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gold fanatics are ignorant suckers("CONSERVATIVES"): Bank reserves are in effect embryonic money that hasn't been born yet. The bank can give birth to new money based on those reserves, using the fractional reserve system to create money and..
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May 22, 2013, 5:44:02 PM5/22/13
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gold fanatics are ignorant suckers("CONSERVATIVES"): Bank reserves are
in effect embryonic money that hasn't been born yet. The bank can give
birth to new money based on those reserves, using the fractional
reserve system to create money and lend it out. But until those loans
have been made and the new money born, reserves are just potential
money sitting in the central bank's womb
http://finance.yahoo.com/news/gold-rallied-years-misunderstanding-021935344.html
Gold Rallied for Years on 'Misunderstanding'
By Marshall Gittler, Head of Global FX Strategy | IronFX | CNBC – 18
hours ago
The following CNBC guest blog is from Marshall Gittler, head of Global
FX Strategy at IronFX, an online trading firm specializing in Forex,
CFDs on U.S. and U.K. stocks, and commodities. He was previously head
of the Forex Committee at Deutsche Bank Private Wealth Management.
The rally in the gold (CEC:Commodities Exchange Centre: @GC.1) market
over the last several years has been based on a misunderstanding of
the global economy's problems and a misunderstanding of what
quantitative easing is.
Investors are just starting to realize that their framework for
analysis can't account for what's happening in the world right now.
They are gradually learning that the economics they learned from
textbooks needs updating. That's why they are starting to throw in the
towel on gold and why I expect the price to fall further.
The macroeconomic case for buying gold can be summed up by recent
comments by John Reade, partner and gold strategist at Paulson & Co,
who said: "federal governments have been printing money at an
unprecedented rate creating demand for gold as an alternative
currency. It is this expectation of global paper currency debasement
which makes gold an attractive long-term investment." (Financial
Times, April 15 2013). This analysis is based on a misunderstanding of
quantitative easing. Furthermore, it fails to take into account the
unorthodox behavior of an economy facing a "balance sheet recession."
Governments have indeed been engaging in quantitative easing . But can
that be called printing money? True, the central bank's balance sheet
expands, but on the private sector side, all that happens is that
banks replace one asset with another - they sell bonds to the central
bank and get reserves
in their place. Are reserves money? This is a philosophical question
akin to asking when life begins - at conception or at birth.
Bank reserves are in effect embryonic money that hasn't been born yet.
The bank can give birth to new money based on those reserves, using
the fractional reserve system to create money and lend it out. But
until those loans have been made and the new money born, reserves are
just potential money sitting in the central bank's womb.
(Read More: What the Silver Chart Is Telling You About Gold ) At the
moment, this birthing process isn't happening. The money multiplier
(the increase in broad monetary aggregates
relative to the increase in base money) has collapsed around the
developed world as bank lending stagnates or declines.
The reason central banks in effect can't even give money away for free
is that we are in a balance sheet recession. So long as consumers and
companies find that the value of their assets - houses, shopping malls
or whatever - are below the value of the liabilities they took on to
pay for those assets (a situation technically referred to as
"bankrupt"), they will not be in a position to take on new loans no
matter how cheap they are. They will only be interested in saving
money and repaying their loans.
This is the aspect of a balance sheet recession that confounds people
who have only experienced a typical recession caused by the central
bank raising interest rates. In a normal recession, once the central
bank lowers interest rates again, borrowers return and things go back
to normal. In a balance sheet recession, such as took place in Japan,
this doesn't happen.
1 of 2
5/22/13 4:41 PMGold Rallied for Years on 'Misunderstanding' - Yahoo!
Finance http://finance.yahoo.com/news/gold-rallied-years-misunderstan...
(Read More: The Race to Cut Rates: Look What Japan Started )
The problem is compounded nowadays because governments, particularly
in Europe, don't understand this difference. They run afoul of the
fallacy of composition: it's impossible for everyone to save money at
the same time, because one person's spending is another person's
income. There has to be some borrower of last resort to ensure that
the money is recycled. The government usually serves that role, but
that goes against the trend in official ideology nowadays. On the
contrary, governments are trying to save money too. The result is a
downward spiral of declining spending, declining incomes and declining
prices.
While the gold bugs wait for hyperinflation, the global economy slides
first into disinflation and then - who knows? - perhaps deflation.
Remember that in Japan, the real estate bubble peaked in 1991 but
deflation didn't start until 1999. It's still early days.
As people hoarding gold in anticipation of hyperinflation gradually
realize that they have things backwards, they are starting to sell and
to put their money to work in more productive assets, such as stocks.
The physical market may see today's prices as a fire-sale bargain, but
investors holding gold in paper form are likely to be reconsidering
the need for an asset to fill the role that gold currently plays in
their portfolio.
(Read More: Relax, India's Massive Gold Imports Likely a One-Off )
The risks in gold that people in the physical and the paper markets
see are different. Many of the people holding physical gold can wear
it, will never be marked to market, and if worse comes to worst can
pass it down to their children. But many of the people holding paper
gold get no particular pleasure from their investment, are marked to
market at least every quarter and can lose their jobs (and thereby
lose even their debased paper currency!) if their investments go
wrong.
I expect more selling to come until the price falls well below the
marginal cost of production, estimated to be around $1,100 an ounce,
and supply starts to decrease.
in effect embryonic money that hasn't been born yet. The bank can give
birth to new money based on those reserves, using the fractional
reserve system to create money and lend it out. But until those loans
have been made and the new money born, reserves are just potential
money sitting in the central bank's womb
http://finance.yahoo.com/news/gold-rallied-years-misunderstanding-021935344.html
Gold Rallied for Years on 'Misunderstanding'
By Marshall Gittler, Head of Global FX Strategy | IronFX | CNBC – 18
hours ago
The following CNBC guest blog is from Marshall Gittler, head of Global
FX Strategy at IronFX, an online trading firm specializing in Forex,
CFDs on U.S. and U.K. stocks, and commodities. He was previously head
of the Forex Committee at Deutsche Bank Private Wealth Management.
The rally in the gold (CEC:Commodities Exchange Centre: @GC.1) market
over the last several years has been based on a misunderstanding of
the global economy's problems and a misunderstanding of what
quantitative easing is.
Investors are just starting to realize that their framework for
analysis can't account for what's happening in the world right now.
They are gradually learning that the economics they learned from
textbooks needs updating. That's why they are starting to throw in the
towel on gold and why I expect the price to fall further.
The macroeconomic case for buying gold can be summed up by recent
comments by John Reade, partner and gold strategist at Paulson & Co,
who said: "federal governments have been printing money at an
unprecedented rate creating demand for gold as an alternative
currency. It is this expectation of global paper currency debasement
which makes gold an attractive long-term investment." (Financial
Times, April 15 2013). This analysis is based on a misunderstanding of
quantitative easing. Furthermore, it fails to take into account the
unorthodox behavior of an economy facing a "balance sheet recession."
Governments have indeed been engaging in quantitative easing . But can
that be called printing money? True, the central bank's balance sheet
expands, but on the private sector side, all that happens is that
banks replace one asset with another - they sell bonds to the central
bank and get reserves
in their place. Are reserves money? This is a philosophical question
akin to asking when life begins - at conception or at birth.
Bank reserves are in effect embryonic money that hasn't been born yet.
The bank can give birth to new money based on those reserves, using
the fractional reserve system to create money and lend it out. But
until those loans have been made and the new money born, reserves are
just potential money sitting in the central bank's womb.
(Read More: What the Silver Chart Is Telling You About Gold ) At the
moment, this birthing process isn't happening. The money multiplier
(the increase in broad monetary aggregates
relative to the increase in base money) has collapsed around the
developed world as bank lending stagnates or declines.
The reason central banks in effect can't even give money away for free
is that we are in a balance sheet recession. So long as consumers and
companies find that the value of their assets - houses, shopping malls
or whatever - are below the value of the liabilities they took on to
pay for those assets (a situation technically referred to as
"bankrupt"), they will not be in a position to take on new loans no
matter how cheap they are. They will only be interested in saving
money and repaying their loans.
This is the aspect of a balance sheet recession that confounds people
who have only experienced a typical recession caused by the central
bank raising interest rates. In a normal recession, once the central
bank lowers interest rates again, borrowers return and things go back
to normal. In a balance sheet recession, such as took place in Japan,
this doesn't happen.
1 of 2
5/22/13 4:41 PMGold Rallied for Years on 'Misunderstanding' - Yahoo!
Finance http://finance.yahoo.com/news/gold-rallied-years-misunderstan...
(Read More: The Race to Cut Rates: Look What Japan Started )
The problem is compounded nowadays because governments, particularly
in Europe, don't understand this difference. They run afoul of the
fallacy of composition: it's impossible for everyone to save money at
the same time, because one person's spending is another person's
income. There has to be some borrower of last resort to ensure that
the money is recycled. The government usually serves that role, but
that goes against the trend in official ideology nowadays. On the
contrary, governments are trying to save money too. The result is a
downward spiral of declining spending, declining incomes and declining
prices.
While the gold bugs wait for hyperinflation, the global economy slides
first into disinflation and then - who knows? - perhaps deflation.
Remember that in Japan, the real estate bubble peaked in 1991 but
deflation didn't start until 1999. It's still early days.
As people hoarding gold in anticipation of hyperinflation gradually
realize that they have things backwards, they are starting to sell and
to put their money to work in more productive assets, such as stocks.
The physical market may see today's prices as a fire-sale bargain, but
investors holding gold in paper form are likely to be reconsidering
the need for an asset to fill the role that gold currently plays in
their portfolio.
(Read More: Relax, India's Massive Gold Imports Likely a One-Off )
The risks in gold that people in the physical and the paper markets
see are different. Many of the people holding physical gold can wear
it, will never be marked to market, and if worse comes to worst can
pass it down to their children. But many of the people holding paper
gold get no particular pleasure from their investment, are marked to
market at least every quarter and can lose their jobs (and thereby
lose even their debased paper currency!) if their investments go
wrong.
I expect more selling to come until the price falls well below the
marginal cost of production, estimated to be around $1,100 an ounce,
and supply starts to decrease.
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