Tuesday, June 21, 2011

Monetary Psy-Ops With a "Twist"

Bill Gross just loves to manufacture heavily publicized comments about the U.S. Treasury market every now and again. At first glance, they may even come off as his deeply personal opinions about Treasury bonds and the future of U.S. fiscal and monetary policy. Take more than a glance, though, and it becomes easy to see that men like that, in such lofty positions of financial power, never make any "public statements" very lightly. In fact, they are usually calculated to several decimal places in a room full of financial vultures, political hawks and public relations wizards before they ever see the light of day.

That was the subject of a piece I wrote about two months ago, found here at TAE, which argued that Pimco's net short position on Treasuries in its flagship fund was very little more than a magician performing a misleading sleight of hand on stage. It was certainly not an unconditional bet against the U.S. Treasury market, the Fed and the entire debt-dollar system of corollary bonds and derivative instruments, as some had began to claim when the position was made public. It is very well known that Gross has an all-access VIP pass to the Fed's monetary nightclub, but that level of inside connect is exactly why we should be skeptical of his public actions or statements.

[Bill Gross, Master of Monetary Psy-Ops]: "Now, the TRF is net short treasuries and many people are convinced that its short position is, in fact, nothing short of a prediction by Gross that the treasury market will soon collapse. Indeed, he seems to be at least betting that rates will increase significantly in the short-term. Perhaps that is true or perhaps he is making a bad bet, but perhaps we should also be wary of such plainly advertised convictions. After all, the insider "beltway" encompassing Wall Street and Washington has two lanes running in both directions.

...An unexpected end to QE operations will send the dollar soaring, and as mentioned before, all asset markets plunging except for the U.S. treasury market. Bill Gross may have dumped all of his treasury exposure for now, but has any other major financial institution or money manager followed suit? Has the Fed announced any plans to sell its treasury holdings back into the primary or secondary markets?

I suspect that, by that time [when the rush to Treasuries as a "safe haven" really gets underway], there would have been a significant reversal in the treasury holdings of TRF and the superficial justifications for the investment decisions of the omniscient Bill Gross. Perhaps he will continue to have minimal exposure to U.S. treasuries throughout the year, as a partial hedge to his fund's enormous cash holdings, but that certainly should not be taken as an absolute bet against the treasury market."

The record cash holdings were obviously a bet on dollar-based deflationary pressures, and the value of the entire Treasury curve really doesn't have that much distance from the value of the dollar. Indeed, it didn't take very long before Gross made another statement to lay the foundation for justifying such a reversal in his fund's position on Treasuries:

Gross: “Treasury yields are currently yielding substantially less than historical averages when compared with inflation. Perhaps the only justification for a further rally would be weak economic growth or a future recession that substantially lowered inflation and inflationary expectations.[Bill Gross: Only a Recession Will Change Short Bets on Treasuries].

You mean the type of weak economic growth and low inflation evidenced by significantly declining or decelerating home prices, consumer spending, retail sales, consumer/business confidence, manufacturing strength and PPI/CPI levels, Mr. Gross? Well, I know the man doesn't need me to tell him this, but that kind of "justification for a further rally" is quite easy to stumble upon these days, and it turns out we already have. Add in the entirely predictable worsening sovereign debt situation across Europe, and a Treasury rally becomes all but inevitable. Perhaps its time for those short bets to change?

Of course, no self-respecting financial shark would just give up the guaranteed extra value he could gain from buying bonds at even lower prices, so Gross may have to stretch out the role of "bad cop" for a bit longer:

[Bill Gross, Master of Monetary Psy-Ops]: "(Gross is) The bad cop who beats the suspect over the head and tells him he has one last minute to confess before the entire case is blown wide open, followed by the good cop [UST/Fed] who enters the room and promises they will go easy on the suspect and recommend leniency to the judge, as long as he just tells them where all the money is hidden. Once again, it is not about enforcing the law or finding justice, it's only about using deception to drive all of that money out of its hole and into their hands."

Recently, Gross has made another stir about how further QE operations by the Fed may come in the form of "interest rate caps" on 2-3 year Treasury notes.  []. The comment came over Twitter as a "tweet", so I guess we can be certain that it was strictly intended as his informal and personal opinion about monetary policy. Zero Hedge commented that this tweet was "troubling" because it also seemed to back up what David Rosenberg had predicted earlier, when he wrote that the Fed may engage in "Operation Twist 2". The initial "Operation Twist" occurred in the 1960s when the Fed began buying the long-bond and selling the short-bond to flatten the rate curve. [].

This time around, Rosenberg believes that it may only start buying up 10-year Treasury bonds on the open market to clear them at a targeted interest rate, instead of targeting a specific increase on it's balance sheet like it did with QE2. Therefore, the amount monetized (and added to the Fed's balance sheet) would ultimately depend on how much supply was being issued by the UST and how much demand existed for that supply from other investors. Rosenberg surmises that the potential upside for the Fed in capping long-term rates would greatly exceed the downside, "since just about everything that has to do with the economy is either directly or indirectly priced off the 10-year part of the curve" (such as variable mortgage rates).

There are a lot of valid points made in Rosenberg's "OT2" analysis, and I would be the first to support the argument that the Fed is focused on maintaining the integrity of the Treasury market above all else (especially the long-end). At the same time, it's hard not to notice the fact that so many people are talking about QE3 and it's arrival on the monetary scene any day now, in whatever form it may happen to take. Perhaps these people are actually over-estimating the need for the Fed to intervene this year, as deflationary pressures set in and natural investment in "safe haven" Treasuries starts to pick up some major steam.

Does it really make sense for the Fed to risk the potential downsides of a balance sheet ex(im)plosion at this stage of the financial crisis, when equity and commodity markets have barely lost any value back from QE2? That question brings us back to Bill Gross, who has also recently stated that the banks do not have excess capital waiting to buy Treasury bonds when QE2 ends, in another example of his righteous and very public indignation with the bond market. Just as a reminder, though, we are talking about THE bond market that has kept Pimco, Gross and El-Erian filthy rich for many years now.

[Bill Gross, Master of Monetary Psy-Ops]: "Besides, did anyone really think that the world's biggest bond fund was about to unconditionally give up on the world's biggest bond market (which just so happens to support every other U.S. bond market, and foreign ones as well)? Personally, I think Bill Gross is going to continue doing what he does best - speaking in half-truths and pretending like he cares about day-to-day developments in the U.S. fiscal situation, while carting his millions in compensation to undisclosed personal bank accounts around the world. That is one financial shark who cannot survive outside of the deep waters, and his next feast of flesh will be no less filling than the last."

Zero Hedge reported on June 12, after conducting a solid analysis of bank reserves data, that almost the entirety of QE2 funds to date (~$600B) has gone to European Banks, and concluded that this revelation provided support for Gross' contention that the funds would not be available for re-investment in Treasury bonds. Here is a simple graph indicating strong evidence of the Fed-European transfer and the relevant quote from the ZH report (emphasis mine):

Tyler Durden: "Recall that Bill Gross has long been asking where the cash to purchase bonds come the end of QE 2 would come from. Well, the punditry, in its parroting groupthink stupidity (validated by precisely zero actual research), immediately set forth the thesis that there is no problem: after all banks would simply reverse the process of reserve expansion and use the $750 billion in Cash that will be accumulated by the end of QE 2 on June 30 to purchase US Treasurys. 


The above data destroys this thesis completely: since the bulk of the reserve induced bank cash has long since departed US shores and is now being used to ratably fill European bank balance sheet voids, and since US banks have benefited precisely not at all from any of the reserves generated by QE 2, there is exactly zero dry powder for the US Primary Dealers to purchase Treasurys starting July 1."

From my point of view, that conclusion makes no sense whatsoever, unless we assume that European-owned banks listed as Primary Dealers for the Fed are no longer allowed to show up at Treasury auctions. The Treasury bills and notes purchased with U.S. dollars could essentially perform the same "re-capitalization" function as the cash itself (theoretically, of course). There is really no credible reason to think that at least some of that cash won't find its way back into the Treasury market in the near future. Of course, that train of thought does not sit well with those consistently trumpeting the imminent collapse of the Treasury and USD markets, which happens to be something ZH is quite fond of doing.

Which also may be why it continues to take Bill Gross' tweets at face value, and expects more details of "Operation Twist 2" on the short-end to be revealed quite soon (perhaps when the FOMC minutes of its June 22 meeting are released). []. I still suspect that we are not going to hear anything about further monetization in the next few months, at least not from the Fed itself. A few bold statements from Gross and the speculative rumors that naturally accompany such statements should do the trick just fine. Indeed, what better way is there to support a naturally forming Treasury market rally without opening yourself up to the political and/or financial risks of actual monetization?

The latest Treasury International Capital (TIC) report shows that net inflows into Treasuries increased for the month of April, mainly due to foreign government purchases. So when can we expect all of those "private accounts" to get with the program?

"Outside of equities, official accounts, which include foreign central banks, were the biggest buyers in the month with net inflow into Treasuries of $24.4 billion vs a net outflow from private accounts of $1.0 billion.  

A look at Treasury holdings by nations shows a $7.6 billion rise in mainland China, which is also a positive, to $1.15 trillion and a small decline in Japan to $906.9 billion. UK-based accounts, which are the third largest holders of US Treasuries, shows a $7.8 billion increase to $333.0 billion."

Well, with the rapidly progressing financial troubles of Europe and Japan, I suspect it will not be very long from now. In the meantime, as discussed in Bailing Out the Thimble with the Titanic, the Fed can continue to exert some influence over longer-term rates by selling insurance (IR swaps) on Treasury bonds through primary dealer banks, without any explicit monetization or anyone being the wiser (major investors). Eventually, the time will come when some form of QE3 is necessary, but that time will likely be sometime next year after asset prices have come down significantly. As for Gross, well, I still expect that financial shark to be well-positioned for the long-bond rally when it occurs, and in no small part because of his immensely public fear-mongering tactics.

Thursday, June 16, 2011

The Post-Peak Rapture

Photo of a "Hoverville" from Utah Rent to Own Blog

It deserves a brief mention that May 21, 2011 came as expected and went the same way, without any massive earthquakes rapidly spreading around regions of the world as the Sun cast its light on their shores. The reason it deserves a mention at all is because it highlights the difference between the true doomsayers and the realistically "pessimistic" among us. The two groups are frequently confused, especially by those casually belonging to the dedicated tribe of "hopefully apathetic consumers".

These people thrive on mindless entertainment, so it is no wonder that they make a sport out of ridiculing anyone who dares to utter the word "conspiracy" or "collapse". They have a slightly easier time suppressing their condescension when the topic of discussion is "peak this" or "peak that", but still lose interest in such topics very quickly; in fact, almost immediately. Many of them, however, are not ashamed of conversing with their family and friends about the banality of "debt". While debt is obviously a very important issue in today's world, it is chronically misunderstood by mainstream society.

Perhaps that is because it is constantly bandied about in the mainstream network media and in political press conferences like any other old issue (see abortion, gay marriage, tax policy, etc.). People have too much debt... there is way too much debt in this country... people are so irresponsible with debt... the government's debt levels are too high.. I would never think about taking on so much debt... there's no way these people are going to pay back all that debt... stop leaving so much debt for my grandchildren!

It seems that everyone is now a certified expert on the evils of sub-prime borrowing and structured finance, and they won't think twice about arguing with someone who tells them to avoid debt like the plague. It isn't very difficult to see that taking on debt is usually a destructive endeavor, especially when you have no job, customer or taxpayer security. So that's a start, but shouldn't these people also understand why the advice to avoid debt is solid, instead of simply swallowing it down like a bitter pill?

It's easy for them to ramble on about debt, but not so easy for them to see where all of that useless debt truly leads. If you start making connections between debt deflation and the Egyptian revolution, European protests or the war in Libya, you can literally start to see the hidden skepticism betrayed by their physical expressions and mannerisms. They would hesitate to actually say there is no relation, because that would be plainly foolish, so instead they avoid the issue and discuss other potential reasons why such dreadful things occur in this world.

The Egyptian people finally got tired of Mubarak's ruthless politics and corruption and revolted. I know this to be true, because I saw an interview with some of those disgruntled Egyptians on YouTube! And it was only a matter of time before Libyan rebels came out into the streets to fight for freedom and democracy... seriously, what have those people been waiting for? Oh, and EU member states have been spending money, raising wages and cutting retirement ages for years now... they are finally getting their just desserts for embracing the titillating sirens of Socialism.

There is certainly no shortage of short-sighted theories to explain all of these "isolated" problems, but heaven forbid that they are all connected to each other by some "higher force", because that starts to sound like someone is preaching the End of Days. A rational analysis of financial deterioration and collapse suddenly becomes a premonition of the occult; the nihilistic musings of people who just love to wallow in their own misery. You may as well pick up an "Eat the Bankers" sign, wear it around your neck and tell people what day and time to meet you at the Bank of England.

Obtained from No Sweat Wesbite (flyer for G20 march)

If you are brazen enough to throw the imminent issues of peak oil and climate change into the discussion , then you may as well go ahead and pencil in a date on your calendar for the Rapture to begin, so that the whole world can look and laugh. Immediately, people will begin conjuring up Hollywood images of fire and brimstone; death and destruction; utter confusion and chaos; digitally grafting those simple crowd-pleasers onto the remnants of your once complex and rational argument.

Welcome to our global society of "all or nothing", where either the world burns to the ground in a few weeks, at most, or things just muddle along in an entirely plain and mundane fashion for at least a few decades. What this binary logic fails to understand is that financial, industrial and environmental collapse will be a combined process of gradual deterioration, stabilization, slight "improvement" and rapid disintegration, coming to the surface of our consciousness in fits and starts. It will not necessarily follow that order, and will be extremely non-linear and short-term unpredictable.

The scale and practical implications of collapse will be very dependent on the specific time and place in which you exist when its effects build up, peak and decline. For the people of Egypt, economic and political collapse has been an ongoing reality that is punctuated by days where people gather in forceful uprisings, and other days where people sit in their homes or on the street and suffer in silence. They will see both signs of hope and billboards of despair during their travels down the trail of collapse.

Libyans will be mired in bloodshed and poverty for an extended period of time, but their experience will only be slightly closer to the wrath of a Doomsday Event than it has been in the past. Europeans and Americans will watch their standards of living plummet over the next 20 years, as their over-indebted and class-divided populations figure out how little "equity" they actually possess in life, within all possible meanings of that word. Many of them will find others to blame for their plight, while some may maintain their faith in human nature for much longer.

Sadly, many will also die in the process of societal collapse, but death can and will occur just as easily in the dead of a cold winter night as it can in the midst of loud explosions and gunfire. On the other hand, many others will be fortunate and/or scrappy enough to keep living through the collapse, emerging on the other side of a brave new world that is wholly unrecognizable in some parts, not much different in others and whispers of familiarity all over. They will re-form some of the economic, social and political bonds that were broken, and leave others how they were found.

Obtained from Hummingbirder Blog ("Red Cardinals")

The Post-Peak Rapture will not be emblematic of little children staring into the raging fires of Armageddon, but will be more like a bright red cardinal perched quietly on a twig, gazing out at the grayish landscape that surrounds him. There will be other animals shuffling around and the cardinal will perhaps even observe a few humans buzzing by his line of sight every now and again. The air will be just a bit more crisp and the water a bit more clean than it was pre-Rapture, as industrial activity and transportation networks would have significantly slowed down.

He will also be surrounded by human experiences of systemic violence, starvation and sadness. Many people will be forced to live in an environment entirely unfit for their material resources or temperament; one in which helping hands are hard to come by, and survival is much more pressing than satisfaction. Some of them will surely wish they had experienced the Second Coming and that the world had ended the day before. Their wishes won't come true, however, and the Sun will continue to rise in the East and set in the West for generations to come. It will remind us that there is a process of birth, growth, death and renewal that stops for neither men nor Gods of men.

Swift Creek Reservoir in Midlothian, VA

(Credit to VK for this article's title and inspiration)

Monday, June 13, 2011

The Future of Physical Gold (Part IV - Deflationary Canyons and Caves)

Golden Canyon in Death Valley [Obtained from the NPS Wesbite]

After writing Part III of this series, I received an excellent comment from a reader who enjoyed the articles and summarized many of the Marxian arguments that I had made in a much more accessible form. I understand that the academic structure and technical details of this series has not made it the very easy to digest, and it helps when readers are already familiar with the basic foundations of my argument, which was the case for this specific reader.

I am going to re-post a sizable portion of that insightful reader's comment here, as a means of re-encapsulating the somewhat dry theoretical arguments of Parts I, II and III (Dialectic Foundations, The Evolution of Value and The Final Realization) in a significantly more lay reader-friendly capsule with some clear examples. I will also add a bit of my own commentary within the bold brackets, but just a bit, because the comment is quite good on its own: [Chris Martenson's Forums - The Future of Physical Gold Thread]

darbikrash: "Great series of articles Ashvin!

I think you bring a fresh perspective to the Marx/Keen/Harvey axis in coupling these theories to the discussion of gold. I had posted something congruent with these ideas on the ever popular subject of alternate currencies in another thread. You’re quite right, at the center is the struggle between labor and big business [the material dialectic of Part I], which I define as multi-nationals.

This struggle sets up a natural and quite healthy tension between the two opposing forces. When this healthy tension is displaced [it inevitably must be displaced over time], to either direction of bias [labor vs. capital], bad things happen. The convergence over the last three decades of the neo-liberal agenda, and the capture of the mainstream media by conservative business interests has resulted in the disruption of this tension away from the side of labor.

Propelled by the momentum of the burgeoning success in minimizing organized labor, business and conservative interests teamed together to usher in an ongoing era of deregulation and complimentary legislative climate that promoted favorable tax incentives for big business. These incentives were leveraged to follow with near perfect parallelism along with Marx’s prediction of capital heading to markets with unlimited low cost labor surplus [although Marx may not have envisioned the extent and longevity of economic "globalization"].

It is an irony lost on many that the perfect climate for capitalism's magnum opus was to be under the color of a totalitarian Communist regime- embodied by mainland China [under it's "false flag" of Marxism, so to speak]. This diffuse and disjointed labor base was confronted with several classical Marxist predictions, a profound loss of collective bargaining power as the threat of job outsourcing to China and Mexico stymied any meaningful protests for re-organization.

This resulted in lower wages for those lucky enough to retain jobs, and Marx’s predictions about consolidation of capital are demonstrated in the aggregation of “big box” stores [i.e. Wal-Mart] designed to lower the sustenance costs for low and middle class labor, furthering enriching the capitalist class- as predicted chapter and verse. With the cratering of the credit market [due to endogenous instability as described by Hyman Minsky and Dr. Keen - Part III), the emperor can be seen to have no clothes, and here is where it gets real interesting.

With a collapsed income, the vast majority of Americans can no longer afford the products of consumerism that capital has morphed into [the final "realization problem" - Part III], having exhausted by sheer competitive overhang the more productive and meaningful products and services, the average capitalist is now presiding over a string of yogurt parlors and useless iPod apps, analogous to unwashed children selling Chiclets gum at the Mexico border crossing.

The bourgeoisie has simply engorged itself so completely and so effectively on the middle and lower class, there is no money left for the poor fools to purchase the trinkets and trivia that the bourgeoisie needs to maintain their lifestyle, in effect tuning their gated estates into miniature Easter Islands, replete with carved stone masks and bad artwork. So this leaves us with another problem, what do the wealthy do with all the money?

It used to be a budding capitalist could re-invest and maintain an income stream though investment, real estate purchases, or entering the rentier class to sustain cash flow, all the while ignoring, contrary to free market mythology, risky entrepreneurial ventures and instead focusing precious man-hours on reducing tax liability and preservation of capital strategies... There are not simply enough attractive investment opportunities to go around, a face the music moment in a system that requires perpetual compound growth to function.

Capital abides no limits. It must expand its markets to prevent the destruction of demand. It must seek larger and larger labor markets, with lower and lower labor costs, as the coercive laws of competition wreak their havoc
[continuous re-investment/realization of surplus value and debt issuance/rollover in markets]. Capital consolidates, aggregating smaller, less powerful firms unable to achieve the international reach necessary to grow into offshore markets, purchased for pennies on the dollar as the multi-nationals observe and track strangling mid-level businesses with a predator’s gaze as they asphyxiate on a contracting domestic market - leaving consumers with even fewer choices."

Thank you for a very poignant summary, darbikrash, with an even more poignant ending. Indeed, capital "cannot abide a limit" and so it will transform the limit into a barrier that must be temporarily overcome (by repressing labor's share of wealth/power, as depicted in the above graphs). It creates increasingly larger and stronger barriers in the process, though, since the old ones never really disappear. It is now, at this unique point in time, forced to face these insurmountable barriers and witness the inefficacy of kicking the proverbial can, as it nears the end of a shadowy and winding road in history.

With that systematic foundation established, we can discuss what this internal predicament of capitalism implies for the future roles and values of physical gold in human society. Towards the end of Part III, it was stated that a global system of Freegold was very unlikely to ever take hold. The Freegold system is essentially a modified global financial system with fiat currencies floating against the reserve asset of physical gold, which trades independently of the credit system and solely as a "store of value" for savers, rather than a medium of exchange.

Freegold's argument for gold as a limitless "store of value" in the capitalist system is based on the "marginal utility theory of value", which was discussed and debunked in Part II - The Evolution of Value. Practically, an objective approach to complex economic evolution means that Freegold is unlikely to occur because the concentration and centralization of capital is a process that irreversibly undermines economic growth in the financial capitalist system, and it cannot simply be overcome through either "easy money printing" or re-capitalization with "hard money".

Central banks can monetize all of the assets they want, both debt-based and "debt-free" (gold), but that does absolutely nothing to alleviate systemic issues of severe wealth inequality, insufficient demand and structural unemployment. Even the relatively short-lived trends towards increasing wages in China has already started to threaten the growth of its productive economy, as explained in this recent article from MarketWatch:

"How much should China worry? Actually, the worrying is already over for some enterprises: They’ve closed shop.

An executive in the city of Jiaxing at Zhejiang Youbang Integrated Ceiling Co. said his firm is among the 90% of more than 500 local integrated-ceiling enterprises that have managed to survive since wages started climbing last year. Others, though, have not.

“Since last year, there have been reports of enterprises collapsing, one after another,” the executive said. “About 10% went out of business.”[China's Factories Face Big, Labor-Driven Challenges]

Of course, much of that pressure on productive factories stems from the ongoing collapse of financial capitalism, and the pressure generated from labor and input costs is merely a pronounced effect at this stage of the system's evolution, as there are very few places left for it to expand to. The following example helps reveal the broader inadequacy of gold-based re-capitalization in the context of a specific gold revaluation process that was outlined by FOFOA, a popular Freegold advocate. He has suggested that Congress should force the U.S. Treasury (UST) to revalue their physical gold holdings to the market value (MTM), which has recently trended upwards.

Once the revaluation is complete, he suggests that the UST monetize the additional value by pledging it as collateral to the Fed in return for printed dollars. That actually sounds like a great thing to do in the ideal, and a much better idea than continuing the issuance of Treasury bonds to be monetized by the Fed, but it is practically just as useless and/or destructive when considering the systemic reality we are a part of in the global capitalist economy (this complex reality was discussed at length in Part I) (emphasis mine):

FOFOA: "That's right, it [the available value of the Treasury's gold] jumped again. From $336 billion in October, to $355 billion in January, to $370 billion in April. And guess what it is today. $390 billion! That's the amount of untapped equity the US Treasury has in its gold today. And that equity can be monetized without selling the gold, by the simple act of Congress ordering the revaluation of the gold.

...Again, I realize this doesn't solve any of the big problems, but it does buy some time... You can use it without selling it for gosh sake! And just like the old gold certificates, the new ones will NOT be redeemable by the Fed or any other banks in physical gold. They will simply be an accounting entry on the Fed balance sheet. In the future, that gold can be mobilized, if necessary, in defense of the US dollar. But only with the approval of Congress. The physical gold remains the property of the United States."
[Open Letter to Ron Paul]

Assuming those calculations to be accurate (based on the UST owning 250+ million oz. of gold), there are still many flaws contained in the process. For starters, the monetization of any surplus generated from the MTM revaluation would give the Fed (private banks) a claim on the gold as collateral. It would be just like a "home equity loan" that is secured by the price appreciation of the property since it was purchased. Once that claim is established, it should be obvious that the gold is practically no longer "property of the United States" (the citizens) any more than the home equity would be (unless the asset value manages to completely offset liabilities forever).

Congress may technically have to give "approval" for the Fed to foreclose on our gold, but that would not be difficult to get, considering the fact that the politicians in Congress are realistically owned by major players in the financial industry, especially during these trying times. They are currently "foreclosing" on our retirement accounts as a means of avoiding a technical UST "default" [], so why should we expect anything different for our gold? The MTM revaluation would indeed "buy some time", but that time would only be used by financiers to extract more wealth through the all-American pyramid scheme before it implodes.

Secondly, the revaluation would do very little to solve any of the fundamental systemic problems that Marx envisioned (as FOFOA implies), and therefore the ponzi implosion will still occur as expected. Most of the value monetized by the Treasury will not find its away to the productive economy or struggling debtors, and if, heaven forbid, the price of gold takes a large hit during a deflationary process, then the taxpayers will end up losing their gold too. Lastly, it is almost certain that this revaluation will not occur anyway, because it is simply not worth it for the elites, at least not right now.

A gold revaluation doesn't provide nearly as much benefit to them as financing deficits via Treasury bonds and letting most other asset prices naturally decline to subsequently buy them for pennies on the dollar (including gold). The only "solution" to the problem of insufficient demand has become to keep the global ponzi system of capitalism running for as long as possible. Fiscal and monetary policies of influential regions (the West, Japan, China, Russia, Brazil, etc.) will not trend towards some gold-based equilibrium through revaluation and/or dollar HI, but will merely reflect the drawn-out deterioration in financial and productive markets over time.

There is a distinct possibility that the Federal Reserve, for example, holds off on further monetization of federal or agency debt for some time, allowing asset prices (equities, commodities, real estate) to collapse further before once again re-asserting itself directly into the Treasury market to help maintain low rates (it will most likely continuously provide this support indirectly via selling insurance on bonds). By "allow", what I really mean is that the Fed will not make its final "printing" stand against the natural forces of debt deflation for some significant period of time, which could be the result of both voluntary and involuntary forces.

It is starting to become quite clear that foreign investors (private and public institutions) are now very hesitant to hold U.S. Treasuries yielding 3% over 10 years, as public deficits continue to mount, speculative price inflation has raged and the domestic economy (housing/labor market) continues to rapidly weaken. A liquidity crisis, naturally resulting from debt deflation, would conveniently scare that capital back into the Treasury market and the dollar, as the system's elite are forced to sacrifice even the appearance of economic health to hold those markets together a bit longer.

[Bailing Out the Thimble With the Titanic]: "When global equity and commodity markets begin their downward cascade in response to the ongoing debt deflation and a temporary end to quantitative easing, margin calls will indeed be coming in fast enough to make your portfolio spin. The demand by institutional investors for a "safe haven" will emerge as quickly as the daylight descends into pitch black, and it will then become clear that the intent was never to bail out the Titanic with a thimble, but the other way around.

The bond markets of Japan and Europe simply can't make the grade, and, as referenced in Jumping the Treasury Shark, there really isn't enough gold to soak up all of that capital. Instead, the U.S. dollar and Treasury bond, because of their fundamental weakness, will be the refuge of choice and design, and this will also serve to aid the Fed's Mafioso protection scheme [selling Treasury "puts"] for controlling rates.

[Welcome to Slaughterhouse-Finance]: "Stoneleigh at The Automatic Earth has repeatedly pointed out that people in such fearful environments tend to discount the future by an increasing rate, which means they care less and less about what will happen several decades, years or even months from the present time. The discount situation of financial elites is similar because they know how precarious the dollar-based financial markets are, so their concern is over whether they can corral all of the lambs into one or two places over a relatively short time period. So far, most of the evidence says that not only is it possible, but the process is already well under way."

If this process of short-term (within the next 10 years) debt-dollar deflation is likely to occur within developed economies, then one should not be surprised to see both paper and physical gold holdings liquidated along with other investment assets as investors are forced to meet their margin requirements, and average workers are forced to pay their consumer debts, bills and expenses, all of which are denominated in fiat currencies (primarily the U.S. dollar). A gold price collapse in dollars could occur just as it did in 2008, since nothing has fundamentally changed in financial markets since then, except there is more debt and less ability of governments and central banks to intervene.

We could even see several large institutions, such as central banks and governments in Asia, Europe or Japan, flood the markets with (sell) a portion of their gold holdings to temporarily relieve pressure from their dire private and public funding situations. The sheer momentum of financial capitalism will lead them to conduct their "re-capitalization" efforts through established fiat currency and debt mechanisms, rather than through an ongoing revaluation/monetization of gold by central banks such as the ECB (as argued in FOFOA's Reference Point: Gold - Update #1 and Update #2).

Darbikrash provides us with another insightful observation of why such a MTM revaluation and monetization process is practically precluded by the "coercive laws of competition" in a capitalist system, through the example of "competing" currencies, with my emphasis in bold [Chris Martenson's Forums - John Rubino Thread]

Darbikrash: "Beyond these points, competing currencies violate one of the fundamental requirements, that of universality. Note we all currently have access to competing currencies, we can use dollars, yen, francs, German marks etc. if we are so disenfranchised with any particular flavor of fiat. But then we face the onerous task of currency conversion, due to lack of universality. We must convert one currency to another, and suffer devaluation risk as well as a arbitrage fee to operate between currencies.

The notion of free market forces attempting to migrate patrons to a common system based on perceived stability or any other inherent advantages is not practical and subject to the same coercive laws of competition that any other unregulated commodity will precede. This means regulation is needed, and we come full circle back to the eventuality of regulatory capture, centralization and consolidation, and ultimately fewer choices for the consumer and just another, slightly varied distribution of the same wealth.

At this stage in "free market" capitalism, it would be hardly worth it for the financial capitalists to switch to a system of currencies competing relative to the floating value of gold, because liquidity constraints in the productive economy would only be magnified by that transition. It would be perceived as a futile endeavor to generate effective demand in a system that has already pulled demand forward to its maximum threshold. The following is a very loose analogy I discussed with regards to the "choices" of capitalist elites operating in the debt-dollar system earlier this year:

[Jumping the Treasury Shark]: "The choice they face can be analogized to the choice faced by a middle-class entrepreneur with a relatively profitable business operation in his home country. Although the businessman may be getting anxious about the market for his products and his ability to continue generating revenues and profits, he is also very experienced at operating the company in its current environment, with his current clients and his traditional methods of conducting business.

...There is no guarantee that a smaller market in another community would even be able to accommodate the scale at which he is used to operating his business, or that new clients there would be able or willing to entertain his services. Ultimately, the physical, financial and psychological costs of such a dramatic switch do not appear to be worth the trouble for the businessman. He decides to simply continue running his local business and hoping or praying for the best possible outcome.

Are the major financial players, who hold trillions of their net worth in dollar-denominated debt-assets, any different from the hypothetical businessman above? Perhaps they have a degree of more flexibility in their decision-making process and significantly more resources to help them decide, but they are also slaves to tradition and the human tendency of sticking to what they know.

Even if we assume that the Freegold transition will be (or is being) initially attempted in some regions, then, as darbikrash pointed out, the system will soon end up coercing economic actors (countries and large institutions) to re-adopt the "easy money" modes of accounting, exchanging and storing whatever limited value they have left. This coercion would be accomplished through both explicit regulations (capital controls, tax structures, etc.) as well as implicit incentives and the butterflies in the bellies of those who are initially hesitant to comply (i.e. the lingering threat of sanctions, asset confiscation or military force).

What this means in the debt deflationary phase of financial capitalism is that demand will spike for those "easy money" currencies which are still the primary means of settling debts and purchasing real goods and services, by natural design and by conscious regulation. What this implies for debt-dollar holders, then, is that they should not sell their dollars for physical gold when they reasonably expect that cash will be needed to satisfy daily/monthly expenses, such as principal and interest on debt. In addition, a smaller excess portion of savings should be held in dollars for more favorable entry points into various hard assets over the next few years, including physical gold.

The substantial monetization of debt-assets (i.e. private and public bonds), however, will also fail to alleviate fundamental economic instabilities, and its continuation will only make them worse at a later time by destroying the currency-based savings of people who have become thoroughly dependent on the debt-dollar system and were placed far away from the money spigot (less time to trade devalued currency for hard assets). That is why the global capitalist economy is in a classic "predicament", because neither deflation nor hyperinflation of debt-based currencies will "cure" the problem of insufficient aggregate demand anytime soon.

The ponzi process of creating additional credit-based claims on wealth to support the previous ones and "manage" a debt deflation will not be sustainable in the medium to long-term (my best estimate is 10-20 years). A self-reinforcing debt deflationary spiral will eventually grind economic activity to a halt somewhere within that range of time (most likely on the shorter end), and leave much of the global population under-employed, unemployed and/or struggling to survive. Local, state and federal tax revenues will dry up and governments at every scale and in most regions will be forced to borrow, print and spend more to maintain a semblance of social and political control.

That is when we can expect the real HI "tipping point" to arrive, as hyper-deflation has naturally set up a complete loss of confidence in the economic and political structures of global society, which will invariably include the global reserve currency. By that time, the destruction of the dollar will simply be the equivalent of blowing out the candles on a moldy cake that nobody dares to look at anymore, let alone eat. It will be a ceremonial burial of the deceased; the act of laying limp corpses to rest after bloody battles have already been waged for years and years on end.

The only legitimate question to ask, then, is when will HI of major fiat currencies happen and what does it imply for the value of gold in specific locations.  Although this article was meant to be the final part of my series on the future of physical gold, I have decided to write an additional fifth part for the sake of constraining length and increasing clarity. Part V will delve into more detail about the prospects of HI in various regions and its implication for the roles and values of physical gold. We will discuss the fact that the "periphery" of a complex and dynamic system tends to completely give out before the center does.

Until then, we should remember that upcoming years will be characterized by debt-dollar deflation, and therefore the dollar price of gold will most likely face significant downward pressure for some time. That does not mean physical gold, however, should not be purchased as either inflation insurance or a long-term monetary store of value right now. Both of those functions are best served by physical gold (and silver to a somewhat lesser extent), and the percentage of excess currency wealth that one should devote to physical gold is entirely dependent on the individual's circumstances (amount of excess wealth, levels of debt, recurring expenses, extent of physical preparations, etc.).

Slaughter Canyon Cave [Obtained from Our Amazing Planet]

Some people will find that they cannot reasonably afford to purchase any gold, while others will find that they are well-prepared for deflation, both financially and physically (control over the "essentials of your own existence"), and now is a great time to allocate some excess wealth towards precious metals. Still others may even find that they happen to live in a specific location in which gold and/or silver could soon potentially thrive as an informal means of exchange. As debt-assets and confidence deflates, the unifying structures of economic, social and political coordination will seize up, and the subtle cracks between local environments will be magnified into canyons and caves.

Monday, June 6, 2011

The Future of Physical Gold (Part III - The Final Realization)

In Part I and Part II of this series, Dialectic Foundations and The Evolution of Value, we discussed how the material conditions of human existence drove the evolution of the capitalist political economy, and how wealth came to be created through the production of "surplus value" from commodity inputs (= its objective "use-value" minus its "exchange-value"). The fruits of surplus value were increasingly concentrated among those who controlled productive assets and managed cash flows (finance) in the "wealth accumulation" circuit (M-C-M+).

However, this value cannot be realized without monetizing the exchange-values of finished products or services in a market. The realization of surplus value becomes a significant barrier to capitalist growth when workers cannot keep up pace through proportionally increasing wages in an unfriendly, time-constrained environment (only 24 hours in a day), while thousands are also displaced by technological gains and added to the "reserve labor army" of the unemployed. The latter process was heavily influenced by the discovery of fossil fuels, which allowed machinery capital to generate a higher ratio of surplus value than labor.

As the dialectic struggle between workers and capitalists progressed, certain political concessions had to be made by the latter so they could continue recycling surplus value in consumer and investment markets. For example, a minimum wage had to be set, basic working conditions had to be improved and monopolies had to be prevented or disbanded so companies within an industry could theoretically offer competitive prices and wages. The "Socialist" revolutions of Russia, Eastern Europe, Latin America and China provide extreme examples of political concessions that did little to alter the fundamental reality of workers living in a world marked by capitalist relations of production.

Many "progressive" labor policies became more prominent in the West after World War II, when aggressive "safety nets" were created and labor was allowed to organize at larger scales. This trend was largely aided by the natural dialectic pullback from the perceived failures of capitalism during the Great Depression, which ultimately only ended for the the world through a global war effort. The monetary circuit (M-C-M+) of surplus value, however, cannot function well when labor's share of power is growing, which caused the "neo-liberal revolution" of the 1970s to reverse the trend and give an unprecedented wealth advantage to the purveyors of speculative financial capital.

Obtained from Life Magazine's Website
Over the last 40 years, gains in productivity and income have continued to be distributed more unequally, as capitalists took their investments to parts of the world with much less influence of labor and, therefore, much fewer regulations of capital. This transition allowed transnational capitalists to reduce their costs and offer lower prices to consumers in their "home" country, as those developed economies oriented their growth towards finance and other related services.

It also allowed financiers to usurp the wealth extraction role of capitalist producers to a large degree, since many productive firms could only remain competitive within an industry when they were continuously financed; a distinct feature of capitalism that Marx terms "the coercive laws of competition". These laws should sound familiar, because they are the same ones that force the capitalist producer to continue re-investing portions of their accumulated wealth in the M-C-M+ circuit.

The system also relied on explicit coercive policies by the state to help organize and maintain the centralization of capital (selective private property rights, corrupt court systems, favorably complex tax structures, discriminatory regulation, etc.). For example, the state-led process of subsidizing financial markets during every recession over the last 30-40 years has helped to concentrate even more wealth, as larger institutions were subsidized for losses, continued their operations and soaked up the productive/financial assets of the smaller ones at huge discounts.

David Harvey, a sociologist and historian with a Marxist perspective, provides a very creative animated summary of how the dialectic evolution of financial capitalism has progressed over the last 40 years, in the following video [starts 5 minutes into 11 minutes - obtained from Naked Capitalism]:

The striking result of the wealth inequality generated over time by financial capitalism is partially captured by the following graphs, featured in Parts I and II of my article series, The Math is Different At the Top, as well as the additional data points I have included below them for purposes of this article:

U.S. Statistics

Global Statistics

The U.S., Japan and Europe are obviously the "central hubs" of global wealth, and comprised 77% of the pyramid's upper-level ($100,000-$1M) when it was released last year. [1]. In the U.S., almost 6.5M people have dropped out of the labor force since April 2008, with close to 550K of them dropping since January of this year. According to Mish Shedlock's calculations, in which 60% of these people want a job but cannot find one, the revised unemployment rate would be around 11.2% if those people were added back into the labor force. [2]. Are all of these unemployed workers receiving public revenues that keep will them happy and spending?

Well, according to the WSJ, at least 5.5M of them (nearly 30%) are not receiving any unemployment benefits. [3]. Of those jobs that do happen to exist, 41% of them are classified as "low income" positions. [4]. More than 44M Americans ore on food stamps right now, which is about a 90% increase since 2007 [5], and a study indicates that Americans are currently falling $6.6T short of what they "need" to retire. The Personal Consumption Expenditures component of Q1 2011 GDP dropped nearly 20% from last quarter, and the GDP itself came in at 1.8% (~1.2% came from "inventories"). [6].

Meanwhile, across the Atlantic, the European population is in a similar position, and countries such as Ireland, Greece, Spain, Portugal and Italy can barely afford to support their private economies through public deficits anymore. That fact is especially troubling for a country like Spain, which is financially closer to the EU's "center" than its "periphery", and whose educated youth suffer a jobless rate north of 40%. [7]. All of those Spanish "homeowners", like U.S. "homeowners", are watching their home equity, already purchased with debt repayments, rapidly evaporate while the real asset owners (large banks) are being subsidized for a large portion of their losses. [8].

Finally, Japan was in a low-growth environment for decades (~1.5%), has the highest public debt/GDP ratio in the world (225% as of 2010) and had an unemployment rate of at least 5-6% as of 2009. However, the latter number is severely under-estimated, as evidenced by the fact that the job offer/applicant ratio had declined (40% in one year), as well as average hours worked and wages paid (~3% in one year). Of course, the recent earthquake, tsunami and nuclear meltdown (ongoing) in the country has massively impacted economic growth (subtracted ~3.7%), and it will continue to be a major factor in the upcoming months and years. [9].

So how do we know that this highly unequal wealth destruction and redistribution has resulted from structural instabilities of capitalism, as Marx and Harvey argue, rather than just corrupt state policies and an ever-increasing portion of the population being "lazy" and unproductive? It is obviously not possible to know anything for certain, but the overwhelming logical and empirical evidence suggests that the latter are merely byproducts of the former. As briefly alluded to earlier, Marx's ideas about net negative demand in the entire economy, as a sum of the commodity and monetary circuits, meant that the system necessitated certain levels of finance over time.

To overcome the conundrum of net negative demand without sacrificing economic growth for too long, at least some consumers of commodities and investments (individuals, businesses, governments) must be able to issue debt and finance their consumption. Roll curtain and enter stage left the system of endogenous (internal) financial money, which has shined over decades of periodic booms and busts around the world. Although the state is obviously needed to maintain systemic finance within an economy, it is not the primary driver of credit creation.

That role is reserved for private financial institutions that "offer" credit and the firms/households that demand borrowed capital for investment and consumption. As described earlier, the concentration and centralization of wealth in the monetary circuit of capitalism makes it practically impossible over time for firms to finance productive investments and produce returns adequate to cover their debts and other expenses, while also generating a profit. To maintain a somewhat stable and growing economy, then, both the firms and households must be able to produce artificial cash flows through the use of speculative finance.

Hyman Minsky has clearly laid out how a capitalist economy with a developed financial sector is endogenously prone to speculative credit bubbles that could ultimately result in a severe debt deflation and depression, and Dr. Steve Keen has thoroughly outlined and modeled this process in his research. [Policy Forum: Household Debt, Australian Economic Review]. As investment concerns from the last credit bubble continue to linger on (there is always a previous credit crisis in financial capitalism), firms and households only take out debt to finance relatively conservative investments. Once these investments start paying off, the investors become less risk averse and more aggressive with their projections of future revenues.

The banks are more than willing to finance these aggressive investments, since they are also optimistic about productive growth and debt repayments, and they are not practically restricted by any "fractional reserve requirement". At this point, the credit bubble takes off in full force and every investor with some pocket change to spare hops on for the ride, allowing their debt to equity ratios to rapidly balloon up. People who are not typically considered investors also jump in the inviting water, as they glimpse a chance to increase discretionary consumption and grab hold of the "American Dream". Interest rates in most credit markets remain quite low for some time during the bubble, aided by the loose monetary policy of the central bank and financial "innovation".

However, since much of the borrowed capital has been used to purchase assets or asset-based securities for the sole purpose of speculating on price appreciation, as well as goods that are not "self-liquidating" (i.e. SUVs), productive cash flows begin to dry up and some investors must start selling assets to service their debt. This tipping point will lead to decelerating asset prices and higher interest rates, making it more difficult for new borrowers to enter the asset market or existing borrowers to roll over their obligations. Eventually, the "ponzi financiers" who have taken on huge leverage ratios for pure speculation will find themselves in a seller's market, with very meager cash flows from the underlying assets and very high debt servicing costs.

Graph Showing Interest Burdens Consuming Productive Capacity in Australian Economy (applies to most other OECD countries as well) [Obtained from "It's Just a Flesh Wound" on Dr. Keen's Debt Deflation Blog]

Graph Showing the Correlation between Debt, Aggregate Demand and Economic Deterioration in the Age of Speculative Financial Capitalism [Obtained from "It's Just a Flesh Wound" on Dr. Keen's Debt Deflation Blog]

As these investors and financiers become insolvent, the entire financed market begins to implode in a self-reinforcing manner, in which lower asset prices lead to less revenues, lower ability to service existing debt, business layoffs, lower consumer spending, etc. which all feed back into lower prices and less affordable debt. If the system had allowed this process of debt deflation to continue unabated in the asset markets of 2008 (mainly housing), it would have eventually taken down the entire economic and political apparatuses of countries and regions around the world. The rate of debt deflation has only decelerated over the last few years due to the unprecedented intervention of governments and central banks around the world.

The latest GFC is surely the most potent crisis that capitalism has ever had to face, and therefore it is no surprise that the capitalists have tried that much harder to overcome the debt deflationary barrier through aggressive fiscal and monetary intervention since the implosion began. However, that doesn't necessarily mean their only option is to spend multiple trillions of dollars (or the equivalent amount in foreign currency) each year and monetize every single bad debt-asset on the books of private institutions. Another option would be to simply continue doing what they are doing now, albeit at a somewhat larger scale over time.

They will continue to run record deficits, but mostly spend that money for the benefit of the "defense" industry, financial institutions, energy corporations, big agribusiness, etc. Entitlement spending is certainly a huge component of the budget, but it has become increasingly evident that most taxpayers and retirees will be forced to bear the brunt of the "austerity" plans that are designed to make them "live within their means". As the housing market dips back down hard (the Case-Shiller index of home prices has fallen ~6% since last year [10]), mortgage-backed assets will be monetized in some cases, and left to the whims of "free market" forces in others, depending on how much political influence the owners of such assets have.

The point, then, is to exercise a degree of control over the deflationary process, and make sure the losses are properly socialized among those who can least afford them. There is very little blood left to squeeze from the collective turnip of human civilization, but our financial owners will not be satisfied until they get every last drop. Whether they are successful or not in this aim is largely irrelevant for our current discussion, though, because the damage has already been done. People who used to identify themselves as part of the "first-world" and "middle-class" will watch those labels "melt into air" just as quickly as their wealth.

With these dynamics revealed, it becomes clear that physical gold as an independent monetary asset could ideally be a great receptacle for those with enough excess wealth to save, but it would be valued entirely differently by that class who desires to constantly accumulate wealth and is ever-so important to the financial capitalist system - the financial capitalist. As discussed in Part II, it may not be valued in the capitalist system at all, beyond whatever limited surplus value it provides as a commodity in the production of goods and as a speculative investment play.

The reason is because a new global and stable "wealth reserve" will not aid the system in replenishing aggregate demand and maintaining economic growth. Some may argue that inflating away currency-based debts will alleviate the present burden of insufficient demand in both consumer and investment markets, by freeing up much more money for people to spend and invest. For example, the theory of Freegold argues that a process of dollar hyperinflation ("HI") will inevitably occur soon, during which a new global financial system and gold-based monetary order will arise.

The physical gold will allegedly recapitalize the major banking sectors and governments of the world, and that will then allow businesses and consumers to continue financing productive investments in their regional or national currencies. [Deflation or Hyperinflation?]. It is presumed that economic growth will once again be left unencumbered after a relatively short period of major monetary transformation. Even assuming this process actually did occur, we must still ask ourselves how it would realistically affect the dynamics of Marx's "realization problem".

The financial capitalists unconditionally require an expanding circuit of capital, in which monetary capital produces greater exchange-values over time (remember, the use-value of money = its ability to produce future exchange-value), and a portion of such values are continuously monetized for profits. The value of gold under the Freegold system would be inherently constrained, since it is meant to sit still and absorb some excess currency wealth, while the majority of people in the world still find themselves with tiny scraps of wealth to save, spend or invest in the first place.

The latter fact is especially true when we consider that most consumers in the developed world hold a large portion of their savings in fiat currency-based accounts. Indeed, Freegold advocates make it quite clear that HI will act as a rapid means of socializing the investment losses on the books of a few large institutions, and the super-wealthy individuals that own/manage them, throughout the productive economy via currency devaluation. If you happen to be saving most of your excess currency wealth in physical gold before HI really sets in, then perhaps you will be able to at least preserve that wealth, but how many people can we reasonably expect to be positioned in such a way?

ME: "What are the chances that the majority of people who find themselves invested in U.S. government bonds and the dollar will get anything close to a return on their investment over 10, 20 or 30 years? The answer to that is probably a massively negative percentage, because the psychological pain of holding on for that long will be even worse than the total wipe out itself. However, the herd typically doesn't figure out how close they were to the edge of the cliff until after they are tumbling down the other side." [Welcome to Slaughterhouse-Finance]

In addition, the prospect of "net producers" placing significant excess wealth in gold would leave even fewer profits for the capitalist's to realize from monetizing their goods and services in consumer and investment markets, which means fewer profits for the financiers who now control production. The aggregate level of consumer purchasing power at a given time would necessarily drop, because "fast" money would be traded to the capitalist class for dormant gold. For the above structural reasons, it is highly unlikely that the economic system of Freegold ever takes hold at a scale even close to that which its advocates envision.

That, in turn, means that investors or "savers" should not expect their current gold holdings to skyrocket in value to the equivalent of at least $55,000 in purchasing power anytime soon (as suggested in FOFOA's The Value of Gold). That prediction is based on a flawed conception of value in the capitalist economy, as explained in Part II - The Evolution of Value, and therefore fails to account for the "realization problem". Freegold views the future dollar HI event and the resulting destruction of the dollar's role as the global reserve asset as a wealth transfer from "easy money" debtors to "hard money" savers (those who place excess productive capacity into physical gold).

Perhaps this process is an accurate description, at least to some significant extent, but that means the debtors are necessarily defined as anyone who does not have a majority of his/her savings in physical gold. That definition, in turn, encompasses almost every worker, investor and "saver" in the developed world and many in emerging economies as well. It really only excludes, of course, the major institutions and super-wealthy individuals (and their political apparatuses) who control the means of production, sell toxic debt-assets to taxpayers at face-value and had previously extracted massive amounts of energy, resources and hard capital from the rest of the world.

If these people are almost instantly given 10-20x the purchasing power they already receive from their current physical gold holdings, then they will truly be the "demand of last resort" for consumption and investment in the markets of our global capitalist economy. That is wholly incompatible with the capitalist model of economic growth, which relies on the constant expansion of Marx's monetary and commodity circuits, in which surplus value is created and realized, respectively. It should also be noted that the natural processes of demographic shifts, climate change and energy/resource depletion (peak oil) will severely constrain productive income gains, making realization of value even more difficult.

Therefore, it is very unlikely that the current crises of capitalism will lead to a new reserve system based on physical gold, and is instead likely that they will lead to systemic collapse of financial and productive markets around the world. In the final part of this series, Part IV, we will discuss what this process of collapse really means for physical gold as a means of preserving wealth over time. The discussion will focus solely on financial collapse, rather than the demographic/environmental issues mentioned above, but the latter should obviously not be ignored when considering various means of preserving "wealth".

With regards to systemic finance, the realistic likelihoods of short-term deflation and HI are obviously very important considerations, as well as the specific properties of locations in which financial deterioration occurs. These properties may belong to anything from one's region or country to one's state, local community and household. As the trend towards centralization and concentration of capital grinds to a halt, our perceptions of a unified and "small" global society will also give way, as we are forced to observe the simple and enormous world existing right in front of our eyes and at our feet.

"All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses, his real conditions of life, and his relations with his kind."
-Karl Marx and Frederich Engels, The Communist Manifesto