Musical Dollars

Off the keyboard of RE

Published on the Doomstead Diner on June 22, 2013

Discuss this article at the Economics Table inside the Diner

In the last couple of weeks we have begun to see a rapid unwind across all asset classes, from Stocks & Bonds to Commodities like Oil and Precious Metals. For many people this seems confusing, since usually when one Asset Class goes DOWN, another one goes UP.

Also confusing to the Gold Bug crowd is why PMs are getting SLAMMED, when quite clearly all the Fiat Paper out there is completely WORTHLESS TOILET PAPER! Why isn’t EVERYBODY dumping their Rolls of Charmin and snapping up PMs here?

The reasons are many, and they have been evident since the first major phase of the collapse began back in 2008 with the failure of Bear Stearns and Lehman Brothers, yet along the way many predictions have come across the net that the Dollar was going to Hyperinflate in the Near Term, Gold would Skyrocket to $5000/oz and the Dow would hit $30,000. Rather what we have seen is even though massive “Quantitative Easing” has been undertaken by world Central Banks, they are barely able to keep the whole Titanic from Sinking.

Anyhow, Golden Oxen our Resident Gold Bug on the Diner thinks of me as a Tool of Central Bankers because I don’t see PMs as a real good alternative to Fiat Currency, even though I despise Central Banking and in fact all Money. So I once again tried to explain to him why it was always quite likely that Gold would suffer an Asset Collapse here along the way, and this explanation follows below as a part of this article.

Saying What?

Saying basically that across the board Asset Price Collapse was predictable given the extreme amount of leverage in the system.

Whether you like it or not, the financial system is organized around the Reserve Currency of the Dollar, and Dollar Liquidity and Availability to the people who push around Big Money determines the prices of EVERYTHING. If there is a shortage of Dollars moving around the system, it’s like a Shortage of Chairs in Musical Chairs. When the Music Stops, everybody runs for a Chair, but somebody HAS to be left Chairless.

There is CLEARLY a shortage of Dollars now moving around the Asian Markets, that is why the SHIBOR is skyrocketing. Similarly, “Investors” aka the TBTF Banks are trying to Liquidate Investments in Developing Markets like Brasil for example, which further drains liquidity from the system.

Helicopter Ben’s announcement the “Tapering” would begin was the equivalent of Stopping the Music in the game. Some Players are getting left Hung Out to Dry without Chairs, and some of them hold very large positions they are then forced to liquidate into a falling market. There are thus Sellers, but no Buyers. If you are a Trader, you are not even going to Buy Gold into a falling market, it is better in this case to hold onto your Dollars and in fact go ahead and Short Gold, further driving down the price. This is a Game of Chicken, to see just how far you can go at driving the price down before finally jumping back in and buying when the assets finally bottom out.

Relatively speaking, compared to the Sovereign Bond Market and the Derivatives Market, the Gold Market is pretty small. So when Bond Prices start falling, many Players with Large Positions in Bonds get some BIG ASS Margin Calls there, and to cover they then have to start liquidating smaller positions in Gold. The smaller Gold Market thus gets overwhelmed by the larger Bond Market this way. The counterparty risk in the Derivatives Market also forces liquidations, the FEAR is that the counterparties cannot pay off on these instruments. It all feeds on itself once it gets going in earnest.

At this point it is going to be a very hard thing to stop, because the problems are distributed so widely across so many economies now, it is a much worse situation than it was in 2008. The Central Banks basically shot their wad in stopping that Cascade, they don’t have tools now to stop it again. Credibility is completely shot here, and EVERYBODY KNOWS the CBs themselves are Insolvent, holding at Par Value TRILLIONS in Bonds that will never Pay Off.

So there will be a Washout Phase here, as Andrew Mellon said:

Quote from: Andrew Mellon

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.

In this case it is more like:

Quote from: RE

Liquidate Bonds, Liquidate Derivatives, Liquidate CDOs, Liquidate Stocks, Liquidate Real Estate, Liquidate Student Debtors, Liquidate Commodities, Liquidate Precious Metals, Liquidate the ENTIRE FUCKING INDUSTRIAL ECONOMY!

Now, down the line a ways it is marginally possible PMs will make a Comeback as a Currency, though the Coinage and Distribution problems remain a very large obstacle to this. However, the nearer term Washout & Liquidation phase has been predictable as an outcome for quite some time, at least since 2008 when I first picked up on the phenomenon. Stoneleigh of The Automatic Earth also picked up on this around the same time, I don’t know anybody else who did though. Steve from Virginia of Economic Undertow maybe, but I don’t think he started publishing until 2009.

Recently jumping on this Bandwagon is Chris Martenson of Peak Prosperity. He notes with some concern the Mad Dash For Cash going on in Asset Classes across the board:

The Dash for Cash

The early stage of any liquidity crisis is a mad dash for cash, especially by all of the leveraged speculators. Anything that can be sold is sold. As I scan the various markets, all I can find is selling. Stocks, commodities, and equities are all being shed at a rapid pace, and that’s the first clue that we are not experiencing sector rotation or other artful portfolio-dodging designed to move out of one asset class into another (say, from equities into bonds).

Here’s the data. Let’s begin with the place that the most trouble potentially lurks bonds and here we have to start with the U.S. Treasury 10-year note, as that is the benchmark for so many other interest-rate-sensitive items, such as mortgage bonds.

Here there’s been a very interesting story that predates the recent Fed announcement by nearly two months. This chart of the price of 10-year Treasurys tells us much (remember, price and yield are exact opposites for bonds; as one moves up, the other moves down):

The first take-away is that the current price of 10-year Treasurys is now lower that at any time since late 2011. The second take-away is that this has happened despite both Operation Twist and QE3.

That is, after all the hundreds and hundreds of billions of dollars of thin-air money-printing and bond-buying, Treasurys are now lower in price than when the Fed initiated Operation Twist and QE3.

In the meantime, until this washout is completed, you have some very WEAK currencies that gotta get slammed here, notably the Yen and Euro. People holding large positions in those currencies are going to look to trade them for increasingly scarce Dollars. This drives up the value of the Dollar relative to everything else including Gold until the Conduits begin to fail in earnest, at which point perhaps people try to unload Dollars for what Gold they can get their hands on, except it is in Permanent Backwardation. You likely won’t find much to buy at any price in this situation.

Next week will be a good indicator whether the CBs still have enough Firepower to put the brakes on it again. Even if they do temporarily though, it can’t last long. Too many weak links now.

You have to remember always that all Money is an Abstraction which represents a perceived value of other things, mainly the Resources of the Earth and the Value of Work done, which can come in the form of Human or Animal Labor, or in the days since the Industrial Revolution began from the Thermodynamic Energy contained in fossil fuels, themselves a Resource of the Earth available only in a Finite Quantity. When the money stops representing what is truly available and truly has value, the monetary system starts to deteriorate, and it really doesn’t matter WHAT is being used for money. Precious Metals are no more “Sound Money” than anything else chosen to represent the real value of other things which at some point are either no longer available or lose their utility value.

There is a persistent Myth that before we got stuck with Da Fed and Central Banking, PMs provided a stable Monetary system for the world, but they in fact never did that at all. During the Free Banking era of the 1800s when Gold & Silver both were in some circulation as Currency in the FSoA, there were very regular Depressions and Crashes of the economic system. Going back to the Colonial era over in Europe, Gold & Silver would appear and disappear from circulation in various economies as the trade, production and THEFT of these metals sometimes put more in circulation, other times pulled them out of circulation. Wars were a constant state of life in those times. War does not indicate stability of any sort. The Hundred Years War, the Napoleonic Wars, quite endless there really. Certainly utilizing PMs for Currency did not make the economy of the Roman Empire stable once it reached its Limits to Growth. So there is no real good reason to suspect that returning to PMs would make for any more stable an economic system now than it did back then.

From Wiki, here is the list of Recessions/Depressions/Banking Crises JUST during the Free Banking Era up to the Great Depression:

US recessions, Free Banking Era to the Great Depression
Name Dates[nb 2] Duration Time since previous recession Business activity [nb 3] Trade & industrial activity[nb 3] Characteristics
1836–1838 recession ~2 years ~2 years —32.8% A sharp downturn in the American economy was caused by bank failures and lack of confidence in the paper currency. Speculation markets were greatly affected when American banks stopped payment in specie (gold and silver coinage).[3][14] Over 600 banks failed in this period. In the South, the cotton market completely collapsed.[9]
late 1839–late 1843 recession ~4 years ~1 year -34.3% This was one of the longest and deepest depressions. It was a period of pronounced deflation and massive default on debt. The Cleveland Trust Company Index showed the economy spent 68 months below its trend and only 9 months above it. The Index declined 34.3% during this depression.[15]
1845–late 1846 recession ~1 year ~2 years −5.9% This recession was mild enough that it may have only been a slowdown in the growth cycle. One theory holds that this would have been a recession, except the United States began to gear up for the Mexican–American War, which began April 25, 1846.[13]
1847–48 recession late 1847–late 1848 ~1 year ~1 year −19.7% The Cleveland Trust Company Index declined 19.7% during 1847 and 1848. It is associated with a financial crisis in Great Britain.[15][16]
1853–54 recession 1853 –Dec 1854 ~1 year ~5 years −18.4% Interest rates rose in this period, contributing to a decrease in railroad investment. Security prices fell during this period. With the exception of falling business investment there is little evidence of contraction in this period.[3]
Panic of 1857 June 1857–Dec 1858 1 year
6 months
2 years
6 months
−23.1% Failure of the Ohio Life Insurance and Trust Company burst a European speculative bubble in United States’ railroads and caused a loss of confidence in American banks. Over 5,000 businesses failed within the first year of the Panic, and unemployment was accompanied by protest meetings in urban areas. This is the earliest recession to which the NBER assigns specific months (rather than years) for the peak and trough.[5][8][17]
1860–61 recession Oct 1860–June 1861 8 months 1 year
10 months
−14.5% There was a recession before the American Civil War, which began April 12, 1861. Zarnowitz says the data generally show a contraction occurred in this period, but it was quite mild.[15] A financial panic was narrowly averted in 1860 by the first use of clearing house certificates between banks.[9]
1865–67 recession April 1865–Dec 1867 2 years
8 months
3 years
10 months
−23.8% The American Civil War ended in April 1865, and the country entered a lengthy period of general deflation that lasted until 1896. The United States occasionally experienced periods of recession during the Reconstruction era. Production increased in the years following the Civil War, but the country still had financial difficulties.[15] The post-war period coincided with a period of some international financial instability.
1869–70 recession June 1869–Dec 1870 1 year
6 months
1 year
6 months
−9.7% A few years after the Civil War, a short recession occurred. It was unusual since it came amid a period when railroad investment was greatly accelerating, even producing the First Transcontinental Railroad. The railroads built in this period opened up the interior of the country, giving birth to the Farmers’ movement. The recession may be explained partly by ongoing financial difficulties following the war, which discouraged businesses from building up inventories.[15] Several months into the recession, there was a major financial panic.
Panic of 1873 and the Long Depression Oct 1873 –
Mar 1879
5 years
5 months
2 years
10 months
−33.6% (−27.3%) [nb 3] Economic problems in Europe prompted the failure of Jay Cooke & Company, the largest bank in the United States, which burst the post-Civil War speculative bubble. The Coinage Act of 1873 also contributed by immediately depressing the price of silver, which hurt North American mining interests.[18] The deflation and wage cuts of the era led to labor turmoil, such as the Great Railroad Strike of 1877. In 1879, the United States returned to the gold standard with the Specie Payment Resumption Act. This is the longest period of economic contraction recognized by the NBER. The Long Depression is sometimes held to be the entire period from 1873–96.[19][20]
1882–85 recession Mar 1882 –
May 1885
3 years
2 months
3 years −32.8% −24.6% Like the Long Depression that preceded it, the recession of 1882–85 was more of a price depression than a production depression. From 1879 to 1882, there had been a boom in railroad construction which came to an end, resulting in a decline in both railroad construction and in related industries, particularly iron and steel.[21] A major economic event during the recession was the Panic of 1884.
1887–88 recession Mar 1887 –
April 1888
1 year
1 month
1 year
10 months
−14.6% −8.2% Investments in railroads and buildings weakened during this period. This slowdown was so mild that it is not always considered a recession. Contemporary accounts apparently indicate it was considered a slight recession.[22]
1890–91 recession July 1890 –
May 1891
10 months 1 year
5 months
−22.1% −11.7% Although shorter than the recession in 1887–88 and still modest, a slowdown in 1890–91 was somewhat more pronounced than the preceding recession. International monetary disturbances are blamed for this recession, such as the Panic of 1890 in the United Kingdom.[22]
Panic of 1893 Jan 1893 –
June 1894
1 year
5 months
1 year
8 months
−37.3% −29.7% Failure of the United States Reading Railroad and withdrawal of European investment led to a stock market and banking collapse. This Panic was also precipitated in part by a run on the gold supply. The Treasury had to issue bonds to purchase enough gold. Profits, investment and income all fell, leading to political instability, the height of the U.S. populist movement and the Free Silver movement.[23]
Panic of 1896 Dec 1895 –
June 1897
1 year
6 months
1 year
6 months
−25.2% −20.8% The period of 1893–97 is seen as a generally depressed cycle that had a short spurt of growth in the middle, following the Panic of 1893. Production shrank and deflation reigned.[22]
1899–1900 recession June 1899 –
Dec 1900
1 year
6 months
2 years −15.5% −8.8% This was a mild recession in the period of general growth beginning after 1897. Evidence for a recession in this period does not show up in some annual data series.[22]
1902–04 recession Sep 1902 –Aug 1904 1 year
11 months
1 year
9 months
−16.2% −17.1% Though not severe, this downturn lasted for nearly two years and saw a distinct decline in the national product. Industrial and commercial production both declined, albeit fairly modestly.[22] The recession came about a year after a 1901 stock crash.
Panic of 1907 May 1907 –
June 1908
1 year
1 month
2 years
9 months
−29.2% −31.0% A run on Knickerbocker Trust Company deposits on October 22, 1907, set events in motion that would lead to a severe monetary contraction. The fallout from the panic led to Congress creating the Federal Reserve System.[24]
Panic of 1910–1911 Jan 1910 –
Jan 1912
2 years 1 year
7 months
−14.7% −10.6% This was a mild but lengthy recession. The national product grew by less than 1%, and commercial activity and industrial activity declined. The period was also marked by deflation.[22]
Recession of 1913–1914 Jan 1913–Dec 1914 1 year
11 months
1 year −25.9% −19.8% Productions and real income declined during this period and were not offset until the start of World War I increased demand.[22] Incidentally, the Federal Reserve Act was signed during this recession, creating the Federal Reserve System, the culmination of a sequence of events following the Panic of 1907.[24]
Post-World War I recession Aug 1918 –
March 1919
7 months 3 years
8 months
−24.5% −14.1% Severe hyperinflation in Europe took place over production in North America. This was a brief but very sharp recession and was caused by the end of wartime production, along with an influx of labor from returning troops. This, in turn, caused high unemployment.[25]
Depression of 1920–21 Jan 1920 –
July 1921
1 year
6 months
10 months −38.1% −32.7% The 1921 recession began a mere 10 months after the post-World War I recession, as the economy continued working through the shift to a peacetime economy. The recession was short, but extremely painful. The year 1920 was the single most deflationary year in American history; production, however, did not fall as much as might be expected from the deflation. GNP may have declined between 2.5 and 7 percent, even as wholesale prices declined by 36.8%.[26] The economy had a strong recovery following the recession.[27]
1923–24 recession May 1923 –
June 1924
1 year
2 months
2 years −25.4% −22.7% From the depression of 1920–21 until the Great Depression, an era dubbed the Roaring Twenties, the economy was generally expanding. Industrial production declined in 1923–24, but on the whole this was a mild recession.[22]
1926–27 recession Oct 1926 –
Nov 1927
1 year
1 month
2 years
3 months
−12.2% −10.0% This was an unusual and mild recession, thought to be caused largely because Henry Ford closed production in his factories for six months to switch from production of the Model T to the Model A. Charles P. Kindleberger says the period from 1925 to the start of the Great Depression is best thought of as a boom, and this minor recession just proof that the boom “was not general, uninterrupted or extensive”.[28]

In all cases through the Growth Period of a Civilization, Debt & Credit have been used as a means to facilitate Commerce and accelerate the Growth of a Civilization to the Limits of its Resource Base. When those Limits are reached, the Monetary system begins its collapse phase, because the associated Debt & Credit systems are all predicated on persistent Growth of the Economy. The Interest being paid on any money can only be paid if the economy grows. If the money is Gold or Silver, said interest can only be paid for so long as more Gold and Silver are mined or Stolen from others. If the money is Fiat, the interest can only be paid as long as the containing economies produce more and more stuff from the resources of the earth. When the expansionary period is finished, you can’t return on investment, you can’t pay interest. Thus now in our case, you have the ZIRP policy, but unfortunately said policy has the Blowback that nobody’s Pension Plan will pay off anymore and there is about no Asset Class you can buy into where there will be an organic return on the investment.

To conclude here today in this episode of the Financial Collapse Phase of Industrial Civilization, we still have a bunch of Workouts and Unwinds that have to occur here before the Dollar is abandoned as the Numerical Arbiter of Value in the Global Financial System. A couple of Smaller but nevertheless still pretty BIG currencies have to be unwound, namely the Euro and the Yen. Investors trying to unload these currencies are most likely to head for the Dollar, backed as it is by the Big Ass Military. Hedge Funds looking to Unload securities they hold large positions in in Developing Nations will also be looking to unload them for Dollars. TBTF Banks concerned about counterparty risk in Derivatives they hold written by other TBTF banks seek to unload those for Dollars. As many Dollars as Helicopter Ben has Printed here over the last 5 years, there just are not enough to go around in a Shadow Banking Economy that very likely is measured in Quadrillions. There are not enough Chairs here to go round. When the Key Men in the game begin to fall, it all begins to accelerate. It appears now this Game is Afoot at last.




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