Will US Treasuries replace Gold ?

[VIT]

Re: Will US Treasuries replace Gold ?

I doubt that we will see gold standard again:

- The main players today do not have incentives to return to the gold since they will be immediate losers

- Gold itself has no economic sense like oil for example. It restricts the grow of a new and keep the old boys in play. In addition it is difficult to adjust gold to increase in world GDP.

I do not consider US treasures as standard since it does not benefit others

What else might be good as reserves standard ?

[Guest]

Re: Will US Treasuries replace Gold ?

VIT -

Oil would be the best standard, but it is becoming scarcer and it's price will be rising uncontrollably. What you overlook about gold is that with oil going into critical shortage in the 2020's and 2030's until we see a viable replacement to fuel the industrialized world we will have cost push inflation from rapidly rising energy input costs. This will be a world unlike anything we've seen in two industrial centuries, where cost push inflation becomes a runaway train because the "energy-oxygen" is beginning to starve the world economy.

The paradox of your observation that "gold is non-productive" is that A) that's true, and B) we are heading into a world where cost push inflation from energy shortages will move gold into a central position for the global economy - and this recipe is at least good for the next 20 years, because the most optimistic estimates for "alt-energy" to replace hydrocarbons is that they will represent 5%-10% of global energy needs by 2030. VIT, as a Russian you are used to approaching all "truisms" with a healthy dose of cynicism. When it comes to gold, and "Peak Cheap Oil" however, you will be in for a real surprise.

This is where the financially oriented members here end up merely offering a blank stare - they see all events as determined by financial cycles, and financial instruments, and cannot grasp that a world careening into Peak Cheap Oil makes ALL government attempts at fiscal and financial prudence merely a bad joke. Gold will be central to this entire event. Jim Sinclair sniffs out the truth here better than most others, who may sound more "realistic" but actually are not. It is very, very difficult for financially oriented thinkers to make space in their universe for geology.

Geology is about to become a stone wall, which blocks the road ahead, to all notions of a new and smoothly functioning global currency order. I think *T* sums it up best (he definitely gets it) - with his signature line:

"Thermodynamics is never and nowhere a monetary phenomenon"

Too many people have extreme difficulty wrapping their wits around what this will mean in our future.

[Jay]

Re: Will US Treasuries replace Gold ?

JT,

It is a thought in the right direction, but keep in mind that number you speak of also includes paper representation of real things. Remove that, and the number drops considerably. After all, what need is there for a commodity backed currency to replace a house? or a car? or a bushel of wheat? Besides the friction of transaction costs, the true value of any currency - commodity backed or otherwise - is as a separate store of value over and above the physical. And that can shrink just as much as it grows...in its purchasing power. The main benefit of commodity-backing is to preserve the purchasing power value, but in turn it also constrains growth.

It is the extreme aversion to this (growth constraint) which has led us to where we are now.



I think the mistake being made here is lumping the reaction of a national or central bank with the reaction of the overall government.

Sure, the national banks (i.e. UBS) or central banks (i.e. CCB) are screaming for their bad agency loans or MBS' to be made good.

They don't really care if the process of making their bad investments good, degrades the overall portfolio value since the present dilemma is a threatened violation of their charter/reserve requirements.

However, the national governments don't think the same way. Just as the CCB is begging a reluctant Chinese Treasury (Finance ministry) to loan assets, so too do national governments (like the Chinese Finance Ministry with its trade ledger standpoint) not view the existing financial arrangements as all good.

Once again: why would a national government agree to the negative interest rate credit card? Because so long as their net purchasing power gain is positive - i.e. the nation is selling its crap and making a purchasing power profit - it is acceptable to lose some of the value along the way. Much as merchants pay Visa or MasterCard 5% of the value of credit card purchases - because ultimately they get more business than otherwise.

Once the profit goes away, so too does the credit card. Much like gas stations are increasingly charging 'cash' and 'credit' prices: for the low end gas stations - there is no benefit to accepting Visa or MasterCard.



How would China dumping its Treasury hoard hurt the everyday Chinese consumer?

Would prices go up? Actually, they'd probably go down. The Yuan would strengthen so fast it'd make your head spin. It is precisely the buying up of Treasuries which is 'sterilizing' incoming dollars and keeping the yuan weak. But a weak yuan makes a lot of things like food more expensive.

How about jobs? Certainly there is going to be job loss due to the US being severely constrained to buy Chinese crap. But I'd point out that the Treasury dumping would be as a result of American consumption failure, not a cause - or more precisely that Americans may want to consume, but won't be able to pay enough for it.

If China wants to subsidize its population that badly, they might as well do it directly and skip the American bankster system in between.

The only people that'd be unhappy in China with a mass dump of Treasuries are those few manufacturers directly exporting to the US - who somehow have failed to start exporting to Europe and the rest of the world.

Of course, as I've noted, a Treasury dump is high risk hence extremely low probability for China.

But equally (ultimately, if not immediately) painful for the American consumer would be a cessation of buying more Treasuries.

Lukester: a git is an elf. And it was part of a comparison of iTulip members with Lord of the Rings. And I am not British. And I will resume ignoring you.

I don't disagree that dumping Treasuries would hurt America badly, but I think we disagree on the level of spillover there might be in China. Their banking system is limited and probably would have a tough time dealing with the sudden removal of the dollar as a world currency. Second, I doubt that the Chinese populace is ready to replace the American consumer, especially since the European consumer would be hobbled in the face of a global contraction in the wake of a dollar crash. I think revolution would be very possible in this scenario. It was close in 1989 and was only turned back through force and ultimately by allowing in capitalist ideas. Those sentiments still exist.

[vcif]

Re: Will US Treasuries replace Gold ?

aren't treasuries just unprinted dollars?

[Guest]

Re: Will US Treasuries replace Gold ?

You mean like little USD-eggs that hatch into baby USD-dinos, and grow up into big USD-dinosaurs?

aren't treasuries just unprinted dollars?

GROWN-UP FEDERAL RESERVE NOTE.jpg

[VIT]

Re: Will US Treasuries replace Gold ?

To Luke:

I think oil as the US treasures can not be the standard since it does not benefit "others". We have some wars going on for oil but if you make it de-jure ultimate price for everything, gee what we will see after :eek: A lot of people will realize it is not fair that some countries have it by luck

I agree energy itself is a good value standard since it has the features of asset and can generate wealth and have high liquidity. The problems are:
- we don't have the form of energy we can store
- it is highly volatile to other assets/commodities depending on technology

The latest for example will not be good for you pension savings.
The more I think about value reserve standard the better I understand it should combine opposite features

As I said before my hope and position: we will sort the oil crisis somehow in the next 30-50 years. Probably this will be painful and costly process but that is the only path forward available for mankind.

When the giant oil fields start to deplete we will see shocking oil shortage so that will be a time when there is still plenty of oil in the ground but it become apparent we need to invest in other energy. So the remaining oil will be a safety pad in this transition process. I do not have the numbers but if you can divert todays investments in oil to other energies this would dramatically speed up the process. The investments in 100$ oil world are just huge. Today is the real rush to squeeze the latest drops of oil from Gulf of Mexico. Just for reference scale some numbers for deep water exploration/production:
- one offshore platform costs about 1 billion USD.
- one rig day of drilling offshore is about 250000-500000 USD per day. There are about 150 rigs working everyday (in GOM).

Everybody is welcome to compare these numbers to investments in alt energies

[c1ue]

Re: Will US Treasuries replace Gold ?

I don't disagree that dumping Treasuries would hurt America badly, but I think we disagree on the level of spillover there might be in China. Their banking system is limited and probably would have a tough time dealing with the sudden removal of the dollar as a world currency. Second, I doubt that the Chinese populace is ready to replace the American consumer, especially since the European consumer would be hobbled in the face of a global contraction in the wake of a dollar crash. I think revolution would be very possible in this scenario. It was close in 1989 and was only turned back through force and ultimately by allowing in capitalist ideas. Those sentiments still exist.

Jay,

I'm still unclear as to why the everyday Chinese would be affected in any way by a dollar crash.

The yuan is still not convertible, and furthermore while those whom export have access to dollars, the typical person does not

In the old days, this was important as 'foreign exchange' RMB were needed to buy washing machines and what not, but this is no longer the case.

Certainly America is the largest customer for Chinese exports, but it is not the only one. Europe is now almost as large, and China is furthermore spreading its exports everywhere in the world.

Even in the Treasury dump case, America won't stop buying. Its just that the amount bought will be constrained by cash payment terms instead of the present all you can eat. The difference could be as little as 10%, and as much as a 50% reduction in overall trade.

As for the banks - as a currency account surplus nation - China has full capability to fully insulate its population from most outside currency effects if China chooses to. Much as Japan can make everything stable in prices internally (but expensive) despite a consistently undervalued currency, so too can China.

Having a large currency account surplus means never be forced to convert local currency to pay off foreign obligations.

That's how most of the currency crises develop.

Here in the US, no such luxury.

I think the revolution won't be in China.

[jimmygu3]

Re: Will US Treasuries replace Gold ?

I have no idea where you could go to find the correct data. Perhaps shadowstats.com would be a start. According to the government, we had 3.3% growth last quarter and the lowest inflation in 17 years. I certainly wouldn't look towards them for accurate data.

Also, inflation adjustments would certainly matter if they were calculated incorrectly. My point is that the methodology used to calculate GDP is flawed. The flaws are in the hedonics adjustment, imputed rents, GDP deflator, etc.

I saw the chart on shadowstats but that only shows YOY change. My point about inflation cancelling out is that the same inflation multiplier would be used in the numerator and the denominator. Irrelevant, since these are nominal figures we are talking about, not inflation adjusted.

OK, here's another ratio I decided to check. Median household income (nominal) has doubled since 1993 to $61k. Public debt per capita has not quite doubled over the same period, from $16,600 to $31,800. So the public debt/household income ratio has shown a small net decrease over the last 15 years. The national debt is not skyrocketing as fast as you may think.

I'm just trying to show that the country is not beyond hope of repair. Some of these banks, yes. USA, no. Sorry for being a bit off topic!

Jimmy

[Supercilious]

Re: Will US Treasuries replace Gold ?

Jay,

I'm still unclear as to why the everyday Chinese would be affected in any way by a dollar crash.

The yuan is still not convertible, and furthermore while those whom export have access to dollars, the typical person does not

Because the $1 box of lead painted pencils you buy today at Walmart would cost them $4 to make (compared to $1.5) today. The Average Joe would find more convenient to buy the Made in USA box of pencils at $2/box and even then would buy less (kids would not afford anymore to throw their pencils on the window or break them to play with the carbon core).

The Average Li, who works in the Pencil Factory nr 322, would become jobless next day. The dollar didn't need to fall (we have a liquidity squeeze only) and look what happens inside China:

http://piaohaoreport.sampasite.com/c...t-of-capit.htm

Another terrible day on the stock market saw the SSE Composite, led kicking and screaming by energy and financial companies, trade more or less straight down by 3.2% to close the day at 2203. The brilliant autumn weather in Beijing (and the best week for air quality I have seen in seven years of living here) seems to have bypassed the market altogether.

Away from the weather there is plenty of bad news for those looking for it. Yesterday Reuters cited a Lehman Brothers report on declining August car sales:

China's passenger car sales fell 10 percent in August from a year earlier, preliminary data showed, due to the impact of the Olympics and weakening consumer confidence, Lehman Brothers said in a research report on Thursday.

The report said auto sales in China, the world's second-largest car market, were
expected to remain lacklustre for the rest of 2008 and possibly into early 2009.
Compared with the month before, sales were down 12 percent, the report said.

Also yesterday the Financial Times warned that “Chinese steel consumption set to fall”:

Growth in Chinese steel consumption is expected to slow markedly in the second half of this year amid weakening demand from the construction, household appliance and automobile industries, according to industry experts.

Yang Siming, general manager of Nanjing Iron & Steel told a steel conference in Xiamen this week that most Chinese steel mills had cut output last month, because of shrinking demand and high costs of raw materials. ”We’ve been cutting production since last month, and according to my knowledge, most domestic mills are cutting output too,” Mr Yang said.

The China decoupling theory is a myth. As long as China has to sit on a stash of treasuries, and are forced to keep the renmimbi in a very narrow window (low enough to have their exports competitive and high enough to have a razor thin profit margin or at least small loss), in fact China's economy is now dollarized (on the cheap). Part of their inflation is in fact a Value Added Tax payed to the american consumer (actually to big importers and retailers).

Their currency manipulation scheme could work great only as long as the dollar was strong and the Fed was fighting inflation When the dollar went south (thanks to Ben) they began to import import our inflation with leverage. Here is an interesting piece:

http://www.thepeninsulaqatar.com/Dis...8091304023.xml