Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

[Polish_Silver]

gold sales not anonymous, improving Taylor

Rajesh (sorry had to bring in the Big Bang Theory name ) The thing is when you buy physical you dont have to put your name etc. When I go to sell they wont take my name either. All I have is a receipt with the price paid for my gold coins. In other words I am anonymous, how would the government know I ever owned any gold?

The windfall profit tax wouldnt apply, I presume.


On a side note here is Guggenheim talking about the Fed and their Taylor Rule. If I remember correctly EJ's own chart on the Taylor Rule said they should have raised rates back in 2010.

Here in SC, the coin shops keep a paper copy of your drivers license for a while, supposedly to verify that the coins are not stolen. Then they destroy the record. So there is at least a temporary record of your name and what coin you sold. There is some logic in this, but it is certainly a sacrifice of freedom.

Taylor has a nice article showing how if the FED followed his rule, the higher rates would have prevented a housing bubble. No secret that rates were too low, except to Bernanke et. al.

I think I figured out a way to improve the taylor rule. It is based on measured inflation and measured gdp.
Well, what if the measurments are off? Likely the government would bias towards higher gdp growth and lower inflation, as Williams claims. Then the taylor rule will keep interest rates too low. So what is needed is to add an additional term to the expression, which measures either debt growth or money supply growth . In our system, money supply and debt are highly correlated . The idea being that if debt grows above a certain level, interest rates rise. Right now the taylor rule does not explicity include debt or money supply growth, and so it does nothing to prevent a gradual increase in debt level, which is what happened from 1980 to 2008.

[Polish_Silver]

Rate suppression: always the same purpose !

Referring back to the chart above, the purpose of government price fixing of bonds is wholly different today than during and shortly after WWII.

--EJ

Wasn't the purpose of the 1940's rate suppression to make it easier to finance the government's debts acquired because of WW II, and to a lesser extent, the new deal?


Isn't the purpose of low rates now to support the housing sector and other highly indebted aspects of the fire economy?

So in both cases the rate suppression makes debt levels more supportable.

When federal debt at $14 trillion, the US could not finance this debt at 7% rates, so the low rates are also keeping government debt "manageable".

They mystery to me is why people people bought UST bonds when inflation was so high. Probably because they had so few alternatives.

[raja]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

The thing is when you buy physical you dont have to put your name etc. When I go to sell they wont take my name either. The windfall profit tax wouldnt apply, I presume.

I agree, a windfall tax on gold couldn't be applied to hidden transactions.
But who would buy your gold?
Don't you think that a 90% tax would put a damper on gold price and sales?
Would you buy gold now if you knew that it was a criminal act?

I know I would look very hard for other, less risky investments.
And, isn't that just what the government wants . . . to control our behavior and channel our money into areas where they have control and can profit? Greed and power -- it's the eternal human story.

I am pretty confident I will know when the manic phase is occurring. One way is to observe the individuals going into the gold shops. If suddenly for a stretch of 3 to 6 months there are lines out the door at the gold shops to buy gold then you know it is in the manic phase (ala 1980-81).

Yes, I think I would be able to tell the manic phase, too.
But the question is knowing when to sell during the manic phase.
If you sell at $5000, and gold goes to $10,000, you've lost half your profit to inflation.
If you wait too long and the gov't institutes a windfall profit tax, you've lost 90% of your profit.
How will you know when to sell during the manic phase.

By the way, if the s___ really hits the fan, you'll wish you hadn't sold at all.

Most of the other 1/2 is in gold ETFs like IAU, PHYS and GLD or Futures. Those products are super liquid and I could dispose of them closer to the top (if i called it right).

That's a good idea.

But what would you do with the dollars from your sale?
Would gold hitting the top signify that inflation is over?
In that case, it would be good to sit on your dollars.

If the government decides they need a new "reichsmark", as in the 1920s, you would take a big devaluation hit.
If inflation continues, you better spend your dollars as fast as possible on "real" things.
In that case, why not buy the "real" things now?
I guess the answer there is to profit from the mania as much as possible.

I haven't heard much talk anywhere about what the world would be like AFTER the gold mania.
We talk a lot about profiting from gold, but not what will happen once we have our profits.
I'd like to hear some opinions if anyone would like to share . . . .

[Polish_Silver]

Less corrupt government

This is a well-written and cogent analysis. Thank you!


What is needed is thus a government that is structured to make corruption harder. Mandatory transparency into all aspects of governance and campaign funding is a start. And many further steps beyond that would be required as well. But simply saying "smaller is better" is, to my mind, throwing the proverbial baby out with the bath water.

We needed better structures in our institutions. For example, if we use Kotlikoff's Limited Purpose Banking,
we have a secure banking system without leverage, TBTF, fed regulators etc. In that context, market forces really would regulate banks. The fed would not be setting interest rates.

Another example is our election system. We need proportional representation in at least the Senate.
That would bring new parties in, which would really have different ideas. The choice you have now is voting for someone you hate or voting for someone who will certainly lose.

[radon]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

What this means is that by the time 2015 rolls by, all else equal, the Fed
will be far behind on the tightening curve and when it finally does admit
tightening is overdue, it will have to scramble to not only hike
short-term rates, but promptly proceed to commence offloading its balance sheet
which as we calculated will be $5 trillion by then, or nearly
100% higher than it is now, and with a DV01 of $4 billion. Oops.

They won't be able to raise rates. They can't slow down without the bomb on the bus going off.

[radon]

Re: Less corrupt government

Another example is our election system. We need proportional representation in at least the Senate.

Also, it shouldn't take a billion dollars to run for president. People should be as upset at a political add on TV as a cigarette machine in a high-school.

[Mn_Mark]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Yes.

Also, regarding the fear of gold confiscation, he says that the government need not confiscate gold . . . it can simply slap a 90% windfall profit tax on gold. If that occurs, those who bought gold early hoping to cash in will lose most of their profit.

He also says he owns gold . . . so I guess he figures he'll be able to know when to sell.

Be careful with your gold. You may not have a financial counterparty, but you have a political one -- Uncle Sam.

I've found the posts and discussion over at fofoa.blogspot.com very interesting. This issue of confiscation has been discussed at length and FOFOA contends that there will be no confiscation or 90% windfall profits tax on gold after the transition from the current dollar-as-world-reserve-currency status quo. In fact he argues that there will be no capital gains tax or sales tax on gold either.

His reasoning is that after the transition, gold will again be the international currency for settling trade imbalances. Countries that export more than they import will gradually accumulate gold, and countries that import more than they export (USA) will gradually see their gold flow out. This will not be an official government function, but a function of the market.

The important thing for a countrywith regard to this international trade balancing function of gold will be the total amount of gold held within that country, whether by government or private citizens - and private citizens will be the major source. Us average joes selling our one or two ounces down at the coin store in response to market factors, and those ounces flowing out to our trade creditors, will be what matters.

If the government puts a punitive tax on an average joe who wants to sell his ounces, average joe won't sell them. He will hoard them or he will sell them on the black market. They will not be available for serving this trade-balancing function that will occur because of irresistible market pressures once the international community no longer accepts dollars as the international reserve currency. A short-sighted government may try to put such a tax in place, but it will be forced in relatively short order to abandon it in order to keep the private flow of gold moving. Same goes for confiscation. A government that says everyone must turn in their gold for a set price is a government that will see the flow of gold stop immediately.

India and Singapore both had to recently remove taxes on gold sales that they had tried to impose. As I understand it, there is already no sales tax on gold in Europe. Europe is smarter about gold than we in the USA are; as FOFOA points out, they revalue their central bank holdings of gold to the market price quarterly, which smoothly transitions their central bank holdings to a larger and larger share of the total (with foreign reserves like dollars shrinking as a percentage of the total as gold's price in euros increases).

FOFOA also makes a good argument that there will be no blow-off top and then drop in the dollar price. Instead, there will be a "reverse waterfall", where the price swoops relatively suddenly to a very high level (he estimates the most likely price to be in the neighborhood of $50,000/ounce), drops for a short period as weak hands like those here discussing how to time the market sell out, and then rises back to more or less a plateau going forward. So no need to try to time this....just buy physical gold coins and hold them through the transition and (if applicable) any short-term government stupidity like windfall profit taxes or confiscation attempts.

But don't count on your PHYS and GLD and GDX saving your ass. In the turmoil of the transition, much of that "paper gold" is likely to evaporate, and mines will be nationalized or heavily taxed. What will count is the physical gold in your hands. In fact, FOFOA predicts a plunging "paper gold" price before this transition occurs as it becomes clear that GLD, the COMEX, et al can not deliver physical gold after all. It will simultaneously become impossible to buy physical bullion as no one wants to sell. After a short period, a new physical price discovery method will evolve and physical gold will be priced at around $50k (in today's dollars - much more in inflated dollars).

Again, go read the FOFOA archives for the details of these arguments. I find them the most convincing arguments I've read. The basic idea is that what we are heading into is not just another bump like 1980 or 2000. The dollar is going to lose its international reserve status and that is going to yield an entirely new (but very old) role for gold that has no analogue in living Western memory.

[Chris Coles]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

....just buy physical gold coins and hold them through the transition and (if applicable) any short-term government stupidity like windfall profit taxes or confiscation attempts.

But don't count on your PHYS and GLD and GDX saving your ass. In the turmoil of the transition, much of that "paper gold" is likely to evaporate, and mines will be nationalized or heavily taxed. What will count is the physical gold in your hands. In fact, FOFOA predicts a plunging "paper gold" price before this transition occurs as it becomes clear that GLD, the COMEX, et al can not deliver physical gold after all. It will simultaneously become impossible to buy physical bullion as no one wants to sell. After a short period, a new physical price discovery method will evolve and physical gold will be priced at around $50k (in today's dollars - much more in inflated dollars).

....... The basic idea is that what we are heading into is not just another bump like 1980 or 2000. The dollar is going to lose its international reserve status and that is going to yield an entirely new (but very old) role for gold that has no analogue in living Western memory.

On these points I whole heartedly agree.

[ProdigyofZen]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Fed's Fisher sees "Inflation Expectations Rising"

http://www.bloomberg.com/news/2012-0...ns-rising.html

Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s third round of large-scale asset purchases has led to an increase in market expectations for higher inflation without more job creation.
“I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction.”



Fisher, who doesn’t vote on monetary policy this year, opposed the Federal Open Market Committee decision last week to expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing. The Fed is seeking to boost growth and reduce 8.1 percent unemployment.



Measures of expected future inflation “have ramped up pretty quickly,” Fisher said. The five-year, five-year forward breakeven rate, which projects the pace of price increases starting in 2017, rose to 2.88 percent on Sept. 14, the day after the FOMC decided on QE3. That was up half a percentage point from July 26. It dropped to 2.80 percent on Sept. 17.

[dd eisenhoover]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Why QE3 ?
It's mostly for Treasury-Market support, according to the 'Turd':

"An here's where almost everyone drops the ball. The mainstream media will tell you that The Fed is "supporting the mortgage market" and "helping to keep homes affordable" with this program. This is complete, unadulterated BS. Sure, The Fed is buying $85B in MBS every month...but...from whom??? Which institutions own these MBS and are obligingly selling them to The Fed??? I'll wait here and let you think about that one for a few moments...

The Primary Dealers! Goldman, The Morgue, MorganStanley, Citi, BoA...all of them. They own or purchase new the MBS which The Fed buys from them. And here's the very important next step: The Primary Dealers turn around and use the proceeds from these sales to buy U.S. treasuries! To the tune of $85B/month. Let me do the math for you...that's slightly more than one trillion dollars over the next year. And what does the Congressional Budget Office project the U.S. federal deficit to be in fiscal 2013? It will again be north of one trillion dollars, at a minimum. http://www.cbo.gov/publication/43539

At the end of the day...and here's where we get down to brass tacks...last week The U.S. Federal Reserve announced a plan whereby they will be almost completely and directly monetizing the deficit spending of the U.S. government. Though the illusion of legitimate borrowing will be maintained and politicians will continue to claim that "we're borrowing all of this from China", you should not be fooled. We have entered a new paradigm of direct debt monetization. By doing so, The Federal Reserve has begun the process of overt currency debasement and devaluation."
From "Brass Tacks" http://www.turdtalksmetals.com

[jtabeb]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

The "rhetoricalness" of my question "how are they going to raise rates if inflation hits 5% in thext 3-6 months" was apparently lost in internet forum purgatory !

[\sarcasm], it helps.


V/R

JT

[raja]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I've found the posts and discussion over at fofoa.blogspot.com very interesting. This issue of confiscation has been discussed at length and FOFOA contends that there will be no confiscation or 90% windfall profits tax on gold after the transition from the current dollar-as-world-reserve-currency status quo. In fact he argues that there will be no capital gains tax or sales tax on gold either.

Mn_Mark, thanks for sharing that !!!

I will check out the archives at FOFOA, and jump back in the discussion if I have anything worthwhile to bring up.

[astonas]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

FOFOA has come up on these forums several times before, and when I've looked into the writings, I've found them to include very detailed (if not always orthodox) information. But the conclusions strike me as somewhat dramatic, at times even hyperbolic. And yet I don't have enough specific information to refute the picture that is being painted.

EJ has studied gold to an extraordinary extent. Has he ever given an analysis on FOFOA's thesis in the past? Not just a dismissal, since that would almost be too easy, but actually pointed out where an error was being made? Alternatively, does he agree in principle, but not to the $50k/oz degree? In this case, how does he calculate his estimated maximum value, that is different from FOFOA.

FOFOA's ideas are a bit out there, but not so far that I think they shouldn't be addressed substantially.

[metalman]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

On first take, I thought that was a good idea.
At least one would make some good profit on 1/2 of one's gold stash.

But there are two problems:

1) What if you sell your 1/2 gold, and later in the year the gov't passes the "windfall profits gold tax"? You would still have to pay it next April 15th.

2) How do you know when the manic phase is occurring? And, how do you know how far along it is?
Say that gold goes up to $5000, and you sell. But then gold contines up to $10,000. Your prior profits are cut in half by inflation.

Still, selling 1/2 halfway up the manic phase is better than losing 90% of profits to a windfall tax.

Any thoughts?

EJ thinks he will know when to sell.
Although I don't know what's in his mind, I imagine he'll be looking at Treasury rates. If Treasury yield get very high -- like in the Volker years -- Treasuries would become a more desireable investment, and gold would fall.

By the way, when you suggest selling 1/2 of gold in the manic phase, what would you do with the other 1/2?

ej on gold confiscation...

---

For example, a gold bug will tell you that gold was illegal for Americans to own from 1933 until 1974, which is true, but then he will spin this into a tale of government goons cracking open safe deposit boxes to confiscate gold. The fact is that that the law was so weak that it was enforced only once in 40 years, and that single case was dismissed.

The truth of the episode of the gold's 41 years as contraband is more interesting than the conspiracy theories. The majority of gold investors, who become known as gold hoarders whenever the government needs it, turned in gold voluntarily before the May 1, 1933 legal deadline set by FDR’s order. They did so for largely patriotic reasons, to help rescue the economy that had been in a deflationary death spiral for three years under the non-leadership of Herbert Hoover.

Sixty-five years later, in the depths of the Asian Currency Crisis in 1998, without force of law millions of Koreans scraped together more than a billion dollars worth of gold jewelry, coins and other personal items to give to the government voluntarily to be melted down to shore up the central bank's reserves. To put this egalitarian behavior into context, thousands of Korean college students had to go home to their families in Seoul that year from the U.S. because the won had so depreciated that savings in domestic bank accounts could not cover tuition. City parks filled with the unemployed when only months before unemployment was largely unknown. It was a classic Sudden Stop event (see Headed for a Sudden Stop, 2008). The populace rallied in the nation’s time of need, turning in gold to shore up the system for the greater good.

This nuanced interpretation of gold's function in a currency crisis is critical to get right because it suggests how the latest episode in the life of gold as a monetary asset is most likely to end. Rather than by government confiscation as gold fanatics warn, I have argued since 2001 that the most probable endgame is for global monetary crisis to force the U.S. to re-open the gold window, a concept I explain in detail later, with gold turned in by U.S. citizens voluntarily to increase U.S. holdings from 8,133 tons today to enough to truly back the full faith and credit of the U.S. Treasury.
http://www.itulip.com/forums/showthread.php/20640-Essential-Trends-Part-I-A-Gold-in-an-Era-of-Global-Monetary-System-Regime-Change-Eric-Janszen

---
ah, yep... flags waving & crosses in the air... patriotic gold bugs will be 1st in line to support the usa when the dollar plops

[Slimprofits]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

ah, yep... flags waving & crosses in the air... patriotic gold bugs will be 1st in line to support the usa when the dollar plops

No, it will depend entirely on who is doing the asking.

Imagine if it happened this year. How many Patriots do you think would be volunteering their gold for the Marxist, Muslim El Presidente Hussein Obama?