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"Yesterday, the textbook was thrown
out the window. All asset classes saw sudden and sharp moves far in excess of
normal volatility patterns. To an old timer, that points to one conclusion.
Liquidation. Wide-spread liquidation across asset classes. Currencies, bonds,
commodities and stocks all moved swiftly and sharply in a direction that
screamed - Seek safety! Raise cash! Get liquid...
All of that had a quick and discernible negative impact on markets. But, the
selling was far more pervasive and dramatic than simply a conscious
adjustment of positions based upon new data. Thursday’s action screamed
liquidation - and not all of it voluntary."
Art Cashin, 22 September 2011
"That day the U.S. announced that the dollar would be devalued by 10
percent. By switching the yen to a floating exchange rate, the Japanese
currency appreciated, and a sufficient realignment in exchange rates was
realized. Joint intervention in gold sales to prevent a steep rise in the
price of gold, however, was not undertaken. That was a mistake."
Paul Volcker, Nikkei Weekly
2004
There was a major sell off in gold and silver today that was due in part to
the liquidation of assets coming out of Europe. That is the basis of the
quotation from Art Cashin, and he is right in what
he says.
But while stocks and the dollar all paused today, gold and silver were
hammered, and the selling looked to be more calculated than incidental as it
has been throughout the week.
There is little doubt that some of this is the association with usual gaming
of the Comex option expiration next week, and the
potential delivery situation on that exchange with their unusually thin
supplies and concentrated short positions held by a few of the banks. Comex Hikes Gold, Silver, Copper
Margins After the Bell.
But today in particular seems to be even a little more than that.
Every time the central banks and their affiliates get desperate, some economic essayist trots out an
outlandish argument about why gold is a
'barbarous relic.' Here is one that tops even the almost petulant argument of Willem Buiter in
2009.
The Price of Gold in 2160 - Statsguy and James Kwak
I had to read this essay twice to make sure it just was not satire. I can
summarize my reaction by saying that finding gold in outer space with assumed
technologies speaks to supply, but the author does not present any
assumptions about population, economics structures, and of course future demand.
The method by which gold is formed in relatively rare supernova events is
fairly well known, and its distribution relative to other elements and
compounds is not completely eccentric, at least not as random and eccentric
as pseudo-scientific economic theories might become these days.
The author's premise of the discovery of new bullion supplies in outer space
is analogous to the discovery of the New World by Europeans, and the
remarkable finds of gold and silver on those two vast continents.
And yet here we are today.
Some might say that the author was merely saying in a cute way that commodity
based currencies always fail, with an example being salt or Yap stones as Mr.
Buiter had argued to greater effect.
And I would say that all currencies do go in and out of favor in their time,
since there is an element of relativism in value that can be enforced by
ruling authorities, who themselves tend to come and go, even if in their time
these authorities might seem invincible, their empires intended to last for a
thousand years.
But some stores of value, not based on passing utilitarian criteria or force,
do tend to be resilient, and come back again and again, and retain an
element of value from generation to generation. Or as some might with a more
profound understanding of money might say, they maintain the confidence of their
steadfastness that is a pre-requisite of sound money that is difficult to
maintain by mere force of will.
As some historians of money have pointed out, the Federal Reserve was
initially set up to emulate this type of external immutability of value in
what later became a purely fiat currency. As men like Andrew Jackson would
have predicted, they failed in exactly the same ways and for the same reasons
that every other attempt at this has failed throughout history.
All systems are prone to corruption and decay, but none so much as those that
rely exclusively on the goodness and wisdom of small groups of powerful men,
especially when acting in secret.
It does seems quite cheeky for a modern economist to criticize a natural
store of value with a 5000 year history, while standing on the platform of a
purely fiat currency, given the short half life of
every fiat currency throughout history. They may be recreated and devalued,
but they never retain much of their value and character, with the only
remnant their name.
I hear the sounds of printing presses over the horizon. Get ready for
Quantitative Easing European style, and massive European bailouts, and
increasingly absurd arguments from the econo-sphere
as they avoid the subject of justice for the sake of expediency.
I have some limited sympathy for the dilemma facing the increasingly
desperate western central banks, and understand their rationalizations. But
they are doing something that is the very epitome of moral hazard, and abuse
of power, in their attempts to stabilize the unsustainable, without allowing
for meaningful change and reform.
The heart of the issue is that the existing monetary and financial system is
becoming increasingly arbitrary and corrupt. A relatively small group of
interconnected crony capitalists wishes to create a digital
money out of nothing, and distribute it increasingly as they will, to whom
they will.
And this is the basis of my resentment with this policy abuse, and the
irritation with the assault on reason by those in the financial demimonde
engaging in what might be politely called perception management.
This self-serving arbitrariness, even if done for 'good motives,' is the very
reason why all fiat currencies fail. No matter how you want to rationalize it
they are going to create money out of nothing, and give it to whom they will, while corrupting the political system in
the process.
And the cumulative results of this abuse of power are corrosive to society.
Lawless example by a ruthless few brings out the worst in all the people,
always. And that is a shame.
"Our
government teaches the whole people by its example. If the government becomes
the lawbreaker, it breeds contempt for law; it invites every man to become a
law unto himself; it invites anarchy.”
Louis D. Brandeis
I
am reading The Garden of Beasts by Erik Larson, and it is diverting as
well as instructive, full of personal vignettes of Berlin in the 1930s told
from the standpoint of the US Ambassador and his family. It is perhaps not
surprising that most cruelty is based in casual disregard for others, and a
pre-occupation with the self. And of course, that evil flourishes when the
good do and say nothing.
As a preparation for this I read The Long Night by Steve Wick. Perhaps
this is responsible for my gloomy frame of mind this week. But these things
do not happen overnight, but by measures, until one is firmly in the crude
grip of the banality of evil. And then of course it is too late to escape
from the maw of the abyss.
So don't go there.
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