Gold: I smell a trap

[netrin]

It is my impression that the ECB and PBC devalue because they must but the Fed because it can. Last month Cypherdoc made the point that the US banks have cleared their most toxic debt. US debt is a risk entertained by foreigners and citizens, not the financial institutions, which can not be said of Europe and certainly not China.

So while the US fundamentals sans military are poor, the money keeps rolling in and will continue as long as S. Europe walks the plank. This allows the Fed to stimulate the economy through inflation with the pretense of countering deflation.

With US interest rates approaching 0% while Greece approaches 100%, I can't help but see USD as a bubble. But I also don't see it popping before Greece. I foresee metal going parabolic only after a few sovereign defaults.

[cypherdoc]

we have entered the Age of Deleveraging and the debt has to be written off for the global economy to move forward.

Perhaps this is one of the central subjective questions, but....How much debt has to be written off?

I looked around a little for current estimates of M2, M3, derivatives, etc, but didn't really find what I was looking for. Anyone have a good source?

Cypherdoc, do you have any theories or data about how much debt has to be defaulted on before a sustainable level is reached? What is a sustainable level, and is there long-term data to support that number (ie, can we simply look at leverage levels before the debt/securitization explosion of the 90s and 2000s as the "norm" that we will/should return to, and calculate the necessary debt-money supply deflation on that?).

i think we would have to get down to about the fractional reserve norm of 10:1 as the banks used to be.  with all the deregs like sweep accts that occurred since 2000 the primary dealers had gotten to 40:1 and i think FNM/FRE got up to 120:1.  effectively they had NO reserve ratios which is how things got so out of hand.  home buyers would need to put down the old usual 20% and the debt to income ratios would need to be restored to 1:3.

[cypherdoc]

@melbustus:  this is out of Gary Shillings last letter and shows how the private sector's debt and equity issuance has been contracting while offset by gov't.  perhaps a reasonable estimate would be a return to the trendline average.

[cypherdoc]

i think we need to take a different tack on this thread from now on.   i think we need to provide more data from the economy to figure out what is happening; inflation or deflation and then try to figure out how this applies to pm's.   i'm going to stop with the conspiracy theories and manipulation allegations.  i'll try and throw up more data charts to support the deflation theory; as if i don't already.

bottom line is there is deflation occurring all around us in financial assets, tangible asset (RE, cars, equipment) commodities (oil, softs, ags, copper, gold, silver), wages, and foreign currencies vs the USD.  do any of you honestly feel any real pressure to buy anything right now except for possibly gold and silver based on what you think the Fed is going to do?  the answer is no; its better to hold onto your cash since for most things you will be able to buy more with it later.

the only things that are still relatively high are goods and services which are already starting to come down.

http://www.nj.com/news/index.ssf/2011/09/seton_hall_will_lower_tuition.html

this lowering of prices across the board is happening b/c of the global slowdown that is now painfully becoming apparent.  PMI's worldwide are slowing dramatically and China can no longer provide growth.  Fedex announced slowing orders and banks are having to dump assets to shore up balance sheets (BAC sold their $8.3 billion holding in China Construction Bank).  loan issuance is almost non existent and the banks excess reserves are not budging.

miscreanities whole argument is that the Fed is going to monetize all this bad debt.  well when exactly is this going to happen?  theres about $54 trillion in private debt out there so he'd better get going.  he ignores that nothing has happened since QE2 ended and Op Twist is really net neutral.

in the meantime gold, silver, and the miners are dropping (brutally in the case of silver and stocks) but he keeps saying the monetization is coming. 

so lets just look at what IS and not what we think will happen.

[cypherdoc]

Bank stocks have been cut roughly in half since the highs from 2/11.  this has contributed mightily to crimping their balance sheets in addition to the bad loans.  so if these guys are the ones responsible for pushing money out into the economy via loans and they're not lending how is everyone supposed to get access to enough money to drive gold and silver to the moon?

[cypherdoc]

what does this tell you about consumer credit?  ask yourself what you're personally doing.  are you going out and getting a loan to buy gold and silver?  i seriously doubt it altho this group is a biased sample.  that little hook at the top right of this graph is a sure sign of credit rolling over for the first time in 70 yrs.  with all the deflation occurring around us do you really think this graph continues its upward trend?  i don't.

[cypherdoc]

whereas the last graph showed a hook with a small gasp of a rebound, this chart has clearly rolled with no signs of coming back up.  ask yourself, what is your biggest personal asset?  if you're a home owner this one is easy.  therefore, if no one is taking out RE loans to buy more houses this means that house prices are going to continue down.  if we were threatening  hyperinflation, everyone and their mother would be rushing to the banks and borrowing to buy a house (a tangible asset whose loan would inflate away, ie, a free house).

[cypherdoc]

here are those pesky banks again.  do they look like they've been lending out debt money to the public?  or is there something seriously wrong?  we've been inflating uninterrupted for 40 yrs.  does this graph tell you we're going to keep doing the same and drive gold and silver to the moon?

[cypherdoc]

ah yes, credit cards.  why the hell aren't you bums buying gold with that free Visa card with $50K automatic credit in the mail?  oh, you mean they aren't mailing those out anymore?

[cypherdoc]

in all fairness i should show this one too.  however, its been well documented this consists primarily of student loans.  higher ed has gotten away with murder way longer than it should have primarily by selling the story that if you don't get a degree you won't be able to compete in this new recession type economy.  this is a sham and the link to Seton Hall shows this is rapidly coming to an end.

[cypherdoc]

financial stress is rising once again.  do these spikes occur in inflationary or deflationary times like we saw in 2008?  more importantly, will the banks lend in this environment?  no.

[cypherdoc]

are ppl going out and consuming as if their USD's are going to be worthless?  no.

[cypherdoc]

is money moving thru the economy normally?  or is all of it going to magically go into gold?

[cypherdoc]

why is all this money fleeing from money market funds into bank deposits?  its b/c investors are scared.  scared that another fund may break the buck or that their European bond investments will go kapoof.  in other words, investors are fleeing into the USD and not much else.

[cypherdoc]

in uncertain times such as now, investors want the ultimate liquidity and safety of cash. they want to be free to take advantage of the next best thing which at this point is not certain.  not a speculative investment like gold thats at the end of its bull run.

[cypherdoc]

commercial paper funds businesses.  no business lending, no economy.  no economy, no inflation.

[cypherdoc]

the all important category of asset backed commercial paper. critical funding for businesses leading up to 2008.  what does this mean; inflation or deflation?

[cypherdoc]

here is a 10 yr gold chart with a hook at the end.  now i ask you, how much different is this price graph than the economic data graphs i just showed you?  gold is just a reflection of whats going on in the economy with speculation added in i submit.

[cypherdoc]

how's your income by the way?  inflating?  i think not.  and you're not alone.

[cypherdoc]

you mean you're not going out and buying refrigerators, washing machines, ovens, etc?