Thursday, February 8, 2018

The Pendulum

Some things happen through great effort and intent, by design. Other things happen by circumstance. When they happen by circumstance, they can be fought against, or welcomed. This is the way of the world.

As the savings built up from America's post WWII economic power and production have gradually been used up by consumerism, inflation and adventurism (endless foreign war economy), the pendulum swings toward balance - and beyond. A stronger yuan and a weaker dollar are characteristic of that dynamic.

Maturing generations of the U.S. can no longer sustain the former consumption of Chinese-made products. China has more promising customers elsewhere, including within their own borders. They have equitable trade partners and a growing middle class which holds much true wealth in the form of savings (much as the U.S. middle class once did).

The U.S. must now become a producer nation (if it can, a tall order) with a relatively weaker national currency. The global dollar reserve and unit of account is still very deep in financial markets, but the virtual reality of financial markets was never designed to sustain the physical world.

As the pendulum swings, we see the result of the first systemic test of volatility reversal. As complacency had been traded as an asset for so long, one could say that inverse volatility was "due for a correction" just as much as equities.

Now that the FED is seriously testing the gradual withdrawal of QE and the reduction of its balance sheet, volatility is probably the product to trade long for now. But as the CBs slowly sell off, equity indices will follow suit. Retail advisers will talk their "long term strategy book" but the true future for equities is a bumpy down trend with reassuring bounces. All according to BIS design, with it's US dollar CB making the first move. It's other CBs will follow.

As the pendulum builds momentum it will surely pass it's intended resting place and overcompensate for past imbalances, but the global financial system will not melt down in some post Apocalyptic crash. We even have a balance-structured SDR as a relief valve mechanism.

While some held that dollar prices would hyper-inflate for all items in the physical world from wheat to pork bellies to real estate and oil, there are really only two asset classes that need to hyper-inflate: financial paper (derivative speculation) and gold.

Humanity probably cannot survive a world where dollar holders pay $75 for a loaf of bread or $2600 for a barrel of oil. But we can survive a world where gold trades for $52000/oz.

You see, only gold needs to hyper-inflate in US dollar terms to solve the worldwide dollar imbalance problem. And our dollar denominated paper gold pricing system is in a perfect position to accomplish this. At a 4000% increase from today's dollar price, gold will flow to where it is needed to balance dollar debt in international trade and the financial market derivatives which currently enable the structural imbalances of the status quo. With this in mind, please reread the first paragraph above.

As no one can predict the future, Roacheforque cannot provide assurances - only likelihoods. A high dollar price of gold solves many dollar problems, and enables the continuation of the current system under a new global unit of account. Likewise, the position of gold today seems structured to allow for those solutions.

How fast the pendulum swings, where it lands and where you will be as it moves from point to point are questions that make life interesting. In the end, perhaps sweetness follows.

As the flower of understanding reveals - we live in interesting times indeed.


  1. Bravo! Excellent post. Gold revaluation will in essence be an accounting gimmick for the central banks.

    1. This is what Rickards said to my face when I met him in 2016 - it's just an accounting convention, d'oh.

  2. That is certainly one way to see it Grumps. A little different than the FOFOA view of 2009, but who knows where he stands today. One must buy that opinion now ;0)

  3. The matter of whether or not the dollar holders will pay $75 for a loaf of bread or $2600 for a barrel of oil depends on how much gold we have in Ft. Knox.
    If the U.S. don't have 8000 tons of gold to enable the aforementioned accounting gimmick, we will pay $75 for a loaf of bread.

    1. It's really foreign goods that will be high in price. US is a bread basket. Raspberries from Argentina in our offseason might be a different story.

  4. I'm trying to put it all together and am going to ramble a bit. Is it possible that the price of bread would depend on both our GDP and amount of gold reserve?

    For example: IMF would set the exchange rates for productive or resource rich nations like Germany and Saudi Arabia to almost 1:1 ratio. I imagine the Deutsche Mark should be as strong/good as gold or maybe even occasionally surpass the price of gold. Germany would have no problem getting $100 SDR with $99 Deutsche Mark and $1 SDR worth of gold.

    For dirt poor nation like Greece or Zimbabwe, the requirement would be 1% worth of local currencies in SDR and 99% gold in exchange for $100 of SDR. Country such as Greece would have no choice but to make themselves extremely accommodating to outside investments or find a lot of goods for export - a loaf of bread or olives would be marked for export first before distribution to the indigents. If Greeks needed SDR for foreign goods, they would either earn the SDR or convert $99 SDR worth of gold (domestically mined gold) and $1 SDR of drachma until the drachma is strengtened with improved productivity.

    I suspect IMF will create a crypto currency denominated in SDR to be used exclusively by the central banks. Each nation's central bank will be equipped with a block and IMF will manage the SDR Gold & Regional Currencies Exchange.

    Does it make any sense?

  5. Mssr. Le Roache, this current system cannot survive a massive gold revaluation, because it is a dollar devaluation. When the world reserve currency devalues it is the reserve no more.