

faustus, to clarify explicitly, the monetary base consists of currency in circulation (which is M0), cash held in bank vaults, and cash on deposit with the Federal Reserve as reserves. The is a fact and not an "implication" as you mention.

The Fed obviously has direct power over the monetary base, but only has indirect influence on fractional reserve lending by the banks (and thus the other monetary aggregates). This is why the Fed can "print"/"create" all of the money it wants (assuming that it has an adequate supply of treasuries in the secondary market to buy- which it didn't in September, hence the emergency creation of the TSFA) and it will not have an impact on inflation if the banks do not put it to use and instead hoard as reserves.

This is exactly what is going on right now. That HUMONGO spike has not yet translated into M1 and M2 as the banks have not "digested" properly the infusion properly.

In other words, it hasn't worked it's way through the fractional lending system yet. But the stimulus/injection HAS already been made, and the Fed is trying to manage it from EXPLODING.

In fact, the reason these funds are being held and not loaned out by the banks is actually quite simple. The Fed is actually PAYING banks to hold the funds in reserves. Indeed, the Fed increased the rate it is paying by 40 basis points on 10/22.

You may or may not know that the Fed was originally going to start paying banks for excess Reserve Balances starting in 2011 but the recent emergency bailout legislation moved that date up so that Reserve Balances would start to earn interest immediately. The Fed’s intent is to try to keep the massive increases in Reserve Balances close to the heart so that these funds serve mainly to shore up the banks’ balance sheets but don’t create a tsunami of “unnecessary liquidity” in the money supply.

In Bernanke's "helicopter" lingo, the $Hundreds of Billions have been dropped but it is fluttering in midair due to an updraft created by the rotor.

The Fed will have to dispense with its “gradualism” before too long and fly the helicopter to open airspace in order to avoid a crash. Even if the Fed has no intention of moving clear, the longer the money stays out there fluttering in midair, the more difficult it will be to keep it aloft. Moreover, once the dropped money has cleared the updraft from the helicopter’s rotor, it can no longer be reclaimed by the Fed without consequences, especially while the global economy remains on an unsure footing.

Watch the M1 carefully, and you will see it spike once the "helicopter" drop currently fluttering in midair lands on the ground. The Fed will make sure of it.

I suspect, however, that the Fed will have to dispense with its “gradualism” before too long and fly the helicopter to open airspace in order to avoid a crash.

MMafia - there's no doubt the money hasn't made it into M1 yet. That's what everyone is complaining about, that the banks aren't lending. They're merely sitting on the cash.

The question that really matters is: Once this cash is released into M1, is the effect (1) hyperinflation, (2) modest inflation or (3) a mere offset to current deflation. Sorry MMafia, but I still have not seen anything persuasive that this effort will result in hyperinflation, or even abnormal inflation. It should certainly help to reduce deflation if only because it keeps companies operational and workers employed.

But when $16 trillion of value has been destroyed in a 12 month period, color me skeptical that the TARP - your "hundreds of billions" - is going to lead to crazed hyperinflation.

In order to assess how "inflationary" this is, MMafia, you need to demonstrate by how much the cure exceeds the illness. So far it is very much the other way around.

"But when $16 trillion of value has been destroyed in a 12 month period, color me skeptical that the TARP - your "hundreds of billions" - is going to lead to crazed hyperinflation."

faustus, you are confusing:

1. ASSET DEFLATION

- with -

2. MONETARY INFLATION

There is a huge difference between asset deflation and monetary deflation, and they can most definitely occur at the same time. We can have asset deflation and monetary inflation simultaneously - and we will (just need to wait a little for the massive injections already made to filter its way through the fractional banking system into M1).

This is a topic that is being widely debated- many people are confused (not saying that you are) and misunderstand the current dynamics. For instance, many people think that inflation = higher prices. As we know, that is incorrect.

sorry for the typo, i meant you are confusing asset deflation with monetary deflation.

MMafia - you're making a distinction without a difference. Think of it in simple terms: aggregate demand/purchasing power. That's to say that asset deflation is a destruction of purchasing power, and monetary inflation is the creation of purchasing power.

So let me rephrase my point: you need to demonstrate how the increase in AD/PP from monetary inflation will outweigh the decrease in AD/PP associated with the massive asset deflation/credit destruction that has already occurred. This is key, and it's where I have yet to see the "hyperinflationists" present a cogent argument.

I'm sure you understand this, but to avoid confusion, when I say "asset deflation is a destruction of purchasing power" I am referring to the effect that asset deflation (net worth destruction) has on wealth/aggregate demand.

bad money chases good money into hiding. same with intelligence. for those who are (still) interested in gold and who have money, switch from USD to gold/silver in their physical form out of reach of confiscation. this is the only insurance against a (coming) currency crisis. your investment may loose value as in loosing insurance premium, but the key is preservation of wealth.

nicercatch - so where do you buy your physical gold? do you buy bars or coins? Its not so easy to find. and coins have large commissions attached.

Monetary deflation – In this case, we have the literal destruction of money. This only happened one time in the 30’s when monetary authorities let banks fail and whipped out the savings of millions of people. This is not the case today.

Price deflation – This is more or less the deflation we all know and feel and it’s what "good" deflation. It’s the result of competitive forces, globalization, high inventories and yes, recessions from time to time.

Asset deflation – This is dangerous type of deflation. In this case, assets of all sorts get reduced in price across the board. The problem with Asset deflation is that most loans are based on different assets and thus, when assets get discounted, the loan portfolios of banks (which are based on these assets) get eroded and you end up having a banking crisis like the one we are having today.

We do not have monetary deflation today because central banks are printing money like madmen (although I know faustus, that you don't believe so because currently, the money printing method is still debt-financed). If we had monetary deflation (in which case central banks would not have printed money), chances are that most banks in the known world would have already been broke and most people would have lost all their savings by now. But this is not the case.

The key issue here is, gov'ts around the world are scrambling around on trying to figure out how to defeat "asset deflation". Currently the US has embarked on a highly modified form of quantitative easing based on Japan's experiment which started in 2001. But the US, as Bernanke has said many times, will NOT make the mistake that Japan made and start much earlier and be much more aggressive in its "easing". Reflate or die is the current mantra.

Now, back in 2001, when Japan started it's quantitative easing experiment, the US took a different approach (more mild) and just cut interest down to 1%, and Greenspan THREATENED to follow Japan in its quantitative easing- that was enough for the Bond traders to back off, and we all saw what happened to GOLD after 2001, which ignited the current GOLD BULL market.

This time around, Bernanke and Paulson aren't threatening, they already are IMPLEMENTING quantitative easing and will slash interest rates down to 0 next year. We saw what happened to GOLD when Japan did it... now we shall see what happens to Gold when the US and the rest of the entire world does it!

We saw what happened to GOLD when Japan did it... now we shall see what happens to Gold when the US and the rest of the entire world does it!

I think I Was traveling and screwing off in general when that happened. What happened?

kgg, pardon my ignorance if you are being sarcastic, but for those who truly don't know what happened, a picture is worth a thousand words:

http://goldnews.bullionvault.com/files/deflation_depression_6.png

BTW- according to Bloomberg this morning, the Fed has bumped up it's pledge of $$$ to $7.4 trillion now:

http://www.bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home

" Nov. 24 (Bloomberg) -- The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis. "

In the end, whether the FED/TREASURY succeeds in reflating our problems away into inflation/hyperinflation, or fails, Gold still remains the insurance of ultimate last resort.

It's easy to understand why that is the case if we truly end up with inflation/hyperinflation, but what about if what faustus and other deflationists are right and the US/World fails like Japan did?

Gold will still be the place to protect your assets:

"The Fed is Out of Ammunition"

"With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.

Those who want to understand the mechanism might ponder Irving Fisher's comment in 1933: When it comes to booms gone bust, "over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money."

The growing risk of falling prices raises a challenge for one of the conventional wisdoms of the modern economics profession, and indeed modern central banking: the belief that it is impossible to have deflation in a fiat paper-money system. Yet U.S. core CPI fell by 0.1% month-on-month in October, the first such decline since December 1982.

The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s -- persistent deflationary malaise unresponsive to near zero-percent interest rates -- shows that it is not so easy to inflate one's way out of a debt bust.

In the U.S., the Fed can only control the supply of money; it cannot control the velocity of money or the rate at which it turns over. The dramatic collapse in securitization over the past 18 months reflects the continuing collapse in velocity as financial engineering goes into reverse.

True, this will change one day. But for now, the issuance of non-gency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.

It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.

But the growth of excess reserves also reflects bank disinterest in lending the money. This suggests the banks only want to finance existing positions, such as where they have already made credit-line commitments.

Monetarist Bernanke and others blame Japan's post-bubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think. So too will the Keynesians who view an aggressive fiscal policy as the best way to counter a deflationary slump. While public-works spending can blunt the downside and provide jobs, it remains the case that FDR's New Deal did not end the Great Depression.

There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.

Virtually everybody blames Mr. Paulson for the decision to let Lehman Brothers go. But this decision should be applauded for precipitating the deflationary unwind that was going to come sooner or later anyway.

The Japanese precedent also remains important because the efforts in the West to prevent the market from disciplining excesses will have, as in Japan, unintended, adverse, long-term consequences. In Japan, one legacy is the continuing existence of a large number of uncompetitive companies which have caused profit margins to fall for their more productive competitors. Another consequence has been a long-term deflationary malaise, which has kept yen interest rates ridiculously low to the detriment of savers.

Meanwhile, the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.

Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of "pushing on a string" -- i.e., the banks can make credit available but cannot force people to borrow.

What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.

It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.

In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.

The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part."

we need Stevjhx to be devils advocate here, keep the discussion going

true... true.... =D

urbandigs.
if u have little $ (less than 1ooK)coins and small bars are still relatively easy to get, though at a premium. 47th street and chinatown. coins are nice to look at, but gold is gold and bars are OK.
if u have serious $ (up to 1 Mil for physical) the easiest is bullionvault.com and goldmoney.com. excellent products though conceptually different.
after 1 Mil papergold/silver

There is no opposing side. The argument changed from "buy gold" to "the US economy is in trouble". Well, yeah, it is in trouble. Nobody debates that. Its just that you assume "US economy in trouble" implies that "buy gold" is a good solution - I disagree. And as I learned recently, so does Warren Buffett, so this isn't exactly a crazy anonymous Internet board theory I randomly concocted.

Its that knee-jerk reaction to jump to gold for safety that keeps the price afloat. And as long as everyone has this shared delusion, it'll continue to work. One day, however (and I don't claim this day is tomorrow) people will realize how worthless gold really is in this modern, non-gold-standard economy, and that bubble will burst.

by then Ill be out.

buy gold is not a knee jerk reaction to the bad economy. It is a hedge, an insurance against the currency. that is all. not an investment. in the end u just hope not to make any money from it because it would mean terrible things have happened.

As I said, I can't / don't / won't day trade. I don't know what gold's price will be tomorrow or next week or next month. I just don't see any long term intrinsic value (beyond jewelry, and we all agree that alone wouldn't support anything close to this price). If you know you can get out before that turn, great.

But MMAfia seems to think there's long term value: "noah, don't bother bantering with those who don't believe or understand the austrian/mises monetary perspective on money supply"

MMAfia, you're quoting a political ideal that does not, in any way, match US law. How can that possibly support a trade? Ron Paul is the most popular US politician who agrees with these policies, and what percentage of the vote did he get? Its about as ridiculous as quoting Nader's extremist views on US politics and using that as your basis for today's trades.

nicercatch: I understand the desire to hedge against currency issues. My claim is that you should buy useful goods with intrinsic value. Oil, copper, food, whatever. Gold has no intrinsic value. Its a giant bubble. It used to have value when major economies used the gold standard. That fundamental changed, but the price hasn't plummeted in response yet. One day it will.

tech guy: commodities are perfectly reasonable. I own a farm in Europe: inherited.house in Costa Rica is great too. It is hard to own /store/exchange.
Gold is money. Always was. always will be. The word for money in chinese contains the symbol for gold. If u tell a chinese/indian/arab/european that gold has no value they will gladly relieve u of your headache.
"In extremis fiat money is accepted by nobody. Gold always will be".... A.Greenspan. (for real)
Buy insurance

Well tech_guy, riddle me this:

Why do Central Banks around the world (the lenders of last resort) stashing away so much Gold in their vaults? Currently, Gold is the reserve for the Central Banks themselves- it is, in effect, the Central Bank's insurance.

But, as you argue, Gold has no "intrinsic" value right? Why don't the Central Banks store Copper or Palladium instead? Surely, these Central Banks must be delusional to hoard so much gold as a % of their reserves if it truly has no "intrinsic" value right?

You, and many others have it all backwards. The dollar bills in your wallet is what has no "intrinsic" value. It's printed paper. The 'value' in those paper bills is merely our 'trust' in the Fed. If you can 'trust' the Fed (a counter-party) that the printed paper in your wallet is worth something, then the value of those printed paper bills is based purely on your trust.

Gold has always had value in human history as a precious metal- whether it be in the form of jewelry or as a store of money. Unlike the dollar bills in your wallet, there is no "counter-party" for Gold. It is what it is, regardless of Governments, politicians, and any other counter-party.

Again, try and understand why Central Banks are hoarding Gold. Why Gold in particular? I assure you, they are not delusional or clueless or misguided or misinformed.

Do the Chinese / Indians / any of the Arab countries (well, the ones with big enough economies to matter in a worldwide economic stage) / European countries (same caveat) use the gold standard? If not, gold isn't actually money - they just wrongly believe it will.

["In extremis fiat money is accepted by nobody. Gold always will be".... A.Greenspan. (for real) ]

Sure, if you believe in complete collapse of the world economy such that nobody wants the USD or the Euro or the Pound or the Yen and instead everybody is trading gold for goods and services, you're making an amazing investment at today's gold prices. I just don't think we'll be getting that bad.

Given that Greenspan recently testified before Congress that his economic beliefs were wrong, I'm going to instead stick with Buffett: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

http://en.wikipedia.org/wiki/Warren_Buffett

"But, as you argue, Gold has no "intrinsic" value right? Why don't the Central Banks store Copper or Palladium instead? Surely, these Central Banks must be delusional to hoard so much gold as a % of their reserves if it truly has no "intrinsic" value right?"

A few decades ago it was the basis for their monetary supply. They just haven't gotten rid of it yet. I can convince you that if all oil reserves in the world mysteriously vanished overnight, there would be a HUGE struggle to drill more and restock the reserves. That has intrinsic value. You *can't* argue that if all the central bank's gold mysteriously vanished overnight, that there would be a huge struggle to mine more and resupply. People would shrug and not really care.

"A few decades ago it was the basis for their monetary supply. They just haven't gotten rid of it yet."

They can't get rid of it.

Do you understand that Gold is despised by the Central Banks? They HATE it. It's the bastion that Keynesian economic theory wants to dispose of as a "barbaric relic". Do you know what the Central Bank Gold Agreement (CBGA) is?

They TRIED to get rid of it, really REALLY badly. And they were selling so much of it that it's price went down so much that they had to create the CBGA.

But alas, they were forced to eat their own words and start accumulating Gold. And that is because they realize that the Keynesian-based monetary machinations put into place could break down. And when that happens, the only recourse is to go back to the form of money that human kind has been using for thousands and thousands of years.

This is nothing new- this country has been on and off the Gold standard many many times:

1785-1861 - FIXED Gold standard 76 years
1862-1879 - FLOATING fiat currency 7 years (Civil war, printed money to pay for it)
1880-1914 - FIXED Gold standard 34 years
1915-1925 - FLOATING Fiat currency 10 years (World War I, again printed money to pay for it)
1926-1931 - FIXED Gold standard, 5 years
1931-1945 - FLOATING Fiat currency, 14 years (World War II, yet again, printed money to pay for it)
1945-1968 - FIXED - Gold standard, 26 years (Bretton Woods)
1971 - FLOATING - Fiat currency, 5 months (Vietnam war, and YET AGAIN, printed money to pay for thank you Nixon)
1971-1973 - FIXED - Dollar standard, 2 years
1973- PRESENT - FLOATING - Fiat currency, 35 years

See a pattern there by any chance? And this is just for the US, nevermind other countries.

In any event, people focused on the 'manufacturing/industrial' quality of commodities do not understand why those are different that 'precious metal' commodities.

But at the same time, these people will take the paper-bills in their wallet which also has no 'intrinsic value' and accumulate it as wealth.

Meanwhile, they have no idea why Central Banks, the lenders of last resort, use the very same material, Gold, as its own insurance in its reserves. They can't explain why the Central Banks today are increasing its Gold reserves.

Surely, Central Bankers are not 'speculators' in a growing Gold 'bubble' now are they?

=D

"See a pattern there by any chance?"

I see a broken pattern. Steady gold standard broken temporarily. Now it looks like the gold standard is gone for good. Are you suggesting that we're going to go back to the gold standard? Like I said, you're betting on politics that are extremist and won't come to pass.

"Do you know what the Central Bank Gold Agreement (CBGA) is?"

Not only do I know what it is, we discussed this already earlier in this thread. The fact that the central banks have a price fixing cartel is yet another reason why you should not be on the other side of that trade. You're not part of that cartel. You can try to mirror them, but then you're always one step behind the market makers. That's a terrible position to be in.

"But at the same time, these people will take the paper-bills in their wallet which also has no 'intrinsic value' and accumulate it as wealth."

I can buy groceries with those paper-bills. I can't buy groceries with gold coins. If the US government ever were to collapse, green pieces of paper with Benjamin Franklin's face on it would be worthless. Similarly, when gold-standard based economies collapsed, the monetary proxy they used became worthless. That monetary proxy was gold.

alas tech_guy, you apparently think that this time around, "it's different".

In human history, a fiat currency has never ever survived. Do you think that the current dollar hegemony is the exception? Think again. The temptation to print is too great. It never works. And history confirms this.

Again, why are Central Bankers accumulating Gold now? Just answer that question. It's a very simple question. Remember, it has no intrinsic value, so why, of all people, would the highly informed and educated Central Bankers be INCREASING it's reserves of the precious metal today?

I should clarify: As I said earlier, if you do believe we're going back to a gold standard, then gold is a great long term buy. I suppose when I call it extremist, I'm talking out of my league - I don't really know what politicians will do. Anytime I think I do, they've proven they can do very stupid things instead.

The cartel you described also furthers my point - if all the gold reserves disappeared, central banks would be *happy*. They know its worthless, they know once they start selling the prices will plummet, and they created a price fixing cartel to prevent that from happening. It boggles my mind that you know this, buy gold anyway, and use it as a defense for buying gold.

Again, tech_guy, answer the simple question:

Why, of all people, would the highly informed and educated Central Bankers be INCREASING it's reserves of the precious metal today?

MMAfia: link? I did a bit of searching and saw this:

http://www.marketoracle.co.uk/Article6586.html

Western central banks still sell gold, while Russia, China, and OPEC nations buy gold. Do you have a link showing that western banks are also buying gold?

Western Central banks, which already have most of its reserves in Gold (for example the US has an astonishingly high 75% of its reserves in Gold), are CURTAILING sales, whereas other nations, which realize that they don't have enough of it like the Western CBs, are starting to accumulate it.

So why would Western Central Banks be curtailing/stopping sales while other Central Bank accumulate more Gold?

Isn't it a worthless relic? What's the point? Why on earth would the US hold/retain 75% of its entire reserves in something that has no value? Why would other countries like China want to acquire something that has no value?

Are these guys smoking crack? or could these government think that Gold actually does have an intrinsic value that requires no counter-party or backing to prove its worth?

tech_guy, in the link you posted:

"Financial market instability , concerns about the dollar and huge systemic risk are making gold more attractive as a reserve asset for central banks ."

So again, why would Central Banks, the lender of last resort, consider something with no intrinsic value as a "reserve asset"?