17 May 2009

A hedge against Government instability

From the latest Martin Armstrong piece (edited):

Currency = Shares in the political state
Bonds = Issued by Government are nothing more than a derivative option
Shares = In the corporate world are a hedge against domestic inflation
Gold = Is the hedge against Government instability

Currency is an instrument that represents the total wealth of a nation. It is nothing more than a individual common stock share whose value will rise and fall dependent upon how the world believes and trusts in the management.

So bonds are simply an option on the currency and you hope that the interest paid offset the depreciation in the value of the bond/currency for the duration it was held. Of course, buying government debt is the one bet you can make that is a guaranteed loss. It is only a question of how much capital you lose.

Shares/stocks of private corporations reflect a hedge against inflation. Most stocks will only keep pace with inflation that is real, not manipulated statistics.

Gold is just starting to come into its own. Its role is obviously not the hedge against inflation as is stocks, but the hedge against the instability of government. For when all else fails, gold becomes the only store of wealth.


  1. Nice precis,

    Something people who frequent this blog might be interested in....there might be a story or two in it...I didn't have much confidence in the banking system already but wasn't aware of some of the following. Its hard to tell if its just paper backed by paper or if there is something of substance behind much of the banking system.

    "Traditional textbook discussions of the operation of monetary policy focus on the quantity of money. In this model, the transmission mechanism works through either changing banks' reserve requirements or using open market operations to change the money base, which is essentially liabilities of the central bank. Changes in the money base, operating through the money multiplier, were designed to influence growth in the money supply, which in turn influenced interest rates and, ultimately, economic activity."

    "It is important to recognise that operating procedures for monetary policy in Australia - or in any country for that matter - do not conform to this traditional model.

    **There are no reserve requirements on banks in Australia; their demand for central bank funds comes from their need for settlement balances**, not reserve requirements. The Reserve Bank's operations focus on establishing a price at which these are made available, rather than on the quantity of liquid funds - i.e. they operate to affect the cash rate, not the money base."

    from http://www.rba.gov.au/MarketOperations/Domestic/Publications/implementation_of_monetary_policy.html

    The highlighted text with ** caught my attention -- no traditional reserve requirement!

    So I started to look and see what settlement balances (exchange settlement (ES) balances) are and how they operate, this speech was somewhat enlightening;


    ....of note...

    "In Australia, banks are not required to meet targets for holding reserves at the central bank. However, a bank’s ES balance must always be non-negative, even on an intraday basis."

    "Overall, the Bank has found it advantageous to be as flexible as possible in the way that it manages system liquidity. We operate daily in the market with a relatively wide range of counterparties and over a wide range of maturities."

    "However, for similar reasons, there was an increased precautionary demand for ES balances, reinforced by the fact that ES balances are a risk-free asset."

    "When lending cash against the receipt of collateral, the Bank always imposes a margin or ‘haircut’ on its counterparty. For example, on short-term bank paper, the margin has been 2 per cent (note 7 in original text). That is, for every $100 lent by the Bank, securities worth $102 need to be pledged as collateral. If, during the term of the repo, the security declines in value, the counterparty is required to post additional collateral. In the case of RMBS and ABCP, a margin of 10 per cent is imposed."

  2. It is all funny money, what more can one say?