China to install more than 2,000 gold ATMs

[moore_capital54]

http://cnbusinessnews.com/china-to-install-more-than-2000-gold-atms/

 

This is the kind of stuff we all need to be worried about. If the creditor nations begin to use gold as a medium of exchange...

[bmichaud]

http://cnbusinessnews.com/china-to-install-more-than-2000-gold-atms/

 

This is the kind of stuff we all need to be worried about. If the creditor nations begin to use gold as a medium of exchange...

 

China is not a creditor to the United States of America. The only possible way for China to purchase USTs is to obtain USDs via its trade relationship with the USA - the only possible way for those USDs to be made available to China is for us to first spend/print them into existence. If the USA was starting from zero, it would be metaphysically impossible for China to "lend" to us b/c there would be zero USDs in existence.

 

http://pragcap.com/china-divests-97-of-treasury-bill-holdings-what-does-it-mean

 

http://pragcap.com/bernanke-still-doesnt-get-it

 

http://pragcap.com/america-cannot-go-the-way-of-greece

 

http://pragcap.com/mmt-as-an-alternative-to-austerity

 

http://pragcap.com/whoa-thats-a-lot-of-private-sector-savings-i-mean-debt

[moore_capital54]

Bmichaud, who cares about the UST's right now, what if China and Russia engage in trade utilizing gold as a medium of exchange? What if China buys its iron ore in gold from Australia.

 

The US is only 25%~ of world GDP.

 

Try to understand, this is very serious and even more due to the obvious fact that these policies are being pushed from the top of the chinese politicial system.

 

The chinese would like to control their commodity prices so they can shift from an export nation to one which is supported by internal consumption. They view gold as the ultimate currency and it matters little what you or americans think. If chinese use gold as a medium of exchange it will not be good for America or any other nation with fiat currencies.

 

Only the creditor nations can afford to make this switch, the debtor nations are screwed if the rest of the world moves on to hard money. This will be a game changer.

 

 

 

 

 

 

[moore_capital54]

The worst thing that could happen is for the USD to lose its reserve status. Especially to an RMB that is backed by gold..

 

 

[bmichaud]

Bmichaud, who cares about the UST's right now, what if China and Russia engage in trade utilizing gold as a medium of exchange? What if China buys its iron ore in gold from Australia.

 

The US is only 25%~ of world GDP.

 

Try to understand, this is very serious and even more due to the obvious fact that these policies are being pushed from the top of the chinese politicial system.

 

The chinese would like to control their commodity prices so they can shift from an export nation to one which is supported by internal consumption. They view gold as the ultimate currency and it matters little what you or americans think. If chinese use gold as a medium of exchange it will not be good for America or any other nation with fiat currencies.

 

Only the creditor nations can afford to make this switch, the debtor nations are screwed if the rest of the world moves on to hard money. This will be a game changer.

 

The only way for China, and the world for that matter, to discontinue accumulating USDs, is to stop exporting to the USA. Is that really going to happen so that said countries reduce their "reliance" upon the USD? What economy is going to buy all of China's products? Europe? Japan? If so, Europe and Japan would have to begin issuing more currency in order to buy Chinese products, i.e. run higher deficits - so China would then be holding other trade deficit currencies at risk of "inflating". Or the entire world ex. the USA would have to move to the gold standard.

 

In order for China to even think about moving in the direction of reserve currency, it would have to open its economy, and loosen currency and capital controls. I don't see that happening.

[Carvel46]

2,000 gold ATMs in China seems like another sign of a bubble in gold. Listen to Prem!

 

Moore, what do you like about a "hard currency" system? Help me understand your argument. A "hard currency" system seems prone to frequent deflationary episodes.

 

[Liberty]

1) Isn't the chinese government a total control freak? The last thing they want is to completely lose control of their currency by tying it to gold.

 

2) China has a lot of US dollar debt, and making the US dollar lose value would hurt them a lot, so it's not in their interest.

[moore_capital54]

Carvel, unfortunately I do not feel like engaging in a long debate on this matter on this Sunday. I will just say that a hard money system is the optimal system for unleashing the powers of capitalism. A fiat system punishes the savers and rewards the debtors, encourages lower classes of society to assume debt, and leads to significant booms and busts.

 

In a gold-standard system whatever progress society makes is permanent. Money retains its value. Deflationary issues are not bad, they are good and are part of the natural cycle of capitalism. A fiat system attempts to force trust on the participants in the market place. We have now learned that this trust can disappear without warning and results in widespread fear.

 

With a gold standard system that would never happen. There would be no questions about counterparty risks or ability to repay.

 

This was a very light version of my thoughts, if you go through some of my historical posts you will see more about this. Keep in mind, if we had a gold-standard system where Base money was supported by a ratio of gold IE: 35 to 1 or what not, Central Bankers would still have the same tools IE: Interest Rates, and we would keep a fractional reserve banking system to allow the economy to expand and contract based on the forces of capitalism. The key difference is that the government would no longer be able to subsidize their deficits, leading to a much healthier economy, and the same would be true for market participants, would be able to sleep at night knowing their US Dollars were convertible into gold.

 

In this system the lower classes would have a harder time to succeed, they would have to work a lot harder.  But the good news is that any advancement in prosperity would be near permanent and sustainable. I tell people that on a gold standard system human prosperity escalates a stairwell as opposed to a slope. With each prosperous period we take a new step forward, its sustainable, its permanent. With fiat money we are always on a slope, one mistake and we can slide down to where we were 10-20 years ago.

 

I see comments on this board that just strike me as incredibly naive. Bmichaud for example (sorry man we seem to butt heads) with his analysis of why China is not a creditor to the US, going out of his way to convince himself that we are doing them a favor. Come on...

 

We would all be much better off if we reduced the debt in the system and had a medium of exchange that would retain its purchasing power over time. The economy might contract for a few years but the growth would be geniune and sustainable.

[moore_capital54]

Nothing would change for anyone on this board if we returned to a gold standard system. I assume for the most part everyone here is a creditor and not a debtor and that you have more assets than liabilities.

 

The only thing that would change is that you would no longer have to worry about inflation as much, and most definitely real GDP would decline for a few years, maybe even a decade. But life as you know it would be a lot more straight forward. There would be little worrying about the future, the uncertainty of government debt, commodity prices etc. A dollar would be harder to earn but when you earned it you would know it's value.

 

I heard this weekend, that Peter Thiel's Seastead is interested in having a gold denominated currency in one of their first floating islands. That is going to be very interesting.

[bmichaud]

Carvel, unfortunately I do not feel like engaging in a long debate on this matter on this Sunday. I will just say that a hard money system is the optimal system for unleashing the powers of capitalism. A fiat system punishes the savers and rewards the debtors, encourages lower classes of society to assume debt, and leads to significant booms and busts.

 

In a gold-standard system whatever progress society makes is permanent. Money retains its value. Deflationary issues are not bad, they are good and are part of the natural cycle of capitalism. A fiat system attempts to force trust on the participants in the market place. We have now learned that this trust can disappear without warning and results in widespread fear.

 

With a gold standard system that would never happen. There would be no questions about counterparty risks or ability to repay.

 

This was a very light version of my thoughts, if you go through some of my historical posts you will see more about this. Keep in mind, if we had a gold-standard system where Base money was supported by a ratio of gold IE: 35 to 1 or what not, Central Bankers would still have the same tools IE: Interest Rates, and we would keep a fractional reserve banking system to allow the economy to expand and contract based on the forces of capitalism. The key difference is that the government would no longer be able to subsidize their deficits, leading to a much healthier economy, and the same would be true for market participants, would be able to sleep at night knowing their US Dollars were convertible into gold.

 

In this system the lower classes would have a harder time to succeed, they would have to work a lot harder.  But the good news is that any advancement in prosperity would be near permanent and sustainable. I tell people that on a gold standard system human prosperity escalates a stairwell as opposed to a slope. With each prosperous period we take a new step forward, its sustainable, its permanent. With fiat money we are always on a slope, one mistake and we can slide down to where we were 10-20 years ago.

 

I see comments on this board that just strike me as incredibly naive. Bmichaud for example (sorry man we seem to butt heads) with his analysis of why China is not a creditor to the US, going out of his way to convince himself that we are doing them a favor. Come on...

 

We would all be much better off if we reduced the debt in the system and had a medium of exchange that would retain its purchasing power over time. The economy might contract for a few years but the growth would be geniune and sustainable.

 

Obviously we can disagree whether or not a gold standard is appropriate, but come on....how can you read the links that I posted, think through it, and still believe that China is a creditor to the USA? Do you honestly believe that China must first gives us the dollar bills required to buy their goods? If so, how did those dollars that China is "lending" us first come to exist? By definition we had to spend/print them into existence.

 

I went a long while fighting this reality, and would be willing to go back to believing China "funds" our spending if it was in fact explained to me....

 

Seriously, please explain.

[Guest]

Correct me if I'm wrong, but weren't we on the gold standard in 1929?

 

That didn't work out all that well.

[bmichaud]

With a gold standard system that would never happen. There would be no questions about counterparty risks or ability to repay.

 

and we would keep a fractional reserve banking system to allow the economy to expand and contract based on the forces of capitalism. The key difference is that the government would no longer be able to subsidize their deficits, leading to a much healthier economy, and the same would be true for market participants, would be able to sleep at night knowing their US Dollars were convertible into gold.

 

Where I am in fact naive is with regards to the gold standard. So under a $35/ounce of gold system, there by definition could only be 35 USDs in existence for every ounce of gold at the Fed, correct? So under that scenario, the Fed cannot print money and the Federal government must run a balanced budget.

 

Ok so even if that is the case, with a fractional reserve banking system, the banks can create an unlimited number of deposits in the system constrained only by capital requirements. So within the horizontal banking system, there would still be large debt super cycles and deflationary busts, as the private sector rushes for the monetary exits to sell down assets in order to pay down debt.

 

With a fractional reserve banking system, there could still be a "run on the bank" because lending creates deposits in excess of the actual money supply available to pay back depositers.

 

All that to say - how would there be "no questions about counterparty risks or ability to repay"? Who is the counterparty that would always be able to pay under the gold standard?

 

For your gold standard society to actually work, there would have to be zero horizontal credit creation so that all economic growth would be via productivity. I would attach the document if I had it, but someone posted a paper by Ray Dalio that outlines this whole issue.

[bmichaud]

Correct me if I'm wrong, but weren't we on the gold standard in 1929?

 

That didn't work out all that well.

 

According to Jim Grant the Great Depression was actually healthy for the economy b/c it deflated away all the excess....

 

Let's ask Japan how that's working out for them. Or perhaps the Europeans in three years after they "cut" their way to prosperity over the next three years.

[moore_capital54]

Bmichaud, you are one of the few posters I tend to avoid direct debates with, not because I do not respect you, quite the contrary you are very intelligent and I enjoy reading your comments specifically relating to stock ideas.

 

The problem here is that when it comes to monetary policy you are extremely liberal and quite academic in your thinking, where I am a lot more conservative. I think you even mentioned in the past you studied at the University of Chicago or some of the classic Keynsian/Friedman academic institutions that have instilled in you this great passion for monetary liberalism.

 

I on the other hand am a lot more conservative and have, based on my studying of history, little confidence in my fellow man to control the output of currency, just as I have little confidence in my fellow man to control the output of anything. We fundamentally disagree here.

 

That being said, I can tell you that we have a trader in our shop. And hes always more bearish than most. He always thinks the world is gonna end. And my partner always jokes that this is due tot he fact that he has not much "skin in the game" as traders generally do not. This puts them at a psychological advantage over long-term investors in making end of the world predictions or enjoying down days while we suffer from significant paper losses. Anyhow as an analog, I tend to find that investors who take a more liberal approach to monetary policy are for the most part academics or swing a small line in the markets. Hard core capitalists tend to lean towards hard money and can relate to it quite easily.

 

With respect, do you have significant market exposure? And if so how can you be a proponent for a system that at it's core punishes the capitalist, punishes the saver and erodes your wealth unless it is fully invested at all times.

 

 

[bmichaud]

I have significant skin in the game as i manage money. Believe it or not I'm 70pc net long at the moment.

 

My beliefs on the monetary system and fiscal policy used to be very similar to yours, but the work of Cullen Roche over at pragcap.com has changed my beliefs for the better, as his work outlines not economic theory but economic reality. I'm a math guy, and 2+2 makes sense to me. China "funding" a country that issues "debt" in its own currency doesn't add up to me.

 

I don't think the world is coming to an end at all, or else I'd be in 100pc cash. I think the deleveraging nature of the post-global-debt-bubble has created an environment where value investors should take care to protect against Prem's "second leg down" scenario.

[moore_capital54]

Prem has built a $15mm equity business into $8.5B his job is to preserve his capital first, and then focus on growth. He has achieved his goal, and even passed it with flying colours.

 

With regards to Pragmatic Capital and Cullen Roche, again, and this is with 100% respect to both of you, you guys are being extremely naive.

 

Let me pose this question to you, do you think if China did not exist the US would not be running fiscal deficits? Who accumulated the debt US or China?

 

I never once said china is funding the US deficit, I don't care who owns the US debt. The bottom line is that the US is indebted to the tune of roughly 100% of GDP. And that would not have happened on a gold standard system.

 

The fiat money system does not help capitalism achieve its potential, on the contrary it encourages too much debt in the system and as we have learnt the only thing that can slow down capitalism is debt. Debt cripples the economy by mortgaging the future as we have just witnessed. If you remove the current government debt, even with a much smaller economy we would all be much better off, and yes productivity growth is the best kind of growth.

 

With regards to your other comments about Fractional Reserve Banking, I do not agree at all, as a gold standard system would instill the common sense rule. Everyone talks about the need for tougher regulation, but the best regulation is a common sense test or a "smell test". We have all but lost those tests with robo signers and online mortgage forms. With a gold standard system some portion of the base money would be converted into gold, at any given time a small segment of the population would be redeeming their money for gold. This would impose significant transparency on the central bank and as a result they would impose significant regulatory scrutiny on the banks which in turn would impose significant scrutiny before extending credit.

 

Everyone keeps bringing up 1929 as a black stain on the gold standard but that is just sophistry. The great depression was due to a rapid accumulation of debt it had nothing to do witht he gold standard. The bernanke/keynsian view that it was what happened subsequently which exacerbated the state of the economy is academic nonsense. The period leading up to 1929 was a complete perversion as accounted in "A World in Debt" and "Only Yesterday", this period saw the beginning of what became a cancer on the american capitalist. It was the genesis of all our current problems ie: households consuming more than they produce, emphasis on service as opposed to manufacturing, easy money, debt accumulation, and liberal monetary policies. Buffett has a good line: "In a bear market shares revert to their rightful owners", well the period post 1929 was just that, a major correction where the economy has to return to its rightful track, of sustainable growth.

 

Politicians, representing the most unscrupulous segment of the population decided to play god, and this was the beginning of the subsidized economy.

 

Now, China will not repeat that mistake. That is why it is so important to take notice of this link I posted. The Chinese government believes in hard money, they absolutely hate debt. This is true for Brazil as well having witnessed the disastrous effects of hyperinflation and debt/gdp levels that were nauseating.

 

If China and the rest of the productive world begin to engage in trade with a gold backed currency, this will put the US at its true test. I think that even this test will see the US prevail, but essentially the test will be this:

 

Is the US and its "superior" system, really capable of prospering in a self sustaining manner? Can we produce all our own energy internally? Can we get back to exporting more than we import? These are all issues that will have to be tackled. There is no free lunch and contrary to the political rhetoric I believe that competition for global gdp is in fact a zero sum game.

 

 

[Liberty]

Now, China will not repeat that mistake. That is why it is so important to take notice of this link I posted. The Chinese government believes in hard money, they absolutely hate debt. This is true for Brazil as well having witnessed the disastrous effects of hyperinflation and debt/gdp levels that were nauseating.

 

Are you so sure that this is the case? I've read that most of the emerging countries that are doing so well because they have low debt were forced in that position because their credit was so bad they couldn't borrow. And on the individual level, savings are very high because there's basically no safety net. This obviously had tremendous benefit to them, but who's to say that under different circumstances they won't fall into the same traps as other countries...

 

Some people seem to attribute superhuman powers to the Chinese government, but people are people and we're all vulnerable to the same problems... This time is probably not different.

[bmichaud]

I only have access to my phone, so this will be brief...

 

Moore, you're implying that whoever holds USTs is "funding" the USA. Under our monetary system, it is metaphysically impossible for another country to "fund" the USA - that's not naïve or ignorant, it's operational fact. It's a dangerous practice for someone as bright as yourself to tell people that the USA is funded or has creditors - this will lead people to believe that we are at risk of becoming Greece. Again, metaphysically impossible since the USA has to first spend dollars into existence for others to buy US treasury bonds.

 

It sounds like you're venturing down the path of hyper inflation/Ron Paul fear mongering...what is so bad about our current system with regard to inflation? It's averaged 3.5pc over time - I don't see why that's bad. If you read Dalio, when we allow for horizontal credit creation, there will be debt super cycles - the gold standard only exacerbates this bc there would be no effective central treasury to make transfers, precisely the problem Europe is facing. Europe is on the gold standard - has that kept them from profligate borrowing? Heck no - let's take a poll to see if the board would rather be America or Europe right now.

 

And you indicate you want the US to reduce its trade decit...I'm guessing you realize that for every net export nation there must be a net deficit nation. So if all governments were on the gold standard and ran a balanced budget, net import nations would drive the private sector into the ground due to the following unfallible accoutning identity:

 

Private sector savings = public sector deficit + net exports.

 

Under a balanced budget, a net import nation would be sucking dollars out of private sector hands on an annual basis.

 

A fiat money system with fully convertible currency systems where governments don't outspend their productive capacity is the most appropriate system for a dynamic global economy where there are net export and thus net import nations, in order to allow exchange rates and capital flows to adjust naturally.

 

Like it or not, we'd get out of this debt bubble mess if we had fewer gold standard proponents and more proponents of running the US government according to the accounting identity cited above. For the love of God the UST market is BEGGING the govt to run huge deficits "financed" with sub-3% 30 year "debt". It's ridiculous. We're trying to cut deficits, i.e. reduce the current build up of private sector savings, while at the same time the private sector is paying down debt.

 

Yes we need more effective govt spending policies, flatter tax rates, social security reform, medicaid/medicare reform, and less market manipulation by the Fed - but our system works, and our system is begging us to spend more dollars into existence.

[Guest]

Let's not even beat up on 1929. Look at all the crashes before that:

 

http://en.wikipedia.org/wiki/List_of_stock_market_crashes

 

I'm not a gold bug, but weren't we on the gold standard for almost all of these?

[bmichaud]

Stanley, it's a great observation. I can post later, but preceding every depression (or a good number)in the USA going back to the 1800s, guess what the govt ran...surplus. Guess what preceded the most recebt decade of outrageous profligacy in the private sector? The Clinton surplus/"resposnible" govt years.

 

But yes, let's go back to the gold standard. My life here in the USA blows - my standard of living is deteriorating before my eyes.

[moore_capital54]

I only have access to my phone, so this will be brief...

 

Moore, you're implying that whoever holds USTs is "funding" the USA. Under our monetary system, it is metaphysically impossible for another country to "fund" the USA - that's not naïve or ignorant, it's operational fact. It's a dangerous practice for someone as bright as yourself to tell people that the USA is funded or has creditors - this will lead people to believe that we are at risk of becoming Greece. Again, metaphysically impossible since the USA has to first spend dollars into existence for others to buy US treasury bonds.

 

It sounds like you're venturing down the path of hyper inflation/Ron Paul fear mongering...what is so bad about our current system with regard to inflation? It's averaged 3.5pc over time - I don't see why that's bad. If you read Dalio, when we allow for horizontal credit creation, there will be debt super cycles - the gold standard only exacerbates this bc there would be no effective central treasury to make transfers, precisely the problem Europe is facing. Europe is on the gold standard - has that kept them from profligate borrowing? Heck no - let's take a poll to see if the board would rather be America or Europe right now.

 

And you indicate you want the US to reduce its trade decit...I'm guessing you realize that for every net export nation there must be a net deficit nation. So if all governments were on the gold standard and ran a balanced budget, net import nations would drive the private sector into the ground due to the following unfallible accoutning identity:

 

Private sector savings = public sector deficit + net exports.

 

Under a balanced budget, a net import nation would be sucking dollars out of private sector hands on an annual basis.

 

A fiat money system with fully convertible currency systems where governments don't outspend their productive capacity is the most appropriate system for a dynamic global economy where there are net export and thus net import nations, in order to allow exchange rates and capital flows to adjust naturally.

 

Like it or not, we'd get out of this debt bubble mess if we had fewer gold standard proponents and more proponents of running the US government according to the accounting identity cited above. For the love of God the UST market is BEGGING the govt to run huge deficits "financed" with sub-3% 30 year "debt". It's ridiculous. We're trying to cut deficits, i.e. reduce the current build up of private sector savings, while at the same time the private sector is paying down debt.

 

Yes we need more effective govt spending policies, flatter tax rates, social security reform, medicaid/medicare reform, and less market manipulation by the Fed - but our system works, and our system is begging us to spend more dollars into existence.

 

I disagree with everything in your post.  Of course the US cannot default on its debts because it can print USD but there are two types of defaults the defaults where you don't get paid or a default where you get paid in currency that is worth substantially less on a purchasing power basis. The US is no doubt on the latter path, as are all fiat money system governments.

 

Lets agree to disagree, you are clearly a diehard keynsian and there is no doubt in my mind, even in my lifetime this expirement will end the market forces will not allow governments to run deficits the way you hope. It goes back to my point about common sense. Would you ever run your house that way? What makes the government different? There is no such thing as a free lunch!!!

 

You are very bright and your mobile phone posts are far better than my PC posts, I am also recovering from a weekend of drinking as it was Thanksgiving but nevertheless you are extremely bright. I think you have just overdosed on too much Chicago style/keynsian economic theory and refuse to simplify things. This is no different than all those geniuses who created the CDO's and CDO's squared, they were very articulate and drove the point home, they used math to rationalize everything but anybody who just applied a "common sense test" would say wtf is going on here?

 

Lets agree to disagree. You continue to fight the trend by hoarding worthless cash, and taking part in the rat race, because that is what this system demands of you.

 

I have figured that out about 25 years ago, thanks to my Father and we are no longer slaves to that system. The system is a slave to us. I have LP's that have similar nominal net worths as in 1999 or 1998 and they sit here crying to me that they can't afford to provide their children with the same lifestyle they had.... Again whether you agree with that or not, that is the purpose of a fiat money system, it encourages the accumulation of debt  to boost investment returns due to the pace of erosion of the currency which is ultimately dictated at the government spending level (deficits).

 

You will never convince me otherwise, and the price of gold merely confirms all this.

[moore_capital54]

Stanley, it's a great observation. I can post later, but preceding every depression (or a good number)in the USA going back to the 1800s, guess what the govt ran...surplus. Guess what preceded the most recebt decade of outrageous profligacy in the private sector? The Clinton surplus/"resposnible" govt years.

 

But yes, let's go back to the gold standard. My life here in the USA blows - my standard of living is deteriorating before my eyes.

 

Again, who cares about stock market busts? Booms and Busts are part of capitalism, it is the fiat money system that attempts to artificially fix booms and busts, a gold standard system simply looks you in the eye and tells you your ugly!

[bmichaud]

We'll agree to disagree..but as I sign off from this topic, I would strongly encourage you to take the time to study Warren Mosler/Cullen Roche's writings in order to at least see why the govt should NOT be run like a household.

 

Believe it or not, but I very much enjoy studying the other side of a debate. If you promise to take a week and study their stuff I would gladly accept any articles and books you may suggest so that I can study your side of the aisle.

 

At one point I believed as you did, and shorted USTs in droves. It wasn't until their stuff that I realized why it is (or was) a fruitless bet due to the monetary system and forces actually in play.

[moore_capital54]

I highly suggest you read and re-read Adam Smith - Wealth of Nations.

 

The problem with your position is that it relies on expirementation total expirementation and you are expirementing with the most valuable of things and that is a nations wealth.

 

Wealth = the annual produce of the land and labour of the society

 

When you run deficits IE: PRINT MONEY you are diluting the value of that wealth, and when you run trade deficits you are handing the ownership of that wealth to foreigners. That's it its simple. There is no need to complicate it.

 

Read the Wealth of Nations, and read "A history of money and banking in the United States" by Murray Rothboard. Balance some of your views with those of us simpletons, I promise life will be a lot easier. And you won't find yourself constantly under pressure to explain the unexplainable.

 

 

[bmichaud]

Not at all talking about stock mkt booms and busts, I'm talking purely economic booms and busts.

 

And FYI, my capital is stored in high quality businesses that will grow my real net worth through any environment over time. Not cash.