Comments on the Gekko-Denninger exchanges on gold

[Quixote2]

http://www.gordongekkosblog.com/2010/06/shelby-moores-thoughts-on-gekko.html

Shelby Moore's Thoughts on the Gekko-Denninger Debate

Shelby H. Moore of GoldWeTrust.com has some excellent comments with regard to the points raised in the recent Gekko-Denninger debate on Gold. He has kindly agreed to share his thoughts on this blog:


Denninger loses 17 points

Denninger has attempted to rebut Gordon Gekko's latest article, but he did not rebut my comments here (nor my comments in the prior Gekko article here). Readers might want to challenge him to debate me. I can handle Denninger easily.
Denninger fails on numerous points in his latest diatribe:

1) Denninger butchered his own credibility in his prior rebuttal, see #8 in the comments about Denninger's prior rebuttal:

http://www.marketoracle.co.uk/Article20363.html

He proved he doesn't even know what credit is, and does not understand the basics of economics.

2) Denninger argues that discussions that use the word "gold" have no relevance to the big picture, because he apparently doesn't understand that gold is the Ultimate Market Regulator:

http://www.marketoracle.co.uk/Article20263.html

Thus, since most of what Denninger writes about is fraud and lack of regulation, it is difficult to have an intelligently meaningful discussion in his forums without mentioning gold and getting banned. The Dewey Decimal system has nothing to do with it. Denninger invents straw-men arguments to defend censorship. As for the religious dogma, he could create a forum for that, and send all such posts there. Many of us want
to discuss gold's critical role in regulating fraud and other economics, without adding religious dogma to every post we make. I for one, do also have an orthogonal Biblical view, but I am able to separate my gold arguments from my Biblical arguments, and do so at my forum,


http://goldwetrust.up-with.com

3) Denninger clearly does not understand that hyper-inflation in an across the board rejection of fiat, where the masses toss fiat in exchange for any tangible asset they can get. It is characterized by DOUBLE-DIGIT percentage DAILY price rises, even Net 30 credit terms for receivables is not offered during hyper-inflation, and all such commerce ceases.

4) Denninger again flunks Economics 101, because he does not understand that if gold is unavailable for any fiat price, it does not mean that gold is unavailable in trade for some real goods. Thus gold at that point has a near infinite value relative to fiat, but a more stable value relative to real goods. This is a defacto return to a gold standard, which is in
effect what hyper-inflation means. Serious economists understand that gold has tracked oil within a range since 1970s, because the Arabs demand to be paid in gold:
http://www.gold-eagle.com/editorials_08/nielson042410.html
(note the mention of FOFOA at link above, I have refuted one aspect of FOFOA's free gold thesis here:
http://goldwetrust.up-with.com/precious-metals-f6/how-will-we-physically-trade-gold-silver-at-5000-500-t61-120.htm#3227)

5) Denninger again correctly argues that government (society) will attempt to steal (tax) gold:

http://www.marketoracle.co.uk/Article20327.html

However, that is no argument for LEAPS, because the government will steal those first, as they are easier to steal. The only way the government will stop a black-market from flourishing, is if they offer a new fiat redeemable for a fixed price in gold and are able to supply all redemptions (which will be few if interest rates paid are high enough). And in that case, yes we gold investors could lose some due to taxation if we want to participate in the high interest rate compounding (a theft from society of capital), but we will not lose as much as those who are wiped out in LEAPS and other paper investments. And for those who want to be clever, just buy silver instead. Silver should outpace gold appreciation by several times, and I don't see the government will be able to make a
higher tax on silver capital gains, because they won't be backing the new fiat currency(ies) with it and thus such a differential tax on silver vs. gold would cause a flourishing black-market for silver.

6) The dollar has performed horribly in the past year relative to potatoes and other fresh produce where I am. Potatoes have nearly doubled in price in past year, and are 20% higher than they were at the peak in early 2008. Ditto for meat, fish, and nearly every fresh food product, except not for price (because it is subsidized by the Philippine government).

7) Denninger again fails to understand that gold is a hedge against negative REAL interest rates (which must remain negative until end game of hyper-inflation per #4 in my comments to the prior rebuttal from Denninger), not inflation nor deflation:

http://www.marketoracle.co.uk/Article20263.html

8) Regarding crossing the border with gold, Denninger doesn't seem to realize that some have advocated moving your gold now to other locations where you might want to flee. Also there may be other ways to cross borders, e.g. small plane, boat, submarine, diving, tunnels, horse, hot air balloon painted same color as sky, etc.. And if your gold (preferably silver!) is already well hidden where you want to ride out the crisis, then no need to move it until the crisis is over and you are ready to pay the capital gains tax and join the repaired fiat system again.

9) Denninger does not understand that no shooting has to take place if 79% of people buy silver and just hide it well. The fraud fiat system would collapse over night (due to silver's tiny $10 billion annual global supply), and the government wouldn't even be able to back a new fiat system with gold, because the citizens would be holding and demanding
silver to be money. This ideal won't likely happen (because we can't educate the masses fast enough and TPTB would shut down the availability of silver by war or other means if threatened), which is why there will be lots of shooting unfortunately. And those who lost everything in LEAPS will be lacking resources to protect and survive repeated waves of
threats.

10) I disagree with Denninger that USA citizens will be more safe in USA than in every other country. There is going to be a lot shooting going on in the USA, until the system recapitalizes with a new fiat redeemable for a fixed gold price. I am glad that I am 10,000 miles away from what looks to be a 3 million barrels per month oil gusher that can NEVER be stopped, short of a dangerous nuclear device which could potentially fracture the seabed even worse. Valdez spill was 257,000 barrels, and Nigeria wasteland is 13 million barrels total over decades. BP gusher is 4 - 6 million already. How convenient an "accident" to be enable blaming the already coming implosion of the US economy on BP instead of on the central banks.

11) Denninger argues that investment in secular turns in markets is not profitable (calls it "curve fitting"). Does he even realize he wrote that? Amazing. Secular shift investing is not speculation.

12) Denninger is correct that Gekko had an incorrect statement about CPI being "flat to down". What Gekko should have said is that REAL interest rates have been "flat to negative":
http://www.marketoracle.co.uk/Article20263.html

http://news.goldseek.com/GoldSeek/1247554800.php

http://scholar.google.com/scholar?hl=en&lr=&cites=17085238805223103110&um=1&ie=UTF-8&sa=X&ei=g0ceTM_wN4WlcaC7oYcN&ved=0CDIQzgIwBw

13) Denninger argues against himself, where he agrees that there is no way to operate a viable business without being paid in the debt money fiat currency.

14) Denninger apparently is not aware that the Constitution granted only limited enumerated powers to the Federal govt, and thus the Feds have no right to print currency for use in the States, only in territories ceded by the States to the Feds:

http://www.marketoracle.co.uk/Article14178.html

15) Denninger is again correct TPTB want gold standard without silver, as I explained my comments to his prior rebuttal, that both gold and silver are legal tender in the Constitution in order to regulate the manipulation of either one (the free market trades the gold-silver ratio). Indeed the banksters want a gold standard because they can control gold more easily than silver, but they also were able to manipulate silver in the past too:
http://www.gold-eagle.com/editorials_05/moore070306.html

http://www.coolpage.com/commentary/economic/shelby/Silver%20Up%20To%205x%20More%20Rare%20Than%20Gold. html

So that is why we need both. Hard for them to manipulate both simultaneously, as there is nothing else in the world (other than silver and gold) that have sufficient NATURAL stocks-to-flows ratio to be used as store-of-value.

16) Denninger is correct that wild swings in inflation and deflation result when the predominant money is gold and silver, as was case in 1800s. But what he fails to mention is this only affects those who are doing the borrowing ("debtor is slave to the lender" wisdom in Bible), as it manifests in bank runs on banks that created "gold promises" (i.e.
loans) without 100% reserve. But those who hold gold and silver (both!) are immune from this effect. And those who saved in Treasuries under a gold standard, got 33,900% more REAL purchasing power than those who saved in fiat in the 1900s:

http://www.marketoracle.co.uk/Article16212.html

So we already have historical proof that Denninger's socialist mantra of "enforce the law" and "The Quantity Theory of Money" (MV=PQ) fails miserably. In fact, go back 1000s of years for more proof. Why do we bother to debate this idiot? He doesn't understand economics nor history. I could detail all the reasons that MV=PQ is a useless abstraction (for starters,http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-375.htm#3156), but why bother when the historic proof exists.

17) Decling prices does not accompany wages that decline more than prices in deflation, only during inflation. Deflation is rising real wages, inflation is declining real wages:

http://www.marketoracle.co.uk/Article16212.html

This incorrect understanding about what is deflation is really screwing up most of the "anal-ysis" I see out there. I also debated Mish about this and I think he understood:

http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-360.htm#3008
(read the several posts at link above)

http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-375.htm#3164

Denninger has most of the facts correct, but he makes the wrong conclusion, expecting deflation, because he only looks at the demand destruction. He forgets that all of this is mis-allocation of capital and so supply will also be destroyed. Actually supply of some things (e.g. houses and a slow form of euthanasia "health care") will be too much and
other things that depend on credit, energy and their long-term investment, will go into shortages, i.e. food:

http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-375.htm#3079

18) Denninger is correct that gold does not regulate socialism evenly, but rather in rapid bursts called hyper-inflation. All his politicking won't protect him from being wiped out by the Ultimate Regulator (which will never fail, it just waits to act when the most people can be obliterated for their sin of debt and credit):

http://www.marketoracle.co.uk/Article20263.html

Good luck to all fools.
__________________________________________________ ______________________________


Shelby H. Moore III is the sole or contributing programmer of numerous (some million+ user) commercial software applications, such as Corel Painter, Cool Page, WordUp, Art-O-Matic, etc. He has an education in engineering and math. He is also the programmer and owner of coolpage.com, a site that was the first social network with million+ users in 2000, before friendster, myspace, and facebook existed.


For more articles by Shelby, please refer to the links below:

http://www.marketoracle.co.uk/UserInfo-Shelby_H_Moore.html
http://www.gold-eagle.com/research/moorendx.html
http://financialsense.com/fsu/editorials/moore/archive.html

[Quixote2]

http://www.gordongekkosblog.com/2010/06/fofoas-take-on-gekko-denninger-debate.html


FOFOA's Take on the Gekko-Denninger Debate

FOFOA has just written an excellent article expressing his Thoughts on some of the points brought up in the recent debate between your's truly and Mr. Denninger. Here are some excerpts:


I would like to thank Karl Denninger and Gordon Gekko for providing the backdrop I was looking for in order to present a few concepts and Thoughts.


Karl to Gordon Gekko: You can no more provide evidence that "gold is the only real money" any more than I can prove there is a Christian God.

What I can provide is evidence that gold is the only real wealth reserve accepted by those that create our money. Debt instruments, like Treasury Bonds, have a strange parity relationship with the value of the currency. They don't quite float, making them a poor wealth reserve. If/when the dollar collapses, so does the debt denominated in it. Gold, on the other hand, when marked to market, floats quite well, even in a currency collapse.

As for gold being the only one with this specific characteristic, just have a look.


Karl to Gekko: But to believe that gold will offer you sanctity, you must believe several things:

1. The currency you have now (dollars, in the case of the US) will collapse. Again, if you're going to predict this, you must both predict an event and a time or your prediction is not actionable.

Not true. In some cases throughout history it was best to prepare for the normal event of currency collapse as soon as its possibility became apparent. Currency collapse is a normal event, even if it is extremely rare. Just like death, it only comes once; but it does come once to everybody. And the logical implications and extremely high impact of this event are great enough that it is well worth preparing for without knowing an "actionable time".

In fact, those that took Another's and FOA's advice "too early", back between 1997 and 2001, have had to "suffer" through a 500% increase in the marked to market value of their wealth reserves while waiting. Sometimes it is best to be early.


2. Gold (or whatever) must maintain it's value in real terms. That is, I must continue to be able to buy and sell it in exchange for other things. But you already claimed there would be none on the market at any price - that is, there would be no trade in it at all. If this is the case then it is worthless, not priceless.

What is referred to here is the chaotic transition period between the failure of the fractionally reserved paper gold markets and the emergence of a physical-only free gold market. During this rocky transition any former parity between "the price of gold" and the price of actual physical pieces will be broken. This is when no physical will be available at the published price.

As for the physical price, it will be unknown as it rockets in the background to new heights. So yes, any paper gold will be worthless during this time, and any physical gold will be priceless. Congratulations, you are both right!



3. Government cannot steal it, or you won't have it. But history says that government will steal it. And they don't have to do so by outright confiscation either - they can whack you with a 90% tax on it at the point of sale and demand that all dealers register and report. Oops - they already did the latter after 9/11!

What Karl says here is technically possible as long as continuity is maintained in the official pricing of gold. But what I write about here is a functional change for physical gold. And in this new function governments will find it in their best interest to encourage citizens to hold gold for the purpose of decentralized clearing. This will be preferable to the alternative which will be holding your trading partner's currency.

Gold will not be a transactional currency. That will be the dollar or other fiat currencies around the world. But gold will replace the centralized function of the US Treasury bond and other debt instruments, in a decentralized way.
We will transition from this:

Into this:

I will not go into great detail here, but logical deduction is the best proof that it will not be plausible for governments to track and tax the capital gains realized by physical gold holders who ride out the fire of change. I am talking about discrete, disconnected and discontinuous pricing before and after.

And I am warning of the chaos that paper gold holders and paper gold price-trackers will realize as their price goes to zero. This is the price governments track for capital gains purposes. Most Western gold investors will be wiped out when this price ultimately proceeds from $1,250 today to $0 at some point in the future.

I have also collected logical evidence and arguments as to why a physical gold confiscation is nothing to worry about this time around. Please see: Confiscation Anatomy - A Different View

And lastly, on this subject of confiscation through taxes, the governments of the world will find their softest and most sensible target in the mining operations that they license. Not in the small percentage of Western gold bugs that had the foresight to buy physical coins instead of shares.


..............................................
Karl to Gekko: Then your base claim - that gold is a inflation hedge - that is, it will hold value - is false.

This is true under today's semi-free gold trade. The paper market automatically suppresses the price of physical gold through physical parity with inflating paper gold. The same as gold was suppressed at $35 in 1970. This is true even if you don't believe GATA that the Fed actively suppresses it.

It was also true under the fixed parity of the gold exchange standard. But just like physical gold holders in 1933 and 1971 profited from revaluation, so today physical holders will profit when parity is broken between paper contract gold and physical gold in hand.

And once this separation is complete and physical gold finds its natural equilibrium as a wealth asset parallel to fiat currencies, then and only then will gold be the inflation hedge par excellence. This future stasis is what I call Free Gold.


Karl to Gekko: Indeed, your position is nothing other than a speculative bet - a gamble.

What isn't a gamble today? We are on the brink of a major discontinuity. Are stocks not a gamble? Perhaps they are the best gamble if you expect normal inflation and economic recovery. Are bonds not a gamble? Perhaps they are the best gamble if you expect deflation of the type that perpetually increases the value of the dollar, even in the face of unsustainable debt.

But how do each of these investments fare in the opposite situation? How are stocks in a deflation? How are bonds when the dollar is falling? How do derivatives fare when counterparties cop to insolvency?

And what happens to all of the above when the currency collapses? No, it's not the dollar bills in your wallet nor the quarters in your pants pocket that threaten the system. It is all the contractual debt that requires payment in those things. If that debt can't be paid to the satisfaction of the creditors that earned what he loaned with real labor, then that dollar in your wallet will fail. The mountain of debt is inextricably linked to the currency itself.

Sure, foreign debt can cause a currency collapse quickly. But what about domestic debt? What about the biggest debt in the world being owed by the biggest printer in the world? How long does that take to collapse? 30 years? 40 years? And when should we start counting?

So which is the bigger gamble with your life's savings, your family nest egg, you children's inheritance at this particular time in history? Is it a bigger gamble to keep it denominated in a precarious piece of paper printed by the global debtor par excellence? Or is it the solid, private, physical wealth reserve with a 6,000 year track record that, incidentally, the central banks and sovereign wealth funds hold as their wealth reserve?

The health of your nest egg is a very private matter, just like the health of your body. Do not entrust it to the opinion of others who will not lose a penny if you lose. Do not blindly follow the advice of anyone. Answer the questions above yourself. Think it through. Understand! Then decide for yourself.

This is no cult as Karl thinks it is. Some people here lost a lot of money in stocks, bonds and real estate before they started thinking it all through. Others here made a lot of money in these same schemes, and then went in search of the best way to consolidate that wealth before the coming discontinuity that anyone with eyes can see coming. Yet others, some that I have received generous support from, have family money, old money, and they thank me for sharing publicly what they already understand.

I recommend you read the article in its entirety here. http://fofoa.blogspot.com/2010/06/equilibrium.html

[gunDriller]

Denninger reminds me of the Rain Man character.

he does a great job on a lot of financial stuff - he's close to a prodigy ... but on his political rants and his gold rants, he's your basic ... well let's just say i avoid those.

[Gknowmx]

Money is debt.

Credit is neither; at best it is near money. Time and again, higly regarded figures demonstrate their lack of ability to grasp the fundamental and simple (yet not easy) concept of money. Denniger is closest to being correct (not Gekko) that we all have the power to create money. Unfortunately, GG (and probably Denninger) confuses the concepts of money, debt, credit, currency, and legal tender to say the least. Sadly, this renders most of this exchange little more than emotional and entertaining prose.

We haven't had a good discussion about these terms since the GIM days. looks like a few folks might be ready for such a discussion.