Dave the Dung Beetle

Dave was a hard-working little dung beetle, to be sure. He thought of no better life than rolling dung every morning, with no particular sense as to why, and then bringing it home to his store where he and his adoring family gazed upon the slowly increasing stash of excrement.

Not for Dave the spendthrift antics of his neighbours, Dwayne, Debbie and Dmitri, who think nothing of just eating what they roll in a day, or - worse! - borrowing dung from other beetles using their own future labour or houses as security. No, our Dave is a dung saver, and he is proud of his hard work to secure his family's future.

But, alas, dung beetle life is no fairer than that in many other spheres, and four years ago a great event occurred in which (for reasons they never entirely understood) large swathes of the dung beetle population lost their access to dung-rolling opportunities and therefore faced ruin. One might imagine that the value of Dave's dungpile would thus have increased, but in fact the opposite occurred. In order to save the population, the king dung beetle arranged for some cows to drop more pats all around the field. There was suddenly free dung for everyone, and Dave watched in horror as his little stash started to erode in worth compared to that of all the other dung beetles.


He still had as much dung as before, of course, but relative to the new supply it was less significant. He could barter for fewer dens, mates and crรจmes de menthe than he could before. Whilst acknowledging the fact that the extra cow pats had probably saved the dung beetle population as a whole, he could not shift the nagging resentment in his little dung beetle brain that the whole affair was unjust. He began to look around for options. How could Dave convert his labour (and his dung stash) into a storable form that would mimic his dung stash but would not have the risk of being devalued?


The solution!

Fortunately, an answer soon presented itself. A number of other dung beetles, who found themselves in the same position, began to give sermons on top of a termite mound, taking care to mask themselves behind a curtain of leaves, with the given reason for this modesty being that the king dung beetle would persecute them for their wisdom. In these mini lectures, the advantages of salt were proclaimed up and down the field.

Now, salt was quite rare in this field, as the only supply came from the few grains spilled by the big farmer when he poured a bit on his tomato at lunchtime. It had thus been long prized by the beetles as a curiosity, as an item of beauty (due to the lovely crystals at the micro scale), and as a rare and finite commodity. They of course had no pressing use for the salt, but the fact that the whole community prized it was sufficient in itself to convince each individual community member that (culturally) salt was something of value and therefore something desirable to accumulate. In fact, up until about forty years earlier, one had even been able to exchange a fixed amount of dung for a fixed amount of salt, and to have had confidence that the conversion could be made back in the other direction at a later date, without relative loss of dung.

The new salt-enthusiasts vividly recalled these days, whilst rarely mentioning the reasons for abolishing the original dung-salt conversion (as to do so would have forced them to admit the leaps in prosperity made in the field since). Dave was captivated: here, at last, was a solution to his problem. No longer would he have to sadly gaze upon his pile of dung, gradually decreasing in worth due to the cows' over-excretion. Rather, he could swap it for a pile of salt, which would in no way diminish in value: after all, one grain of salt would always be worth one grain of salt, and throughout history that had been a proven and demonstrable fact.

Being a cautious dung beetle, however, Dave chose to wait, in order that the arguments of the salt-enthusiasts might be shown to be correct, before making his trade. Last year, he noted the huge rise in the salt-dung exchange rate, and boldly made his move: he swapped 1,900 grams of dung for a grain of salt. For three days he smiled at his purchase, gently fondling it with his antennae, and encouraging his family and friends to come and look at it. Many of them were sceptical: 'you can't eat salt', sniggered Dmitri; 'I prefer my dung where I can see it', tittered Debbie; 'there's huge stocks of salt in the king's den-palace - how can you say it's rare?', queried Dwayne.

But Dave refused to be discouraged. He was at peace, safe in the knowledge that the fruits of his labour were safely secure in that little grain of salt. But, just to be sure, he kept going to the salt sermons: he always felt refreshed after hearing them, not least when the dung-salt exchange rate shifted unfavourably. They provided succour and heart during these difficult times.


A test of faith

When the dung-worth of his investment first started to slide (by some 10%!) he was encouraged to hear that this was because of a field-wide salt shortage that was being hidden by the king selling shares in non-existent grains of salt. Those poor beetles who had bought such shares would be wiped out; but Dave (with his 'real' salt) would be fine, thank goodness. Eventually it was proved that these shares were in fact backed by real grains of salt, but by then the meme was fixed and no true salt investor would dare commit the heresy of contradicting the Salt Purveyors in public.

When the rate slid by 15%, Dave was reassured to learn that there was in fact a secret premium of 20% being levied on all bulk salt purchases. Not for trades of a grain here or there, obviously, but rather for those big beetles who wanted to buy 10 grams at a time. The price of such safety for such large investments was 20%, which meant that Dave was effectively still up 5% on his investment despite the plunging salt chart. To make the point, one of the chief Salt Purveyors started his own share scheme, in which this premium was built in to more accurately reflect salt's true value. This significantly reassured Dave and his like-minded friends, as there could no longer be any doubt about the veracity of this particular meme in their minds.

When the rate slid by 20%, Dave started to feel rather foolish in front of his wives. He'd had a terrible year: partly because of the loss in his purchasing power due to his salt investment, but (more significantly) because he simply could not understand what was going on. The cows had been ordered to stop producing more dung, which meant that the value of dung was rising, and that of salt was falling. The Salt Purveyors had assured him that there would be more cow pats produced than in any time in history, but this appeared to be no longer the case. And of course, the farmer kept coming every day and eating his tomato and tipping more salt on it, which meant that every day more and more salt entered the field. So although the dung production slowed down, the salt production continued at the rate it always had.

Worse: in the next field, there were enormous social and economic problems, which Dave had been told would mean that the next field's inhabitants would in droves be swapping their dung for grains of salt. But in fact, they had simply swapped their (rather thin dung) for Dave's field's more nourishing dung, or for dung from other bits of their own field, which they then imported in. No-one was interested in salt - it was now all about which type of dung was best.

At this point, several of the Salt Purveyors were now conspicuous by their absence. And those who remained had shifted their focus. For, one year earlier, the arguments had all been about macroeconomics and dung inflation and the collapse in the dung in the next field. But now these issues were beginning to be laid to one side. The sermons became more frequent, more intense. 'An amazing buying opportunity'. 'The system is about to collapse'. And, towards the end, 'keep the faith'.

In other words, as the economic imperatives for owning salt did not play out as expected, the Salt Purveyors (many of whom were up to their eyeballs in salt themselves, and thus equally in financial dire straits) fell back on the only ideology that they had left to muster. Keep the faith. Be strong. Keep buying. Our thesis is correct. Everyone else's is wrong. 'I know I'm right and I don't care what anyone else thinks' [since removed from the Salt Purveyors' record - Ed.]. This approach reached its glorious nadir with these words from one Salt-Purveyor who called himself 'Soap':

I tell you this not because I expect this to happen. I tell you this so that you are mentally prepared. IF this happens, it will mark the end of salt manipulation, as we've known it. A brief drop...would allow The King's Palace to finally move to a net flat or even net long position. From there, salt will rapidly recover and soar to new, all-time highs. Of this, I am 100% certain. Therefore, IF salt suddenly falls another 20%, do not freak out and panic sell your grains. This would be the biggest financial mistake you'll ever make.

Dwayne, Dmitri and Debbie tried so hard to tell Dave that this was crazy. They admitted that they had no idea in which way the salt market would go, but they did know that no-one else knew either. To talk of 100% certainty about anything, let alone investments, and then pass this on to naive listeners, was borderline criminal. And although they knew what a bull market was they also knew what a bear market was, and that investments sometimes (often) don't go the way that they are expected to. Heck, they'd even bought a few grains themselves, which they'd sold for a small loss, so they were able to sympathise. The salt price might rise substantially over several months - they had no idea. But they also knew that an event the likes of which struck the field four years earlier could destroy the salt price. Even (or especially) if it hit the next-door field.

And they knew that whenever all the arguments were shown to be not working, that a recourse to 'faith' was a short trip to the poor house.

And they knew that a 20% drop on top of a 40% drop (as was the case for a particular form of salt that was traded in the field) was far from normal and that the Salt Purveyors should know better than to keep dishing out the same old crap day after day and sucking in more and more suckers and screwing up more and more naive retail investors.

And they knew that the Salt Purveyors should finally, in the name of all that is holy, actually show some RESPONSIBILITY and OBJECTIVITY for once in their fucking lives.

But Dave turned his little antennae away from his friends and his family, and he set about scrabbling together the last of his dung in order to convert it into another grain of salt at these knock-down prices.

Poor old Dave the Dung Beetle.

Fin

46 comments:

Kid Dynamite said...

I had no idea that Dung Beetles like Creme de Menthe!

how ironic that you chose SALT! Because if the real apocalypse ever comes, salt will prove to be a much more valuable commodity than gold! (in my opinion)

mr pinnion said...

JDA. You and FOFOA and others have explained the situation extreamly well time and time again.If people still want to buy crap(or salt.Keep stacking KD) then i say good luck to them.
Natural selection and all that.

Regards
Ozzy

GM Jenkins said...

Fantastic! I will speak to my global contacts to get this into the Norton Anthology.

"Soap" has indeed begun to scare me the way he's talking. In his defense though he's putting his ass out on the line with a testable hypothesis, time frame, etc., so let's see how it plays out.

Jeanne d'Arc said...

Fantastic! I will speak to my global contacts to get this into the Norton Anthology.

You sarky bugger...

In his defense though he's putting his ass out on the line with a testable hypothesis, time frame, etc., so let's see how it plays out.

Fair enough. But Soap has also put his 'ass out on the line' pretty much every day since September 2011, and it's a rare day when Soap doesn't declare a bottom. One day, of course, he'll be proven correct.

In a similar way, my blue-eyed lemur grandmother (who is given to bouts of melancholy) has declared for the past 15 years that that day will be her last. She has been consistently wrong in this assertion, but one day - I have no doubt - she will be shown to be correct in her hypothesis. At what point do we declare her a validated clairvoyant...?

GM Jenkins said...

But Soap has also put his 'ass out on the line' pretty much every day since September 2011

I agree, but now he's putting his ass out on the line in ALL CAPS! Seriously I don't recall him ever being so confident/unhinged, you make the call which.

Unknown said...

And then the cows contracted TB and died. The dung supply dried up (growth)and all the naysayers were left with ever decreasing, dried out balls of dung to trade with each other.
Suddenly that supply of salt was something that didn't dry out and lose weight when the spigot stopped producing it.

Clever guy that Dave!

Jeanne d'Arc said...

Well, one can push a literary allusion too far, but let me suggest that if the cows all died then Dave and his friends would be too worried about starvation to be able to enjoy their fabulous salt riches...

cpnscarlet said...

Fortunately, Dave's many friends save more than just salt...

Dont't you???

cpnscarlet said...

Seems to me Dave and Soap are the same person. Or do I have it wrong?

Jeanne d'Arc said...

Erm, yes you do. Thank you for your contribution.

JdA

Unknown said...

"Well, one can push a literary allusion too far"

Is that an admission of liberal fiction or are you retarded? If Dave was holding a readily accepted form of currency (by your own admission) as the other currency declined. Would it be so far fetched that those holding the declining value form of currency (the dung) which grew exponentially only to suddenly be restricted (think volcker)to a level that the currency previously disregarded, previously thought of as one of being unsafe, replaced that of the now proven unsafe?
Or the dung could always try to regain its manufacturing base but I believe the breeding program of this cattle is now in China.
They will sell you the dung for sugar of course. The production will never return. Can you see the idiocy of your argument?

Warren James said...

Easy to get hung up about salt, soap or dung, the primary message here is about basic accountability. I wonder if there is any commentator out there who will give an honest appraisal/post-mortem of the 'buy silver, crash JPM' campaign? Or any of the outlandish claims in the talking bears videos?

I get the sense that something big is going down soon and I'm not ready to relinquish any gold coins unless things get really stupid. I guess some could call it a security blanket, but the holding of physical gold also allows encourages a number of other good things, like thrift and responsibility. This isn't the best thread to discuss it though.

In regards to silver, this has proven itself to be an unreliable store of value (good trade though). Date Silver, Marry Gold.

Unknown said...

"Easy to get hung up about salt, soap or dung"
True, much easier to laugh at a person who likens themselves to a heroin that led a country held in high regard for surrendering at the first opportunity. What say you Joan?

"But Dave turned his little antennae away from his friends and his family, and he set about scrabbling together the last of his dung in order to convert it into another grain of salt at these knock-down prices."

As interest rates rose to protect the money supply and the backlash from republicans watching their wealth eroded reached congress.

Oh! How they wished for those rapidly shrinking, cracked excuses for a monetary base, dependant on growth when none was there. (remember TB?) Those dung balls suddenly looked like inflated balls of shit, slowly shrinking the wealth of those holding them. Dave was sure there would be a market for his dung, but he waited, he waited till the bugs in the next field had depleted their balls and watched as they starved due to no more dung coming. He then took a long walk with his small, portable crystal of salt and persuaded the eastern field to return cattle they had taken during the 'hard times' He gave half his salt and used the other half to buy fencing, a house and some land. He let the cattle roam, he sold the dung to his neighbours, for all the salt they could mine.
They just couldn't eat salt. The dipshits!

cpnscarlet said...

Just say it...

Obviously Soap is TF from the quote, so who do you think is "rolling" Turd? Have a problem with someone out there you think is using TF as a dupe? Just come out and say it.

S Roche said...

In defense of our soapy friend, the day he wrote that he was subjected to some rather pointed and unwarranted criticism from what were obviously a few short term, leveraged traders who were taking his exhortations to stack precious metals and "prep" generally as entry points. He rarely encourages trading on his TA, if he does so, it carries all the usual disclaimers.

I like Turd because he expresses his opinion and explains why he holds it, even printing his hand-written S/R lines. He openly acknowledges his errors (Dum-Dum Turd was the heading of one of his posts after the market reversed on his call), and he is entitled to his victory laps, such as June 1st short-covering squeeze which he correctly anticipated.

Another reason I like the Turd is that his site is evolving through his and his many contributors comments. Sort of like Fullermoney's Empowerment Through Knowledge. Turd's is one of very few US sites who focus on the London market, the fact he does so through Andrew Maguire dismays some, but not me, even though I went long (briefly) at $1785 when London Trader described the incredible demand for physical gold at this level. We are all learning.

I now expect the writer of this analogy to turn their attention to spruikers of stocks, bonds and real estate who seem to be getting a free pass, along with the creators of shadow-banking, CDOs, MBS, Basels 1, 2 & 3 or, is that all a given, and for the sake of argument we are now reduced to schisms within faiths? Fact checking I like, derision not so much.

In the scheme of things I believe the so-called "Metals Mafia" is one of life's lesser evils.

Warren James said...

@S Roche,

Really well said. Thank you.

Jeanne d'Arc said...

@cpnscarlet/Unknown (same person? Apologies if not)

Is that an admission of liberal fiction or are you retarded?

You've cleverly caught me out there... This was indeed a fictional story. Well done for spotting that.

Regarding your other points: feel free to introduce as many new elements (Chinese cows, sugar, TB, whatever) as you like into your own version of the story. As Warren explains, my story is about accountability (and responsibility and the foolishness of 100% 'certainty' in a complex and unknowable world).

I've no idea what you're going on about with your 'rolling Turd' analogy. It's certainly not the point I was trying to make.

@S Roche: fair points, all, and well made. But I do reject the 'schisms within faiths' point, I'm afraid. Screwtape is deeply agnostic: we don't have a 'faith', we're just interested in the facts, and we're certainly not a subset of a broader silverogosphere creed. I alternate between bullish and bearish as the facts change.

The only 'schism' that might exist could perhaps be best described as being between those who accept that they have a responsibility to give both sides of the picture when peddling their wares, and those who feel they have no such responsibility to their readers. Sadly, many retail investors (naive, yes, but hardly more culpable than that) have been financially damaged by a lot of the crap that is spooled out onto the web. I just think it's important that there is an independent site (i.e. Screwtape) which is prepared to push back and challenge.

And if someone is really prepared to publicly say that they are 100% certain of what will happen in a certain investment, then I'm afraid they're due a certain amount of derision, even if that does strike some as distasteful. They'll quickly get over being derided, I'm sure... But the poor saps who got sucked into last year's silver bubble (for example) will keep their financial scars for some time...

S Roche said...

Thank you Warren, in turn I commend you on your most excellent comment ;).

J d'A...you are going to be awfully busy, but good luck to you I always enjoy this site.

Might one who studies at STF become a graduate of STFU?

cpnscarlet said...

"rolling" - slang term for what a con man/grifter does to his mark/victim (takes advantage, decieves, tricks him into believing/buying something that just isn't what it seems).

Swampfox said...

Well said Mr Roche.

The problem is that the average dung beetle - little shit heads like myself - can no longer see a clear path in terms of investment or savings. Real estate? Not yet - still dropping in most places. falling knife and all. Stocks? Ummm. Not so much. Geopolitical environment too messy. Bonds? Bubble/ponzi scheme of epic proportions. That leaves cash, gold and in some cases our own businesses. And cash is supect but still widely accepted and in use.

In a time in history when financial markets are rife with fraud and missinformation it is difficult to know where to turn. Want the gold bugs to shut up and go away? Return integrity and trust to the finacial system.

Personally - I'd like to go back a few decades and plug back into the matrix - invest in blue chips, save in bonds - leverage up my business and personal finances now and spend my cash and savings after early retirement (I figure 45 would be nice) while I putt around the pacific in my 50 foot motor yacht - stopping only for conference calls with shareholders and margaritas on the dock at Telegraph.

Unfortunately - I took the wrong color pill and woke up.

Trust is becoming a thing of the past and while I am not an "end gamer" eventually something will give. Cash and gold. One hedges against the other. Right now - the best the little guy like me can hope for is to come out the other end with what I have intact.

If anyone has any better ideas for this day and age I am surely open to hearing them. Seriously....

Swampy

Swampfox said...

Anybody???

Kid Dynamite said...

Swampfox -

Warren, JdA and I had an email exchange on exactly that topic today.

my answer was that at the moment, I am largely in cash. I think that anyone who tells you that in the short term (less than 5 years), cash is riskier than gold is smoking something. But that's just my opinion.

I am liquid in cash because, as you mentioned, I don't find stocks attractive at the moment. I don't find bonds attractive at the moment. I don't find real estate especially attractive - but maybe it might be - in any case, I own my home, and I'm not really planning on becoming a landlord.

So i'm content to wait, take my -2% real return, and I expect that sometime in the near future I will have the opportunity to better deploy my capital.

Sunflower said...

So the Dung can not trust anyone?
Thanks for all the comments. It helped. I started to get confused. Might still be.

Funky Tape said...

Paid $1/lb for salt today at Costco. When the price drops below $1, i'll DEFINITELY be loading...my cart...ummm....with the same amount that I always buy.

Turd's old bloodspot was pretty good. Back then, just some dude with a MacBook. Now it's some cash cow clusterfuck where if you question the braindead groupthink your post will be killed along with your account (no warning). Go ahead, try it yourself; it's a real treat. I even tried a new account just to see if it would get toasted....and of course it did.

'Tis a shame, cause I really miss reading the word 'immanent' pasted next to anything in regards today's volatile world situation. Comex collapse = imminent. QE3 = imminent. Iranian war = imminent. Your IQ shriveling like a raisin = imminent.

/rambling. Well done, Warren.

mr pinnion said...

KD
'I think that anyone who tells you that in the short term (less than 5 years), cash is riskier than gold is smoking something. But that's just my opinion.'

Wow, there are some truly amazing comments appearing on SF lately.

Cash? five years? KD, can you not see the financial world crumbling around you? Why the hell do you think CBs are buying gold? Why are they wasting all that safe cash on risky gold bricks?
Have you read anything about the history of fiat money? It tends to go 'poof' .

Ozzy

Swampfox said...

Ozzy and KD,

Guess I sit somewhere in the middle. I am less worried about the way the world ought to be than I am about the way it is. I can't alter whatever is going to happen I just want to be able to cope with what is happening now so that I am more prepared for what will happen in the future. A bit of common sense, some observation and a bit of an understanding of history helps.

That being said - in the short run I think KD is at least part right -cash is king and easily deployed so long as the system does not come to a screaching halt. On the other hand and in part due to the dullness of my crystal ball - I think a position in Gold/Silver is good insurance. Mind you - so is a stash of food and fresh water.

I came to the conclusion a long time ago that I can't fix this thing no matter how much I rant, rave or shake my fist. I just need to do my best to protect my family and shield them from the fall out. Gold, cash and a large stack of ammo is the best hedge against poltical insanity that I can think of so I am sticking with it until either it comes to the nasty climax it seems to be headed towards or until some semblance of sanity returns to the world of politics and finance. Frankly - I don't have a lot of confidence that latter will happen.

As the old saying goes - hope for the best - prepare for the worst.

Good luck all.

Swampy.

Kid Dynamite said...

Ozzy:

"can you not see the financial world crumbling around you? "

ummm. yes - that's why I'm in cash, not stocks.

the USD is not going to zero. I hate to destroy your doomer fantasy...

Perhaps you don't remember gold's quick 30% decline in 2008? That's risk. Cash did nothing of the sort.

I'm sure you remember silver's irrational exuberance in Spring 2011. that's risk.

The USD won't lose 30% of its value overnight, or over a year, because it can't. It just can't. the world couldn't tolerate it.

call me a sheeple...

mr pinnion said...

KD
Doomer fantasy?

Just looking at the facts.

'Perhaps you don't remember gold's quick 30% decline in 2008? That's risk. Cash did nothing of the sort.'
I remember gold price of about $830 1st jan 2008. Gold price of about $870 1st jan 2009.
Wow glad i wasnt invested in risky gold that year.I would have made a profit!

KD
'I'm sure you remember silver's irrational exuberance in Spring 2011. that's risk.'

Yep 300% profit for me.Then sold.
Luck more than anything,thanks Max lol.But i m not interested in , or talking about silver.I m talking about gold.Big difference.

KD
' The USD won't lose 30% of its value overnight, or over a year, because it can't. It just can't. the world couldn't tolerate it.'

I m sorry but that statment is too stupid to warrent a response.Other than, O REALLY? lol

Ozzy

mr pinnion said...

P.S.

KD, your a sheeple

Kid Dynamite said...

come on Ozzy - you can't just gloss over the drawdowns - that's what we're talking about. your ultimate safehaven lost 25% when the shit hit the fan and you MOST needed it to "store value"... my cash lost nothing.

ok - glad we're not talking silver - that simplifies, because that's not even a realistic debate.

you are USD based, I assume, right? we're not talking about Russia or Turkey...?

and yes - really - on my "too stupid to warrant a response" USD claim. I'd be happy to make a friendly wager on it - settled in gold, of course, cause you wouldn't want my dollars...

maybe the Screwtape Boys/gal will escrow for us..

let me know.
-KD

mr pinnion said...

P.P.S.

Oh KD, you forgot to explain why all those CBs are wasting all that loverly cash on risky gold bricks.
Maybe there all having the same doomer fantasies that you think i m having?
Silly Central Bankers.What the hell do they know?

Ozzy

mr pinnion said...

Regarding your bet.
If the dollar looses 25% this year 25% next year, i win the argument but you win the bet.No thanks.

Ozzy

Kid Dynamite said...

Ozzie - "the US Dollar will not lose 25% this year and next year"

I will take that bet. that is the side I want. Let me know how much you want to do.

There is a reason all of these craptastic central banks buy gold - because their currencies suck ass.

We are talking about the US Dollar. remember?

Kid Dynamite said...

ps - China is buying gold because they have enough dollars already. a veritable metric crapton.

I do not think their currency sucks ass - like those of Turkey and Russia...

The Big Setup said...

Kid I guess that's why China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade..Mexican Government successfully sheds the US Dollar from its economy..The US dollar will go the way of the DODO BIRD. But you'll be holding that dear old sentimental buck until they pull it From your Cold, Dead Hands..

Kid Dynamite said...

TBS - you can have the other side of that bet too. anyone is open to take the other side - put your money where your inner Doomsday Culter is...

The US Dollar is here to stay...

I love how you cited Mexico! the bastion of a rock solid currency!

ps - there's nothing sentimental about the dollar to me. just practical.

but this is getting silly: Ozzy, TBS, why don't you look at the most negative that US Real Interest Rates have ever been - that's how I define "risk" of the dollar. If you have a better definition of how the dollar "loses 25%" then please share it.

anyway, current real interest rates, at negative "a few" percent, are about as low as they've ever been. That doesn't mean they can't go lower, although my claim is that they won't go to negative 25%.

and I'm being generous and defining real rates as short term rates - inflation. Some use long term rates.

I mention this because Ozzy mentioned "just looking at the facts" a few comments back...

Kid Dynamite said...

@TBS - I don't want to get too far off topic, but the whole China thing is really a fascinating game of international chicken/poker/prisoner's dilemma.

China can't renounce the USD because if they didn't take USD, they'd have no GDP, because we buy all their crap.

That, of course, is why the "must" buy our Treasuries - they have no choice - it's a result of the trade balance.

ahhh- but enter another option. They actually do have one other way to get the dollars home... GOLD! which is what they've been doing, to some extent. But what happens if Bernanke & Co get sick of that? Methinks that the Federal Reserve can win a game of golden chicken with China if the Fed decides to actually try to crush the price of gold. but that's a topic for another thread. Or maybe it's the topic of this thread - after all, gold IS risky, and China knows that... hence the game of chicken! who blinks first?

GM Jenkins said...

Hey KD - I'm curious of your opinion of John Williams (shadowstats). Your calculation of real interest rates of course uses CPI. Do you think that's a just measure? John Williams, if his numbers are to be believed (my guess is you won't) says the true inflation rate is 9.3% yearly (at least at one point, I distinctly recall). If so, given near zero rates, the dollar obviously will lose its value much faster (~40% in 5 years)

milamber said...

KD,


Thanks for your comments this thread (and the last one). Since you are discussing risk vis-a-vie gold & cash, I would like to ask you a few questions.

For FY 2012, The US gov't is deficit spending to the tune of about $3.6 Billion per day. Do you see the US govt ever crashing its lifestyle (Cutting Medicare, SS, Defense Spending 30%) to bring that into balance? Or will this continue for the foreseeable future (5-10 years)?

If China decides (for whatever geopolitical reason) to take the hit on their US Treasury holdings what impact will that have on your cash is not risky thesis?

Final question. Is not the argument that the "dollar can't lose 30% because the world wouldn't tolerate it" a faith based circular argument? What is your factual basis for that?

I am not saying it will do that the next two years; I am just saying that is a strange rational for a trader to use.

Milamber

Kid Dynamite said...

@GM -

check out the Billion Prices Project:

http://bpp.mit.edu/usa/

@milamber:

your second paragraph: that's kinda the crux of American politics right now, right?

China - we give them dollars. always. it's what their economy depends on. they are inextricable linked to us.

which is part of why i said "the dollar can't lose 30% of its value"

it would literally crash the entire world.

let me simplify: If you offered me the following proposition:
A) the USD will lose 25% of its value at some point in the next year or
B) gold will lose 25% of its value at some point in the next year

I would take option A, give you option B, and I would lay you 25-1. And i'd do it again, every single year.

Kid Dynamite said...

@GM - related:

http://globaleconomicanalysis.blogspot.com/2012/06/zero-hedge-provides-empirical-proof-of.html

"Zero Hedge Provides Empirical Proof of Deflation (However, He Does Not Even Realize It)"

GM Jenkins said...

Thanks KD - great links.

milamber said...

KD said…

“your second paragraph: that's kinda the crux of American politics right now, right?”

Really? You honestly think that anyone in American politics is going to cut spending by 30%? You need to stop smoking Dave's dung. :)

“China - we give them dollars. always. it's what their economy depends on. they are inextricable linked to us.”

I have often wondered at that statement that they are inextricably linked to us. I see a culture with a 5000 year history pulling itself out a bad Maoist acid trip that lasted 50 years. China has been “inextricably linked” to the US for at most 20 years. I think that a longer lens is needed here.

“which is part of why i said "the dollar can't lose 30% of its value" it would literally crash the entire world.”

I guess that is where we have to agree to disagree. If your argument is,

"Something bad can’t happen because it would be so bad that it can’t happen."

then congrats, you have constructed an impenetrable defensive wall that will never be breached.

Kind of like “housing has never gone down, therefore it won’t”.

“let me simplify: If you offered me the following proposition:
A) the USD will lose 25% of its value at some point in the next year or
B) gold will lose 25% of its value at some point in the next year

I would take option A, give you option B, and I would lay you 25-1. And i'd do it again, every single year.”

I would take option A as well if someone was foolish enough to make that type of bet. But here’s the real question. What happens to all dollar trades & all dollars *IF* the US is unable to curtail its deficit spending habit & the rest of the world (ROW) stops absorbing that flow?

Right now the daily deficit is $3.6 Billion. If it stops getting mopped up, then what happens? As long as the ROW keeps stacking those Benjamin’s then life is good if you are an American, and it makes sense to take option A (as long as you physically own something small, portable and has never been valued at ZERO in over 5000 years of recorded history) because predicting timing on a currency implosion is liking predicting timing on an earthquake or an avalanche.

BUT, just because the timing is suspect doesn't diminish the argument that it is going to happen.

Milamber

victorthecleaner said...

Kid Dynamite,

The USD won't lose 30% of its value overnight, or over a year, because it can't. It just can't. the world couldn't tolerate it.

call me a sheeple...


No problem: Sheeple !!!

If you had written this some 20 years ago, I'd even be inclined to agree. What has happened since? The entire world has done a lot of extra work in order to make the dollar "small enough to be allowed to fail".

The first major step was made by Europe with the creation of the Euro in 1999. The two main features of the Euro are

1) the Euro zone has a balanced trade account (no economic reason for devaluation or revaluation that would create price pressures - forget the capital account, that's short-term hot money flow)

2) Europe has switched from dollar reserve (70% in 1999, 35% in 2011) to gold reserve (30% in 1999, 65% in 2001).

The rest of the world is following the European example and keeps brushing up on their gold reserve.

There is a reason all of these craptastic central banks buy gold - because their currencies suck ass.

Note that this is not because their own currencies suck (they couldn't care less), but because the dollar sucks as a reserve.

The other development to watch is the dollar being eliminated from international trade.

China can't renounce the USD because if they didn't take USD, they'd have no GDP, because we buy all their crap.

That, of course, is why the "must" buy our Treasuries - they have no choice - it's a result of the trade balance.


Take a look at the figures. China stopped buying treasuries in summer 2011. Since then, the dollar has been supported only by Japan and by capital flows (stupid, but more importantly, disloyal money).

How about China's GDP and their exports? Even in international trade, the U.S. are gradually being made dispensable. Here are Chinas major trade partners as of 2011 (E=exports, I=imports in $bn)

European Union: E 356; I 211
USA: E 324; I 122
Hong Kong: E 268; I 16
ASEAN: E 170; I 193
Japan: E 148; I 195
Korea: E 83; I 163
India: E 51; I 23
Russia: E 39; I 40
Taiwan: E 35; I 125
...

Note that China has done a lot in order to balance their trade account, too. Right now, they are achieving this by spending all their surplus dollars on various commodities, leading to funny things being stockpiled, but at least not stockpiling any additional green paper.

I don't think the dollar is too big to fail any longer.

Victor

victorthecleaner said...

Kid,

Methinks that the Federal Reserve can win a game of golden chicken with China if the Fed decides to actually try to crush the price of gold. but that's a topic for another thread.

How is the Fed going to do this? China has at least $2000bn in dollar denominated paper. So they can simply bid $7600/oz and would still get the entire U.S. gold reserve (and the holders of the remaining $6000bn held abroad would want to get their share, too, I suppose). Doesn't sound like a particularly strong negotiating position for the U.S. Treasury if you ask me.

Victor

victorthecleaner said...

In fact, if the U.S. would ever offer China this deal, I am sure the Chinese would accept. This would be a fantastic bargain for anyone who is still trying to get rid of their excess dollars. I am sure most holders of dollars will not be able to get rid of them at any price close to that, neither for oil nor gold nor other commodities nor anything else tangible.

The dollar is worth a lot less than that should the excess reserves every end up on the poker table. In fact, that is the game of chicken that has been going on since 1999: Everyone is trying to get rid of their excess dollar reserves without breaking the market (i.e. making the dollar lose its bid in the forex market).

Victor