US National Debt Clock

More people are becoming aware of the huge US debt bomb.  But what they aren't aware of is the US Treasury has issued so many USDollars that the prices for gold and silver should be astronomically higher, based on the money supply.

If not for the artificial suppression of precious metals prices by the monetary authorities and bullion banks acting on behalf of central banks, gold and silver should be $8,108/oz. and $896/oz., respectively.


http://www.usdebtclock.org/

Key Metric Hits Same Level As Prior To The Great Depression

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/6/1_Key_Metric_Hits_Same_Level_As_Prior_To_The_Great_Depression.html

Gold versus the money supply

http://www.goldmoney.com/gold-research/alasdair-macleod/gold-versus-the-money-supply.html?gmrefcode=gata

The Aboveground Gold Stock: Its Importance and Its Size

http://www.goldmoney.com/goldmoney-foundation/essays/the-aboveground-gold-stock?gmrefcode=gata

M-∞: How to Measure Strains Created by the New Financial Architecture

http://www.realclearmarkets.com/blog/eric-fine-how-to-measure-strains-created-by-the-new-financial-architecture.pdf

As M2 Money Supply Rolls Over, the Stock Market Will Follow

http://www.oftwominds.com/blogjuly12/M2-SPX7-12.html

The Effects Of Increasing Global Money Supply On Gold

http://www.zerohedge.com/news/effects-increasing-global-money-supply-gold

Pento - Money Supply & Inflation Exploding Around the World

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/2/22_Pento_-_Money_Supply_%26_Inflation_Exploding_Around_the_World.html

US Money Supply Surges Surges 33% in 4 Months - Gold To Follow?

http://www.zerohedge.com/news/us-money-supply-surges-surges-33-4-months-gold-follow

Fiat Money

http://youtu.be/hx16a72j__8

M3

Click on chart to enlarge.

When money supply M3 (dark blue line) declines this precipitously, the chances of an economic recovery decline with it. By the way, M3 is no longer recorded as an official government statistic. Hmmm...

Almost two years of zero interest rate policies have not revived the economy or brought unemployment numbers down. 4.5% mortgage rates have not resuscitated the housing market. Fed Chairman Ben Bernanke was hinting at exiting fiscal stimulus programs a few months ago due to a "recovering economy."

I see failure. "Jobless recovery" is an oxymoron. The Fed's only hope is more monetary stimulus, more printing of USDollars, a second round of quantitative easing, debt monetization, etc., whatever opaque choice of words our government officials use. After all, they can't lower interest rates below zero.

In order to combat deflation, Bernanke's biggest fear, QE 2.0 will be implemented after the next financial crisis, to once again "save our financial system." But all it will do is stoke inflation, while debasing the Dollar, and reducing our standard of living.

BIS gold swaps (part 2)

Thanks to Dick for bringing up this article.

http://www.zerohedge.com/article/guest-post-gold-swap-signals-roadmap-ahead

See BIS gold swaps (part 1) here.

Here are my unedited comments:

I read another article which hinted that Portugal was indeed the country that swapped out their gold to cover the bills. The BIS is a very private organization that meets 10 times a year in Basel. It's in a building that has no signs. Swiss citizens pass it every day and don't even know it exists.

Think of them as a big pawn shop for central bank gold. If you need cash, whether in Euros, dollars, etc., just swap out your gold, and receive the currency requested. If you fail to repay the cash, you lose the gold. That article correctly states gold is double-counted--I'll extend that argument further and say it's counted 45 x, which means the other 44 people who think they have ownership to the gold (unallocated), don't really own that gold. They are paper certificates with no ownership rights.

I'll connect the dots, and declare if/when we transition away from the USDollar, whether it's another paper currency like the SDR, gold as priced in USDollars, will soar. In fact, eventually, the SDR will lose its luster too, because it's made up of a basket of four other paper currencies: the USDollar, yen, British pound sterling, and Euro--none of which are backed by gold either.

So they are merely replacing one paper currency for another, although the SDR will give a semblance of stability, since the devaluation risk is spread out between 4 doomed currencies, instead of one. I don't see how the Chinese and Russians will like this solution either.

But whether the SDR becomes the de facto currency or not, and whether a gold-backed currency becomes the new reserve currency, it spells doom for the USDollar, priced against gold. And since our trades are based on a higher price for gold in USDollars, we will do well. How well is the question. If the transition goes well, and the paper chase is concealed for another decade, gold will rise to $2500. If the formula doesn't work well, gold will be $6300....priced in US Dollars, of course.

I'm more convinced than ever this scenario will happen, and that markets will react violently after the Ponzi schemes of central bankers are exposed. The sad truth is that it doesn't have to happen. Imagine if gold were worth $12,000 an ounce tomorrow, ten times what it is worth right now in the spot market. All of a sudden, the US balance sheet looks a lot better, because the Assets side of the ledger just went up by a huge amount, somewhat offsetting our huge Liabilities (I'm assuming the Fed still has the gold they claim to have in Ft. Knox and the New York Fed, which is a big assumption, given there has been no independent audit since 1953).

But government officials and bankers are too worried about what soaring gold prices signal to the markets, and they're too worried their Ponzi schemes being exposed. Re-valuating gold at much higher prices would be an admission of guilty for decades of price manipulation. But it would also relieve them of the huge burden of being too under capitalized, much like an insolvent bank is.

When your crown jewels are re-valuated at much higher prices, you now have much more equity from which to make loans against. For example, if your house value increased from $1 million to $10 million, you can now tap that additional equity of $9 million and put it to work for you. Government officials and central bankers are more worried about soiling their reputations, so they continue on their search to extend the shell game, instead of focusing on fixing the structural problems of RECAPITALIZING THEIR ASSET BASE and producing income again to pay off their enormous debts.

FDR did this in 1933 by confiscating private gold at $20.67 and later re-valuating gold officially at $35. Obama and Bernanke will have to do this also, but their revaluation would have to be significantly higher for it to accurately reflect the huge supply of USDollars sloshing around worldwide, not just in the US. After all, USDollars are held in private hands, commercial banks, as well as in reserve vaults at foreign central banks. Only then will the US Dollar have any link to gold, which encourages sound monetary policy. In our mad world of derivatives, swaps, and endless printing of paper currencies, nothing is backed by nothing, which is exactly why we had the financial collapse in 2008. Lack of collateral caused the collapse of the subprime securitized mortgage bonds when prices of US residential homes went south. Until currencies are backed by gold, a repeat is inevitable.

Re-valuating central bank gold reserves to accurately reflect global money supply will re-energize the sinking world economy, at least in the developed world, as the most indebted European countries and the US have the most gold in their reserves. Emerging growth countries have a disproportionately low percentage of gold in their reserves and are accelerating their gold holdings.

Of course, central bankers won't take steps to restore gold-backed currencies for the aforementioned reasons, but when the world wakes up to the shell game they have been playing, the markets will force their hand, because gold will be priced at much higher levels.

James Turk - threat to the dollar

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/7/8_James_Turk_-_Threat_To_The_US_Dollar.html

US Global Investors on gold

http://www.usfunds.com/investor-resources/frank-talk/?i=2902

Gold is charging up to new highs, so it’s no surprise that the level of interest in this financial asset is charging up as well. Last week I did interviews with CNN, CNBC, USA Today and Reuters, and in most cases a specific question came up – “Should people be buying or selling gold right now?”

That’s a tough one. The monetary turmoil in Western Europe and some early signs of inflation create the right conditions for gold to continue its run, and while we see higher prices in the long term, it’s difficult to predict what might happen in the here and now.

If he’s correct – the masses in the developed world are just now waking up to how their personal wealth can be affected by the future inflation spawned by the trillions of dollars and euros created to finance economic rescue plans – the potential implications for gold are profound.

Here’s one way to look at currency destruction -- 10 years ago this week, $1,000 bought nearly four ounces of gold, and today $1,000 won’t even get you a single ounce. Gold is money, so when you look at the gold-dollar exchange rate, the dollar’s value has fallen by a startling 78 percent just in the past decade.

Murenbeeld goes on to make another interesting point – investment demand, rather than jewelry demand, has been the key driver for gold for most of modern history. We are returning to that scenario as gold’s safe haven appeal grows during this period of unstable government and monetary policies.

Our experience shows that whenever you have deficit spending, rapid money supply growth and negative real interest rates (inflation rate higher than nominal interest rate), gold will perform exceptionally well in that currency. Right now, we’re seeing massive deficits, negative real interest rates in the U.S., and a worldwide debt problem that is projected to get bigger.

We have long recommended, based on regressional analyses, that prudent investors consider an allocation to gold – not to get rich, but as a way diversify assets and protect wealth. Our suggestion is a maximum 10 percent allocation – half to bullion and the other half to gold equities or a good gold fund that invests in unhedged gold stocks.

A quick primer on inflation

According to monetary theorists, inflation or deflation is created through the easing or tightening of our money supply, respectively. The Federal Reserve Bank controls our money supply, so its monetary policies ultimately determine the rate of inflation.

Here is the St. Louis Federal Reserve Bank's chart on monetary velocity:

http://research.stlouisfed.org/publications/mt/page12.pdf

The empirical formula is m x v = p x q, where
m = money supply
v = velocity of money
p = price level
q = level of economic activity

Looking at the two charts above, we can see money supply growth has been astronomical since 2008, while monetary velocity has remained moribund. The financial crisis has depressed economic activity due to lack of money velocity, i.e. banks aren't lending as they recapitalize their broken balance sheets. Velocity of money is the only fuse to stoke the fire of inflation. And when it does, look out. The other components are already in place for soaring prices.

What the markets are telling us...

With the US Dollar in a free fall, along with US Treasury bonds, and hard assets soaring in price, the markets are giving us a clear message: no central bank can support the world's reserve currency when that country is also the world's largest debtor. Despite US Treasury Secretary Geithner's protestations that the US economy is "resilient and dynamic", the Chinese are curiously publicly silent on the subject during his visit to China. Perhaps they are being polite.

But they are connecting the dots: trillion-dollar deficits, coupled with profligate money supply creation can only create inflation and currency devaluation. In other words, they have every reason to be concerned about their US Treasury holdings. While they may publicly declare US Treasuries are the "only game in town" for their reserves, it seems a bit disingenuous when you consider they have been secretly doubling up their gold holdings in response to the dollar's devaluation.

Another chart which needs no explanation...

This chart from the St. Louis Federal Reserve Bank website (I'm not making this up) illustrates money supply expansion by the Fed in lending cash to banks in exchange for their toxic assets. Notice the spike on the right side of the graph, which represents the creation of dollars out of thin air.

Why Monetary theory doesn't work.

According to Brian Bloom, author of Beyond Neanderthal:

The “theory” of the monetarists is that if you flood the market with money then people will continue to buy the same quantity of oil. The “reality” is that if there is less stock available (for whatever reason) and/or if there is a reduction of the rate at which people are replacing what they bought before, then an inflation of the money supply causes an inflation of prices.

Another problem to which the monetarists seem blind is that wages lag inflation. First price rises and then, in response to increasing difficulties being experienced by consumers to make ends meet whilst continuing to buy the same volume of goods, they hold out their hands for more wages. Employers – who are experiencing their own problems – don’t react immediately. Thus, in the short term, consumers have no option but to buy fewer goods and services. It follows that, in an economy where 66% of GDP is accounted for by consumer purchases, any extraordinary inflation of the money supply is virtually guaranteed to exacerbate a slowing velocity of money and a concomitant slowing rate of consumer purchases. At the extreme, if the authorities drop dollars from helicopters, all that they will achieve is that they will hasten the arrival of an Economic Depression. Perhaps the following example will make it crystal clear: Today, in Zimbabwe, a loaf of bread costs somewhere around half a billion dollars and the unemployment rate is around 80%. How many of the 80% unemployed do we think can access half a billion dollars? At the extreme, when you print too much money, the economy tanks.

In summary, dear reader, if you have a robust engine powering a robust vehicle which, in turn, is pulling your 5 ton load then, by depressing the accelerator (increasing the money supply) the car will easily negotiate the next hill. But if the vintage economic vehicle is not sufficiently robust – which is what we are now facing – then you want to be very circumspect about increasing the money supply. This is one of those times when implementing monetary theory will be counterproductive. What will likely happen under these circumstances – as an example – is that the oil price will rise to $150 a barrel. Then, when it collapses again because people can’t afford to pay $4 a gallon for gasoline because wages lag inflation, what you will be faced with is a fall in demand and a consumer who has been burned. And we all know that “a burned child dreads the fire”. If you offer the consumer a box of matches after he has been burned, he will run a mile in the opposite direction. Printing yet more money in today’s environment will not give rise to the desired outcome.