Credibility Inflation - FOFOA - FYI

[Ragnarok]

Snips:

"Here's a neat little concept that FOA introduced briefly in 1999. I think it explains a lot about the inflation, deflation, hyperinflation debate when it finally sinks in that this is where all the money went for the past 30 years: into inflating the credibility of the $IMFS far beyond the underlying reality. And yes, it has a direct impact on the Freegold revaluation as well. So here I will try to expound on this enlightening concept just a bit."

"The Credibility Waterfall

I think it is fair to say that we have finished our 30-year run of high credibility inflation and we are now in the early stages of credibility deflation. The real question now is, can the credibility of the financial system deflate without tripping a breaker, without causing a credibility waterfall in the currency in which it is denominated?

The difference between today and a few years ago is that a few years ago credibility inflation was being fed by private credit (debt) expansion. Asset values, like homes, were being sustained and driven higher with the arrival of new marks. But today the Ponzi cycle of credibility inflation has peaked, there are no more new marks, and its decline is being managed centrally with the government expansion of new base money to conceal the failures one at a time.

And as in any Ponzi scheme there comes a point when redemptions can no longer be financed by new marks. I think the tipping point of credibility must come once it is clear that Bernie Madoff, I mean Uncle Sam is writing redemption checks that can never be cashed. The point is, we are already past the tipping point. So timing isn't really a question anymore. The credibility waterfall has already happened. But somehow we still have early marks continuing to stockpile rubber checks as if they are worth something. Does this mean credibility still exists? I think not.

I suppose this begs the question, is all that dollar debt out there in the world really worth anything anymore? If you answer yes simply because you cashed some of it in today for new underwear, then I say you didn't answer the question. The question is, is all that dollar debt out there in the world really worth anything anymore? The answer is no, it is not. Only at the margin, where you reside, can it still be cashed in for new underwear. But in aggregate, it is worthless, even today.
And then the next logical question should be, what is gold really worth today? If you answered $1,240 per ounce simply because you bought a gold Eagle today for $1,240, then I say you didn't answer the question. The question is, what is gold REALLY worth today? And the answer is it is priceless, but probably could be had in extremely large volumes for somewhere between $10,000 and $50,000 per ounce. (How much physical gold could China realistically get today if it tried to cash in $2T in debt paper for gold? At today's price it could get more than 50,000 tonnes, but only if that's the real value of gold.)

Only at the margin, where you reside, can physical gold still be had for $1,240 per ounce. But in aggregate, in the vaults of the world's central banks as the only reserve asset not tied to the medium of exchange, it is priceless, in the truest sense of the word.

My advice: Get as much of this priceless reserve asset as you can while it's still going for $1,240 at the margin. Seems like a bargain to me."

I humbly suggest you read the entire article - slooowly and thoughtfully:
http://fofoa.blogspot.com/2010/08/cr...inflation.html

FYI, R.

[Gknowmx]

R,

I humbly agree. FOFOA has some brilliant insights. As important as these are, it is sad to see that they don't get more traction on this board. There is a lot of chatter about several internet outlets and mouthpieces but the true intellectuals like Fekete and FOFOA usually get overlooked but for a few here. This is a dangerous mistake. Part of the reason is that the material that each discusses is flat out hard to wrap one's brain around. Another part is that even on a Gold-Silver forum, their esoteric thoughts simply aren't sexy enough to banter about. Thanks for the post.

[Silver Rocket Bitches!]

fixed link: http://fofoa.blogspot.com/2010/08/credibility-inflation.html

[Neuro]

So fiat currency is only worth something as long as someone is willing to accept it in trade for a good or a service, and can subsequently be used to make an investment that reasonably will deliver at least an equal value, when it is cashed in.

It is all based on faith, and when the faith goes, so goes the value of the currency. And the last 30-40 years the credibility of the dollar has been inflated, thus the Federal Reserve and the Banks have been able to issue more and more debt/money. The last year or so the credibility snapped, in total they have not been able to issue more debt/money. In aggragate all the Dollars can't be redeemed for gold, land, goods and services, only on the margin. Since we are on the margin it is a good idea to trade the dollars we have, for goods that actually have an intrinsic value, before the faith in the dollar is gone as a store of value, which can occurr any day now.

[Hatha Sunahara]

I found the Fekete piece he cites very useful. About the Trade Fairs in Lyon France and Seville Spain. This is a great example of the separation of functions of money--namely, the separation of the 'medium of excahnge' function from the 'storehouse of value' function.

The money we use (FRNs) are effectively 'scrip'. Useful only for exchange. If you try to use scrip money as a storehouse of value, you will see that value evaporate. The Fed inflates it regularly at 3% a year. If you use gold as a storehouse of value, you will see it increase regardless of what the Fed does.

This is especially important for people whose 'money' comes from selling their labor. If you work all your life and save your money, it's important to buy something tangible--and not to put the money into a 'savings' account, which should be renamed a 'losing account'. Anything that is a promise with a counterparty is a bad investment at this point in the cycle of fiat money.

Sheeple don't seem to understand this, and really only few economists understand it. FOFOA is good at explaining this. Credibility inflation just means the people who manage the money do things to make you believe their promises to repay you in the future are still good. That keeps their scam going for a little while longer until its inevitable crash. The crash is coming--soon. Gold at $1240 is still a great deal.

Hatha