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The World Complex: Economic policy and the price of gold

The World Complex: Economic policy and the price of gold. (source)

Economic policy and the price of gold

Then the rumour circulated that at night the Fed Governors neglected their sacrifices and prayers. A great depression seized everyone. One day the President said to the Fed Chief, “When will we celebrate the return of normal unemployment rates? I would like to make a journey and return in time for the feast. How long is it until the day of the feast?” The Fed Chief was embarrassed. It had been several days since she had looked at the moon and the stars. She had learned nothing more about their courses. The Fed Chief said, “Wait one more day and I will tell you.” The President said, “Thank you. Tomorrow I will come to see you again.”

The Fed Chief gathered the Fed Governors together and asked, “Which of you lately has observed the course of the stars?” None of Fed Governors answered, because they had all stayed to listen to the stories of Fiat-do-lar. The Fed Chief asked again, “Hasn’t even one of you observed the course of the stars and the position of the moon?”

— modified from The Ruin of Kasch

Economics isn’t a science. It is a mistake to think it would be so. Science does not have schools. Only philosophies have schools.

The difference between a science and a philosophy is the difference between seeking truth while honestly admitting you don’t know it and declaring that truth is something you define.

Ideally science is described by working hypotheses, which are constantly tested, and if falsified, replaced (unless pride is involved or money). In philosophy, you begin with axioms, which are untestable statements that are defined as being true. Each school of economics has its own set of axioms. From axioms, you apply rules of inference (logic) in order to generate new statements, which are also true. These generated statements are called theorems. Thus all theorems are true (within the school of philosophy) but not necessarily applicable to the real world!

In the early days of geology, there were competing schools: the Neptunists and thePlutonists being two that come to mind immediately. The Neptunists believed that all rocks formed in the sea, either as sediments, or by crystallization as salts (this was their central axiom). The Plutonists believed that all rocks formed from magma (as their central axiom). Debates between adherents of the two schools were rowdy, fruitless affairs, because the nature of philosophy is that it cannot be overturned by mere observations.

The distinction between science and philosophy with respect to economics is important because economists have an annoying ability to set policy–policy that affects the quality of your lives. It probably doesn’t matter much to you whether some geologists can’t decide among themselves whether a particular rock formed in the sea or on a volcano (or even on a volcano in the sea). But it does make a difference if some Fed official acts on her belief thatbankrupting the elderly eliminating interest on savings is a cure for unemployment.

Application of economic policy follows the axiomatic approach. Some high priest of an obscure caste

Recently, The World Complex presented the inverse correlation between the unemployment rate in the UK and its “confidence ratio” (dollar value of public debt divided by the dollar value of gold holdings). The idea was that a high ratio could only be supported if bondholders had high confidence that the debt would be properly serviced (forget about repayment). The flip side is that a high ratio could be interpreted as a measure of a country’s ruin.

In the article I had suggested that government economists might cheer a decline in the price of gold.

So today, we look at the same relationship for the United States.

Once again we see a strong inverse relationship between confidence ratio and unemployment.

One of the goals set out for the Federal Reserve is to manage the unemployment rate. Looking at this chart, the answer is clear–to reduce unemployment, increase the confidence. Confidence (as defined above) can be increased in three ways: 1) raise debt, 2) sell gold, 3) lower the gold price.

Of course we all know that correlation does not imply causation. But it doesn’t have to in order to impact on Fed policy. That’s the beauty of politics–reality and truth don’t really matter when there are elections to be won.

There was a comment that perhaps I have too much time on my hands. I’m not sure if the intent was to say that only someone with a lot of time on his hands would notice this relationship. The economists at the Fed have far more PhD’s and time on their hands than does this corner of webspace. So I’m sure they have already seen this.

So the question becomes–even if no causation can be established, can it be used to set policy? And what policies will be followed?

Raising debt is the old standby–but as we see in the clarified chart below, it doesn’t seem to be working anymore.

Since the 2001 peak (on September 10, perhaps?), the increasing debt has been more than compensated by the rising price of gold. Don’t be fooled into thinking the US is sinking into solvency–it is creating debt faster than any time in history. But the price of gold has been rising faster still (although we shall see about 2013).

It appears that policy #2, the sale of gold, is politically untenable. Officially at least. Selling gold is for lesser countries. So that leaves option #3–hope the price of gold falls. Perhaps they do more than hope.

. . . at first the story of Fiat-do-lar was like hashish when it makes wakefulness happy. Then the story was like hashish when it makes dreams delirious. Toward morning, Fiat-do-lar raised his voice. As the Nile rises in the hearts of men, so his words swelled. To some, his words brought serenity; to others, they were as terrifying as the appearance of Azrael, the angel of death. Happiness filled the spirits of some, horror the hearts of others. The closer morning came, the mightier that voice grew and the more it resounded within the people. The hearts of men rose up against one another like clouds in the sky on a stormy night. Flashes of wrath met thunderbolts of fury. When the sun rose, the tale of Fiat-do-lar reached its end. Ineffable wonder filled the confused minds of the people. For when the living looked around, their gaze fell upon the Fed Chief and Governors. They were stretched out on the ground, dead.

— modified from The Ruin of Kasch

 

Silver vs. Fiat Currencies & The Debt Ceiling Delusion : SRSrocco Report

Silver vs. Fiat Currencies & The Debt Ceiling Delusion : SRSrocco Report. (source)

Silver vs. Fiat Currencies & The Debt Ceiling Delusion

As the U.S. Government continues to waste time debating over the “Debt Ceiling Delusion”, the death of the fiat monetary system grows closer.  Since 2000, the value of gold and silver have increased substantially compared to the world’s fiat currencies.

Silver vs Fiat Currencies

According to GoldSilver.com article, Race to Debase 2000 – 2013 Q3 Fiat Currencies vs. Gold & Silverfiat currency has lost on average of 78.16% of its value compared to silver.

You can check and see which currencies have lost the most of their value compared to silver and gold at the link above.  Below is only part of the table which includes 120 fiat currencies from around the globe:

Table Silver vs Fiat Currencies

If you had purchased silver in South Africa in 2000, it would be worth 563% more today.  We can see also why the Vietnamese have been buying the precious metals as silver is worth 519% more today than it was in 2000.

The world is now in the last stages of the Fiat Monetary System.  The debate on the U.S. Debt Ceiling is masquerading the fact that there is no solution or remedy except a grand collapse of the financial system.

Mike Maloney explains in this brief video how there is always much more debt than available currency in existence to pay back the debt:

 

Video Link Here:  Why The Debt Ceiling is Impossible – It’s a Delusion

This is also a preview of Episode 4 of the series, Hidden Secrets of Money which I highly recommend watching the full version when it is released shortly.

Gold & Silver Will Be Much More than Stores of Value

As I have mentioned in prior articles, many precious metal analysts believe gold and silver are either “Insurance” or “Stores of Value” rather than investments.  They believe that the precious metals should be held as insurance against the collapse of currency or governments, while others believe that it will retain a store of value against inflation and etc.

While I believe these are valid reasons to own gold and silver, they fail to address the energy issues going forward and their impact on the monetary metals.  The Dollar was able to survive for another 3+ decades after gold and silver peaked in 1980, due to a rising global energy supply.

A Fiat Monetary System based on fractional reserve and compound interest needs a growing energy supply to survive.  Peak Oil should have already come and gone several years ago, however massive amounts of new debt allowed non-commercial oil deposits to be extracted.

Even though shale oil production from the Bakken in North Dakota has provided a great deal of oil to the United States, it has come at cost.  According to Rune Likvern of Fractional Flow, his estimated cumulative net cash flow of the Shale Oil producers in the Bakken is now at a Negative $16 billion.

July 2013 Estimated Net Cash Flow Bakken

The Red area of the chart shows the estimated cumulative net cash flow and the black bars represent the monthly net cash flow.  Thus, the shale oil companies in the Bakken had to acquire an estimated $16 billion of additional funding not providing by their operations alone.

Unfortunately, unconventional oil resources such as Shale oil and gas will not be able to allow “Business as Usual” in the world to continue as the costs are greater than what consumers can afford to pay.

This is indeed the reason why we have been witnessing the “Great Shale Energy Hype” by the oil industry and official institutions.  Without shale oil or gas, the Fiat Monetary System would have more than likely died a few years ago.

Gold and silver will become excellent investments as they will be the GO TO ASSETS as most others will become increasingly worthless as the global energy supply peaks and declines.  Furthermore, it may not be prudent to switch out of the majority of ones gold and silver investments and into other asset classes when the GREAT REVALUATION OCCURS.

I will explain why in more detail in the future.  However, most Real Estate values on average will decline substantially in a peak energy environment.  Real Estate in selected areas and regions will do better than others.  Moreover, warehouse and commercial real estate will suffer significantly as the market will deal with decades of overbuilding on top of dwindling demand.

Very few realize just how much a peak energy environment will affect the economy and their investments going forward.  The SRSrocco Report will provide information and updates on how energy will impact the precious metals, mining and overall economy.

 

Comedian Takes On The Insanity Of Fiat Money

Comedian Takes On The Insanity Of Fiat Money.

 

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