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I was asked to reenact a dramatic scene from the movie Rollover (1981),
which is a rather frightening worldwide currency crisis, depicted when oil
money is withdrawn from the banking system. Although a total hypothetical
scenario, it brings into crystal clear focus what systemic risk is all about.
To put this into the proper context, we might visit
something seldom talked about today and something I have not used in the past
several years at any of the conferences that I present at-namely, the Golden
Pyramid, which is attributed to Mr. John Exter.
You can get some very good background on Mr. Exter from "A Moneychanger
Interview: Mr. John Exter Simplex Munditiis," provided by Mr.
Franklin Sanders.
Greg Pickup also did two excellent articles and
mentions Mr. Exter's work in both of them. One is
called "The Value of
Money," and the other is "They Rang a Bell."
John Hathaway, the senior portfolio manager at
Tocqueville Asset Management L.P., wrote an article in 1999 called "The Golden
Pyramid," in which he mentions the Exter
Pyramid.
Finally, for the purposes of this article, my friend
and fellow newsletter writer Jay Taylor did an article titled "Systemic Fiat Currency Risk
& John Exter's Golden Triangle."
John Exter's depiction of
the Golden Triangle can be viewed below. This is a representation of the
financial system in John's era. First it must be pointed out that an
upside-down pyramid is a very unstable structure, whereas a normal,
right-side-up pyramid is an extremely stable one. Does this imply the whole
financial structure is unbalanced?
If we examine the pyramid from the tip (bottom) up,
we are looking at the most liquid assets; and as we move up the pyramid, the
financial aggregates not only expand (they must continue to expand in a fiat
system), but they also become less and less trustworthy. Since the entire
financial system is faith based, this could also be viewed as a confidence
meter.
People have had faith in gold through all of
recorded history, whereas many currencies have come and gone in the monetary
history of mankind. The financial markets seem capable of inventing all sorts
of paper asset investments; bad or marginal loans are packaged together and
turned into high-yield "investments." All kinds of financial
"insurance" packages are written to hedge risk; multitudes of
Exchange Traded Funds have emerged that bet on price movement of the
underlying asset. Of course, let's not forget about the hedge fund-once a
rather obscure investment vehicle that few knew of or even had the ability to
locate, it now has become mainstream. And this hot money moves into and out
of various markets with noticeable effect.
The Exter Pyramid does not
include derivatives, which would be at least in my view at the very top of
this unstable structure. There are many problems with derivatives, but the
primary one could be the ability of the parties to pay.
Derivatives have exploded over the past two decades
and it is well outside the purpose of this briefing to delve into the topic.
However, Mr. Puplava of Financial Sense Online was
ahead of the curve as usual and wrote about this topic in his article "Pedal to the
Metal." Additionally, the reader should study the topic of derivatives
carefully, and this can be accomplished with some effort by reading about the
threat posed by these financial instruments. See the first three or four
articles (or more, of course, if you wish) on the Financial
Sense Web site.
The Golden Pyramid
So in the movie Rollover, When the Notes
Come Due, all heck breaks loose
because long-term financial instruments have to be sold all at once and moved
into cash to settle with the oil investors. This causes massive selling
pressure and moves market valuations tremendously. You might call it a significant shift
in investor psychology in an instant!
Thus the financial instruments that the market has
the least confidence in fall in value the fastest (greatest amount), and
those that the market has tremendous faith in (such as gold) move up in
value. In this hypothetical scenario, it all takes place in just a few
trading days. I have no idea whether the writer of the movie Rollover was
familiar with Mr. Exter's work or not.
Finally, it is rather ironic that this movie was
released after gold had peaked on January 21, 1980, and was actually
beginning a long bear market.
By: David Morgan
www.silver-investor.com
Mr. Morgan is a
contributor to Mining Industry Review an e-TV program, available at FreeMarketNews.com He also hosts a weekly Metals Wrap up each week on the Financial
Sense Hour see www.netcastdaily.com/fsnexwshour.htm
Mr. Morgan and has written numerous articles, his e-mail newsletter, The
Morgan Report is issued on a monthly basis and includes economic news,
overall financial health of the global economy, currency problems ahead and
the reason why people need to be invested in the precious metals. His website
is www.silver-investor.com. His
book “Get the Skinny on Silver Investing” should be available shortly.
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