Tag Archives: gold standard institute

Guest Post – The Path Of Easiest Profit

20 Oct

Submitted by reader JMD*.

A lot of hullabaloo is made of the ‘flight to safety’ in ‘investor’ circles, a rising price of the US Treasury bond or rising exchange rate of the US dollar is a ‘flight to safety’. Suddenly ‘risk assets’ become a bit too risky & there is a rush to sell for the ‘safest’ securities. Even a rising gold price is considered a ‘flight to safety’ at times but then when the gold price falls it’s suddenly ‘risk off’. This scenario doesn’t make a lot of sense, either gold is safe or it isn’t & why are ‘investors’ worrying about US dollar devaluation one minute & eagerly bidding for it the next?

The whole concept of ‘safety’ is a false premise, maybe dreamed up by some turkey at the Bank of England decades ago, or some such, to obfuscate the real reason.

What drives the ‘money’ markets is not ‘safety’, or ‘risk on’ or ‘risk off’ but ‘profit‘. A good analogy is water flowing down a hill, it follows the path of least resistance. In the case of the ‘money’ markets, it can be described as the ‘money’ follows the path of easiest ‘profit’.

So what is this ‘profit’ & where is it coming from? The ‘profit’ is rising prices on financial ‘securities’ – bonds, notes & bills – particularly, though not exclusively of the government variety. The ‘profit’ is coming from government, through its central banking arm. As GSI’s Keith Weiner describes, US Treasury bonds (also Japanese, British, Australian, in fact government bonds of most ‘developed’ nations) have been in a ‘bull market’ since at least 1982. By ‘bull market’ is meant rising prices. As an ‘investor’ in government bonds you would have been unlucky not to have made a healthy ‘profit’ from your ‘governments’ at any time in the last 30 years, almost a generation.

Central banks are the ‘purveyors of profit’ in the ‘money’ markets, after all, they issue the currency, they are the market makers. There has been no more consistent ‘profit’ made than in government bonds for the last 30 years. How so? Easy, central banks either lend against or buy outright large amounts of government bonds for their own ‘portfolio’, they bid up the price (denominated in their own obligation) of government bonds. As I alluded to in the paragraph above however, central banks are not restricted to government bonds, they can & do manipulate ‘money’ market spreads by bidding for ‘private securities’. They can, if they wish, hand easy ‘profits’ to ‘investors’ in bank bills, corporate debt & even ‘equities’.

I’ll give you what I think are two good examples of the ‘money’ following the path of easiest ‘profit’, though I’m sure many more can be found.

The first is the recent earthquake & tsunami in Japan. Upon the news, the Yen began to soar against many other currencies, silver fell 6-7% in the space of a few hours, gold was well down, as were share- markets & not just in Japan. It is incongruous that a devastating natural disaster, killing tens of thousands of people & destroying property & livelihoods would have ‘investors’ rabidly bidding up the Yen – natural disasters lead to an increase in productivity? I read how it was Japanese institutions ‘repatriating’ their overseas investments for reconstruction & so on but a more logical explanation was a move to ‘front run’ the ‘big easy’, the Bank of Japan.

The Bank of Japan is notorious for its ‘easy money’ policies. I have no doubt that ‘investors’ speculated on the BoJ ‘easing’ in response to the disaster, that is, they would bid up bond prices & not just government bonds. The ‘investors’ would buy low & sell high.

If you go back to 1995 you will see similar moves in the Yen, right about the time of the devastating Kobe earthquake. Speculating on central bank ‘profit’ has been around for a while.

The second is the very recent announcement by the Fed of ‘Operation Twist’. Upon announcement of the Fed buying, so bidding up, longer term government bonds – gold, silver, oil, share-markets & currencies, in fact you name it, lost their bid against the US dollar & government bonds, particularly the 10 & 30 year. The reason is obvious, ‘investors’ speculating on easy ‘profits’ in the government bond market, as Keith Weiner says “engineered by the Fed”, the ‘investors’ would buy low & sell high.

Having said all this, there is one issue I haven’t addressed & that is as Keith Weiner also says, “the money comes from the capital account of the bond issuer. The speculator carries the bond on the asset side of his balance sheet. The issuer carries it on the liabilities side. No matter whether the issuer marks the liability to market, or not, the loss is taken.” The bureaucrats in Treasury & central banks are neither alchemists or gods, they cannot transmute lead into gold or water into wine. Certainly they can steal the “bread from the mouth of labour” but still, the loss must weaken the credit of the government, there is no way around this. Yet ‘investors’ still rush to bid for government bonds when they think, or know, central banks are handing them easy ‘profits’. This just reinforces my point, ‘investors’ care nothing for safety, the concept is bogus. ‘Profit’ is where it’s at.

It is tempting to speculate that the game will continue until no more ‘profit’ can be given, when the yield curve flattens to a point where it just cannot flatten any further. Can the government issue 30yr bonds with a 0% coupon (no ‘profit’ there) & their credit remain ‘money good’? I guess we’ll find out but I suspect the rising gold price since the Bank of Japan’s overnight rate hit 0% for the second time in 2000, is saying that it won’t.

[This article was originally published by the Gold Standard Institute]

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

* Please see also JMD’s previous Guest Posts –

Infinite Money

The ‘Moneyness’ Of Debt

Why The RBA Sold Our Gold

Our Government Debt Crisis Is Already Here

Guest Post – Infinite Money

16 Sep

Submitted by reader JMD*.

The central tenet of the Gold Standard Institute is that money is what extinguishes all debt. That is its nature, its function. If you have enough money, you can extinguish any debt you might incur and since there is no limit to human wants and desires, money is the one thing you cannot possibly have enough of. Thus the demand for money is infinite. When debt masquerades as money by government decree, that being the irredeemable obligations of central banks, the infinite demand for money can, at least for a time, be met by infinite supply.

Infinite demand met by infinite supply leads to credit or debt bubbles as the inexhaustible demand for money is met by the infinite supply of central bank obligations, or more accurately, the infinite supply of commercial bank obligations ‘backstopped’ by central bank obligations. The bubbles grow and grow, despite the obvious distortions, becoming ever more fragile as they expand, until the day they burst.

This leads to a sobering conclusion. If you have the ability to issue, without limit, debt that trades as money and the demand for your ‘money’ being infinite, you have the ability to extinguish all possible debt, you can have everything you desire and more, you have ultimate power. It is not a stretch to say you are akin to a God. Government has usurped this power, yet government is composed of humans and humans being humans, not Gods, there is zero chance this power will be given up voluntarily, would you….? Rather, it will be lost through a total collapse in the ‘moneyness’ of government debt. The government will take everyone down with them, as the ‘moneyness’ of their obligations ebb due to their declining quality, rather than admit they have been perpetuating outrageous fraud for decades and cease to enforce their ‘legal tender’. As Melchior Palyi wrote back in 1958;

There can be little doubt of the final outcome, unless the process is brought to a halt.

Alas, it won’t be.

With thanks to Doug Noland and his Credit Bubble Bulletin.

[This article was originally published by the Gold Standard Institute]

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

* Please see also JMD’s previous Guest Posts –

The ‘Moneyness’ Of Debt

Why The RBA Sold Our Gold

Our Government Debt Crisis Is Already Here

Guest Post – Why The RBA Sold Our Gold

31 May

Submitted by reader JMD.
A follow up to “The ‘Moneyness’ Of Debt

During 1997 the Australian government, through the central bank (RBA), ‘sold’ some two-thirds of Australia’s gold reserves. The official version of events goes that since gold is no longer important to the international monetary system, the central bank no longer needs to hold it as an asset against its liabilities, there are much better assets to hold, ones that even pay interest!1  And certainly, gold is not money now, even if it was in the olden days.

On the other hand there are many who believe that central bank gold sales – not just Australia’s – were the deliberate policy of faceless bankers to suppress the price of gold. I think that the reality is better described by applying the central tenet of the Gold Standard Institute, that money is what extinguishes all debt, which, owing to the fact that governments’ and their central bank obligations are irredeemable debt, they cannot possibly extinguish debt, which makes gold the only true money. Which means that central bank gold sales were nothing more than extinguishing debt.

Who’s debt? Ours.

As graphs 1. & 2. show, RBA gold sales were about the time of the Asian Financial Crisis.

Coincidence? Maybe but I doubt it (click images to enlarge):

Graph 3. gives the percentage change 12 months ended of M3 and Broad Money, two measures of the growth of system credit, or, the money market. From graph 4. it is clear that the increased issuance of government debt2 is a response to rapidly declining credit growth, or, economic recession. Note the peak in total holdings of government debt in 1997, about the time of the Asian Financial Crisis.

During the crisis, governments’ of the nations affected were unable to simply issue more irredeemable obligations to assuage their creditors. At its low point the Indonesian rupiah had fallen by 86% against the US dollar3 and civil strife was prevalent throughout the archipelago. In desperation Thailand even encouraged people to hand over their gold jewellery to be melted down to boost the central banks’ reserves3. In in least one case – the Solomon Islands – the no doubt weaker credit of the government failed entirely. The Solomon Islands descended into a state of murder and mayhem from – you guessed it – 1997 through to 2003. The Solomon Islands dollar was devalued by 20% in December 1997 alone.

Considering the outstanding level of Australian government debt at the time, I think it likely that the Australian government was forced to extinguish a portion of its debt, rather than roll it over – issue new debt – or face a significant devaluation of the Australian dollar (AUD), with any attendant social consequences. It did this with the only commodity that can extinguish government debt, true money…. gold. Like many Asian currencies, the AUD did depreciate against the USD from….1997. So the government did not ‘sell’ its gold at all, rather it redeemed part of its financial obligations.

The USD gold price did not rise in 1997 but rather fell, albeit slowly, until 2001. There was no financial crisis in the US in 1997 thus no pressing need to extinguish US government debt. Instead the US financial crisis began a few years later in 2001 and continues to this day, along with every other nation. In fact only the other day I read of civil strife in Indonesia, reminiscent of 1997 onwards.

Looking at the current level of outstanding government debt, it seems the Treasury has forgotten any lessons given by the Asian Financial Crisis and looking at the current gold reserves of the RBA, I have to ask, where’s the gold going to come from next time?


1. This explanation conveniently ignores the fact that the RBA had been loaning its gold reserves, according to the Australian Bureau of Statistics, since 1986. These gold loans of course accrue interest.

2. Data for Treasury note issuance is not available pre June 1989.

3. From The Economist

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

Guest Post – The ‘Moneyness’ Of Debt

27 May

Submitted by reader JMD.

I will express a view here that is, as far as I can tell, being laid out by few others. I can’t claim the idea as my own, rather I have put this together based on the thoughts of Doug Noland, my favourite economic analyst by a country mile, who publishes the Credit Bubble Bulletin. I have taken the liberty of lifting quotes directly from his articles, they are in italics throughout my article, though I may have changed his wording just a little to fit in with the flow.

Readers of the Gold Standard Institute know that money is what extinguishes all debt, nevertheless, credit1 can be considered a monetary equivalent or ‘money good’, take for example, Real Bills that mature into gold. Inextinguishable debt, as in irredeemable dollars and dollar denominated debt, are not money since they are, well… inextinguishable debt. Despite this contemporary irredeemability, credit is still considered to be in a dynamic state of ‘moneyness’, driven by the marketplace’s perception of safety and liquidity, and any meaningful definition of contemporary ‘money’ must include government debt instruments.

The situation prevailing today is that key developed economies are locked into a perilous cycle of massive non-productive government debt expansion. Rather than the global money markets being composed of Real Bills, generated through the drawing of short term bills against consumer goods actually required by consumers, we have money markets where for nine quarters now, government finance has completely dominated system credit creation. These ‘marketable’ debt securities now absolutely dominate the world.

Just how massive has this increase in government debt issuance been? I draw your attention to the charts below.

As you can see, government debt issuance has reached levels never heretofore imagined. UST issuance reached almost $1.5 trillion in 2009. While the dollar amount of Australian government debt issuance is small in comparison to the US, the pattern of expansion is the same. I have included Australian government debt issuance back to 1985 to give some perspective of historical issuance. I don’t have figures pre 1996 for UST’s, nor 2010. Nevertheless, you get the picture.

Why the fuss? Because it is the ‘moneyness’ nature of government obligations that they enjoy special treatment in the marketplace. Readers of the Gold Standard Institute also know that when it comes to the ‘moneyness’ of credit it’s not just quantity but quality that counts. I think it safe to presume that government debt has not improved in quality since 2008, yet issuance has exploded with little perception that government debt is being mispriced, over-issued, and misdirected. There is an ever expanding gulf between market perceptions of ‘moneyness’ and the true underlying state of government credit. In simpler terms, government credit is a bubble, a precarious Credit Bubble at the heart of our monetary system. Just as the US financial system doubled total mortgage debt in just over six years during the mortgage/Wall Street finance bubble with little perception of the underlying quality of U.S. mortgage credit, the financial system is now on track to double federal debt in about four years. The situation is no different in Australia and I doubt it would be different in most other ‘developed’ countries.

There is only one true arbiter of the value of government debt, its only extinguisher… gold. Irredeemable dollars, being the obligation of the central bank – not money, cannot extinguish government debt. Is gold reflecting the expanding gulf between perceptions of moneyness and the true quality of government credit? Should holders be loaning their money – gold – for irredeemable government obligations, as if ‘buying’ mortgage credit at the height of the Wall Street bubble? Should the dollar price of gold be falling?

I think not. And we all know what happens to bubbles.

Note: 1. Remember, one person’s debt is another’s credit. I use the terms interchangeably.

Source - Australian Office of Financial Management (AOFM)

Source - Prudent Bear (prudentbear.com)

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

* Stay tuned for JMD’s follow up post, on the Reserve Bank of Australia’s sale of 2/3rd’s of Australia’s gold during the Asian Financial Crisis of the late nineties.

%d bloggers like this: