Gold Daily and Silver Weekly Charts - The US Dollar: Keeping Up Appearances

Ron Paul: "I had a Federal Reserve Board Chairman testify before the committee that the gold standard had some merits but it was unnecessary because central bankers have now learned how to manage a Fiat currency in a manner in which it would mimic the gold standard. Would anybody care to comment about where the flaw is in that thinking?"

Mr. Lehrman: "I am anxious to comment on that, Dr. Paul. Under--and I must say Mr. Greenspan made the same insipid remark. Mr. Greenspan and Mr. Bernanke will have to then explain why it was that two of the greatest booms in American history, and two of the greatest panics and busts in American financial history, occurred under their 25-year watch..."

Mr. Grant: "The failure of AIG is so instructive in this respect. AIG, this immense insurance company with this ever so brilliant financial products group, didn't do one thing. It didn't mark its positions to market. Finally came the day of judgment and it argued with Goldman Sachs about what these things were worth, AIG said 100 cents on the dollar, Goldman Sachs said not close, Goldman Sachs won that debate and AIG failed.

As with AIG and Goldman Sachs, so it is today with the United States and its Asian trading partners. We never clear our trades. Our dollars go there, and they come right back here. We run twenty five consecutive years of debts on a current account and there will be for us, as there was for AIG, a moment in truth in which we must settle."

U.S. House of Representatives, Committee on Financial Services, Testimony of March 17, 2011

The US will settle, in paper dollars.  And if the payment is insufficient, they can always create more.

That is the long and short of it, and the sophistry of modern money.  Because the value of the money is self-referential, it is in essence a literal confidence game.  The dollar is worth what we say it is, and it is worth it because we say it, without regard to other opinions and considerations to the contrary. And as long as people believe this, or even pretend to believe this even if they don't but are afraid of the consequences of their disbelief, the dollar hegemony is secure.

Money is a matter of force and confidence; and when confidence wavers, force must provide. Force can take many forms, from persuasion to deception and even compulsion.

So the appearance of solidity and confidence must be maintained no matter what.   It must, as apparently Messrs. Greenspan and Bernanke have said, must 'mimic the gold standard.'  And they are right.  Caesar's wife must be above reproach, and the fiat dollar is the dowager queen of empire.

That is why the chat board gimmickry of the platinum coin was such a remarkably dangerous folly. Even given that money is a somewhat specialized area of study, it was shocking that a distinguished economist like Paul Krugman did not seem to understand it.  I could attribute that to a moment of political weakness. 

But the rest of the world did understand exactly what was happening, and held its breath.  Would the US dare to cynically impugn the basis of its debt, even by implication? 

Perhaps the greater question, such silliness as trillion dollar platinum coins aside, is how far the Anglo-American financial system is willing to go to keep up the appearance and dignity of a stable global reserve currency in the dollar, even while the dollar is being used and abused by the financiers like a 12th Avenue hooker?

I think you know that I believe that the paper metals markets are an accident waiting to happen, particularly with regard to silver.

It appears that the exchange and the regulators are managing the markets with reckless disregard for their soundness.

So let's see what happens.

SP 500 and NDX Futures Daily Charts - Quick Flip

We had a little backtracking today, but stocks bounced into the close.

VIX climbed a bit, and I took the highly levered bets off the table remarkably near its apogee. Thanks.  Every little bit helps. 

I have a balanced short riding just for grins, but it is greatly reduced. 

So what next. I still am thinking that the wiseguys will have a go at 1570 on the SP futures before this thing falls apart, but keeping the leverage under tight control at such a dodgy time is not so bad either.  To put it in a briefly pithy statement, these Wall Street jokers are barking mad, and Washington is living on their own planet.   Words do not quite capture how I feel about this.

The event risk here is enormous. These markets remind me of a big fat souffle, full of the air of HFT, QE, arrogance, and leverage. If someone slams the oven door it could go quite flat without much more provocation.

Kyle Bass On Japan and Two Key Slides

I was listening to Kyle Bass' forecast of what he sees as the coming financial collapse of Japan.  A link to that presentation at the Booth School is included below.

Here are two key charts that I obtained from Wikipedia that weigh on the economic situation in Japan.  They are a bit particular to that country.

Japan has a largely homogeneous population sharing a common racial heritage and language.  There is little immigration other than a few guest workers, and a shortage of natural resources.  It does have a strong store of intellectual human capital, a highly motivated and capable work force, and a remarkably strong central planning structure.  The public is unusually cohesive and oriented towards the common good. 

I think that although it is packed with facts, Kyle Bass's analysis is a little overly simplistic, and not completely fungible to other countries as he implies in the Q&A as indicated in the talk below. 

I am a little disappointed that Mr. Bass deals with the externalities through the numbers, but never discusses the structure of Japan's economy and the keiretsus, which is very important, and far from incidental.  He also gives a nod to Japanese culture and then dismisses it.  That also is an error, but it is a very common Western error, and he has plenty of company.  After all, inside every foreigner is a greedy, self-serving American style plutocrat just waiting to get out, right?

He also ignores the enormous private losses from the real estate bubble that were never realized, and were essentially buried by the industrial-financial combines together with a single party government of well-intentioned insiders.

He says that Japan is already in the zone of insolvency, and it is obvious that they will collapse.  I think that this is possible, but not inevitable.  If there ever was a case to be made for MMT,  or some sort of debt restructuring in the model of Iceland, another island nation, Japan might be it.  I suggest the latter might be more fruitful because of their dependency on natural resource imports.

Japan's strength, as always, is in what is not seen, not so readily apparent, to Western eyes. 

The primary obstacles to restructuring are the scarcity of natural resources which presumably must be imported, and the lack of population growth with immigration as a threat to racial homogeneity.  Available real estate and population density on an island are also key factors.  These are the classic scenario inputs that lead to colonial expansion which seems not to be a viable option at this time.

The comparisons to the US situation are overly glib and miss the key differences.  The solution for the US is growth, and it has all the options open that are so problematic for Japan.   

What the US lacks is a more public spirited policy making apparatus, one that is not captive to special interests.  It labors under the corruption of big money, and suffers from growing wealth inequality that is beginning to approach a third world oligarchy.  Japan has a GINI coefficient of 38, whereas the US has a coefficient of 45, and increasing.

I am not so much concerned for Japan, but for the tangled web of carry trades, derivatives, fraudulent misrepresentations, and leverage that is the Western financial system.  Japan would certainly be large enough to give it a stress test beyond the Fed's most rigorous scenarios. 

The financiers such as Kyle Bass might be more concerned about this, and not look so greedily at the situation as just another money making opportunity, if they were not so arrogantly sure of a US dollar bailout at any and all costs, even in the event of a major financial dislocation that begins abroad.

Here is a recent talk by Kyle Bass regarding 'The Coming Financial Crisis in Japan.'

Monetary Theory: Where Is the Flywheel and other Intellectual Ponderings and Squabbles

Money is power. And so like those other loci of power, politics, tribalism, and religion, the discussion can sometimes obscure rather than illuminate the facts and issues, such being the emotional state of people.

The discussion can sometimes become very heated, and very particular over the finer points, in a vacuum.   A system becomes rigorous and hardened by usage, and effete and elaborate the longer it is parked on the bench.

I am thinking of course of the recent case of Krugman v. Sachs. It tends to strike someone outside of professional economics as a nerdish slap fight.   If you are blissfully unaware of this, feel free to skim on to the next topic.

There are no quarrels so petty and yet so vicious as those in the faculty departments, precisely because there is so much and yet so little at stake.  It is where people who are essentially without the power to implement their ideas in the real world must leverage the power of their reputations.

I will not get into the specifics of this particular squabble, except to say that out of frustration Sachs was needlessly provocative in penning an op-ed in collaboration with a deficit hawk.  And Krugman has been similarly provocative, out of frustration, in answering objections to deficits by ardent austerians by saying things like 'deficits don't matter' in public forums. Yes, yes he modifies this in the footnotes. But he lowers himself to the level of economic luddites and that is a mistake.

This lowering of the discussion is an understandable outcome given the staged performances, little more than wrestling matches pitting talking head against sound bite adversary, that passes for information on the Sunday morning talking shows and the mainstream news.  It is the age of not of reason, but spectacle.

I suggest that the real reason that Krugman and Sachs are 'at each other' is because the standard bearer of the progressives is at best playing rope-a-dope, and at worst is little more than a cynical deal maker. I speak of course of Barack Obama, whose position is always hard to discern from the standpoint of principles if one watches what he does rather than what he says.  And I suggest that this is because he has few principles, rather than perhaps sentiments, that get in the way of his pursuit of the deal, and his own power. 

Now I turn to the curious situation of the Modern Monetary Theorists.

Let me state, unequivocally, that there is nothing new to be seen here. There are no new discoveries, there are no new wonderful theories that make things possible that were not possible before, in the manner of an invention like the transistor, atomic fission, or flight.

What is presented as 'new' is the notion that the state can simply print and distribute its own funds as needed, determined by it.  And in doing so there will be no serious consequences.

I am willing to suspend all other discussion and objections, and bring this down to the absolutely critical point in any monetary system. And that is, 'where is the flywheel?' Or for the less mechanically inclined, where is the constraint, the restraint, the governing factor, on expanding the money supply?

In the case of an external physical standard, like gold and silver, or a hard peg to another currency, that constraint is easily seen. The 'flywheel' that governs how fast the printing presses may go is the amount of gold and silver one can obtain, or the level of value of some other currency, that is hopefully stable but may not be.

One can expand the money supply beyond the metal supply, but only with a conscious and obvious devaluation of the units which each ounce of gold and silver represents.  Or one can cheat and lie, but that is another matter, and a facet of all human systems which lack transparency.

In the case of a debt based market system, the flywheel is the willingness of the market to take the government debt at some value which 'works' for the monetary authority's purposes.

It is undeniably true that Bernanke is gaming this mechanism in what is purported to be the short term by buying that debt, the government bonds, at non-market, artificial prices. And it shows up in the Fed's balance sheet, for all to see.

As I have pointed out at some length before, as long as the Fed has at least one Primary Dealer in on the scheme, the money machine can keep turning until the market is revulsed by the stated valuations, and the machine breaks down.

And this is by design.  It is the principle of 'lender of last resort.'  And it is supposedly what provides the Federal Reserve System more flexibility to address currency shocks than a hard external system.  That the Fed has caused those currency shocks by its own policy errors at times is another matter.

But at least I understand why the Fed and the board of governors are doing what they are doing now, and it is obvious what they are doing despite the enormous lengths to which some may go to say otherwise.  And since it requires the agreement of a number of different, somewhat independent parties, it may very well stop before it goes too far. 

So I would ask, where is the flywheel in Modern Monetary Theory, in which the government spends at much as it wishes, and simply issues the currency to 'cover' its expenditures?

And if the answer is the checks and balances of the Congressional appropriations process and the policy of the Treasury Department, you will understand if the general public runs screaming towards the exits, given our recent experience with the budgeting and spending levels.  Or if the answer is that it is 'in the cloud' and that a restraint is an old-fashioned concept that is no longer applicable, then we will know that as it stands it is another new era idea like efficient market theory.

So, with regard to Modern Monetary Theory, what acts as the restraining factor on the expansion of the money supply? Where is the flywheel?

Answer that honestly and straightforwardly in less than two paragraphs,  and it might be said that MMT at least has a system.  And if not, it is something that needs to be done to take it from sophistry, which dodges and changes as required by the turn of the debate, into the realm of a real system that can be examined and critiqued.

Gold Daily and Silver Weekly Charts - Complacency Trade

Gold and silver held their price levels quite well despite the rally in stocks, which ordinarily would have spelled a selloff in the precious metals. VIX dropped to a six year low.

Let's see how the Merry Pranksters trade the rest of this week. We may be near a turning point, at least in the short term.

SP 500 and NDX Futures Daily Charts - VIX to a Six Year Low

The VIX, the indicator of volatility, dropped to a six year low today as the US equity markets shook off weak economic data out of China, and the downgrade of Italian debt, to move to fresh highs in the touristy Dow.

The SP futures have a measuring objective of 1570. They closed around 1555 today.

I took a long in volatility towards the close of US trading today to balance some other things out for the most part.

US Unemployment Rates Adjusted For a Constant Labor Participation Rate

These charts courtesy of chartmaster Gary at NowAndFutures.com

Gold Daily and Silver Weekly Charts - God's Mills Grind Slowly

Gold and silver would not be denied, despite some fairly determined efforts.

Silver did the heavy lifting.  The intra-day charts are included below.

"Gottes Mühlen mahlen langsam, mahlen aber trefflich klein,
Ob auß Langmuth er sich seumet, bringt mit Schärff er alles ein."

Friedrich von Logau, Göttliche Rache

Have a pleasant weekend. See you Sunday evening.