No banana republic price inflation yet follow up.

Since the first No banana republic price inflation post got a few thousand more views then the rest even though it was short and rather simple, I decided to follow it up with some simple pictures to illustrate it.  This will just explain the specific conundrum regarding price inflation. Not the Fed buying its own debt and all of that. Just price inflation compared to a place like Jamaica.

The first thing to understand is that purchasing power is something separate in itself. Money is not purchasing power. It is the representation of it.

Since we have established that the money isn't the purchasing power, then we have to understand what it is. It is the end result of the productivity of capital and savings where ever it is being conjured. See the next pic.

The little chart in the above pic, is the real inflation chart of Jamaica. The first few saw teeth you see in chart are bouts of price inflation of 25 to 35%.

Anyway that's price inflation narrowed down to its simplest form. I will also tie this into freegold in a future simple post.

World monetary orders. How long do they typically last ?

We had the classical gold standard from 1873 until World War I (43 years), the gold exchange standard between the two world wars (21 years), the Bretton Woods 1 system from 1944 until 1971 (27 years), and since 1971, the entire world has been on the Bretton Woods 2 system. Which started with  the Nixon wing job.

 How we got here

A negative balance of payments, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued.^[35] The drain on US gold reserves culminated with the London Gold Pool collapse in March 1968.^[36] By 1970, the U.S. had seen its gold coverage deteriorate from 55% to 22%. In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on 15 August 1971, Nixon issued Executive Order 11615 pursuant to the Economic Stabilization Act of 1970, unilaterally imposing 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department.

That  is the very definition of winging it. Little did Nixon know, his wing job would last just as long as the classical gold standard. As of this year, it has been 43 years since Nixon closed the gold window. It remains to be seen , how many years longer this system will last. Historically, it is already older then most. But until now, it was never the same age or older then the gold standard.

How Bretton Woods 1 ended

Robert Triffin accurately predicted the collapse of Bretton Woods and the end of an era of U.S. trade surpluses. Triffin told Congress that, at some point, foreign central banks would become saturated with Treasury securities and seek to redeem them for gold. European countries began to consider that the price of dollar-denominated inputs such as oil would fall dramatically if their currencies were revalued upward. By abandoning Bretton Woods, they could reduce their domestic inflation by reasserting control over their domestic money supply.

 Bretton Woods 2 is the sequel. We are back to square one minus gold. Instead of European countries , Asian countries will begin to consider that the price of dollar-denominated inputs such as oil would fall dramatically if their currencies were revalued upward.

The takeway

 Unmanageable price inflation outside the US's borders will be what brings an end to Bretton Woods 2.

Now that I am on the topic of monetary orders, lets have a quick look at the age of the USD as a reserve currency.

This chart shows the lifespan of the six reserve currencies that preceded the U.S. dollar; the average is 94 years. 2014  marks the 94th year of the U.S. dollar’s lifespan. 

And last but not least, the gold fixing schemes. 

 The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.The London Gold Pool collapsed in March 1968.
 That lasted a rather short 7 years. 

 And the sequel to this

The London bullion market is a wholesale over-the-counter market for the trading of gold and silver. Trading is conducted amongst members of the London Bullion Market Association (LBMA), loosely overseen by the Bank of England. Most of the members are major international banks or bullion dealers and refiners. It was founded in 1987
 

This racket is now 27 years old. Which happens to be how long Bretton Woods 1 lasted.

Why don't westerners understand the concept of currency risk ?

I have been having this heated argument with some fellows on a hockey forum about gold, inflation, investing, saving and all of that. What I have come to understand is that westerners are absolutely clueless on anything to do with currency risk. The reason is because generations of them have never experienced a currency crisis. Even the inflation in the 80's was blamed on Iranians taking Americans hostage and oil prices so they didn't learn anything from that. These guys have not been easy on me so I haven't  been easy on them. Its all part of the fun. Basically we have been arguing endlessly for 40 pages. Since none of them will save in gold, I asked them what they would do with $200,000 if it fell on their lap. I'm just posting this because I did some math that I always wanted to post.

My name is LolClarkson on this forum

Here is the exchanges:

Originally Posted by LolClarkson

I've asked this question 3 times now. Nobody has answered it. What would you do with $200,000 right now if it fell on your lap ????????????

Originally Posted by Epsilon

 

But it all seriousness, with $200,000 I'd pay off my debts, make down payments on a house and a new car, put a chunk in my checking account to make some purchases, and put the rest in a savings account.

I wouldn't spend a cent of it on a bar of gold bullion.

Originally Posted by Roughneck

I'd spend about $10,000 on stuff I don't really need.
A sizable chunk would go towards a home.
$10,000 to a trip
The rest into savings.

Originally Posted by LolClarkson

 Here is another fool who didn't understand the question. What would you do with it as an investment ? I am not interested in what you want to piss the money away on.

You said put it in savings.
 

Canada Inflation Rate
The inflation rate in Canada was recorded at 0.90 percent in November of 2013. Inflation Rate in Canada is reported by the Statistics Canada. Inflation Rate in Canada averaged 3.21 Percent from 1915 until 2013 but we will use the 0.90%

Toronto Dominion Bank Account Interest Rates

Rates as of January 01, 2014

Accounts $60,000 and over rate 0.35%

.90 (-).35 = minus -0.55. So after inflation, you have a negative .55 return.

So your $200,000 in a savings account costs you $1100 a year. (.55% of 200,000 is $1100)

After year one, you are left with ($200,000- $1100=)$198,900

Is this what you call a sound investment or savings strategy ?

Negative yields.... Plus you pay income taxes on the .35% return even though it is no return at all ! Using the governments own statistics.

Interest Income
Investments such as Canada Savings Bonds, GIC’s,
T-bills or strip bonds, pay interest income which
is taxed at your marginal tax rate without any
preferential tax treatment.

So the law says that you have to pretend that your $1100 dollar loss on your $200,000 savings doesn't exist. And you have to pay taxes on the imaginary return. Lets do some imagining...

.35% return on $200,000 = $699

Federal tax rates for 2013

15% on the first $43,561 of taxable income.

15% of $699= $104. So you lose $104 to taxes.

So you can add that to your already negative $1100 loss.

$1100+ $104 =$1204 loss.

$200,000-$1204= $198,796  

Originally Posted by Roughneck

LolClarkson: the guy who has all the gold in the world but isn't smart enough to use a TFSA (Tax Free Savings account)properly.

Originally Posted by LolClarkson

^This guy thinks that a Tax Free Savings Account will shield him from loss via inflation !

And we have already been through many currency risk lessons on this thread !

ZeroHedge compares the Asian Financial crisis to the US dollar bloc.

My second post on this blog went over the Asian Financial crisis in detail and how it compared to the US dollar bloc over the last few decades. I still think this particular crisis does not get nearly enough coverage in these times.  But props to Tyler and ZeroHedge for mentioning it in a recent post.

Although I don't agree with the premise that Thailand is imploding now (its a creditor now and political crisis has been priced in for 30 years), they have it right about the 1997 crisis and the comparison. Here is the post.

http://www.zerohedge.com/news/2013-12-27/1997-asian-crisis-redux-thailand-imploding

The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion.

The crisis started in Thailand with the financial collapse of the Thai baht after the Thai government was forced to float the baht due to lack of foreign currency to support its fixed exchange rate, cutting its peg to the US$, after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.

Indonesia, South Korea and Thailand were the countries most affected by the crisis.

...

The causes of the debacle are many and disputed. Thailand's economy developed into an economic bubble fueled by hot money. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism". The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power.

At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.

In the mid-1990s, a series of external shocks began to change the economic environment – the devaluation of the Chinese renminbi and the Japanese yen, raising of US interest rates which led to a strong U.S. dollar, the sharp decline in semiconductor prices; adversely affected their growth.

...

Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the lender–borrower relationship. The resulting large quantities of credit that became available generated a highly leveraged economic climate, and pushed up asset prices to an unsustainable level

 Just like the US dollar bloc. And it bares repeating that the AFC currencies lost 50% of their value with no QE and no money printing at all. 


This was my post on the subject: http://freegoldobserver.blogspot.ca/2011/10/forgotten-crisis-and-what-every.html 

Comparing publicized Yen intervention to unpublicized gold intervention.

From 2011

(Reuters) - Japan sold the yen for the second time in less than three months after it hit another record high against the dollar Monday, saying it intervened to counter excessive speculation that was hurting the world's No. 3 economy. (Sounds like Nixon in 1971)

The intervention vaulted the dollar more than 4 percent higher (Yen 4% lower) , which would mark its biggest one-day gain (Yen loss) in three years, and Finance Minister Jun Azumi said Tokyo would continue to step into the market until it was satisfied with the results.
"We started currency intervention this morning in order to take every measure against speculative and disorderly moves and to prevent risks to the Japanese economy from materializing," Prime Minister Yoshihiko Noda told parliament.

Ok, so what does this look like on the chart, when finance ministers intervene in the markets  ?

Here it is :

Looks awfully similar to this gold chart no ? But this is all conspiracy right.....

So there you have it. The G20 is smashing down the gold market to support government bond prices. As physical gold holders, we have no idea what the real price of gold is. But the propaganda machine can paint whatever price they want to make us look wrong. All we can do is keep soldiering on until they lose control. When that happens, nobody knows. Its a tough time.

Fast forward to 5:41 of this clip. And when they start talking about silver, FF to  9:48. Nobody can lay out as clearly as Chris Powell. 

Why no banana republic price inflation yet ? Its all about the store of value functions and medium of exchange functions.

 I'd like to share an exchange I've been having with Jim Willie (rumor anyway)  who's been posting as Grumps Labastard of the FOFOA blog. Jim Willie does not seem to think that the store of value (SOV) and medium of exchange (MOE) functions of money can be separated. This will also shed some light on the confusion as to why banana republics have such high price inflation with menial actual printing.

His words

A common assumption I find in the gold community is that there is a somewhat constant store of value that must be available. What this blog has done for me is that the flaws in FreeGold have allowed me to see that value cannot be trapped and isolated for a long period of time. The SoV and MoE functions cannot be separate. The concepts delineated on this blog are zero order, linear. I think the truth may lie in Fekete's Theory of Interest. It's the tension between saver, investor, and producer, the first and second order derivative relationships that make it impossible for the SoV not to be intertwined with the MoE. 

My answer

It is already happening all over the world, all the time. Do you think millionaires and billionaires in banana republics store their purchasing power in their local currency ? No they don't. That's why inflation shows up so fast in these countries. Because the producers are not saving their excess in local currency. They save elsewhere. Thus, the local central bank has no purchasing power to steal via printing (savings are not denominated in the medium that the central bank has the ability to print). The printing just floods the transactional side and you get instant price inflation.

Why hasn't the US experienced banana  republic style price inflation yet ? Simple. Too much savings to to draw from via printing to have enough effect on the transactional side. Too many fools are saving in the medium that the US central bank has the ability to print.

When the producers around the world start saving in a medium other then US dollars (gold maybe ?)
there will be a corresponding amount of price inflation in the US. So it goes back to the same thing. When the bond bubble bursts (savings exit the medium that the Fed can print) the US will join the banana republic club.

Who Cares ?

All this talk about the COMEX, silver, GLD (gold ETF's), manipulation, bull vs bear,  is all noise to me. Even I have been caught up in this.

Why should anyone care what is going on in any gold market, paper or physical until something happens in the US and Japanese 33 year bubble bull markets ?

I still maintain as I said 2 years ago, that the onset of freegold happens when there is selling/trouble in the BOND markets mainly in the US and Japan.

$1000 dollar gold, $2000 gold , what is the difference ? Who cares ? I have paid close to both. As long as BOND prices keep rising and the FED can do no wrong, nothing matters. As long as BONDS are the premier store of value for shrimps and giants alike, long or short term, nothing matters.

Nothing matters in GLD, nothing matters at the coin dealers, nothing matters at the bullion banks, nothing matters at King World News et al.

This is like being in late 60's and early 70's yaking about the price of gold as it bounces between $35 and $60. It didn't matter if you bought at $35 or $80 then until there was trouble in the BOND market and it doesn't matter now as it bounces between $1000 and $2000 now.

  Wake me up when the 33 year bull bubble grenades. Then we can talk gold prices.

And  they say that these bonds aren't a bubble because the great unwashed aren't piling in. I wonder what charts they are looking at..