Mike Maloney: The Rollercoaster Crash

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21

bronx, et al-
If the national debt was entirely owned by domestic creditors, at one level there would be no problem with just rolling it over endlessly.  At the 30,000 ft level, we'd be paying money to ourselves.  However, if you dig down a bit, there are winners and losers.  Domestic taxpayers would essentially be transferring a nice slice of the national product to the sovereign debt creditors (top 1% and pension plans) in perpetuity.  Sovereign debt in that sense is just a guaranteed slice of the national product for whomever holds it, and the bigger the debt, the larger the transfer.  Money paid to the creditors could have been spent on national defense, infrastructure construction (we can only hope), more bureaucrats, education, or transfer payments to our favorite social programs.  And if we simply issue more debt to pay the interest, that still results in a wealth transfer to the group holding the debt, at the cost of higher inflation overall.  (Deficit spending is inflationary).

And that brings up reality, namely, that foreigners hold a good chunk of US debt.  Interest paid to them really means transferring a chunk of the national product to people outside our economy, every year, in perpetuity.  With foreign-owned debt, the interest payment not only crowds out other budget choices, its a tithe we pay to someone else in perpetuity.  And if its for consumption rather than self-liquidating items such as infrastructure, its really foolish - in my opinion.

Now then, we could do things like having the Treasury issue enough currency to pay off debt, or have the Fed "cancel the debt" they hold (after printing a big slug of base money to buy it) and so on, but this operation is not impact-free.  There is a side effect: excess base money is created, and it shows up as excess reserves.  The excess reserves do have an impact on the economy, and from what I can tell, the effect is to suppress short term interest rates and blow asset bubbles because of the reach for yield.  Here's my theory on that:

In the old days (i.e. pre-2008), savings were scarce because every dollar of non-base money (which was 95% of money in circulation) was borrowed into existence.  The requirement to pay interest on each dollar made sure that every dollar in circulation was a dollar that was truly deemed necessary by the free market.

However, if you suddenly parachute in a bunch of money that no longer has an interest rate attached, this creates a money supply that is in excess of what the market needs to function.  Money is therefore no longer as scarce, and so short term interest rates drop.  (Interest rates are, at one level, an indicator of supply & demand for money; low rates = high supply relative to demand).

My guess is (and I really need to construct a model to prove it) that the more interest-free base money we have out there, the more firmly short term rates will be suppressed.  Supply of money exceeds demand.

Our elastic money system is actually pretty elegant.  Free market creates money only when necessary - and when its no longer needed, participants have the incentive to pay it back and destroy it.  Savers (deferred consumption) are rewarded by interest payments.  But these days, there is more money out there than the system really needs, so savings are no longer rewarded.  What's the long term consequence of not rewarding savers?  That I haven't really sorted out - but I'm guessing its not a particularly good thing.  Likely, it results in asset bubbles ("asset hyperinflation?") as yields everywhere are driven down towards zero and asset prices are driven towards infinitly.

At some point the pendulum will swing, and people will worry about risk instead of yield.  Since asset prices will have been driven much higher than normal because of the excess base money, it just means that the crash will come from a much higher price point.  Perhaps that's what "rewarding savers" in our old elastic money system accomplishes - it restrict the heights to which asset prices may go during the good times when perceived risk is low.

Right now, since the Fed holds debt on the balance sheet for each dollar of base money printed, they can theoretically reverse the operation by selling the debt and destroying the base money.  If they cancel the debt, the base money can no longer be extracted from the economy.  Its out there in perpetuity.

There is no free lunch, as Charles said.

If you create a huge amount (say 10 trillion) in base money, might that have a different effect than suppressing interest rates further?  It might.  I just don't know.  However I don't think it will be impact-free, and I don't believe the impact will be something desirable, however I'm not sure exactly what it will be.

We're conducting an experiment with the national economy.  We should realize this.

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23

Hi Dave,
Very interesting post, as indeed was Mike M and Chris' podcast, really excellent.

We're all seeking to protect ourselves (I assume?) from the crisis that will come to pass, sooner or later. My guess was 2017, Mike Maloney's is 2018, but from the look of it, we can all agree that is probably going to be before 2020.

My own research on energy and economics suggests that we are entering a period of prolonged economic contraction, of at least 25 years, that will see contraction of the world economy by around 10% by 2020. I'm deliberately using the term contraction, so as to distinguish it from what will be happening to currency, that is deflation or inflation. By contraction, I mean that the volume of manufacturing and service output will be reducing. 

The first $64K question is what will be the key governments' response to this, essentially recession with reductions in fiscal revenues and all the problems, political and financial that flow from that? My guess is that, as Mike Maloney says, it will be to "print." But that said, we none of us know.

The second $64K is how should we best protect ourselves, and in particular what should be our approach to precious metals and cash holdings? But in particular, what should be the balance of holdings between cash and gold? If we enter a hyperinflation, its obvious that gold is good.

So the third $64K question is what will happen to gold in a contracting economy, accompanied by a  deflationary context? If the markets continue to see gold as a commodity, then I'd assume that we'd see continued reductions in the price of gold, both because of reductions in commodities in the round, but also because of a strengthening dollar assuming Chris' periphery to core model plays out.

But two things could change this. First, is the increasing recognition amongst the conventional but literate financial minority that, because of the contraction/deflation, the overall system is unsustainable, including the bank and financial systems, and that there's thus a need to hedge in precious metals. Second, is the shortage of physical gold, and the recognition that the ETFs et al are worthless. And these two things could happen together.

The question I'm struggling with is, first, what's the best proportion of gold v cash? And second, does it make sense to have some debt, especially if one has secure means of paying the debt?

Dave, would be fascinated to have your thoughts, Dave.

Steve

(Chris/Charles, if you're reading this, it would be great to have Alasdair Macleod on a future podcast, too. He's been providing some fascinating written insights, recently)

24

You said,

I don't see how the national debt matters at all. The US government is a monetary sovereignty, which means it issues currency.
You are really sounding like an MMT'er (modern monetary theory, aka chartalist, aka neochartalist) ... are you?   The US Gov't gave away the right to create currency to the FED in 1912... so while I agree with some of your points in a conceptual way, they amount to nothing but a dream unless congress votes to take back this right from the FED.  Do you think that will happen?  

Later you said,

You're right in that one person's debt is another's asset. But, they don't have to write off ALL government debt. Simply what is owned by the Federal Reserve.
So again.. you are proposing something that is not at all as simple as you make it sound.  The US Gov't does not control the FED.. they cannot simply vote to write off the assets on the FED's balance sheet.  The FED would have to decide to do this.. and the US gov't does not get a vote.  Again, short of voting out the FED, which I am not against... your proposed solution would not happen.  

The wormhole remains as far as I am concerned… it's the mathematical end game for the debt-based fiat ponzi.  Usually this end is hyperinflation.  

 

25

Dave, 

Thank you for your well thought-out response. I can see your point about suppression of short term interest rates and agree that it likely has some unintended consequence (which is currently unknown) down the road. However, I simply do not buy into the borderline doom porn that exist here. I came here expecting a more levelheaded approach to analyzing current affairs, but a lot of what I see is the same rehashed arguments used by the likes of Alex Jones or Peter Schiff. 

Looking back, I saw that Steve Keen has actually been on the show, and at that time, everyone on this forum was lauding his analysis. But did these people actually listen to his lectures or understand them? His view is almost entirely different from that of Chris Martenson - with only superficial similarities. And he calls for a debt jubilee via fiscal stimulus or creation of debt-free money. 

Either way, these are largely academic discussions. I am holding USD at this moment, and diversifying a reasonable amount into precious metals. However, I do not buy into goldbugs' sentiments. 

26

Jim, 
Yes, I adhere to MMT, because at least empirically, that's how the whole system is behaving. While I agree that my proposals are politically unlikely (which I actually conceded to earlier), they are nontheless a viable option that would attenuate the problem at hand. However, I definitely do NOT buy into the hyperinflation scenario. In my mind, that's even less likely than Congress ending the Fed.

However, a scenario that I do buy is a new world monetary system once things get untenable. How this system will work and how wealth will be transferred will be impossible to tell, but I do agree that there is enough concern to diversify into commodities, especially precious metals - but only marginally. I do not agree with the goldbug approach of 50%+. 

27

bronx-
So I'm quite familiar with Keen's proposal.  I've studied his models in fairly close detail, and I know how his theory works.  He is very clear that any printed money will be handed to citizens, and strictly used to get rid of the private debt.  If printed money is used to repay private debt, they both go away - matter meets antimatter and they both vanish (minus the big explosion).  As a result, there is no problem with excess reserves, because the newly printed money is gone.

However if the Fed prints money and then buys treasury bonds from their current owners, and then the Fed cancels those bonds, the former bond owners still have the newly printed cash.  In other words, the bonds get zapped, but the newly printed money remains in circulation, and most likely ends up as excess reserves.

Bottom line: zapping bank debt with printed money is not the same as zapping sovereign debt with printed money.

That's because bonds and bank credit have very different effects on the money supply.  Creating a new bond simply results in an existing-money transfer from creditor to borrower, while new bank debt results in the creation of new money by the bank, and given to the borrower.

If you trace the money flows, you will see what I mean.  I actually designed a simulation for this event, but I never got around to implementing it.  Still, I can see with my mind how it plays out.  Hopefully with my poor description, you can see it too.

However, I simply do not buy into the borderline doom porn that exist here. I came here expecting a more levelheaded approach to analyzing current affairs, but a lot of what I see is the same rehashed arguments used by the likes of Alex Jones or Peter Schiff.
So I'm not familiar with the rehashed arguments of Alex Jones and Peter Schiff you are referring to.  Perhaps you can help me out and tell me what my mistakes are rather than simply lumping me in with a bunch of people I don't follow.

 

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Dave, 
Thanks for your response. I didn't actually mean that you were advocating doom porn. In fact, you were one of the reasons why I even started posting here as you seem to have a great grasp on finance and I appreciate any insight you can provide. I meant simply that the overwhelming sentiment here reflects those shared by proponents of doom porn - the fringe media, whom we will avoid discussing for now. The whole concept of "wormhole" doesn't fit right with me, because I view it as a thought-stopper. In fact, it is the exact same kind of thought-stopper that Chris Martenson himself talked about in one of his earlier interviews. We see exactly what I mean in this thread. "X will cause a wormhole." Then the thought stops right there - no one here can actually describes IN DETAIL what that entails or what it even means. 

I do see what you mean by sovereign debt vs bank debt, though in Keen's proposal (correct me if I'm mistaken) but I don't remember him calling for cancelling sovereign debt. His entire framework is rested upon private debt to GDP ratios, and all he proposes is cancelling of this private debt. I don't think there necessarily needs to be any action on bonds in terms of his "modern debt jubilee." Now, I also recognize that if we don't cancel sovereign debt, then there would be a consistent flow of currency from taxpayers to holders of sovereign debt, but I don't see that as necessarily de-stabilizing. Is it 100% fair? Debatable. But I don't think it will lead to systemic shocks like what is going on now. 

The only thing that Keen's proposal scares me about is inflation, simply because he calls for a "modern" debt jubilee as opposed to a simple debt jubilee. This results in FAR more debt free money being injected into the system. However, inflation is a tricky subject - what is your take on this? 

 

29

JimH-

But the price of Gold today is not representative of the balance of physical supply vs physical demand.  So for me, this blows the theory Dave proposes above right out of the water.  Here is the best piece I have found written lately that helps explain...
Yes, I know, that's your working assumption.  Somehow a supply/demand imbalance exists, and yet it has no impact on price, not even on premiums vs COMEX.

Any alleged supply/demand imbalance that isn't reflected in prices is just hot air and wishful thinking.  If demand truly exceeds supply, price will move until demand is suppressed and supply is increased.

Right now, it appears that the folks in the east want physical gold more than those in the west.  So gold moves to where it is wanted.  That's not an imbalance, that's just gold changing hands at the current price.

A part of the problem is, many in the west are content to own COMEX GC contracts instead of physical gold.  If and when that changes, then GC contracts will no longer act as a substitute for physical gold.  Once GC contracts aren't seen as a valid equivalent to physical gold, then 1200 tons of new physical gold demand will hit the market (that's the COMEX GC open interest right now), and price will definitely jump higher.

If this were any substance but gold, you would see my logic.  If we were talking about shirts, or avocados, you would agree that if an avocado supply/demand imbalance existed, price of avocados would move higher until demand dropped off.  But this is gold, so logic and common sense get tossed right out the window.

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There it is… the thing that acts as a wedge between you and I… the thing that makes it so hard at times for me to believe you are for real;

Any alleged supply/demand imbalance that isn't reflected in prices is just hot air and wishful thinking.  If demand truly exceeds supply, price will move until demand is suppressed and supply is increased.
Thank you for laying it out there.  I would tend to agree with you if in fact price were discovered in the Asian markets.. represented by the red in the chart below.. vs. the Comex market, represented by the physical delivery volumes shown in blue...
 
 
31

Bronx, Dave, Jim: While your viewpoints are interesting, I find them a bit ephemeral given the financial crunch facing us. This world runs on cash flow and velocity is, in my opinion, the indicator on whether the economy will continue to move. I think most of us agree that when financial times get tough, "them's" with cash, hoard it or put it into riskier and riskier investments, including gold (remember, gold is a hedge and not an investment). The Feds only option may be to print their way out of it or finance more military expenditures(same thing). And, as you guys have alluded, inflation will result, even in a deflationary cycle.
Bottom line: better to be in something that cash flows and adds to the benefit of society. Why has Berkshire Hathaway put its money into the oil sands and railways? With Obama canceling the Keystone pipeline and Suncor producing oil at $23 a barrel, wouldn't you think old Warren could smell those B/N rail tankers full and on their way to Houston? NG is falling in price, LNG projects are being canceled and tight oil isn't getting any cheaper to produce. As long as the EROEI is still around 18:1, energy is the best place to put your money. Well, maybe water is a better investment with the drought and all the "fracking" screwing up the ground water supplies. Oh ya, Warren's in that too. When things get dire, the masses will focus on needs rather than wants. That's where my active capital will be and I won't be worrying about any wormholes.Besides, roller coasters can give you a thrill, so enjoy the ride.

32

JimH-
So COMEX accounts for 1200 tons of gold demand, in terms of the aggregate open interest.  (382k contracts x 100 oz/contract x 32151 oz/ton = 1188 tons).  That's substantial, but its also relatively steady state.  That is, when a futures contract expires, anyone wanting to maintain exposure simply sells the expiring contract and buys the new front month.  I've done this myself.  That's how it works.

If COMEX goes away, that's 1200 tons of new physical gold demand that will hit the markets.  That will definitely move price - once - until that demand is satisfied.  But that's not 1200 tons of demand each year.  Once satisfied and the 1200 tons are obtained, price will not be affected further.

Its probably best if you don't confuse stocks with flows.  Think of the 1200 tons of paper gold open interest as a stock, and not as a flow of deliveries.  COMEX is just a big leveraged version of GLD.  At least, that's how it is used anyway.

SGE spot instruments are used to provide a flow of gold to customers who want to take physical delivery.  That's how it is used.

SGE also has futures contracts.  I haven't gone down that particular rabbit hole, but I'd guess that SGE gold futures are used in much the same way as are the COMEX futures: providing exposure to gold price using leverage.  SGE futures buyers probably look and act a whole lot like COMEX GC futures buyers.

So if COMEX (1200 ton) paper price gets out of alignment with the spot price, we see premiums at spot.  We see them right now, but they aren't very substantial.  Once there is a shortage at spot for the "COMEX price", then spot premiums will climb.

Until those spot premiums climb, there is no spot gold shortage.

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Dave,  The Gold that supports all of the Western leveraged markets is disappearing.  LBMA, Comex, and GLD.  All demonstrably leaving town for the East. 

http://www.safehaven.com/article/39627/londons-lbma-and-new-yorks-comex-gold-markets-in-collapse

The consumption of these London stockpiles tells us now that the readily available Western gold is gone. Sure, smaller amounts of leased gold can be made available from central banks or surreptitiously from the ETFs and other funds to the market but the rapid decline of London's gold vault holdings tells us that there has already been a landslide in the London gold market.

To give a sense of scale of this event we can estimate the open interest of spot claims by using a 2x to 3x multiplier of the daily gross turnover as exists in other physical materials (commodities). For ease of calculation, if we use the 200M oz daily turnover of January 2015, that translates to an open interest of 400M to 600M oz or ~ 13,000 tonnes to 19,000 tonnes of gold. That's versus 6 tonnes of Privately Vaulted physical gold in London outside of the BoE and the various gold funds.

http://www.silverdoctors.com/harvey-organ-monstrous-gold-removal-from-gld-as-russian-jet-shot-down-by-turkey/

Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 200.26 tonnes for a loss of 103 tonnes over that period…

We had a monstrous withdrawal in gold inventory at the GLD to the tune of 5.06 tonnes  and this was done with respect to the downing of a Russian fighter jet???/ thus the inventory rests tonight at 655.69 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold.

You are not facing the fact that the leveraged Western paper markets are going to break once they cannot deliver into the Eastern demand any longer.  The flows, of which you readily admit, are of a rare and finite material.  The flows cannot keep going forever.  The flows are sucking a giant vacuum on the entire Western (and primarily LBMA) unallocated system.  When this baby blows.. it's going to take a lot more than 1200 tons to get it back to equilibrium.  I have no idea where price will finally come to rest.. but it won't be at $900.    

 

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JimH-

Dave,  The Gold that supports all of the Western leveraged markets is disappearing.  LBMA, Comex, and GLD.  All demonstrably leaving town for the East.
Yes, I agree 100%.
You are not facing the fact that the leveraged Western paper markets are going to break once they cannot deliver into the Eastern demand any longer.
Could go two ways:

  1. The easily accessible gold starts to run low.  Big bars start to become harder to find, at least at the COMEX price.  As a result, premiums start to appear, in Shanghai, in CEF, and in PHYS.  As a result of the premiums, more people stand for delivery at COMEX and gold starts to leave PHYS and GLD.  As a result of these measurable shortages, the COMEX price moves higher.  If price moves high enough, this causes eastern demand to slow down - as it always does when price moves up.  Equilibrium is reached.  More scrap gold comes out of hiding.  Nothing breaks.

  2. This Baby Blows; this is the goldbug wet dream.  There is literally no gold left in the west.  Not in GLD, not in PHYS, not in CEF, not at the LBMA, and not at COMEX.  All 170,000 tons of above-ground gold are made into little gold bars and jewelry for our Chinese and Indian friends.  One day there is gold in all those ETFs and at the COMEX and at LBMA, and the next day, it is just all gone.

I'm betting on scenario #1.  Scenario #2 is the storybook ending for the goldbugs, and things in the marketplace seldom work out that perfectly.  Especially for goldbugs.  Adjustments are usually a process, kind of like major market tops in SPX, and people waiting for the one-day Earth-Shattering Kaboom generally end up with their Illudium Q-36 Explosive Space Modulator vanishing.  Not to mention that it simply isn't in the interest of our banker friends to let that sort of thing happen.

#2 could happen, but I just think the odds are against it.  Too many forces don't want it to happen, so in my mind, that makes it less likely.

35

bronx-
You're right, Keen advocated just a fix for private debt, not public debt.  Perhaps I misread your post - you seemed to be advocating that the Fed print money, buy up the public debt, and "cancel it."  This would have that effect I was talking about, namely, leaving all that base money in circulation, camped out in Excess Reserves, basically widening the extremes of the highs and lows of asset price cycles.

Keen himself conceded that the modern (private) debt jubilee would be inflationary; he also suggested it would really hose the banks, as it would dramatically reduce their income stream.  Doing simple math: if we gave 50k to everyone 16+ (CNP16OV=252M people), that would be 12.6 trillion.  If we assume 60% of people have at least 50k in debt, that ends up destroying 7.4 trillion in bank credit (bankers lose), and another 5.2 trillion in newly created base money lands in people's accounts.  Most likely, the non-indebted people receiving the cash would run out and spend a good chunk of it.  Let's call it 3 trillion in immediate new spending, or about 16% immediately added to our 18.3 trillion of nominal GDP.  What would that do to prices?  Oh they'd definitely go up, but I'm not sure by how much.  I'd need a model to sort that out.  Simple math: maybe a 16% one-shot inflationary hit, and another 12% spread over the next 2 years?  Probably would be more, not less.

Buck probably tanks hard, maybe it too drops 30%.  This adds to perceived inflation, since all commodities and imports rise in price.  Nominal GDP rises, so ability to service all debts (public and private) jumps.  However, M2 remains more or less unchanged - lots of credit money gets destroyed, and a little bit less base money is created.  Call it a wash.  Velocity probably jumps substantially, although its not clear if this is just temporary.  Probably there is a big spike which then drops off.

The reason he called it a "modern" debt jubilee is because it avoids moral hazard by giving money to everyone, not just to debtors.

As for "doom porn" - I agree with Chris, we have civilization-wide resource limit issues (especially in energy) that, when combined with population growth, are going to cause the world serious heartburn at some point in the not-so-distant future unless we have a Deux Ex Machina event from LENR - and perhaps even if we do.  However, I believe money and credit systems have more immediately pressing problems because of the multi-generational debt bubble, so that's where I put my focus.

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Could there be a #3 possibility and is it actually different from #1 and #2?  What if somebody (a lunatic or a very clever person) decided to cause a 7 sigma event by doing something "crazy?"  What if someone simply wanted to destroy the world monetary system in short order, just because?  Or what if someone came to believe they had positioned themselves just right to end up on the top of the pile after blowing up the world monetary system?  So, I see two wink questions: 1) Who would do either?  2) Could it be done and how?

  1. Who would do it? Any number of crazies come to mind: Kim Jong Un, ANY central bank, BIS, IMF, Lloyd Blankfein, Jon Corzine, Barack Hussein Obama, etc, etc.  There are also other very serious people who might have run some very sober calculations and decided they would be the richest people in the world after igniting a strategic nuclear currency war: Jamie Dimon (they ARE stopping a lot of gold for their own accounts), China, Mario Draghi, Warren Buffett, Donald Trump… Who knows?

  2. Could it be done by one very powerful player, or a few working together?  We are in such a fragile state it seems to me that it most definitely could be done just by knocking out one leg of support and letting the whole rotten edifice collapse under it's own weight.  Of course, this looks impossible or unlikely Dave, but that's only if everyone believes in Mutually Assured Economic Destruction: you're assuming everyone is being "rational" and pulling together to keep us limping along (or at least mitigating the violence of any crash landings).  But what if some powerful someone decided to stab everyone else in the back?  

C) How could it be done?  Frankly, if I knew the answer to that I would probably have done it myself by now, just to keep the situation from getting more explosive by the day and give us a shot at creating a better system while we still can.  How about buy up a large chunk of COMEX gold contracts and stand for delivery?  (By the way, how much would that cost?  I'm checking under my couch cushions.) If that didn't quite do it, do it again in the next delivery month.  How about a whistleblower providing proof that publicly cited US gold reserves are false and that the actual amount on hand is only 19% of what is claimed?  How about a little EMP of unknown origins that hit just the right financial and electronic assets, crashed the system, and caused a nearly instant loss of confidence in all things monetary and governmental?

I'm not sure what's going to happen.  But I'm backing away as fast as I can to avoid being pulled down in the vortex of whatever it is.

https://www.youtube.com/watch?v=6RwQ0hwvh74

 

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Dear all, 
thanks for an informative and spirited discussion!

Mike's expectation of "Deflation followed by Big Inflation/ Hyperinflation" echoes the Ka-Poom theory which Chris has written about. However, Japan is apparently further along in the QE experiment than the other developed economies, so why haven't we seen 'Ka-Poom' play out there? Japan seem to have had 'Deflation ('90's crash) followed by Stagnation'. Why should not we see the same thing play out for US & Europe? i.e. a crash followed by years of a depressed growth coma-economy?

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is the "unintended consequences", as arising from market distortions that are institutionalized with a debt-based money system and exacerbated by those who maintain the pretense they understand what all the consequences will be.  The eventual consequences of these distortions are unintended, usually unforseen, usually unpleasant, often enough large, and most often out of left field and therefore not prepared for.
 

Not "doom porn" per say.  People around here are susceptible to confirmation bias, but from my observation, have wound up here because their own conclusions tend to lead them here.  Making a statement to the effect that this community is unable to tease out the nuances of Keen (or Schiff, or Jones for that matter) and come to their own syntheses  based on the information they've been exposed to is ludicrous.  And, if I may, somewhat condescending.  It is just that this crowd isn't fully invested in the pabulum promulgated by the -er- conventional authorities.  There are certainly differences - even major ones - of world views and opinions here, including yours.

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I'm still surprised Modern Monetary Theory gains so much traction considering it doesn't actually describe how an economy works.
For the record, I subscribe to the Gail Tververg debt sponsored energy extraction model combined with Kondratieff cycles (as popularised by Martin Armstrong). Perhaps that puts me in minority but so be it.

An economy is a transition of energy, nothing more. The stuff that you put in your mouth to stay alive is dependent on photosynthesis. Want to go somewhere to trade, yep, that takes energy too. Want to build a platform for fiat debt currencies, yep, you guessed it, energy too.

See how far you get without the ability to convert mechanical motion into electrical energy, go on, I double dare you…

I'm going to paraphrase Gail here but one of her current themes, "The global economy requires oil to be priced under $75 per barrel otherwise it stagnates, yet oil companies require costs to be above $75 per barrel otherwise they go broke."*

*Granted, tar sands are more expensive than conventional oil fields but the Saudi's now have expensive social programs to quell dissent which are funded through oil revenue.

Energy costs have to be low to encourage people to spend their electronic debt tokens on other items. If oil becomes expensive then our electronic debt tokens get swallowed by high energy costs instead of purchasing 'soon to be landfill' goods.

My current thinking reckons they'll be a bail out of the oil companies, probably nothing as overt as that but the financial tools which allow them to drill (junk bonds) will be swallowed up by central banks otherwise the economy tanks.

Steve Keen has been mentioned here, but I'd like you to think of the ends rather than the means. The end surely is to keep the wheels turning, why perform a debt jubilee and relieve people of their debt burden when you can suppress their expenditure by keeping oil prices low through means of oversupply? My thinking is that our masters have found a more elegant solution - for the time being…

40

Tom-
Jim H was speaking about the "gold disappearing from the west" scenario, and we were discussing how that will probably play out.  He sees gold shortages as ending up with a "storybook ending for the goldbugs."  I disagree - I think it will most likely end up differently, most likely just with the gold price rising when shortages start to occur.

You bring up another scenario, which has nothing to do with gold running out because of Chinese and Indian buying, and is more of a James Bond storyline.  I can think of a large number of such storylines, and all of them result in a "bolt from the blue" unhappy ending for the monetary system.

I believe that a "derivatives accident" is probably the most likely end-of-the-monetary-system over the weekend scenario.  Maybe the #2 or #3 is a deliberate cyber-attack on the system by a state actor.  #4 might be an EMP attack, most likely by a state actor executing it on the sly.

A Dr. Evil scenario is further down on my list.

But back to the original point - how do you see the "gold moving from west to east" story playing out?  Will it end in a COMEX default and all the gold vanishing over the weekend?  Or will it just result in premiums going up, and then prices going up, and then prices stabilizing at higher levels?  If you were in charge of the bullion banks, which would you pick?  And believe me, if you were in charge, and you wanted to keep COMEX operational (because it was both a money-maker, and an axis of control), you would have options.  You wouldn't just "hope for the best" right up until things blew up.

We have to assume they're clever people, and they have contingency plans.  I contend that they will not just  provide the goldbugs with a happy ending by running 60 mph right into the brick wall.