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Thursday, January 8

Is the US dollar going the way of the pengo?

From the Wikipedia article on hyperinflation:
The largest denomination banknote ever officially issued for circulation was in 1946 by the Hungarian National Bank for the amount of 100 quintillion pengő (100,000,000,000,000,000,000).


Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:

> Outright lying in official statistics such as money supply, inflation or reserves.

> Suppression of publication of money supply statistics, or inflation indices.

> Price and wage controls.

> Forced savings schemes, designed to suck up excess liquidity. These savings schemes may be described as pensions schemes, emergency funds, war funds, or something similar.

> Adjusting the components of the Consumer price index, to remove those items whose prices are rising the fastest.
For the first time I wish you could see me. I am laughing so hard, tears are streaming down my face. I guess it was the surprise at finding such refreshing bluntness in an article about economic matters that set me off.

A man whose speech is characterized by bluntness, and who would also be knowledgeable enough to pen an article on hyperinflation, James Sinclair -- long-time precious metals and currency trader, guide extraordinaire to the mysterious ways of The Casino (aka international monetary system) -- has reissued his August 14, 2008 Dutch Uncle essay, More On the Federal Reserve Gold Certificate Ratio, under the sly observation, "Rentenmark to the Rentendollar."

To appreciate his reference to a 'rentendollar' you'd have to know about the papiermark and the rentenmark.(1,2) The papiermark was the infamous paper money that touched off hyperinflation in Germany in 1922-23. The victor nations in WW1 demanded that Germany pay their war costs. With no gold or currency in reserves the German government cranked up the printing press, causing the value of the mark to collapse. The rentenmark (literally, "security mark"):
... was a currency issued on 15 November 1923 to stop the hyperinflation [... ] the Rentenbank, which issued the Rentenmark, mortgaged land and industrial goods worth 3.2 billion Rentenmark to back the new currency. [...] The Rentenmark was only an intermediate currency and was not legal tender. It was, however, accepted by the population and effectively stopped the inflation. The Reichsmark became the new legal tender on 30 August 1924, equal in value to the Rentenmark.
Can hyperinflation happen today in the United States? Not likely unless the US government collectively goes barking mad, because the US does have gold reserves. James makes that point in his essay, which is to suggest that the crashing waves of economic realities are pushing the US ship of state ever closer to repegging the dollar to gold in some fashion or other.

You may trust that federal governments, the US one incuded, would rather stand in front of a firing squad than give up the currency printing press. But once governments try to print their way out of an economic crisis the specter of runaway inflation always looms.

On the time-tested theory that high inflation and great social unrest go hand in hand, all means must be used to shoo away the specter. No matter poor people are they can put with a lot if they know the money they do have is worth something. Once people get the idea that their money is worthless, that's an easy way for governments to fall in the most unpleasant ways.

A small but ominous sign of inflationary undercurrents is found in the sudden ubiquitousness of the US Presidential one dollar coin, which has been in circulation since 2007. To my American readers: I don't know how it is in your city but here in Washington, DC the subway and bus token booths have been retooled to accept the coin, and it's being used everywhere to make change. So, the push that the coin's usage is receiving, which earlier US dollar coins never received, could be a way signaling that the US one-dollar bill has been devalued to change.

Some of my earliest posts on this blog warned that the Bretton Woods monetary system had collapsed, that a new international monetary system had to come into being, and that this would mean a big and unpleasant adjustment for Americans.

I also mentioned that the 9/11 attack on America was actually a sophisticated attempt to crash the US economy. On its own Saddam Hussein's launch of a petrocurrency war against the US, which he coordinated with the EU and particularly the French government's attempts to push up the value of the euro, couldn't do much to hurt the US in the short term. But in combination with al Qaeda's attack the effect might have been devastating.

The plot was foiled by the fastest thinking and acting I've seen from the US government during my lifetime. Within 72 hours of the attack President Bush, with the help of the Federal Reserve and the EU and British central banks, and through arm-twisting of several governments including an oil kingdom, worked a miracle to stave off a crash.

But America's narrow escape in 2001 from financial devastation reminds me of the mystery bullet that came close to Abraham Lincoln in his youth. It was as if divine intervention pushed the shot that was fated to kill him into the future, when he'd finished leading America through the Civil War.

The collapse in the credit markets in 2008 did not create the economic crisis we're facing today; it was only the tripwire. By August 2008 Jim Sinclair had seen the tripwire, and gave his best advice on how to divert the bullet that had been traveling for years.

Those who would dismiss him as a gold bug are ignorant of the ways of The Casino or studiously ignoring them. Jim is not wedded to gold; he's wedded to survival. So it's wise to ponder his view. Before turning the floor over to him I want to highlight a point in his essay:
After the demise of the Bretton Woods Agreement, everything financial moved towards a floating non-system. The move away from fixed points towards a fully floating financial system was the process of removal of all financial ALARMS. No longer was there a currency parity rate that when hitting the lower or upper bands rang an ALARM. The concept of financial crisis no longer existed.
And that is how the 'Black Swan' of the mortgage meltdown appeared out of nowhere. That is how the Asian and Mexican financial crises appeared of nowhere.

There will be many more Black Swan economic events, until monetary policy is moored to objective criteria. If you learn nothing else from reading Jim's essay, you're ahead of the game.
January 8, 2009 - Jim Sinclair: The US Dollar will replace the US Dollar come The Revitalized and Modernized Federal Reserve Gold Certificate Ratio, not tied to interest rates, but rather gold value held by the Fed/Treasury versus a measure of international liquidity. [...] The Federal Reserve Gold Certificate Ratio is the mechanism of the Rentendollar.

More On the Federal Reserve Gold Certificate Ratio
Author: Jim Sinclair
Posted On: Thursday, August 14, 2008

Why will the effort to call any top in the gold price be a waste of time for the gold-ignorant gurus?

Prior to being reduced to zero percent and then removal from the books, there was a direct link between the value of US Treasury gold held (a fixed price of gold then) as a percentage of the growth of the US money supply. As an example, when the cover was deemed to be 25% that meant that as the money supply expanded the value of gold had to be expanded by 25% as well.

Because the price of gold was fixed, the gold cover clause as this device was known, mandated an automatic change in the Federal Reserve Discount rate in order to depress the demand for funds in the US economic system.

There is an argument that says as the dollar was becoming a primary reserve currency and world trade was growing at record rates, the automatic changes in a monetary system were restraining the true wishes of the Administration and Federal Reserve.

After the demise of the Bretton Woods Agreement, everything financial moved towards a floating non-system. The move away from fixed points towards a fully floating financial system was the process of removal of all financial ALARMS. No longer was there a currency parity rate that when hitting the lower or upper bands rang an ALARM. The concept of financial crisis no longer existed.

The movement of any currency up or down, as the Euro recently did, would have been considered a financial crisis.

We have just witnessed multiple central bank interventions that are accepted by the establishment's international investment community as a dandy deed in the cover up of other serious systemic weaknesses. As a result, upper and lower bands have been considered and implemented. To benefit the plan, the lower limit of $1.49 will not be defended yet in time the market will. $1.49 is only a point after which no great undertaking of intervention will be applied. Let the apples fall from the tree, if they please, as per today.

There is no return to a FIXED anything, but there is a clear indication of a return to the relationship of floating financial alarms, a marriage between the thesis of Bretton Woods and the floating sins of our Financial Fathers.

The Revitalized and Modernized Federal Reserve Gold Certificate Ratio will be tied to a broad measure of money supply, M3 or another new definition of liquidity.

The gold that the US Treasury has held primarily at the New York Federal Reserve will be valued at market at the time of adoption of this mechanism. Please understand that regardless of the arguments concerning the number of ounces the Federal Reserve/Treasury holds, since it will never be audited, accept what is said as correct.

Now the floating increase or decrease in monetary aggregates will mandate a change in the value of the gold held by the US Treasury.

The US Treasury will never have to buy or sell any gold because vehicles will be created that are immediately traded on exchanges that will speculate on the changes in the broad base monetary aggregate in terms of the gold price. That will serve the needs as the aggregates increase.

This is in fact a public way to view the aggregate change by changing the value of another asset, which is a means of balancing the balance sheet of the USA as it was at the day of adoption.

It is not convertibility. It floats and is not fixed.

When the need is greatest (.52 USDX or $2 Euro)) it will be seen as an acceptable return to a form of disciplined central banks actions. It will be a reinstatement of an alarm mechanism but with parts that float.

The market value of gold on that day will be a pendulum-starting point, not a fixed price. The broad measure of money supply on that day will be 100 on the liquidity index.

Assuming the dollar is at .5200, the adoption of this mechanism could mark the low of the US dollar for this chapter of the financial history of the USA.

There are other items that will have to fall into place if that is to be the dollar saver from a complete Weimar Experience. This is the major criterion for success.

I assume it is January the 14th, 2011 and gold is trading at $1,650 or higher. Then I would assume the price of gold to trade $100 above and below the price of gold on that day according to changes in the liquidity index.

If the USA would like to avoid a Weimar experience in the US dollar this is the key ingredient to preventing that.

The US dollar is headed in the direction of the Weimar Experience in order to satisfy significant financial failures. Some smaller entities will be rescued by Federal Money, exploding the US Federal Budget deficit and putting the weight of more newly created dollars on the inherently weak dollar.

There is a 70% possibility that since central banks have moved to floating currency parities that the modernized and revitalized Federal Reserve Gold Certificate Ratio will follow under the pressure of future systemic and grave financial circumstances.
I will close by quoting more passages from the Wikipedia article on hyperinflation, and which are not one bit funny:
The main cause of hyperinflation is a massive and rapid increase in the amount of money, which is not supported by growth in the output of goods and services. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run.

Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of a paper money which lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Often the body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralizing their attempts to stimulate the economy.[...]

Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of extreme consumption and hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment. Hyperinflation is met with drastic remedies, such as imposing the shock therapy of slashing government expenditures or altering the currency basis. [...]
1) Wikipedia, Papiermark

2) Wikipedia,Rentenmark
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