The Nominalists And The Realists

Have you ever had a “light bulb” moment? A moment when a huge amount of information just falls into place like the pieces of a puzzle spontaneously rearranging themselves into a clearly recognizable image? Here’s a passage that did that for me a couple of days ago:   

The two extreme types of monetary systems are: the 'realist' under which each unit of money has, as a counter-part in the balance-sheet of the bank that has issued it, an asset that can be sold on the market for an equal value; and the ‘nominalist’ under which money is nothing but a token, void of substance. All the systems that have been, are, or will be in force range somewhere between these two models. (my emphasis)

(Chapter 6, Page 170 - "The Institutional Problem Of Money" from “Balance of Payments” by Jacques Rueff published by The Macmillan Company in 1967)

In 'Balance of Payments' Jacques Rueff explains that a 'realist' money retains its purchasing power. So while it is convertible into assets of equal value it also retains parity with all forms of wealth and consumption goods and services as well as claims that are sound e.g. the debts of creditworthy borrowers. (The words 'convertible' and 'exchangeable' have the same meaning here.) A 'nominalist' system treats money as mere tokens:

"('Nominalist' money) can be brought into circulation by a deficit and withdrawn by a surplus. It will therefore never be self-regulating, and can be regulated only by the utilization of an appropriate fiscal policy. With respect to it (a 'nominalist' system), the management rules of the Keynesian pharmacopaeia will have to be used."  (my emphasis)
This post started life as a response to a Tweet from Koos Jansen. Koos asked if anyone could recommend a book on international economics. My initial reaction was – one book, no way – but after sleeping on it I decided that two books by Jacques Rueff studied together might go close to delivering what Koos was seeking. I’m referring to Balance of Payments (‘BoP’) and The Monetary Sin Of The West. You can download ‘Monetary Sin’ here but I haven’t been able to access a digital copy of ‘BoP’. So I started this post because I believe that you need the content of both books in order to appreciate the elegance of Rueff’s economic theories.

Back to that “light bulb” moment. I have read a huge amount of material on economics, monetary systems and banking. I came to the conclusion some time ago that money should be the organizing principle of my studies and attempts to discuss what I was studying. That passage from ‘BoP’ supplied something else I have been striving for – an appropriate conceptual framework. It’s been obvious to me for years that there was a war being waged throughout economic history (and right up to the present) but I lacked a suitable framework with which to view the opposing forces.

I have been exposed to several concepts and theories about how these forces should be grouped – debtors and savers – labour versus capital – soft/easy money versus hard money - socialist versus capitalist and so on. Ultimately none of these categorizations provided me with a satisfactory conceptual framework. As Rueff points out:

"Contrary to the belief of the uninformed, there is no orthodoxy in monetary matters. A great number of systems can be conceived, each of which has its own distinctive merits. It is only from the standpoint of the functions that one assigns to Society that any one of these systems may seem preferable to the others.....('BoP' Page 170)

I found that when I tried to extrapolate from money as an organizing principle I soon ran into this "orthodoxy" problem. But this notion of realists versus nominalists works for me on several levels. I think I can reorganize a lot of the material I have collected within this framework and present it in a way that makes sense.

That Was Then This Is Now
I have copped some flack over the past couple of years for trying to apply lessons to the present gleaned from old books and texts on the basis that they are outdated. Some folks have argued that the world has moved on and old knowledge no longer applies to the modern world. I marvel at the lack of introspection this attitude implies. To me this is just another version of the "This Time It’s Different" mentality that takes hold during the boom phase of the boom and bust cycle. I think it's a kind of willful, collective amnesia. 

Here is Jacques Rueff's description of the aspirations that policy makers and the general public had for their monetary system back in the late 1960s:

"At present, the consensus demands, above all, of a monetary system that it should not hinder the development of production, and should thereby favor the 'full employment' of productive possibilities, but at the same time it wishes that the system chosen should give to the general price level the fullest stability consistent with the preceding aim."

Wow! Radical aspirations - full employment, price stability, an adequate money supply.... That passage could have been written today. Yet, despite the apparently well-meaning efforts of economists, governments and central banks since that time today we are even further away from this ideal monetary system than they were in the 1960s. In fact we now have an extreme 'nominalist' monetary system that has in turn lead to the creation of the biggest pile of debt the world has ever seen.

In 'BoP' Jacques Rueff describes the main benefit of a 'realist' system and how to structure it in a way that is partially self-regulating:

The essential feature of the 'realist' system is that, if suitably administered, it permits the creation of a situation that tends to avoid all threats of inflation or deflation.... Now, all practitioners know the difficulty met with in foreseeing inflationary or deflationary tendencies before they produce their effects. Therefore, more or less intentionally, monetary systems have been so devised that the regulating reactions have a tendency to develop spontaneously, thus acquiring a partially self-regulating character...."

Interestingly, Jacques Rueff an advocate for gold-based monetary systems, places a metallic currency at the extreme end of the monetary system spectrum. My reading of economic history leads me to believe that the pendulum has just about reached its limit in this swing toward the nominalist extreme. I doubt that it will swing back to something equally extreme as bi-metallism - been there done that! I imagine that a compromise somewhere in the middle is on the way.

$1,081 gold bottom?

We've recently been updated by GM Jenkins on the 10 year USTs priced in silver chart, notably the ratio hitting its upper channel line at around the 1.50 level. GM is expecting a final lower low for gold shortly, before the trend changes back to a bull market.
I decided to see if the gold price was Fibonacci-friendly, and the chart below plots the key retracement levels from the bottom back in 1999 through to its peak in late 2011.
Here's the chart (I manually added the 23.6% level at $1,522):
Who knows what will happen, but the fib levels seem significant, so I'll be saving my pennies to buy the bottom at around $1,081, and I reckon it's coming within the next 5 weeks, in the midst of a liquidity crisis as stock markets take a dive.
I'm not expecting the 61.8% fib level to be hit.
Time is running out for buyers in my opinion, and the next leg of the secular bull is likely to be the most explosive and volatile we've seen since the late 1970s, so hang on tight.
Good luck.

Don't believe the hype

Hello everyone.
Just a very quick post on the collapse in the Chinese stock market, and how it's being (mis)reported by mainstream media in China and in the West.
I'll assume all readers know that the Chinese stock market bubble has burst, and that the bursting is ongoing, with many stocks limit down today.
Reports in the media have all been saying the same things, which can be summarised as follows:
1. The Chinese government are doing all they can to stop the collapse.
2.The People's Bank of China is supporting the market, buying shares, helping brokers, and will do anything to keep it all propped up.
3. Interest rates are being slashed again to try to keep the bubble afloat.
4. Eventually, the Chinese will socialise the stock market and maybe the housing market.
Here are a few links of stories doing the rounds this week:
(The opening line from the Bloomberg presenter in the video: 'What can the government do here to restore confidence'). Help us dear government, please don't let your people suffer, make things nice and fluffy again. That's the world we live in folks.
A few interesting quotes from that last link: 'China froze share offers and set up a market-stabilization fund on Saturday, the Wall Street Journal said, as Beijing intensified efforts to pull stock markets out of a nose-dive that is threatening the world's second-largest economy. Beijing's reported suspension of initial public offers (IPOs) came a few hours after extraordinary announcements by major brokers and fund managers, which collectively pledged to invest at least $19 billion of their own money into stocks. China's government, regulators and financial institutions are now waging a concerted campaign to prop up the nation's two main share markets, amid fears that a meltdown would rock the financial system and inflict heavy losses across an economy where annual growth is already running at a 24-year low.'
$19 billion! A huge sum of money. But did you know that this figure represents less than 0.4% of the market capitalisation of the Chinese stock markets? You probably didn't, because the media didn't mention that, as it would ruin the narrative for you. The suspension of IPOs, is 'reported' you will note. I can imagine there were dozens of companies looking to launch IPOs these past 2 weeks into this crashing market, so a good job the government suspended them, reportedly. It's a good line though, many will believe it. I don't.
Here's a link to the People's Bank of China's website:
Here's a link to the China Securities Regulatory Commission website:
Why not spend a fun half an hour trying to find ANY official press release or other information on the huge efforts being made by these two organisations to prop up the markets. Good luck in your search. Please do let me know if you find anything though.
All that I found on the PBC website was this announcement regarding targeted interest rate cuts:
Here's what they announced:
'The PBC has decided to provide targeted reserve requirement ratio (RRR) cuts for selected financial institutions as of June 28, 2015, in an effort to step up support for the development of the real economy and promote structural adjustment. First, the RRR will be lowered by 0.5 percentage points for city commercial banks and non-county-level rural commercial banks that have reached the targeted RRR reduction standard in terms of the share of loans to the agricultural sector, rural areas and farmers in total lending. Second, a reduction of 0.5 percentage points will be applied to the RRR of large state-owned commercial banks, joint-stock commercial banks and foreign-funded banks that have reached the targeted RRR reduction standards in lending to the agricultural sector, rural areas and farmers, or to micro and small enterprises. Third, the RRR will be reduced by 3 percentage points for finance companies to further motivate them to do their part in increasing the fund use efficiency of enterprises.
At the same time, to further reduce financing costs for enterprises, the PBC has decided to cut RMB benchmark loan and deposit interest rates for financial institutions as of June 28, 2015. The one-year benchmark loan interest rate and deposit interest rate will both be lowered by 0.25 percentage points, to 4.85 percent and 2 percent, respectively. Adjustments are made correspondingly to benchmark interest rates on deposits and loans of other maturities, and to deposit and loan interest rates on personal housing provident fund.'
Everything is being aimed at the real economy, and it's crystal clear that China knows that the real economy is what matters. They may make various media announcements about the stock market to steer the narrative for the masses (your government does care about your stupid investments going down the tubes and we are really doing all we can to help you, but sadly it doesn't seem to be working, oh well, shit happens folks).
So, narratives, it's all about narratives. But the truth is that China are more focused on the real economy than the US, UK and many other developed countries, which remain beholden to the financial sector of the economy. China are slowly but surely becoming a major player in an ordo-liberal world, along with the Eurozone.
So, be careful what you read and think, because the mainstream media, as well as the likes of Zero Hedge, all have their own biases and agendas, and want to control your thoughts.
Edit 12th July 2015:
More narratives for you
From that article:
'The latest warning by the China Securities Regulatory Commission (CSRC) is meant to clamp down on a trick whereby a single investor controls multiple accounts -- often registered under other people's identification numbers -- to bid the price of a stock up or down.'
It's rather obvious that banning multiple trading accounts is not a measure designed to reflate the stock market bubble, rather the opposite. But the narrative remains steadfast, that 'China' wants to blow the bubble up again. Think for yourselves.

The (beginning of the) End

 Greetings friends!

We’re not yet at the end of the great bear market in gold (2011-2015), but I can confidently say it’s the beginning of the end.

[update 6/9] To clarify, based on a question in the comments, re: my statement to "expect a new low soon." Note that although the chart pattern suggests the next up leg in gold should begin when the $TNX/silver ratio hits the green line, in the past these points have been accompanied by a new low in gold first. So my best guess is that a new low is coming soon, while interest rates may also fall to keep the ratio near where it is.

[*update 6/15] Ratio is indeed still at 1.50 at the close of this week, with gold approaching a new low. One thing I should've made more clear is that the pertinent lows on this chart are for weekly closing prices, so a new low would be < $1158, which was the closing price the first week of March of this year. (It was also the lowest closing price in gold in 5 years, going all the way back to April 2010!) ...Working on some cool charts but no time yet to post.

Let it be widely known that I first called this 2 years ago. It actually surprised even me how relevant that post remains. 

However, I regret to say, a video I had posted at the top, the content of which I have only the vaguest recollection, but the titillation derived whereof I distinctly recall, has vanished…

Well, this one should be timeless. 

Note: Below the fold a chart that illustrates the trend in nominal interest rates since 1980, i refer to it in the comments

Quick Analysis on Sticky Gold (chart)

A very quick chart for Gold price (in USD/oz) to demonstrate the gold doldrums. For those who debate Gold's proper value : the market says it is fairly priced at around $1,200/oz. The graph below shows the sample of the mid-point price points for this year, expressed as a percentage of all price samples. The underlying data is for XAU_USD currency pair, from Oanda's trading platform, analysis of all M1 intervals available for calendar year 2015 to date.

$30 range around $1200/oz is highlighted in yellow.
Data points are for Jan - May 2015, from Oanda.

Worldwide Turmoil, Financial Upheaval and Cataclysm

When the Global Financial Crisis (GFC) of 2008 occurred, many including myself were shocked enough to start doing further investigation into the nuts and bolts of our modern financial system. My at-the-time-research led me to be long gold and short sydney property - in 2011. Here we are in 2015 and the result of that is pretty (painfully) clear to me. It's not just my timeframes which were screwy, it became obvious that most of the narrative I had collected was incorrect. Recently I've been exploring this dichotomy, but today I want to bring some definition to something that comes up in a lot of discussion - the idea that the GFC was simply just a dress researsal for something much bigger.

Giving this supposed event a name allows us to study it better, so I'm proposing the term 'Worldwide Turmoil, Financial Upheaval and Cataclysm' or WTFUC for short. We have a new poll running at the right hand side of the page here - I encourage you to vote in it because it's kind of unique - the poll will run for 20 years finishing in 2035 and (fingers crossed) I hope to be around to write a synopsis on the final results. If the blogger platform remains constant then you should always be able to change your vote over time, although it won't let me change the options. The poll allows you to nominate your expected timing for the WTFUC and the hope is that this helps us discuss our beliefs and expectations in a practical fashion (even as they may change over time).