Tuesday, July 13, 2010

When Money Dies

Over the past few days, this blog has had a huge surge in visitors coming from Google searches for Adam Fergusson's 1975 book. I didn't know why until I read this. More here.

Longtime readers know I've commented on the once-obscure book many times over the years. TAC was early on it as well, and even tracked down Fergusson in London (see this article in the 2/9/09 issue).

A new paperback version has been published to cash in on the demand. Here's the current price on Amazon for the original hardcover edition.

25 Comments:

Anonymous Anonymous said...

Will Mr. Sullivan earn any royalties?

7/13/2010 11:09 AM  
Anonymous Randy "Stryker" Schiff said...

Broken clocks are often perfectly accurate. All one needs is some hegelian dialectic to buff up some of these antiques, and sure enough, they're good as new.

http://www.indexmundi.com/commodities/?commodity=commodity-price-index&months=120

7/13/2010 12:40 PM  
Anonymous Anonymous said...

Excellent! The only copy available in my town was stolen from the library.

7/13/2010 12:48 PM  
Blogger Thomas Daulton said...

"Broken clocks are often perfectly accurate."

Good advice to remember next time somebody says "too big to fail" or "the market will never go down" or "housing prices will never go down".

Hey, TCR, did you see this one?
http://www.salon.com/technology/how_the_world_works/2010/07/12/alan_greenspan_gets_his_reward/index.html

7/13/2010 2:32 PM  
Anonymous Goldhorder said...

I don't Understand Schiff's quote about broken clocks and then linking to the commodities index. Commodities... Esp. Gold have done well since january 1999. That is over a DECADE of being "right". Lets take a look at the Dow and S&P 500 index and see where the smart money for the decade is.

7/13/2010 5:26 PM  
Anonymous Anonymous said...

Several years ago I was able to find a copy in the Rochester NY Public Library (I live in AZ). I had a friend check it out and bring to a football bowl game in Texas so I could read and return. Nobody could understand why I would want to read it. There's not enough data in the book to understand what caused the tipping point, however I did learn from "The Economics of Inflation; a study of currency depreciation in post-war Germany" – Constantino Bresdiani-Turroni that by Dec. 1923, the peak of the hyperinflation, tax receipts were only 12% of expenditures....so everyone can keep an eye on that ratio in the US for a heads up. Exchange rate for the new currency created thereafter: 1 trillion to one.

Re. Buffett, why isn't he out front trying to prevent this rather than being fully invested and cheering up Bernanke/congress for the great job they did "preventing" a depression?

7/13/2010 10:06 PM  
Blogger The Cunning Realist said...

Yes, Bresciani-Turroni's book is a classic and must-reading for anyone interested in this subject (though it can be tough going for the average lay reader).

7/13/2010 10:52 PM  
Anonymous rapier said...

I stumbled upon a reported fact recently which I can't site, where that said during the war the German central bank was buying 95% of all the governments debt, directly one should assume. It was probably not much better after the war. If that number is anywhere close to correct obviously the order of magnitude huge compared to what amounts to the current .00000000000000000000000001%, or whatever the Fed does. Only purchasing at auction occasionally replace, roll over, expiring securities.

It is a crucial distinction to understand that more important than the level of debt is the means it is funded. If the market will fund the borrowing then there is nothing inflationary about it. When the Fed did its QE by buying 250bl in Treasuries and 1.25T in MBS that did not create a dime. It liqufied the accounts of the sellers who mosty inflated other financial assets with it, but that's it.

When and if the Fed starts to directly send the newly printed money to the Treasury at a 1% rate we will have something to consider. If 10% even more. But 95%. Can't happen.

7/13/2010 11:49 PM  
Anonymous KAIMU said...

ALOHA!!

The QE did not solve any thing, unless you call moving toxic assets from one balance sheet to another a "solution". How will the US FED get "liquid" now?

Yet the failure in understanding the "con" the US FED puts on for all to see is that the same banks that got "liquefied" are member banks of the US FED so in essence the cartel still owns the "bad debt". Its the same con ENRON pulled only its on prime time TV. When it comes time to abandon the monetary ship those who now occupy the "bridge" of the USS FED will step off as the US Central Bank becomes an onshore shell company full of leaky holes, sinking fast, instantly becoming the property of WE THE PEOPLE, while Bernanke & Co step onto the private deck of the Goldman Sachs owned yacht the "God's Work II"!

We are taught by TV that the main reason we have these low Fed Fund Rates is that the US FED cares about "jump starting" the recovery, keeping rates low to stimulate more private sector borrowing. Instead look to the
US government. Interest rates are low to keep the "cost of debt service" low so the US Treasury can pile up more debt in order to retain political power. It has nothing to do with the American Dream! Some $6.5TRIL in marketable US Treasury debt issuance for FY 2010 so far and about 75% of that debt is short term debt, one year or less.

Total "net"(gross revenues minus refunds) tax revenues is only $1.15TRIL YTD FY 2010. There is a severe REVENUE DEFICIT. Total "net" revenues only make up roughly 18% of "marketable" debt issuance.

EYES WIDE SHUT!

7/14/2010 3:13 AM  
Anonymous Anonymous said...

Rapier: define "funded." Just because there are still buyers at Treasury auctions, it doesn't mean that "there is nothing inflationary" about debt.

7/14/2010 3:44 AM  
Anonymous rapier said...

"Nothing inflationary" was not a very good phrase. All credit creates demand so can be understood as inflationary so I sort of botched the point.

The bigger point was that during the war and after when the German central bank was buying up to 95% of all government debt they were supplying credit and money to the system that otherwise would not have been there. Obviously they bought the paper from the government because nobody else would or at least not at low rates.

If the German governments, the Kaisers and the Republic, couldn't borrow the money there would have not been inflation. (money printing and militarism go hand in glove) I think it is fair to say they couldn't borrow it domestically or internationally. That's why the central bank lent it.

They printed to pay for the guns of the war and to pay reparations, (a huge motivation to destroy the value of the currency) soldier's pensions after the war. They printed that money to pay for these things because otherwise they could not have been paid for.

Nothing like this is possible for a large modern state. Even the hint that the Fed is printing and buying large amounts directly from the Treasury is likely to cause a crisis in confidence. (they do small amounts when rolling over expired paper(till last week they apparently bought 3.4bil in TIPS)) The German case was specific to their ability to borrow so much for so long funded by printed money.

The trillion and a half monetized the last year and a half has roughly replaced defaulted debt. Not the trillions in debt is in default but just not recognized as such. When the Feds balance sheet gets to 10 trillion or 20 trillion, instead of todays 2.2T we can start to talk about inflation.

7/14/2010 8:53 AM  
Anonymous Randy "Stryker" Schiff said...

Dalton & Goldhorder:

So you agree that, at this point, the most useful information in regards to inflation has already been consumed by history.

ALOHA!

Kaimu, good to see your sense of personal responsibility still backed by investment-grade iconoclasm.

I have a question. Would artificially low coupons help the government retain power if bond markets decided, one day, they would stop playing along? What volume of outstanding treasuries do Fed purchases actually account for in the total market, as a matter of fact?

http://www.thestreet.com/story/10803358/1/gold-prices-drop-ahead-of-data.html?cm_ven=GOOGLEN

7/15/2010 12:24 AM  
Anonymous Goldhorder said...

When the Fed funds rate starts rising... I will start selling gold. I don't see that happening. In fact... I don't see that happening unless inflation gets out of control. Every step the fed has taken has been inflationary. Banks, out of self preservation, have stopped lending to Americans because they know what kind of financial shape they are in. The politicians are in hot water though. They know they are getting thrown out on their bums if the gravy train doesn't show up soon. Everybody but the banks is screaming for inflation. Can they hold out? Or will the magic of our fractional reserve banking system rear its ugly head. Just because gold has gone up for 10 years... Don't believe it has to go down for 10 years. It doesn't. The politicians, the banks, wall street, our enemic economy...nothing looks good here. Why on Earth would anybody start dumping gold now?

7/15/2010 6:55 PM  
Anonymous Randy "Stryker" Schiff said...

"Can they hold out?"

Sure, the libberls are screaming "Inflate!" and "Act now!" like their hair is on fire:

http://macromarketmusings.blogspot.com/2010/07/what-is-current-stance-of-monetary.html

The problem is that none of them seem to be able to identify what, exactly, is the lawful mechanism by which the Fed is supposed to bring this about. Of course the policy actions to date are, by definitions, "inflationary." But if everything they have done thus far is inflationary, then where is the inflation? WHAT is the remaining lever, specifically, that the Fed, or its member banks, are supposedly going to pull that would constitute an end of the "holdout"? Animal spirits?!

Where has the predictive power of the models gone, if not to a broken clock?

"nothing looks good here"

That may be true, but it would be true regardless of the reserve policy of the central bank. The whole point is that the Fed has no control over markets anymore with its monetary policy; And even so, a nonmonogrammatic analysis of Weimar will demonstrate quite a bit more was going on there than just bad printing policy. Similarly now, it should not be so easy to blame our nation's wholesale descent into defiant nihilism on central banking policy.

http://www.hussmanfunds.com/html/fedirrel.htm

+

http://www.law.cornell.edu/uscode/12/usc_sec_12_00000412----000-.html

=

Time to find a new hypothesis.

7/15/2010 10:17 PM  
Anonymous goldhorder said...

LOL...there has been continuous inflation since 1971....minus two periods...when Volcker put an end to the inflation of the 70s by dramatically raising rates and today...our credit bubble bursting. The banks will eventually lend. The only way they can continue to get those big bonuses is to start throwing money around...and set the suckers up for another shakedown. All just a matter of time. As for where is it going to come from? Are you naive enough to believe that the fed is a powerless institution? They control the value of the dollar. We have a fiat money system. They own the printing press.

This might just be enough to get old inflation fires burning...don't ya think?

http://research.stlouisfed.org/fred2/series/EXCRESNS

http://seekingalpha.com/article/180427-why-the-fed-wants-to-drain-excess-reserves

7/16/2010 9:07 PM  
Anonymous goldhorder said...

Hey Schiff... we torture people now. We wage wars of aggression now. The president has the right...at his discretion...to determine if an American citizen is a threat and to have him assassinated. LOL. Do you really think we are still a nation of laws? We are a nation of power. You either have it or you don't. The Fed has power. They will exercise it.

7/16/2010 9:11 PM  
Anonymous jrrider said...

When Money Dies - Adam Fergusson

http://www.wolf1168.us/misc/Articles%20of%20Interest/When%20Money%20Dies.pdf

Enjoy

Thanks for the info CR

7/18/2010 1:47 PM  
Anonymous Randy "Stryker" Schiff said...

Indeed, LOLz come easy with your response!

"All just a matter of time"

Like a BROKEN CLOCK!

"They own the printing press"

Wrong! What can one say anymore to such utter fantasy. Here is how it actually works to everyone but the hardened conspiracy theorists who think we live in 1920s Weimar:

http://www.ustreas.gov/topics/currency/

Did you read the US Code citation given above, and comprehend it? The money has to exist in the market first before the Fed will back it. If the market decides to turn that money back into vapor once it's made, it will: Just like it did, 2 years ago. And ever since, the carcasses are periodically pulled out of Level III and burnt away with new earnings from all that "bonus" money -- not commercial loans, but asset carry that need not even be domestic -- or buried in the depths of Treasury's F&F dungeons, likely never to return. 1971-Historical inflation is OVER for at least 2 or 3 years, and likely more. Why wouldn't you sell until then? Because your strategy is a broken clock.

"We have a fiat money system."

Yes, the fiat of the market. Did you read the law?

Congress has the only control over nominal inflation, via direct spending. If you think the deficits projected over the next 10 years are enough to surpass the leverage built up on private balance sheets during the Bush era, then you have even more catching up to do. Come up with an historical theory of inflation that acknowledges the market exists before the Fed ever does, just to start.

Not that it matters anymore. You cannot bring yourself to name the mechanism, precisely, by which "The Fed" "controls the value of the dollar," besides repeating the nonsense that it "controls the printing presses." You cannot admit that every reserve is accounted for by an asset underwritten by the market, and that market is now disinflating, or deflating.

Then, to evade responsibility for this blatant omission, you imply that the mechanism will, in any case, have something to do with Gentle Ben pulling some lever on markets and re-starting "inflation" the way the Executive can whack a dictator or kidnap a dissident. The Evil Deceiver sits up in a shadow government UFO cockpit pushing all the buttons.

Unfortunately it appears you play the part of the nihilist in this Weimaresque narrative.

Never mind it though. The markets are all wrong today and you are right, eventually. A broken clock always is.

http://online.wsj.com/article/BT-CO-20100719-710375.html

"7-19-2010: Gold Falls On Slim Demand For Haven Assets"

7/19/2010 11:38 PM  
Anonymous Randy "Stryker" Schiff said...

Indeed, LOLz come easy with your response!

"All just a matter of time"

Like a BROKEN CLOCK!

"They own the printing press"

Wrong! What can one say anymore to such utter fantasy. Here is how it actually works to everyone but the hardened conspiracy theorists who think we live in 1920s Weimar:

http://www.ustreas.gov/topics/currency/

Did you read the US Code citation given above, and comprehend it? The money has to exist in the market first before the Fed will back it. If the market decides to turn that money back into vapor once it's made, it will: Just like it did, 2 years ago. And ever since, the carcasses are periodically pulled out of Level III and burnt away with new earnings from all that "bonus" money -- not commercial loans, but asset carry that need not even be domestic -- or buried in the depths of Treasury's F&F dungeons, likely never to return. 1971-Historical inflation is OVER for at least 2 or 3 years, and likely more. Why wouldn't you sell until then? Because your strategy is a broken clock.

"We have a fiat money system."

Yes, the fiat of the market. Did you read the law?

Congress has the only control over nominal inflation, via direct spending. If you think the deficits projected over the next 10 years are enough to surpass the leverage built up on private balance sheets during the Bush era, then you have even more catching up to do. Come up with an historical theory of inflation that acknowledges the market exists before the Fed ever does, just to start.

Not that it matters anymore. You cannot bring yourself to name the mechanism, precisely, by which "The Fed" "controls the value of the dollar," besides repeating the nonsense that it "controls the printing presses." You cannot admit that every reserve is accounted for by an asset underwritten by the market, and that market is now disinflating, or deflating.

Then, to evade responsibility for this blatant omission, you imply that the mechanism will, in any case, have something to do with Gentle Ben pulling some lever on markets and re-starting "inflation" the way the Executive can whack a dictator or kidnap a dissident. The Evil Deceiver sits up in a shadow government UFO cockpit pushing all the buttons.

Unfortunately it appears you play the part of the nihilist in this Weimaresque narrative.

Never mind it though. The markets are all wrong today and you are right, eventually. A broken clock always is.

http://online.wsj.com/article/BT-CO-20100719-710375.html

"7-19-2010: Gold Falls On Slim Demand For Haven Assets"

7/19/2010 11:39 PM  
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7/20/2010 7:33 AM  
Anonymous Goldhorder said...

The "broken clock has been correct the last 10 years. The broken clock was correct from 1972 to 1980. So half the time we have been on a fiat currency the broken clock has been correct. Buying a yellow metal and burying it in the ground has been better than investing in wall street. That is a fact. There is no denying that fact. There is no historical precedence for what the Fed just did. Never in the hidtory of America has bank reserves at the fed been so astronomically large. America hasn't seen this many unemployed since the great depression. Social security and medicare have trillions in unfunded liabilities. The assets in those accounts are Government bonds! the Obama budget is over a trillion a year in extra debt as far as the eye can see. You say the trillions upon trillions in debt we have created make everything OK! This is laughable. You say gold is going down.... We are heading for deflation. I say the fed will inflate because laws don't matter. Power matters. Nixon proved that in 1971. Bernanke and Obama will prove it in 2011.

7/20/2010 8:58 PM  
Anonymous Goldhorder said...

http://www.automatedtrader.net/real-time-dow-jones/5906/financial-bill-opens-fed-discount-window-access-to-clearinghouses

fed inflates through the discount window. Money expands by allowing wall street banks to increase their reserves and loan more money into the economy.

7/20/2010 9:10 PM  
Anonymous goldhorder said...

The fed will inflate because the economy will tank if it doesn't. How will the fed cause inflation? The fed can lower...or even charge a fee on banks for leaving their excess reserves at the fed. Right now they are paid interest. The fed can change that policy causing the banks to remove their reserves and begin lending again. So far the fed has been happy to maintain the status quo because they sky hasn't fallen in. They saved the banks and the economy quit collapsing and is in a holding pattern. I see everyone scared as hell...the banks, the fed, the politicians, the public. LOL. What can they do though? We have too much debt. We can't pay it back. We can only default, raise taxes, and inflate. We will probably do a combination of all three. There will not be a deflation. How do I know this? The Fed Chairman himself...“The U.S. government has a technology, called a printing press, that allows it to produce as many U.S. dollars as it wishes at no cost.” How can you argue with that? And fine...you think their will be deflation. Great. I guess we will see who is right. I guess you see a giant reversal of this trend ahead? Is that what you predict? I predict it is going to go in the same direction. Exponentially increasing.

http://research.stlouisfed.org/fred2/series/CPIAUCNS?cid=9

7/21/2010 11:19 AM  
Anonymous Randy "Stryker" Schiff said...

I think you are still missing the point.

Nobody disagrees about the debt overhang problem, and that to fix it "we can default, raise taxes, or inflate." But we can also manage a sustained delevering with Fed repos & loan facilities, which is what all those reserves are currently being used for. It is not the same as "printing currency," though I am aware of the convention to equate the two with metaphorical jargon. An equivocation that Gentle Ben himself has used.

What you are still missing is that every asset that was purchased with the Fed's "printed money" must take down the amount of reserves right along with the fair value of the asset prices once they are recognized. Currently these prices are affected most directly by defaults and write-downs in the market. Inflation via these reserves can't be larger than what was created by the historical assets they represent.

So, if you agree the market still has a debt overhang problem, then you must agree that these reserves are set to decrease. The amount of this "money" in the economy simply cannot be more than it was during the bubble. Even discount-window programs -- especially after FinReg -- have been used to stop deflationary shocks, not to create inflation. The reason for this is that the market PREFERS not to go to the discount window, because if they do, it means they have liquidity problems and their assets are already deflating. You can make a moral hazard argument here, but you would still be ignoring the issue of how much of the old asset stock will need to clear before the market can possibly start inflating like it was in the Bush era.

Nonetheless, even if you can demonstrate more than just a broken clock argument, so far you are still arguing on extrapolation of the past, just like all the risk modelers and financial engineers that crashed the system in the first place. You are also still arguing on the same effective demand assumption made by Keynesians, who are also facing some embarrassment right now for an inability to force markets to do what their models insist ought to be done. The whole point is that the myth of control via monetary policy has finally been exposed.

If there is to be inflation, Congress has to approve more spending. Current deficits are simply not enough to match the gap, and that is what markets are now factoring into the premiums they are now paying on T-notes. The price is now ~104 on a 10-year maturity, mind you. So, I'm being conservative compared to what bond markets are expressing.

As for gold per se, sure, I won't argue you can still make money. But this fact - presuming gold prices are not themselves inflated due to speculative fever - need not have anything to do with the Fed:

http://seekingalpha.com/article/173031-barrick-gold-confirms-we-ve-reached-peak-gold

7/21/2010 1:24 PM  
Anonymous goldhorder said...

I agree with your current analysis. I think you miss the "quantitative easing" that took place to create all those bank reserves at the beginning of the crisis. I think the only thing that stopped it is this....

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5286832/China-fears-bond-crisis-as-it-slams-quantitative-easing.html

I do think Bernanke knows he is between a rock and a hard place. I think he knows he can't push it too much further. The whole world is watching him. As the economy collapses though....what has he got to lose? The Fed and congress will work together to inflate. China has to bid its time. It wants to keep the current system in place long enough to develop their own large consumer market. They need to work with the US and Europe on resource sharing and they don't have a military that can project power beyond its borders. China is still pliable which means there is still room to inflate. China has indicated they will push back to keep a cap on that. All of this is playing out now though. I see gold as the way out. I still think they will inflate. I can't say when...I will just say when it is clear their backs are against the wall and they have to do something.

7/22/2010 1:11 AM  

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