This pyramid illustrates the relative values of each listed asset class, from the lowest risk (gold) at the bottom, to the most esoteric and least understood at the top. The volume (and area, since each layer is of the same thickness) of each layer is proportional to the total value in each asset class.

Here are the values in $ Trillions (and in brackets, the figures for October 2006):

Gold: 0.175 (0.157) …………… UP 11.2%
Currency component of M1: 0.765 (0.747) …………… UP 2.4%
Public Debt: 8.98 (8.54) …………… UP 5.2%
M2 (minus currency): 6.492 (5.569) …………… UP 16.6%
M3b (minus currency): 12.0 (10.1) …………… UP 19.4%
Credit market debt: 45.9 (42.7) …………… UP 7.7%
Stocks and bonds: 47.8 (65) …………… N/A
Derivatives (US banks): 144.8 (119) …………… UP 21.5%

Gold was valued at a market value of $600 in October 2006, and currently at $667.4.

Note: The value of the stock and bond markets in October 2006 was taken from a Marketwatch article, and I have no idea how they arrived at that value. The current figure is obtained by adding outstanding bond market debt from here to the total US stock market capitalization of the NYSE, Nasdaq, and ASE from here… as the basis for calculation is presumably different, a percentage comparison is not meaningful.

As to what the money supply measures M1, M2 etc. mean, you can read up on them at Investopedia and Wikipedia.

Look at how all these money measures are inflating – especially M2, M3 and derivatives – and in only about 3 quarters of a year! (The Austrian school of economics views inflation as primarily an increase in the money supply).

It is interesting to note that demand deposits (the non-currency part of M1) are the only thing that is down, falling 2.1% from $0.613 trillion to $0.6 trillion. This includes checking or current accounts at banks. Does this mean, perhaps, that people are, being no longer able to easily take money out of home equity, now depleting the contents of their bank accounts to maintain themselves?

I have seen my earlier illustration reproduced in several places. For your additional entertainment therefore, I am also providing the following:

A 1024 x 768 pixel wallpaper (132 kb):

What happens when it topples? (animation, 129kb GIF) * Now with explosion!!! *

Old version (no explosion)

Sachsen LB is bailed out…

Sachsen LB, the German publicly-owned bank, last night became the latest victim of the current credit crisis when the Landesbank had to be bailed out because of its exposure to the US asset-backed securities market…

The bail-out came just one week after the bank had reassured the market it had “sufficient liquidity”…

On August 10 Sachsen LB said it saw “no indications” for increased probability of default…

Reasons why you should never believe anything a bankster says:

On August 1st, 2007, Baudouin Prot, the CEO of French bank BNP Paribas said:

“As far as the U.S. subprime crisis is concerned, BNP Paribas’s exposure is absolutely negligible”

On August 9th, 2007, BNP Paribas suspended trading in three investment funds worth €1.6bn because of a “complete evaporation of liquidity in certain market segments of the U.S. securitization market”, meaning that they couldn’t calculate the net asset value of the funds… in other words, they may as well be worthless for all they know. For the time being at least, the funds are worthless to their investors who can’t take anything out of the funds.

That’s a pretty good reason… no doubt there are plenty of others, such as the historical quote from Arthur Reynolds, the Chairman of Continental Illinois Bank of Chicago, who said on October 24, 1929: “This crash is not going to have much effect on business.”, or the IMF’s Financial Market Update on July 25 which said “Delinquencies, defaults, and foreclosures have continued rising, especially in the 2006 vintages of subprime lending… However, so far, our assessment is that this risk is likely to remain largely contained…”, which was echoed by US Treasury Secretary Henry Paulson on July 26th. On May 17th, Fed Chairman Ben Bernanke said “…we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market…”.

The “absolutely negligible” exposure caused more than £29bn ($58bn) to be wiped off the value of companies in the UK’s FTSE-100 index, €6 billion ($8.2bn) off Irish shares, and similar things have been happening in many other markets worldwide.

How much is a $1bn? As Chan Akya of the Asia Times explained, if you actually burnt one US$100 bill every 10 seconds, it would take more than three years to get through a billion dollars.

Globalisation has led to lousy “fog a mirror and you can get a loan” mortgage debt created in the US being repackaged as “collaterised debt obligations”, or CDOs, which have been sold off around the world.

Some idiots seem to think that it’s a good thing that no single financial instution is going to be destroyed, because the crap has been distributed far and wide.

But what we have now is a situation where every financial instution is under suspicion and no-one knows exactly how much crap is being held, no-one knows how much it’s worth because the potential buyers have vanished, and what we therefore have is a global financial crisis, where even perfectly healthy banks and funds can be destroyed by rumours and spooked investors rushing to take their money out. This could easily develop into a self-fulfilling prophecy effect of people fleeing anything that might have a “negligible exposure” to subprime and looking for safe havens. Unfortunately, even funds generally accepted as safe, such as money market funds, usually thought of as equivalent to cash, are now under suspicion, as pointed out by the Wall Street Journal (August 11, 2007):

“Commercial paper, a staple investment for money-market mutual funds, are short-term loans typically issued by highly rated companies for less than a year. The market — $2 trillion in the U.S. and nearly $1 trillion in Europe — is considered one of the most easily traded and safest corners of the financial markets outside of U.S. government bonds.

But interest rates on commercial paper have risen as far and as fast as they did after the shock of the Sept. 11, 2001, terror attacks.“

And here’s another example showing how supposedly “safe” investments have been tainted by the subprime crisis:

The failure of some companies to pay on time has cast a pall over the securities, which are considered to be almost risk free, said Lee Epstein, chief executive officer of Money Market One.

“The subprime tsunami has come to the beach, as it were, to the safest of the safe,” Epstein said

Subprime `Tsunami’ Hits Asset-Backed Commercial Paper Market

The big problem with all these fancy funds is that they have linkages to other funds and borrowers at the end of a long chain who are the ultimate source of payment, and who have been vanishing in little puffs of smoke as they turn out not to be reliable sources of repayments for home loans, obtained on “fogging a mirror”, also known as “liar loans”.

Paper investments are built on top of other paper, and derivatives are built on top of them… a lot of it is interconnected, opaque and incomprehensible to mere mortals. As I explained on Goldblogger.net in October 2006, it is like a huge inverted pyramid with the only real safe investment, gold, at the bottom. Gold is safe because it has its own value… an ounce of gold is precisely that; it was worth something to ancient Romans and it will be worth something to our distant descendants.

This pyramid illustrates the relative values of each listed asset class, from the lowest risk (gold) at the bottom, to the most esoteric and least understood at the top. The volume (and area, since each layer is of the same thickness) of each layer is proportional to the total value in each asset class. For 2006 these values were in the region of:

Gold: 0.157 $ Trillion
Currency: 0.747 $ Trillion
Public Debt: 8.54 $ Trillion
M3b (minus currency): 10.1 $ Trillion
Credit market debt: 42.7 $ Trillion
Stocks and bonds: 65 $ Trillion
Derivatives (US banks): 119 $ Trillion

The figures are from the US, but most of the world is following the same fiat money path. Mostly, this system simmers away with a moderate inflation and loss of wealth that doesn’t get noticed by the majority of people. Exceptions are normally on the negative side, i.e. where the system has broken down, currencies are devaluing rapidly and people are denied access to money they thought they had in the bank.

At the base of this pyramid is gold (and/or perhaps silver). That stuff represents intrinsic value, as it is not dependent on any debt, currency or banking system for its wealth… no strings are attached.

This viewpoint was first offered by John Exter in the 1970s to represent the financial system as an inverted pyramid of debt built on a “tiny point of gold”.

Anything else is “money” created out of thin air – by fiat decree, as nowhere today is there a money system based on a gold standard in which currency is redeemable on demand in a fixed weight of precious metal. What about cash? It’s subject to currency risk… look at what happened in Argentina. Dollar, euro, pound, yen, strong resilient currencies? A dollar put aside in 1913 is worth 5 cents today. Alan Greenspan once described the bleeding of wealth through insidious currency devaluation in an essay called “Gold and Economic Freedom”: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”

Banks only have to have a small percentage of physical cash to back deposits. They can create loans out of thin air, hoping that borrowers will return the loan plus interest. The loan money is created as a bigger layer on top of the physical cash. The banks hope that no more than a few percent of this money is demanded in the form of actual cash, because most of it just doesn’t exist. This is why bank runs are so damaging… they are a panic that breaks the fractional reserve system.

There are more and more layers, all of which represent paper claims dependent on the honouring of some organisation’s contract or promise.

M3b is the reconstructed version (thanks to work by John Williams of Shadow Government Statistics, and members of NowAndFutures.com) of the M3 broad money measure discontinued by the Fed on March 23, 2006. As you can see it is a key element of the inverted financial pyramid.

On top of everything is the derivatives market. Does anyone really understand them? Long Term Capital had to be rescued by a number of American and European institutions in 1998, yet it had on board Nobel-prize winning economists Myron Scholes and Robert Merton, who with Fisher Black in 1973 had developed the mathematical basis of derivatives. Warren Buffett, one of the richest persons in the world, called credit derivatives “financial weapons of mass destruction”. Well, that seems to me to be a description of something with inherent high risk. I am happy to take Mr Buffett’s word for it.

When panic ensues, people move from high risk layers to lower risk layers. Money moving out of derivatives might flow into stocks and bonds, which then gain in “value” simply by the inflow of liquidity. Then with bonds, yields move inversely with value, so bond yields and interest rates go down.

Eventually people start moving into lower layers which, counter-intuitively, appear to gain value. Now you know why debt instruments and currency have been inexplicably holding up, even as stories surface about investors wanting to dump bonds and the worst prognostications of currency bears remain unfulfilled. The risk-fleeing investors must pass through the intervening risk-reduction layers before they reach gold. In the meantime, movements in the price of gold are “just noise” (People who can’t get at their worthless funds may sell anything more liquid, including gold, to save their hides, which may result in safe-havens appearing to drop in a crisis).

The end game of course, will be when people decide they need the ultimate store of value and the asset with the lowest risk, gold. But there is little room for them in this asset class. There is just not enough of it to satisfy more than a tiny percentage of the fiat pyramid.

Smart investors have been quietly acquiring gold, at low prices, during many years in which central banks were happy to sell it off. In the eleventh hour, when everyone decides “we must have gold now”, they will rush to purchase it at any price, but it will be too late, for there will not be enough to go around to fill grasping hands.

British authorities moved quickly to try and contain the outbreak of the highly infectious disease, imposing a nationwide ban on talking about gold and silver.

“There will be a ban on goldbuggery within the European Union. That is automatically imposed as a result of the finding of gold-and-silver bug disease,” a Cabinet Office Minister told the BBC.

In a statement, the European Commission said it would adopt an emergency decision Monday “concerning restrictions on the movement of goldbugs and the dispatch of precious metals from the U.K.”

Japan banned British gold coins following an outbreak of goldbuggery in southern England, the Japanese finance ministry said Saturday. Japan had already banned silver imports from Britain since the 2001 outbreak of Mad Ted Butler disease.

The case is the first in Britain since 2001, when a gold-and-silver bug epidemic led to the melting down of 7 million Kennedy Silver Half Dollars and junk silver collected from people newly infected with the silver craze. Many of the coins were burned on huge pyres that dotted the country, before being shipped off to refiners. Large swathes of the country were declared off-limits to visitors, to avoid infecting tourists with the deadly gold-and-silver bug disease.

Prime Minister Gordon Brown cut short his holiday when he learned of the new outbreak and was due to attend a meeting of the government’s crisis committee, COBRA, on Saturday. Many goldbugs suspect that they will seek a fresh round of central bank gold sales. “…there are countries which previously had not been prepared to consider gold sales but were prepared to do so now…” Brown said. Gordon Brown has previously advocated IMF gold sales and sold half of Britain’s gold reserves at the bottom of a 20 year bear market. The price of gold has been steadily trending up ever since.

At the affected town, shrinks in protective white overalls rounded up goldbugs.

A government spokesperson said investigations would try to determine whether the gold-and-silver bug disease reached Britain through word-of-mouth, gold forums, email, or by accidental exposure to gold and silver coins.

Nearby bankers were worried, but hopeful that quick action would contain the disease. and no-one would pay any attention to gold prices hitting a 1-week high at $672.70/oz. on a weaker dollar and $75 oil.

“We are keeping our fingers crossed but there is really nothing we can do about it except wait and get more suckers to take out loans,” said one banker, under condition of anonymity.

Between 1999 and 2002, Gordon Brown as Chancellor of the Exchequer sold 60% of the UK’s gold reserves at $275 an ounce. As of May 2006, it has been calculated that this cost the UK $6.6 billion, and it marked the bottom of the gold bear market, a 20 year low. Where did this gold go? Did it go to EU banks (in a gold suppression game where the sellers loudly announce their gold sales, while the buyers keep quiet, all in order to save the bullion banks who have no hope of getting their gold back)? Was it really a way of legitimising gold that was surreptitiously lent out and can never be replaced in the market without triggering an all-out run in the gold price? Did the gold really go to Nibiru, to be replaced by paper money printed specially to cover the deal with the space aliens? I suspect it will be a very long time before we discover the real reasons.

Notice how before the bottom, the gold price generally lies below the long-term moving averages. After the bottom, the gold price generally lies above the long-term moving averages. This is an important clue to the bull market, because the gold price is pulling the moving averages up. The orange moving average is the 354 day, the yellow is the 219 day. These are not too dissimilar to the 1 year and 200 day moving averages. However, the number 354 is chosen for its special significance as the length of the lunar year (354.372 days to be precise). This year was used by Neolithic mound builders, in whose mounds gold artifacts were often buried. The Moon Goddess was the supreme goddess of time and space. The number 354 is also the sum of the first four fourth powers (1, 16, 81, 256) and the product of three distinct prime numbers (2, 3, 59). If you divide 354.372 by the fibonacci number (1.618034…) you get 219.0, which is my second moving average. The gap between these two moving averages narrows when gold is consolidating or is in a temporary counter-trend. This last happened in November 2005 and was followed by a run from the $475 area to $720.1. Now, on the 1 year chart, we see that the two moving averages have touched again. The latest drop looks like running out of steam near the 219 day moving average. Could it be that we are getting close to the end of a period of consolidation and about to see a new run?

As always, DYODD, IMHO, CYA, IIRC, AFAIK, YMMV, JMHO, ATM, E&OE, Caveat Lector and any other relevant TLAs.

The differences between men and women.

There’s a whole lot more stuff from Gold Queen too, over here:

 Things you don’t see every day

This archive contains everything posted by Brian W. Pascal on the Goldblogger.net blog.

Unfortunately, Brian deleted all the posts from other posters before this archive was saved, so you will only find posts by Brian on this archive.

“As for housing, the situation has gone from bad to worse in recent days as credit-rating agencies announced they will downgrade billions of dollars in bonds backed by risky subprime home loans…”

Economy may face withdrawal symptoms

“Market losses from forced sales are near, but there is still little actual credit loss from defaulted mortgages — that’s still ahead, and the loss magnitude will depend on the depth and length of the housing recession… Based on housing markets early to the distress party, Colorado the leading example, Bubble Zone foreclosures will increase for at least the next three years (announcements of bottom in 2008 are fantasy-based)…”

Foreclosure damage to be worse than expected

“Richard Bernstein, chief investment strategist at Merrill Lynch & Co. Inc., said in report yesterday… that “home prices are unlikely to appreciate from today’s valuations over the next 10 years.”… “

Rating agencies sound subprime alarm

Don’t Panic!!!

How do you know what to worry about? Anything that Fed mouthpieces tell you isn’t anything to worry about, because the system is “well equipped” to handle it, is in “good shape”, “well contained” etc. Their job is to keep things stable and avoid panic, which can make things worse… especially with a fractional reserve system, where a run on the banks can create new crises. The lessons of history are that you should take any official denials with a pinch of salt.

“Never believe anything until it has been officially denied”

Claud Cockburn (1904 – 1981)

“Moody’s Investors Service said Wednesday that it might cut ratings on $5 billion of collateralized debt obligations, a day after lowering the ratings on sub-prime mortgage bonds that make up the securities.

The AAAs “are supposed to be bulletproof,” said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. and co-author of a recent study that said ratings firms understate the risks of sub-prime bonds”

Downgrade likely on sub-prime debt

“Even Wall Street banks such as Merrill Lynch are vulnerable, with analysts saying the crisis could wipe out $132 million, 1.6 percent, of its profits this year.”

HEDGE HORROR – SUBPRIME MELTDOWN COULD WIPE OUT BILLION$

“If the concerns about the subprime and CDO market intensify as seems likely following Moody’s announcement overnight, then the dollar may fall further, lifting gold higher still”

Gold prices drop but supported by dollar slump; silver hits a high

“We’re going to see more downgrades… It’s going to get worse before it gets better. How much worse, I don’t know…”

U.S. FDIC chief looking at banks’ CDO exposure