Where Does Our Money Come From?• Ever noticed that here is a lot more money around than there was, say, 20 years ago?• So someone is manufacturing it (literally making money).
Taboo Topic: Money Manufacture• Public conversation is at kindergarten level, because hardly anyone knows how money is manufactured.• Vaguely referred to by euphemisms in public (economy is ―overheating‖)
Money Manufacture Dominates the Economic Landscape• Interest rates• Bubbles• Debt crisis• Money manufacture is power: determines which elites get to run society
What if You Could Manufacture Money?• No ―work‖ – producing goods or services that others want.• Freedom! Material wealth! Buy almost anyone to do almost anything!
Good News• Legally manufacture of money is limited to banks and governments.• Manufacture by commercial banks: (nothing) $ -$• Only governments (central banks) can grossly exploit the manufacturing power: (nothing) $
Bad News• Some paper shufflers capture much of value from money manufacture.• Wealthy, without working hard.• Historically, fiat currencies lead to corruption and unfairness.• Fiat currencies usually die after 25 – 50 years. It’s now 40 years since 1971…
The Origins of Banking• Goldsmiths took gold deposits, issued receipts.• The receipts circulated as money, more convenient than the metal.• Goldsmiths learned they could issue more ―receipts‖ than they had gold.
More Receipts than Gold• Lent out these extra receipts and charged interest on them (to cover risk of non repayment, and profit).• Typically safe to lend out 10 times as many receipts as gold deposits. Depositer Goldsmith Borrowers
Classical Gold Standard• Base money = gold• Bank money = receipts (cash, bank notes)• Bank money is created out of nothing, yet can buy stuff the same as gold.• Amplifies the base money by 10.• 90% of ―money‖ is created by banks, by lending.• Depositor’s money is NOT lent out; they have access to their money at all times.
Modern Base Money• Transitioned from gold 1913 – 1971.• Two forms: 1. Physical cash – Manufactured by a printing press or coin press. 2. Money in an account at the central bank – Manufactured by increasing the account balance on a computer (―monetization‖).• Manufacture unconstrained.• Moderated in practice only by desire not to raise inflationary expectations.
Modern Bank Money (1)• One form: 1. Money in an account at a private bank – Manufactured by increasing the account balance, on a computer.• Manufacture is constrained by Basel Accord, since 1988, a formula based on – Equity capital of bank – Size and riskiness of existing loans – Depositor’s funds.• 90 – 95% of all money is bank money.• Most purchases move it between accounts.
Modern Bank Money (2)• A loan is made: (nothing) Bank money $ -$ Matching liability• And repaid: (nothing)• Bank debt = Bank money.• Nearly all modern money is debt.
Today’s Money System• The current system is a fiat base amplified by a fractional reserve system.• Both parts create something-for-nothing: 1. Base money, created by the central bank. 2. Bank money, created by private banks.• Each part is somewhat unstable historically.• What could possibly go wrong? Cute but irrelevant
Monetary Experiment Starts 1982• Novel money system started in 1971, with the switch to fiat base money.• Only constrained by the sensible behavior of banks and governments.• 1970s stagflation dealt with the inflationary consequences of the 1960s.• Reset in 1980 by 20% interest rates.
How Governments and Banks Blew It• Central banks kept interest rates as low as possible (keep CPI low)• Changed banking rules to make money manufacture ever easier.• Responded to every crisis by bailing everyone out with new money. No one took away the punchbowl .
The Debt-To-GDP Ratio• ―Amount of money‖ = (total) debt• ―Size of economy‖ = GDP• ―Size of bubble‖ = debt-To-GDP ratio• This is the financial story of our times…
Gold peaks at 850 USD/oz Volcker 20% interest rates GFC Tech Crash -> Housing Bubble 1987 Crash235%, 1929 crash 235%, 1987 crash Change to Fiat Base Money (Nixon) Clinton Strategy Starts Bubble Starts The longer view: 1870 – Q3 2009
The Bubble Began To End in 2008• World is running low on borrowing capacity: 1. Not enough income to service more debt – Debt = 400% of GDP – Interest rate = 4% – So interest repayments are 16% of GDP 2. World running low on unencumbered collateral.• Money manufacture in the private sector stalled in 2008 Global Financial Crisis.
Governments Prolonged the Bubble• Governments took up slack of money manufacture in 2008: – Borrowing – A little printing (―monetization‖) – Lowered interest rates.• Late 2011: Many governments running out of capacity to borrow more.• Now realizing private sector is debt-saturated, no return to pre-2007 ―normal‖.• Only option left for manufacturing money is government ―printing‖.
What Now? • Last year’s debt has to be repaid with interest, so every year the stock of money must increase or there will be widespread business and bank failures (a la 1930). • World at a fork: orPrint and Widespread failures inflate and deflation
The Dismal Arithmetic• 1994 – 2007: Extra debt added 1 – 2 % to GDP, each year.• 15 - 25% of growth was borrowed from the future.• To return the debt-to-GDP ratio to normal, must pay back that borrowed GDP growth 15 – 25% fall in GDP• Double depression!!
Philosophical View : Essence• Money is a promise – of similar purchasing power anytime in the future.• Work is motivated by those promises.• Too much money = Too many promises.• Promises cannot all be kept: not all debts can be repaid in dollars near current value.• So there are going to be many losers.• The political system, not usual economic rules, will determine who the losers will be.
Politicians Will Choose Inflation• Basic democratic calculus: – Lenders: Few – Borrowers: Many (vote, might riot). – Powerful business interests: Don’t want to fail.• Keynesian fog will be used to excuse this choice, to ―reduce the people’s debt burden‖.
Inflation is coming…• The political system won’t allow failures of big banks and corporations. TBTF.• Bernanke vows he won’t allow deflation, like 1930s.• Establishment economists already suggesting running mild inflation (6%) for a few years. (Rogoff, Mankiw)• Government spending more than tax receipts.
Winners• Borrowers, the profligate.• People without savings.• Banks that would be bust if their assets were marked to market (most big banks).• Businesses that would be bust if they had to pay back loans at original value.• Owners of real assets not tied to wages – especially commodities, but not houses.• Gold and silver.
Losers• Lenders.• Savers.• People on fixed incomes.• Retirees, pensioners.• Most industrial companies.• The Economy (suboptimal allocation of capital, friction costs of inflation).• Everyone in the economy.
Even the MSM Are Noticing…―It was probably always going to turn out like this. That is, with both the United States and Europe monetising their debt and sending the world’s owners of capital scurrying into gold – effectively producing a de facto return to the gold standard.‖―There was no way the debt-funded golden decades following the end of Bretton Woods in 1972 could be paid back via global deflation and depression. It was always going to be done through inflation.‖ Alan Kohler, 7 Nov 2011
Gold:• Enforces honesty.• An anti-cheating device.• A reliable store of purchasing power.• Gold is the foremost non-government currency, evolved in the marketplace over 5,000 years. Fiat currencies come and go.• Might return to the monetary system.• They can’t print it.• And who hates gold?
A Bet On Gold is a Bet AgainstGovernment and BankingThe monetary elite and governments: – Prefer dishonest money – Enjoy first use of the new money – Profit by funneling new money to favored sectors when it suits – Print to cover debts – Bash gold – Will not give up their power easily.
A Bet on Gold is a Bet on Political Interference• Without political interference, the current debt bubble would collapse in a massive deflation.• A bet on gold is a bet that central banks will interfere to manufacture more money, Bob Prechter and deliberately increase (Analyst) inflation.
Gold in a Bubble?• Long-term value of currency is determined by its relative growth rates: – Aboveground gold: 1% pa growth – Fiat Currencies: 10%+ for last three decades 10+% 1% p.a. p.a. Amount• Huge catch-up ahead for gold.• Gold will basically go up forever against fiat. $1m /oz is only a matter of time.
Gold Bubble? No end in sight!• Reasons for gold are currently intensifying.• 1970s : Took 20% interest rates to end the gold bubble (and inflation).• No one can afford 20% interest rates today. Wikipedia: ―Volckers Fed elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve‖
Gold Bubble?• By historical standards, gold price is low.• Imagine it is 1850…• I might do it for $20,000 /oz.• Gold mining today is mechanized yet marginal.
Gold as an investment??• Gold is a currency.• Most of the time, gold is a lousy investment.• Gold becomes a good investment only when the other currencies are failing, inflating, profligate, corrupt, ….• This is one of those times. Timing is everything
The Economy• High but tolerable inflation, a more intense version of the 1970s, goes on longer.• Debt strangles the world economy. Moribund industries and zombie banks.• Governments keep interest rates low, to keep interest payments down.• People save in gold, but pay taxes and daily commerce in national currencies. A dual currency system will develop.
Precedents? Not really.• The inevitable reversion to the mean debt level of 150% is a double-depression.• Depression debt started at 235%, up to 15 years to revert to 150% via deflation.• 1970s, 6 years of 10% inflation, mild.
How Long?• Shrinking total debt levels from 375% of GDP to 150% is a reduction of 60%.• How much inflation is required? – Three years to get started 2014. – 12% inflation high but tolerable, like 1970s. – 14 years of 12% inflation (6% after interest), reduces original debts to 42% of original real value 2028.
Inflation Ends ~2028• To end the inflation, governments must make a credible commitment to halting the rapid growth in the stock of money. They must: – Cut spending severely so they can run surpluses severe trimming of welfare and business subsidies. – Raise interest rates rapidly, to 15 - 20%.
Gold Price (1)• Gold price will rise right up until the interest rates rise rapidly.• Until then…relax (ok, it will be volatile).• Gold price has been rising fairly steadily at about 21% per year for the last 10 years, so assume it continues...
Gold Price (2)• Nominal prices in USD/ oz: – 1980: $ 850 ($3,300 in today’s money) – 2001: $ 260 Start growth of 21% p.a. – 2011: $ 1,750 – 2015: $ 3,800 – 2020: $ 10,000 ($4,600 in today’s money) – 2025: $ 25,000 – 2028: $ 50,000 ($8,400 in today’s money)• USD worth 17c in 2028 (14 y @ 12%).
Risks1. Inflation slips out of control into hyperinflation. Schedule accelerates.2. Governments cut back spending now, because Ron Paul and Tea Party types overpowered the ruling establishment. Less inflation required.3. A derivatives blow up??4. Run on London ―physical‖ gold. Gold price up very far and fast.
What Do I Do?• Moved investments from banks to 100% gold.• ASX gold stocks, for security and leverage.• Direct exposure to gold price via long-dated options (not ETFs). Traded gold futures.• Started GoldNerds. We sell spreadsheets comparing all 250 ASX gold stocks, every two weeks. www.goldnerds.com
Leverage of Gold Stocks• Typical gold producer today: – $1,000 /oz cash cost – $ 500 /oz corporate, on-going capex – Sell for $1750 Profit $ 250 /oz.• Real value of gold doubles to $3,500. Costs same Profit $2,000 /oz. – Gold price: × 2 – Gold company profit: ×8
Sector — Huge Upside• The combined value of all the worlds gold miners < Exxon.• Almost no superannuation (401k) money goes into this sector.• AUD will fall when world economy stagnates. Boosts profits of Aussie Miners.
GoldNerds v1: Spreadsheet• Prototype product.• $399/yr. Updated every 2 weeks.• Proves investors want something like this.
GoldNerds v3: Special Program• Vastly more detail on deposits, production, and finances.• Under development for past three years, ready early 2012.
Experience from a Different Fight• Worked for the Australian Dept of Climate Change 1999 – 2005, part time 2008 - 2010, modelling carbon in Australia’s biosphere for Kyoto accounting purposes.• Early ring side seat in climate fight.• Was alarmist, now skeptical.• joannenova.com.au
Establishment Strategy― First they ignore you, then they ridicule you, then they fight you, then you win.‖ Gandhi• Climate skepticism: ―ignore‖ ―ridicule‖ in 2008, when we started gaining in polls.• Sound money: at ―ignore‖. Starting to move to ―ridicule‖, as we gain public support.
Soon They Will Ridicule Us• Main weapon will be to call us names: – ―extremist‖ – ―nut‖ – ―conspiracy theorist‖ – Every version of ―stupid‖ and ―ignorant‖.• In news and current affairs, newspapers, popular tv shows, websites, movies,…
And Smear Us• Result: All our opponents will be very confident they are right and we are kooks.• Leaders like Eric Sprott will be vituperated. (Eric will learn to ignore it.)• Above all they want to shut us up, by any means short of violence.• Our opponents often have their income or position on the line fight dirty and hard.
How powerful is their propaganda?• Please accept my apologies in advance, I know this sensitive topic for some.• I am a scientist and engineer, six university degrees, PhD from Stanford.• I will now demonstrate how powerful the MSM is (or not) by pointing out some facts. Compare the following with what you ―know‖…
Did You Know?• Skeptics agree that: 1. Global warming is occurring*. 2. Carbon dioxide is a greenhouse gas and levels are rising. 3. Every molecule of carbon dioxide we emit causes some global warming.* Warming trend since 1680 of 0.5°C per century. Within trend, pattern of 25 – 30 years of alternating warming and mild cooling. Last warming phase 1976 – 2001.
Did You Know?• Skeptics agree that doubling the carbon dioxide level will, of itself, raise the global temperature by about 1.1°C.• The central disagreement is over what happens next: – Alarmists: Water vapor amplifies the 1.1°C to 3.3°C (dangerous!). – Skeptics: Earth reacts to 1.1°C by reducing its impact, to maybe 0.7°C (no action needed).• There is no evidence for amplification; it is purely theoretical, in their climate models.
How Do You Go?• Hardly anyone knows that. Yet every skeptic scientist has been saying it over and over for 20+ years!• Establishment prepares the public in advance, so when they hear skeptics they simply ignore them.• Distract with trivia, ignore their points, misrepresent them.• The same reality-distortion tactics will by used against us in the sound-money fight!
The forbidden data…Their air temperature predictions always way too high, clueless about carbon. Climate Models: Emissions cut savagely from 1988. Reality
Seen this in the MSM?We only started measuring the oceans properly in 2003 … and they aren’t warming.
Absolutely forbidden.The hotspot that causes the amplification in their models is not there in reality.
And they quote you temperatures measured like this…
or this…Volunteers surveyed most of the US land thermometers, found 89% were too close to artificial heating sources.
or this…Over half of the worldwide land thermometers are at airports, near warm tarmac and copping jet-blast.
But NOT temperatures measured like this…• Satellites say the warmest year was 1998, and the temperature flattened from 2001.• Land thermometers say the warmest year was 2010, and the temperature is still rising.
Lessons for Sound-Money Fight• They can prevent even the most obvious, relevant data getting through to the public.• Sound-money advocates are currently naive, like the skeptics were: ―We’ll just point out the evidence to the public and they’ll see.‖ Nope.
Establishment Tactics• ―Trust us, we are the experts. All experts agree with us.‖• ―Anyone who disagrees with us is a fool or nut or just politically motivated.‖• Never debate, simply denigrate opponents.• Bluff. The public will never find out. My wife was called a smelt Welcome to rat and a paid your future, mercenary in Eric Sprott! Parliament.
Climate Skeptics are winning• Western public about 50% skeptical, was 20% in 2008.• Governments backing off. Now only Europe, Australia, and NZ serious about reducing emissions.• Climate scientists now making major modifications to their models.• The climate is not warming up the way the alarmists said it would.
Array of ForcesEstablishment: Skeptics:• UN Vs. • Internet• Western governments • Talkback• Mainstream media radio• Banks • Scientists• NGO’s • Amateurs.• Leftists• Government scientists Similar to the Sound Money Fight!• PR firms• Academia.
How Skeptics Won• Internet trumps MSM, it just takes a while.• Precedent: Printing press broke church’s monopoly on ―truth‖.• Bonus: Climate issues have opened the eyes of many citizens to the ways of the MSM and government, which will make it easier for us in the sound money fight.
Thank you.Investing in Gold Stocks? goldnerds.com
The Future of ―Capitalism‖• Capitalism (as generally understood) : 1. Free markets – The most efficient way of setting prices and thus allocating resources. 2. Property rights – Secure, easily transferred, provides basis for lending, etc. 3. Manufacturing money out of nothing – Good for bankers and government.• Most pathologies of modern economies traceable to way we manufacture money. Not intrinsic to capitalism, could remove it or rein it in.
Economic Classes• Society is evolving a three class system: 1. Producers • Produce goods and services. Most people. 2. Welfare Recipients • Entitled to goods and services taken from producers. 3. Paper Aristocracy • Manufacturing money for your own direct benefit is forbidden, but they obtain goods and services by exploiting side effects of money manufacture. • Small, powerful, wealthy, prefers low visibility. • Wealth growing as money manufacture rages on.
Special Situation in the USA• The European paper aristocracy ―conquered‖ all other countries long ago.• The American Revolution was mainly about whose money to use.• The US was free of the paper aristocracy for most of 1776 – 1913. The biggest economic miracle in human history, free of the predations of any aristocracy.• The US Constitution was designed to prevent takeover by the paper aristocracy, but has failed because it was subverted.
The US Dollar• The USD is the world’s reserve and trading currency.• The single biggest export of the USA for the last few decades has been US dollars.• The rest of the world has been sending the USA real goods and services for years, and receiving paper money in return.• Ships travel to US full, return half empty• This privilege is ending. US living standards will fall, but US manufacturing will revive.
Manufacturing New Money Devalues Existing Money• Prices = ratio of money supply to the goods and services for sale.• Typical bubble year in the West: – 10% increase in money supply – 2% more goods and services – 8% higher prices, mainly in asset prices – 2.5% increase in CPI – 3.5% wage growth.• Not sustainable.
The Clinton Strategy• Clinton’s Problem: Government spending initiatives constrained by bond market.• Solution: Surreptitiously: 1. Lower Long Term Interest Rates. 2. Lower the CPI. 3. Suppress the Gold Price.• Result: Lower short and long term interest rates extended a long bubble into the biggest, deepest, longest bubble ever.
Free Markets Are Now Broken• Each part of the Clinton strategy had to be clandestine, designed to mislead the public and to interfere with the normal operation of markets.• Free markets find and set prices most efficiently, free of political influence.• Long bonds, short bonds, stocks, housing, gold and silver, agricultural, oil?,…• There are no free markets anymore, just interventions.
Inflation• Manufacturing new money (inflation) is a tax that transfers wealth from existing dollars to the recipients of the new money.• The people with the new money get to spend their new money before prices are bid up by the new money.• Saving in our money system is almost pointless. Inflation and taxation usually take it all, and more.
Asset Bubbles (1)• In our casino economy, it is more rational to buy assets that (we hope) will appreciate faster than the growth in the money supply.• Better still, buy the assets with borrowed (newly manufactured) money.• New money mainly bids up asset prices – which are not tied to wage growth, which is in turn is tied to CPI which underestimates money supply growth.
Thomas Jefferson― If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.‖ This is coming to pass as the bubble in the US pops. Presumably we will follow.
Manufacturing Money available at sciencespeak.com