Down we go …

Daily Bell: Is the world headed toward a further depression?

Hugo Salinas Price: It is headed for worse than depression. It is headed for collapse, and the direct cause of this has been the idea that the world could manage quite well without gold money. In 1970, total international reserves, excluding gold, were about $50 billion dollars. Today, total international reserves, excluding gold, amount to just under $11 Trillion dollars. What has happened is that the “payments” of trade imbalances between nations, since 1971, have been with fiat currency – the dollar, the British pound, the yen, and lately, the euro. None of these currencies can achieve settlement, a cornerstone concept; the dollars are in effect certificates of credit, and pay no interest, so they are exchanged by the creditor (exporter) countries for bonds, which are certificates of a debt obligation: there is the proof that there has been no settlement of trade imbalances. Then the bonds are used to build a pyramid of local fiat money.

Total world debt relative to world GNP (here I have to resort to a term – GNP – that is a fallacious concept of present-day economics) is so great that it cannot be sustained. The whole apparatus is coming down. There is no alternative to collapse. Collapse is not comparable to depression. From a depression, if humans are allowed to act, the mistakes can be written off and human effort will restore prosperity. Collapse involves social collapse, and with social collapse you get social fragmentation and revolution. Dark days ahead!

April 24, 2013admin 7 Comments »
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7 Responses to this entry

  • Mike Says:

    Bitcoin – and not a moment too soon!

    [Reply]

    admin Reply:

    Yes, Price’s picture has to be bullish for BTC … I expect it’s some distance from consensus wisdom right now, though.

    [Reply]

    Posted on April 24th, 2013 at 5:12 pm Reply | Quote
  • Nick B. Steves Says:

    I have been tracking predictions of collapse for a long time. Someone will eventually be right. But as Lord Keynes said, the market can stay irrational much longer than you can stay solvent. I turned perma-bear in ’06 and (alas!) missed out on some impressive gains, if I had postponed my abandonment of conventional assets for two years. Early as usual, Nick B!!

    As Mike alludes, bitcoin is a potential game changer, with all the requisite caveats and quid pro quos about whether it will actually be allowed to live and exchange markets can get their crap together. If, as is now only epsilon possible, BTC were to gradually unseat USD as global reserve currency, it could make for a relatively soft landing (i.e., less human sacrifice, dogs-n-cats living together, mass hysteria). We shall see. If, as I am now publicly predicting USD/BTC reaches $1000 during this calendar year creating an M0 center of gravity of ~11 billion, it may by that time become too big to cleanly kill.

    [Reply]

    admin Reply:

    “I am now publicly predicting USD/BTC reaches $1000 during this calendar year…” — courageous!
    Remember Handle’s warning though: in principle, even remotely efficient markets make timing unpredictable.

    [Reply]

    Nick B. Steves Reply:

    What is very odd based on my (admittedly amateur) calculations is that it almost purely growth in the transaction market that drives BTC price. The higher the price, the LOWER the speculative trade vs. transaction ratio. The effect is, I think, what Moldbug predicted in his Bubble Theory of Money, but it is not being driven principally by store of value people, i.e., speculative investors, but by people just wanting to spend it. Quite paradoxical. I could be miles off… But it seems the higher the price goes, the more stable the currency will become (the battery gets more fully charged and thus harder to drain down in Moldbug’s parlance), and the more popular it will become for transaction use (more vendors and customers, less scared to hold the “volatile” currency), which will continue to ratchet the USD price in only one direction: Up. Volatility isn’t so bad when it mostly goes in your favor.

    If someday, the Chinese demand BTC to balance US accounts, that will be an end of trade deficits, and BTC will be properly market valued (in at least 5 figures).

    [Reply]

    Mike Reply:

    “What is very odd based on my (admittedly amateur) calculations is that it almost purely growth in the transaction market that drives BTC price. The higher the price, the LOWER the speculative trade vs. transaction ratio.”

    Actually if you think about it, that makes sense – in every currency trade, for every speculative buyer pushing up the price, there’s a speculative seller pushing it down. By contrast, increases in transactional usage of Bitcoin involve buying and actually _holding_ bitcoins for at least a while, then using them to buy something, then possibly the merchant (or more likely, payment processor) at the other end might eventually get around to converting the coins to domestic currency.

    The effect is that BTC is taken off the speculative market, at least temporarily, and so the lower supply of BTC on the speculative market causes the price to increase.

    Just a theory. But it’s superficially plausible at least.

    Nick B. Steves Reply:

    Doh. That makes sense. I must have missed that part in Moldbug.

    This whole superdeflation argument, that the currency is so valuable that no one will want to trade it is just pure bunkum, and I think we have controlled experiment underway that may (once and for all) prove it.

    People keep trading in the same number of USD for fewer and fewer BTC to get the same amount of pot, porn, alpaca socks. That makes them happier and happier to hold onto a few extra BTC, the more BTC they hold, the richer and richer they feel, and the more they’ll want to buy. If BTC crashes, they go “bummer”, but they still want the pot, porn, and alpaca socks, so they keep buying in, holding as few BTC as possible, until the pattern resets itself and it becomes attractive again to hold a few more and so on. The cycle will tend to ratchet up with the “GDP” of the BTC economy. The USD price should be a linear function of that “GDP” multiplied by the speculative trade ratio (which trades ultimately, if on anything at all, on future such GDP estimates). So we should expect BTC to track BTCGDP-squared until it is either killed by “externalities” or takes over the world, at which point we will be at or near a steady state and there will no longer be hyperdeflation.

    Posted on April 24th, 2013 at 7:15 pm Reply | Quote

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