When someone claims I don't come up with answers as when I take the effort to write them no one is interested in the answers as was the case with this post.
I wrote this the other morning after finishing James Rickards "The Death of the Dollar"
He wrote this between 2010 and 2012 and I heard a n interview the other morning where he stated that he stepped up his predictions based on how quickly Obama pushes with his "sanctions" This is pretty long but summarizes the whole book. If you want me to summarize the conclusion where he talks about what we should do let me know.
"Mishkin (Bernanke's mentor) has determined that the Central bank (fed res.) is on the brink of insolvency. Mishkin warns that the fed is compromised and dangerously close to it independence being compromised and its sole purpose is now to monetize debt through inflation.
Larger deficits and higher borrowing costs will cause a death spiral and countries will have to chose of austerity or defaulting on the debt. Austerity hurts nominal growth worsening debt to GDP ratio and can cause a debt default while trying to stop one.
They have taken the policy of monetizing the debt to give them time and keep interest rates on the debt under control.
This is a double edged sword in that "printing causes a lack of confidence in a currency. Miishkin describes this as "fiscal dominance" and the debt will have to be satisfied by issuing monetary assets and will cause inflation while the fed tries to lower it due to the gov debt. So despite the feds policy to control interest rates it nflation will be produced.
Swapping long term debt for short term makes the gov more vulnerable to lose of confidence and flight from the dollar. (treasuries).
The fed thinks they are managing a reversible process and that is not the case through out history. Turning deflation into inflation through money creation is irreversible.
From 2009-2012 the fed monetized 1.2 trillion the bankers jobs and bonuses were saved but only replaced private debt with public debt. This debt is unpayable in real terms and default for smaller economies are happening now. (Cypress, Greece, Argentina). Larger countries will deal with this through inflation and will steal the savings, deposits and bond holders alike.
Deflation is rooted in depressionary psychology and not in the control of the policy makers. Investors start to save and hoard money to avoid risk. Once deflationary thinking occurs it is not reversible through crutched up stock prices and rising housing market numbers as shown that despite record highs in the markets volume continues to be very low and the housing market is not fueled by family ownership but developer purchases. The fact that central banks are doing all they can to cause inflation but other than food and fuel prices continue to deflate are a sign that the demand is low and confidence is gone. No consumerism means deflation.
Historical when currencies hit this point a new system is needed to restore confidence. as was the case of the Sterling replacement from 1925-1944 and the replacement of the gold standard from 71-80.
Three things can happen. 1 a world currency in SDR's; 2 is a gold standard; third is social disorder.
SDR's is already in the works and has been a pet project of Soros/ Popper since 1969. It increases SDR through the IMF through SDR based investment assets, issuers, investors, and dealers. Its not the debt but the derivatives that are out of control that would push this system into play before it is ready. China will insist that it is not used to save the dollar but to replace it with the yuan. The dollar will be devalued to the new SDR and cause massive inflation and adjustments will have to be made as they will have to be earned through global competition and not printing.
Gold standard is another way and could arise from the massive inflation and lack of fiat confidence or through deflation where the dollar is revalued by by the gov to increase general price levels and has been suggested to peg at $9000.00 an oz. Revaluation of gold would have to be sufficient to support global trade and cause inflation in the USD and would wipe out savings of all kinds.
Social disorder is pretty self explanatory and will as usual create fascism and gov condoned theft.
Originally it was the baby of Mussolini from an extreme left leaning agenda. Today the distinction lies in the division of those who want more state power thinking they can fix it and those who want more liberty. In the state ontology order comes before liberty or justice.
Seven signs.
1. price of gold either way could signal a buying, uncontrolled buying frenzy and price drops could signal an out of control deflationary policy.
2 Banks continued buying up gold. Remember this was written in 2011 and we are already seeing this happen as is true in a price drop last year.
3. IMF governance reform. China is already gather more voting power in the IMF so that has occered since this was written.
4. Failure of regulatory reform. The banks lobbist are beating down the members of congress that are trying to bring back some of the basics of the Glass- Steagall main provisions. They are losing since this was written.
5. System crashes like the one on May 6th 2010 when the market dropped 1000 points in minutes. On August 1st 2012 Knight Trade computer debacle wiped them out and these types of occurances as we have seen markets shut down due to glitches that have occurred several times in the last couple months should not be seen as flukes but as cyber wars are being perfected there are little safe guards left.
6. Is the sustained down turn to assets buying of the Japanese and American treasuries which is also occurring.
7. A Chinese collapse of the economic Ponzi scheme that is all economies now world wide. We will sewe communist China stealing the assets of sovereign investors and further efforts to either cap or devalue Chinese currencies to stimulate trade.
The last section is on what to do. If anyone reads this and wants me to "nutshell the conclusion I will be glad to but don't want to continue if there is no interest."

Mishkin's work is well thought out, but I take issue with his prediction of imminent and fatal collapse.

Gold, for one, is no longer a harbinger. It is pretty much a manipulated market catering to Indian tastes in jewelry and the cranky whims of the Chinese.

Our public debt is primarily owed to the beneficiaries of so called entitlement programs such as social security and medicare. These benefits will pay out in either inflated or deflated dollars...or the system will "partially default" by lowering benefits. My guess says these benefits going forward will be indexed against individual income or restricted by significant reduction in COLA.

The wildcard in our balance of payments depends on the time table of energy independence. The sooner it happens, the better off the public's balance sheet (and tax revenue).

The danger I see is not in the federal management of debt, but in the computerized trading of securities and derivatives markets. Both are "black boxes" and very dangerous.

But in the end, I take a fairly calm and blunt view of the situation. Markets go up...down...crash...and rise. It's cyclical. Winners buy at the bottom. And as for the "unsustainable deficit and debt levels", we only have three options. Inflate. Deflate. Default. They will try the first two before blowing up the sovereign rating.

You might find this article useful in see how and who fixes the gold price.
http://www.zerohedge.com/news/2013-11-25/how-gold-price-manipulated-during-london-fix
only a little bit over 1/4 of our debt is publically held.
Yes I agree that the 250 trillion dollar derivatives market is the elephant in the room but don't know how you can say its a problem and still not believe that it will cause the collapse of the global economy. It was 40 trillion in 2008 and is now over 250 trillion.
http://www.zerohedge.com/news/five-banks-account-96-250-trillion-outstanding-derivative-exposure-morgan-stanley-sitting-fx-de