With permission to publish from Monetary Metals http://monetary-metals.com/

By Keith Weiner on November 5, 2014

I proposed seven drivers of financial implosion in my dissertation. My recent writing has focused on two of them. One is the falling rate of interest on the 10-year government bond. As interest falls, the burden of debt rises. Since the falling rate incentivized more and more people to borrow, the number of indebted people, businesses, corporations, and of course governments is large. When the rate gets to zero, the burden of debt becomes theoretically infinite.

In the US, the downward trend is still in a deceptively mild phase (though there was a vicious spike down on Oct 15 to 1.87%). The rate on the 10-year Treasury is 2.3% today. In Germany, it is down to 0.82% and in Japan the metastatic cancer is much closer to causing multiple organ failures, with a yield of just 0.46%.

Two is gold backwardation, which has also been quiescent of late. Although it is worth noting that with these lower gold prices, temporary backwardation has returned. The December gold cobasis is over +0.2%).

I haven’t written much about a third indicator yet. What proportion of government bond issuance does the central bank have to buy? I theorized that when the central bank is buying all of the bonds issued by the government, that this is another sign of imminent collapse. I phrased it, as with the other indicators, as a value that is falling. Collapse happens when it hits zero, if not earlier. Here is what I wrote:

“the average amount of new Treasury bond issuance minus new central bank Treasury bonds falling towards zero (i.e. the central bank is buying a greater and greater proportion of Treasury bonds issued).”

Bloomberg recently published an article about the Bank of Japan’s announcement of a new bond-buying program. Bloomberg presents two facts. One, the Bank plans to buy ¥8 to ¥12 trillion per month. Two, the government is selling ¥10 trillion per month in new bonds. This is an astonishing development.

The Bank of Japan will buy 100 percent of the new government bond issuance.

Popular theory holds that a currency’s value falls as the quantity issued rises. In this view, the yen falls as the yen supply increases. While admittedly not scientific, here are graphs of the Japanese yen supply and the price of the yen in dollars from 1970 through present.

(click on graph to increase size)

 

 

 

 

 

 

 

 

The yen has been falling since 2012, but not because of its quantity. It has been falling because the market is questioning its quality. One way to do this is to borrow yen, trade the yen for another currency, and buy an asset in that currency. This carry trade is equivalent to shorting the yen. So long as the yen is falling, and the interest rate on the bond in the other currency is higher than the interest rate paid to borrow the yen, this is a good trade.

What happens as the yen falls faster? Contrary to populist economics, it’s not good for Japanese businesses. However, it is a free transfer of wealth to those engaged in the carry trade. They can repay the borrowed yen at a cheaper and cheaper cost. When the yen goes to zero (which may take a while to play out), their debt is wiped out.

That’s what a currency collapse is. It’s a total wipeout of debt denominated in that currency. Since the currency itself is just a slice of debt, the currency itself loses all value. While on the surface it may seem good for debtors, it’s a horrific catastrophe. No one who understands the human toll, the cost in terms of the lives wrecked (and lost) would look forward to this with anything but dread.

The objective of my writing is to try to prevent it from happening. We need a graceful transition to gold, not an abrupt collapse like 476AD. It may be too late for the hapless Japanese. I hope it’s not too late for the rest of the civilized world.

By Keith Weiner on October 14, 2014 in Core Economic Concepts, Gold

After President Nixon’s gold default in 1971, many people have advocated a return to the gold standard. One argument has been repeated: consumer prices are rising. While this is true, it wasn’t compelling in the 1970’s and it certainly doesn’t fire people up today. Rising prices—what most people think of as inflation—is a dead-end, politically. People care about rising prices, but not that much.

There is a greater danger to fixating on this one argument. What if you make a really bad prediction? The Fed did massively increase the money supply in response to the crisis of 2008. Many gold advocates predicted skyrocketing prices—even hyperinflation. Obviously, this has failed to materialize so far.

Preachers of imminent dollar collapse have lost credibility. Worse yet, they have poisoned the well. People who were once receptive to the benefits of gold have lost interest (their selling has exacerbated and extended the falling gold price trend). And why shouldn’t they walk away? They can see that some Armageddon peddlers have a conflict of interest, as they are also gold and silver bullion dealers.

The gold standard has nothing to do with buying gold in the hopes that its price will go up. It has little to do with the price of anything—gold or consumer goods.

There’s no doubt that the fiat dollar harms us in many ways. However, the chronic rise of prices is the least of the wounds it inflicts. If prices could rise for a hundred years, then there’s no reason they couldn’t go on rising for another century—or a millennium. There is no finite endpoint for rising prices.

There is a finite limit to the abuse of credit, before the dollar will fail.

The interest rate is a prime driver of systemic failure. Interest has been falling for 33 years, since its peak in 1981. What happens when it hits zero? I don’t refer to the Fed funds rate, discount rate, or any short-term rate. I mean the 10-year bond or even the 30-year bond. In the U.S., the 10-year bond pays 2.3%. In Germany, it has already fallen to 0.91% (not a typo, 91 basis points). In Japan, it’s close to half of that, at 0.5%.

Naturally, the cheaper the rate, the more it encourages borrowing. When the rate keeps falling, the borrowing keeps rising. Is there a failure point for debt?

Along with encouraging borrowing, low and falling interest discourages savings. Isn’t that perverse, to discourage saving? What happens when an entire society doesn’t save?

Our financial system has suffered an escalating series of crises. Each crisis has grown out of the fix applied to the previous one.

The crisis of 2008 was different. No matter what the Fed has attempted, they have not been able to create even the temporary appearance of recovery (other than in asset prices). It’s not merely that growth will be slow, or slower than it should be in some theoretical ideal economic world.

There will be no recovery while our monetary cancer rages, unchecked. We must rediscover the gold standard, which is the only cure.

Our ancient ancestors adopted money to enable them to coordinate their productive activities in their economies. They could only go so far using barter, but money made possible the division of labor and hence specialization. Lubricated by money, there is no limit to economic growth and the development of wondrous products. For example, today we have access to the Internet on a thin handheld device.

The dollar still does perform this function, which is why it hasn’t collapsed yet. However, it is slowly failing. It is increasingly imposing perverse incentives. The dollar is hurting us by encouraging us to destroy precious capital in numerous ways.

The Gold Standard Institute is sponsoring an event in New York City on November 1. I will be speaking about the destruction being wrought by the dollar, including a detailed discussion of the problems mentioned above. I will also propose a practical transition path to the gold standard.

You are cordially invited to join us for a presentation of ideas you won’t get anywhere else. Here is the link to the conference page and registration.

From: http://monetary-metals.com/why-is-the-gold-standard-urgent/