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With an increased talk over taper, many in the gold industry think it can't happen. While the outcome for markets and expectations for the end of this third (3rd) bout of printing is well known, the timing is not known by markets. As Mike Maloney , "every single dollar is borrowed into existence, they are all owed back with interest, and this is why the debt ceiling is impossible... the system is resigned to require ever increasing levels of debt, just to continue" -- in other words, it's all song and dance.
The point is 3 fold:
1. The Fed has ended printing before, twice (two (2) times), markets collapsed, printing redoubled, dollars fell further in value
2. One means of extending the expectation for the end of printing (taper includes a belief in a linear decrease in flow, eventually reaching zero printing over the course of 12 months), while still cutting monthly purchases, is by lowering their 'threshold' for unemployment, presently at 6.5%. Goldman Sachs thinks lowering this to 5.5%, while simultaneously decreasing the pace of printing flow, could mitigate negative impacts on prices. As Bernanke and others have acknowledged the distortion caused by a falling labor force number (the denominator when calculating unemployment), it seems goundwork has already been laid here. In addition, the Fed will be able to offer markets their Treasuries, displacing what would otherwise be demand in reuse markets (where cash is conjured/lent against securities like Treasuries), so there is no concern over the Fed "running out of Treasuries to buy," and that impacting credit (cash) creation, as below by Peter Stella (former IMF)
"...ways of reducing credit:
-
Increase the haircut (like raising the reserve requirement);
-
Reduce the supply of assets that can be used for pledging; and
-
Reduce the re-pledging of pledged collateral (shortening the collateral chain).
Most recent research has focused on the first. Balance sheet shrinkage due to ‘price declines’ (i.e., increased haircuts) has been studied extensively – including the recent April 2012 Global Financial Stability Report of the IMF and the European Banking Association recapitalisation study (2011).
...we raise the flag on the second and (more importantly) the third way. When market tensions rise – especially when the health of banks comes under a shadow – holders of pledged collateral may not want to onward pledge to other banks.
-
In practical terms, the ratio of pledged-collateral (which is a measure of the credit thus created) to underlying assets falls as this onward pledging, or interconnectedness, of the banking system shrinks.
This ratio decreased from about 3 to about 2.4 as of end 2010 – largely due to heightened counterparty risk within the financial system in the present environment."
The Fed can effectively increase printing in ways--directly and indirectly--by 'buying' more Treasuries or mortgage securities, as we know, and by , an operation the Fed has tested since end-summer.
3. Actual employment is horrific, depression levels as 1.3 million less U.S. young adults 24 and under are employed, relative to January 2007, just before Bear Stearns was bailed out. Taper is good for gold, as it sets up conditions for increased printing, and the Federal Reserve is able to do this once fiscal deficits again increase (monetizing more than the deficit at present). As already know, the inclusion of the suspending the debt ceiling--and the only way to ever get one back is for a president to self-impose one, or by congressional super-majority. Checkmate.
With an increased talk over taper, many in the gold industry think it can't happen. While the outcome for markets and expectations for the end of this third (3rd) bout of printing is well known, the timing is not known by markets. As Mike Maloney , "every single dollar is borrowed into existence, they are all owed back with interest, and this is why the debt ceiling is impossible... the system is resigned to require ever increasing levels of debt, just to continue" -- in other words, it's all song and dance.
The point is 3 fold:
1. The Fed has ended printing before, twice (two (2) times), markets collapsed, printing redoubled, dollars fell further in value
2. One means of extending the expectation for the end of printing (taper includes a belief in a linear decrease in flow, eventually reaching zero printing over the course of 12 months), while still cutting monthly purchases, is by lowering their 'threshold' for unemployment, presently at 6.5%. Goldman Sachs thinks lowering this to 5.5%, while simultaneously decreasing the pace of printing flow, could mitigate negative impacts on prices. As Bernanke and others have acknowledged the distortion caused by a falling labor force number (the denominator when calculating unemployment), it seems goundwork has already been laid here. In addition, the Fed will be able to offer markets their Treasuries, displacing what would otherwise be demand in reuse markets (where cash is conjured/lent against securities like Treasuries), so there is no concern over the Fed "running out of Treasuries to buy," and that impacting credit (cash) creation, as below by Peter Stella (former IMF)
"...ways of reducing credit:
-
Increase the haircut (like raising the reserve requirement);
-
Reduce the supply of assets that can be used for pledging; and
-
Reduce the re-pledging of pledged collateral (shortening the collateral chain).
Most recent research has focused on the first. Balance sheet shrinkage due to ‘price declines’ (i.e., increased haircuts) has been studied extensively – including the recent April 2012 Global Financial Stability Report of the IMF and the European Banking Association recapitalisation study (2011).
...we raise the flag on the second and (more importantly) the third way. When market tensions rise – especially when the health of banks comes under a shadow – holders of pledged collateral may not want to onward pledge to other banks.
-
In practical terms, the ratio of pledged-collateral (which is a measure of the credit thus created) to underlying assets falls as this onward pledging, or interconnectedness, of the banking system shrinks.
This ratio decreased from about 3 to about 2.4 as of end 2010 – largely due to heightened counterparty risk within the financial system in the present environment."
The Fed can effectively increase printing in ways--directly and indirectly--by 'buying' more Treasuries or mortgage securities, as we know, and by , an operation the Fed has tested since end-summer.
3. Actual employment is horrific, depression levels as 1.3 million less U.S. young adults 24 and under are employed, relative to January 2007, just before Bear Stearns was bailed out. Taper is good for gold, as it sets up conditions for increased printing, and the Federal Reserve is able to do this once fiscal deficits again increase (monetizing more than the deficit at present). As already know, the inclusion of the suspending the debt ceiling--and the only way to ever get one back is for a president to self-impose one, or by congressional super-majority. Checkmate.
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