The Bermuda Triangle of Currency

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Published : June 07th, 2009
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Question: How long do they disappear in the Bermuda Triangle? How do they describe the experience?
By candylove Asked Jun 15 2008 3:50PM

Answer 1: By Suzycue
They don't describe it because they are never found again!

Answer 2: By Annon
They go forever. They don't describe it.

I watched a docco though. It said, one of the reasons that planes keep going down in that area is that it is a highly active storm region. You seen the movie, 'The Perfect Storm'? It's a bit like that - different drafts and different temperatures of air bashing around in that particular area, all meeting there for some unknown reason, creating some wicked storms.

But you know, they don't know, because people just disappear when they go there.



Poker and the Stock Market

In some card rooms where people play poker, there are employees called Prop Players. The name is short for Proposition Player, also known as a House Player, a Stake Player or a Shill.


Card rooms sometimes employ house players in order to ensure that there are enough players to start and maintain games or to gain an additional source of revenue from the player's winnings. Many gaming jurisdictions have rules governing whether or not house players are permitted, whether or not they are required to identify themselves, and the purposes for which they may be used. Player attitudes toward house players vary based on the type of house player in use. The use of easily identifiable proposition players is generally accepted on the one hand, while on the other hand the use of shills generates distrust.


In the poker world, these prop players play with their own money. They can win or lose hundreds or thousands in a single day. But normally, they are paid a salary for staying at the table when the paying customers start to thin out.

The main reason card rooms use prop players is to lure in real players with the illusion of a bustling and vibrant game. In the stock market, the prop players are the large market makers that receive rebate money in exchange for "providing liquidity". Keeping the market liquid means that any real participant will always be able to buy or sell, even if the price is not ideal. It gives the illusion of a bustling and vibrant marketplace.

Now imagine a card room where the majority of the people at the tables are shills. Imagine that they are not only being paid to play, but they are actually allowed to play with the casino's unlimited chips, not their own money, yet they get to keep the profits they make. Going even deeper, imagine that the casino allows them to cheat in various ways to maximize profits.

You would not want to play in this card room if you knew what was going on, right? Over time, the entire card room would become a festering snake pit of shills just waiting for an unsuspecting victim to walk through the door. What kind of a game would this be? Would you call this a scam? A swindle? A trap? A fraud? How about a racket?

The difference between Real Money and Play Money

When you first sit down at a table, you must exchange your dollars for plastic chips. This exchange of "real money" for play money is made possible by the faith of the players that at the end of the game they will be able to turn in the plastic chips at the same exchange rate. And also because of the expectation that, with a little luck and skill, the players will be able to gain some chips prior to cashing out.

In the real world, this same exact faith-based system is used to entice people to exchange real, valuable goods for paper notes. The expectation is that later, someone else will take those paper notes from you and give real, valuable goods in exchange. And while you are holding the mere paper, the real world "casino" offers you many games in which, with a little luck and skill, you MAY be able to gain some more paper notes before cashing out.

The big difference between the real world and the casino is that the casino still operates a "Cashier Window" or a "cage". In the real world they permanently closed the "Cashier Window" back in 1971. So today, in "the big game", you can only cash out your chips as long as fresh new players are coming through the door.

So now, imagine that you were lured into playing poker in that festering snake pit of shills. After a few hours of losing, you start to realize where you are. You go to cash out your remaining plastic chips and you are told that the Cashier is closed. You glance at the doors and realize that you haven't seen a new player come in for hours. Without showing your panic, you must now formulate an exit strategy. You must identify the few remaining "real" players and try to sell them your chips. As your panic grows, you may even be willing to take less than full face value for your plastic chips. What a nightmare, huh? Now you know how China feels.

Credit doesn't even matter, Neither does M2 or even M1 really

We all know that prices have collapsed. Since early 2007, the average house price has collapsed about 32% (Case-Shiller). In 2008 through late November, the S&P 500 collapsed 49%. Over the past two years, a "balanced" 401K has collapsed in value about 35%. But does this mean we have "deflation" as so many deflationists have been proclaiming? No, it does not. As Adam Hamilton explains in
Big Inflation Coming 2, you must look at the cause of the falling prices:


Deflation is purely a monetary phenomenon. If prices of anything are falling simply for their own intrinsic supply-and-demand reasons, and not as a consequence of monetary contraction, then it is not deflation. In reality, the money supply was skyrocketing in the panic.


To get around this small problem, the deflationists tell us that "the money supply" is different today. They tell us that the money supply includes credit, and since credit has collapsed, so has the modern money supply, ergo, DEFLATION. But as Adam Hamilton explains, credit is simply access to someone else's money!


Only a central bank can directly affect the base money supply. Yes, commercial banks can expand credit through fractional-reserve banking, but credit is not money. Credit is just access to someone else's money. If I offered you a $100k check as a gift, you'd be pretty excited. If I offered you this same $100k as a loan, you wouldn't be. Money and credit are very different beasts, so don't make the mistake of assuming credit contraction automatically means general deflation.


To get around this small problem, the deflationists expand their definition of "the money supply" to include "broad money", which really means "assets" or "derivatives of money" that people generally believe to be "as good as cash". These are the assets where people "park their money". But the money doesn't stay parked. It gets loaned out or reinvested by the banks. And the people that hold these assets hold only a paper promise of the later return of their paper money notes.

To give you a few examples, M3 used to include "large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets." [Wikipedia]
M2 includes smaller CD's, savings accounts and money market accounts. "M2 represents... for money." [Wikipedia]

Even M1, which is generally considered "narrow money", is still not money. It includes checking accounts, debit accounts and traveler's checks. While these types of accounts "spend" like money, they are still one step away. They are still a derivative of money because the banks do not hold all the money you think you have in your checking account in a segregated account waiting for you to spend it. They only hold a small portion of it. The rest they loan out or reinvest. So when you empty your checking account in the process of a large purchase, the bank must demand cash from somewhere else in order to pay for your purchase.

This demand for real cash actually affects the supply and demand curve of money itself. If everyone tried to empty their checking accounts at the same time this would create a HUGE demand for real cash, whether or not it is digital credits or physical paper FRN's. This is called a run on the banks. In the 30's, this happened when people took out physical cash to stuff in their mattresses. Today it could also happen if everyone maxed out their debit cards at the same time, spending the money into the market place.

In either case, this massive demand for real cash (whether it be digital or physical) exiting the banking system will create an upward spike in the value of the dollar. As long as you are simply "hoarding" your money in a checking account, you are not affecting the supply and demand of money. You are not affecting "inflation" or "deflation". In fact, you are not holding money. You are holding the promise of "real cash".

This "real cash" is best described as M0, or the Monetary Base. M0 is "currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply. The monetary base is sometimes called M0, but this denomination seems to imply that M0 is part of M1, which is not the case."

The important point here is the part of the Monetary Base that is not included in the M1, M2 or M3 measurements, namely "real cash" reserves (whether digital or physical). These are the reserves from which the banks can pay your vendor when you empty your checking account. And these reserves RELIEVE the upward pressure on the value of the dollar that a modern "bank run" would cause. In other words, they RELIEVE the risk of true deflation, even amidst a wide world of misunderstanding. In fact, they not only relieve one risk, but they become potential energy poised to create the OPPOSITE effect.

So, let us take a look at what the heck is going on with the Monetary Base. For this, we return to Adam Hamilton of Zeal LLC:


M0 growth was trending lower in 2008... But then the stock panic erupted and the Fed panicked, getting swept away in the fear. Bernanke decided to inflate far faster than has ever been witnessed in the Fed’s entire history since 1913.

In October, the scariest month of the panic when the S&P 500 plummeted 27% in less than 4 weeks, the Fed suddenly expanded the monetary base by $224b. This was a 25% surge in a single month, just insane. And it led M0 to rocket to its highest YoY growth rate ever by far, up 36.7%! But the Fed was just getting started in its unprecedented inflationary campaign.

In November it grew M0 by another 27% over the prior month, yielding 73.0% YoY growth. In December it again grew M0 by 15% MoM leading to a mind-boggling 98.9% YoY gain. In 4 short months, the Fed had literally doubled the US monetary base! Something like this has never even come close to happening before, so we are deep into uncharted inflation territory here.


Click on image to enlarge



By late December this information slowly started to leak out and contrarians who have studied monetary history were appalled. Was the Fed mad? Bernanke responded to these growing criticisms in Congressional testimonies, promising that the Fed would remove its “accommodation” (a euphemism for inflation) as soon as possible. Even though the Fed has never shrunk the money supply noticeably, Wall Street curiously took Bernanke at his word.

So every month since the panic ended in mid-December, when the VXO fear gauge fell back out of panic territory, I've been watching M0. In 3 of the 4 months since (May data isn't out yet), the Fed has actually grown M0 further! In January, February, March, and April, the absolute annual M0 growth rates weighed in at 106.0%, 88.5%, 97.9%, and 111.0%! And in April alone M0 surged to a new all-time record high. And by late April the stock markets had already rallied 29%, yet the Fed was still rapidly growing M0.

Friends, this data is flabbergasting!


Friends, this is the perfect setup for hyperinflation, which is similar to "deflation" in that it happens during the WORST economic conditions, similar to "inflation" in name only, and in all practical ways, the same thing as "currency collapse".

Inflation/Deflation is the wrong focus, Currency Stability/Collapse is what we should be watching

Please don't take my illustrations the wrong way. I do not expect that my Thoughts will ever make it into an Econ 101 textbook. I am simply making some broad points for you to think about.

As Albert Einstein said, "everything should be made as simple as possible, but no simpler."

This is part of my problem with the common understanding of economics; it is far, far, far more complex than anyone realizes. And it is far too complex for our simplistic understanding of "inflation" and "deflation". In fact, the discussion of these topics, "the debate", is so horribly flawed by simplicity and misunderstanding that it is simply worthless and pointless.

I find myself to be a "hyperinflationist", yet I agree with the "deflationists" on economic grounds, and with "inflationists" on monetary grounds, and I agree with the "Austrians" that most of the world completely ignores human psychological factors to the point of global catastrophe.

So this is my attempt to shape my own Thought process on our developing situation. Perhaps some of you can help!

Simple minds (and I'm sure you know a few) look at the average price of everything to determine inflation or deflation.

If prices are moving up, we are in "inflation". If they are moving down, it's "deflation". For the most part, this includes the MSM.

There is just one simple dot (prices) that exerts pressure on this ephemeral thing we call 'flation. What could be simpler?

Moving along, we have government minds. They see this same dot exerting pressure in one direction or the other, but they try to control what it is saying to the world by carefully defining a basket of goodies.

When the government's "basket" is getting more expensive, we have inflation. Of course, being the government, they also have "the power of substitution"! So if steaks are getting too expensive, they will substitute ground beef. Or if gas and food is too volatile in price, they will just ignore gas and food. Or if personal computers are remaining stable in price, but the processor speed is growing, they will say that the price of "processor speed" is falling.

Suffice it to say that government minds are a "basket" case when it comes to inflation and deflation.

Also in the one-dot category we have some purist Austrian minds.

I mean no disrespect to the Austrians. Like
Richard Maybury, I use the Austrian model. But to many unsophisticated modern followers of the Austrian school of economics, inflation and deflation is simply a one dimensional function of the money supply. Money supply up, inflation. Money supply down, deflation. This view ignores many important variables, like economic growth and contraction relative to the money supply (to name one).

At least the modern Austrians apply a firm definition, which you can't say for the simple minds or the government minds. But by sticking to such a strict definition and model for inflation, in my opinion, you make "inflation" itself irrelevant to the current situation. (More on this in a moment.)

As we get a little more sophisticated, we come to Keynesian minds. These highly educated (read: programmed) minds see two dimensions where simple minds and government minds see only one. The two dimensions are the supply and demand forces of both money and goods.

In this linear model, each dot can exert up or down pressure on the other. You could have money supply growth and a stable supply of goods and you will get demand pull inflation. The demand for goods from the high money supply pulls upward on the price of a limited supply of goods.

Or if you have a shrinking supply of goods in an economic contraction paired with a stable money supply, you will get cost push inflation. Here the cost of a smaller basket of goods pushes up the price relative to a fixed quantity of money.

Of course you can have varying levels of up and down pressure exerted from each side onto the other, causing varying levels of inflation or deflation. The first derivative of this supply and demand pressure is the velocity of price movements. The second derivative is what the Keynesians watch closely. This is the acceleration or deceleration of inflation. This measurement can give you readings like "disinflation", or a slowing of the rate of inflation.

After taking these measurements, the Keynesians adjust the valves, meaning they print money at a slightly different rate. You see the Keynesians believe they can control the economy with one tool, the speed control of the printing press. It is kind of like trying to build a house with only a hammer.

Personally, I believe that this thing we pay so much attention to, this thing we call "inflation", is vastly more complex than any of the models even recognize. I believe it is unimaginably complex like Richard Maybury's ecology of biological organisms (PEOPLE).

But in an effort to follow Einstein's advice, here is my diagram:

While I believe that money and goods exert supply and demand pressure on each other, I believe that the much more important variable is the psychological state of the humans through which the money and goods pass. Human psychology provides the actual demand. Money and goods provide the supply. Human psychology provides the analysis of the supply and, in certain circumstances, fear drives the action.

But because I must compete with a few different (fairly well defined) definitions of inflation and deflation, I will make the bold statement that inflation and deflation are not what we should be worried about in our current situation. Instead, we should be watching to see if our currency is stable (behaving normally) or collapsing (behaving like all fiat currencies eventually do). In other words, is our currency simply having a mid-life crisis, or is it 96 years old and dying?

I think that right now we are in the midst of the Perfect Storm for a currency like the dollar, a purely symbolic fiat currency that has spread itself over the entire globe.

Look at the above diagram. The monetary base has literally exploded parabolically. The economy is contracting which is applying at best, second derivative downward pressure on the supply of goods, and at worst downright shortages are already in the pipeline. Meanwhile the state of global human psychology is very dollar-negative. The demand for necessary goods is high and growing. The fear of inflation is starting to come back. And only God knows how long it will be before the fear of starvation starts to spread.

I know many people who are stocking up on durable food-goods. So these Thoughts are circulating. The trend is established. The second derivative is showing acceleration and we are no where near reversal.

So forget about inflation versus deflation. Think instead about currency stability versus collapse.


Julian Robertson Bets the Farm on Inflation

Simply put, Julian Robertson is the definition of a hedge fund legend. And, his success is noted by the fortune he has amassed as he now graces the Forbes' billionaire list. He has pioneered a successful investment methodology, he has generated outstanding returns at his famous hedge fund Tiger Management, and his influence has sprouted some of the most successful modern day hedge funds in the form of the 'Tiger Cubs.' And, most importantly, he predicted the financial crisis two and a half years ago in an interview with Value Investor Insight. When he talks, you listen...


Julian Robertson is "betting the farm" on inflation. Billions!! Yet he avoids gold, saying, "I've never been particularly comfortable with gold as an investment. Once it's discovered none of it is used up, to the point where they take it out of cadavers' mouths. It's less a supply/demand situation and more a psychological one - better a psychiatrist to invest in gold than me." Adding, "Zinc would also seem to me to be a very good inflation hedge."

The point is that this exemplifies the danger of being right when you are watching the wrong thing. Jim Sinclair is exactly right...


[Julian] Robertson is right, so we are right, as the [interest] rates he looks for come compliments of a currency event that delivers hyperinflation. He just has to be sure the other side or sides of his OTC derivative puts up margin on a daily basis or he could be 100% right and not get paid one penny.


If you are cruising through this crisis with your wealth stored in financial products that derive their value from someone else's promise, or if you are "going to cash" as the deflationists recommend, then you might as well be flying through the Bermuda Triangle in a rickety old airplane, low on fuel, during the perfect storm. And actually, that is a poor analogy, because the dollar faces more dangers than that airplane.

This IS the perfect storm for the dollar. The trend is established. The second derivative is showing acceleration and we are no where near reversal. The Fed is still expanding the monetary base.
This man is your pilot. He has mastered (Keynesian) ground school, but he has never flown through a storm like this. But don't worry, he has "theories" on how to make it through.

So do I.



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