Buiter Still Obsessing Fitfully on Gold: What Time is the Next Currency Crisis?

Mr. Buiter, advisor to central banks and to Goldman Sachs, is at it again, comparing gold to Yap Island stone money, ranting against those who would trade valuable bank paper for something that he does not like, (but has endured as a store of wealth nonetheless for thousands of years).

Once is a phenomenon, but twice is a trend. What can be dismissed as a crank rant must now be seen as a symptom of a man talking his book, and none too gracefully.

We give more credence now to the rumours that the Bank of England has miscalculated badly and the LBMA et al. are 'on the hook' for more gold than they can provide, precipitating a crisis for their advisors, especially those on the wrong side of the trading advice. And further, that gold held offshore by some prominent members of the European Union are having difficulty getting their collateral back from some of the bullion banks in a deliverable condition.

Quite a few options are coming due on the US Comex next week, and the bankers may be once more 'staring into an abyss.' Or setting up for a big push lower to 'save the banks.' That would be traditional central banking stewardship of late days.

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake..." Eddie George, Governor Bank of England, in a conversation with CEO of Lonmin, September 1999

"W. Buiter, CBE, Member Monetary Policy Committee of the Bank of England (1997-2000)" Shoulder to shoulder with Sir Eddie on the brink, eh? That must have been rather intense. Oh, bravo.

People can remain rational and place their trust in the timeless longer than central bankers and politicos can feed them arbitrary illusions and promissories for wealth on the bankers' terms. At least while they retain free market choice.

Welcome to the unintended downside of quantitatively easing your way to wealth, ie. a loss of credibility.

Welcome to the world of bubble-nomics with negative returns on savings.

Financial Times
Yapping away at gold: lessons from the last days of the Rai

By Willem Buiter

November 16, 2009

Far be it from me to assert that a fate similar to that suffered by the Yapese Rai will befall gold - another intrinsically worthless fiat commodity. But the demise of the Rai as a store of value and means of payment, when taken together with the historical experience of pre-columbian native American tribes and nations that attached very little value to the shiny metal, should give the gold bugs some sleepless nights. More importantly, it ought to discourage investors who are not rich enough to survive a speculative disaster from putting too much of their savings into this frivolous store of value.

(Pre-columbian native American tribes that atttached very little value to the shiny metal Oops1 and Oops2 not to mention the Aztecs and the Mayans, who were rumoured to have existed prior to the arrival of the Europeans. Fact check please, other than watching American 'cowboy movies.'

Oh, perhaps your understanding of early American economic history pivots on the sale of Manhattan island to the Dutch by a tribe of Indians for some beads? A bit selective perhaps, and a narrow experience for a pivotal historical thesis. It may be like basing a general history of European Banking on Wall Street's recent selling worthless CDO "wampum" to the continent's commercial banks. - Jesse)

Comment 5 to this article from some fellow named 'Jesse'

"Perhaps if I phrase it this way it might be more clear.

In one philosophic sense, gold is indeed a fiat valuation, if all valuations are fiat,

nothing being essential but air to breathe, food to eat, shelter and clothing in

roughly that order. All else is discretion.

Gold, however, may be less fiat, less arbitrary a a money, a medium of exchange

and a store of value, rather than the essential itself, in an other than barter economy. Just as the Aussie dollar or the euro may be less ephemeral than the US dollar,

This is what is happening. The Bank of England made an error in selling its nation's

gold 'at the bottom' and will pay a price for this; live with it.

Oh, and try to move on please, else you may begin to resemble King Canute, sitting

on his throne at ocean's edge, ordering the incoming tide to stop its inundation.

Thank you. Mr. Buiter Apparently Does Not Like Gold

Mr. Willem Buiter’s CV Summary

Previous academic appointments in economics at Princeton University, the LSE, the University of Bristol, Yale University and Cambridge University.

Former external member of the Monetary Policy Committee of the Bank of England (1997-2000)

Former Chief Economist and Special Counsellor to the President, European Bank for Reconstruction and Development (2000 - 2005)

Advisor/consultant for the International Monetary Fund, the World Bank, the Inter-Americal Development Bank, the OECD, the European Bank for Reconstruction and Development, the European Commission, many national governments and central banks.

Advisor to Goldman Sachs International (2005 - present)

P.S. If Goldman Sachs is holding gold short on your advice and getting face-ripped by it (sweet) I'll let you be my Facebook BFF for life.

What is a "Nominal" Stock Market Chart Versus a "Deflated" View?

Lots of interesting questions in the email bag over the weekend.

A reader asks 'What exactly is a nominal or artificial stock market rally as you use the terms?'

Nominal is used to mean "being such in name only; so-called; putative." This is an example of a nominal, or artificial stock market rally that someone had posted over at Alphaville earlier this year. (Hat tip to Rasputin of WSB for reminding me of where I had seen these charts.)

The Zimbabwe Industrial Index



I would have preferred a logarithmic chart for this extreme view of a hyperinflation in action, because the final moonshot tends to crush the detail of the prior action by skewing the scale so high. Still on the surface that looks pretty good right? Enough to get Jimmy C. to pound some teak on the table on Mad Money?

Another way to show the detail is to deflate the nominal chart.

The 'deflated' view is when you take the index and show what its value would be in terms of some other value, in this case the US dollar.

The Zimbabwe Industrial Index Deflated by the US$



Here is an example of the SP 500 viewed from two perspectives.



"Oh this is all very well and good Jesse, but when I go to the grocery store or to the gas station or the convenience store to buy my instant Lotto tickets I pay in dollars and not gold or euros."

Yes, but when your suppliers go to buy their goods that are imported, they pay in dollars that are depreciating. You know that some prices are moving higher despite slack demand overall. This is what we call 'selective inflation.' This is how it starts.

The trick of course is to get off Bernanke's monetary hamster wheel. If you are not in the US, reducing exposure to the dollar is more straightforward. If you are a Yank, then generally you would look to add exposure to contra dollar hedges to lessen your currency risk. You might also wish to begin to secure some essentials for your future.

Having said all this, as you may recall we are dubious on the hyperinflationary and severe deflationary scenarios for the US. It seems that a severe 'stagflation' is most likely based on current policies. Obama and crew are inflating the currency, but it is selectively being applied to the FIRE and Health sectors, resulting in a very slack stimulus to overall employment and the median wage.

The worst of both worlds: Inflation and Unemployment.

This is the policy mistake made by Japan in trying to reflate a status quo that was broken beyond all sustainable repair. But what can you expect when you reappoint the same team of Timmy and Larry to key economic positions, the crew that started the mess in the 1990's under Robert Rubin?

Continuity of error you can believe in, it appears.

Long Term Gold Chart Updated (And An Addendum Showing Detail)

The character of this move of the breakout will tell us how far gold will correct when it hits an intermediate top and consolidates or corrects.

Gold is in a bull market. One never gives up all their position in a bull market. Rather, you hold it while the bull is running. If you are an aggressive 'trader' you can buy on support and sell at resistance around a stable position to improve your cost basis, taking some of your own money 'off the table' but letting your profits run.

Otherwise it is better to just hang on and enjoy the ride.



As always, in a general market crash the liquidation will also hit gold and silver, and may set up an exceptional buying opportunity. But do not count on it. Never give up your seat completely on a bull market train while it is running, because it may take an extraordinary act of will to get it back again.

Last Update November 4, 2009

Sept. 16 Addendum: Someone asked for a 'picture of Scenario 1.' Here is what it might look like. With regard to timing, I am expecting gold and the SP 500 to make some sort of a short term top together, and for SP 500 DEC futures to peak out about 1117 before they correct back down to trend support. So you can see my dilemma in trying to synchronize these two views and charts. I think a market 'crash' is off the table unless there is an event, but who can predict something like that reliably?

Money Supply and Demand, and the Monetization of Debt

The growth of the broad short term money supply remains strong for a slack economy, although not quite as robust as when there was a flight to quality out of equities and Ben did his moonshot with the Fed's balance sheet.



Demand for money? What demand? This is something new in the post World War II era.



Relative to the growth of bank credit, the growth of broad short term money as measured in MZM is outsized as the Fed intends it to be.



The limit of the Fed's ability to monetize various debt instruments already in existence is the value of the dollar relative to the purchasing power of the other major fiat currencies.



Do people realize that a monetization of the dollar is occurring? Some do.



As one might expect the velocity of money, which is the ratio of money supply to the aggregate demand for money (GNP), is very low. This is helping the Fed to keep inflation selectively low, because although there is a lot of money relative to bank credit demand, that increased money is not doing much chasing of goods. It seems to be flowing once again into financial assets, which is probably an artifact of where the money has been allocated. How many cars and meals can a wealthy person or corporation consume? They do not create consumption out of their excess, they increase their speculation and the acquisition of the means of future production.

As the velocity of money starts increasing then the Fed will have to change its stance on quantitative easing, which is really nothing more than the monetization of existing debt.