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Paul Brodsky QB Asset Management Company (QBAMCO)
The Big Picture Conference New York, NY October 11, 2011
US M3 growth US GDP/Capita growth
• From 1994 to 2006, M3, which was the only monetary aggregate that included overnight repurchase agreements among banks, grew 142% from $4.3 trillion to $10.4 trillion (11.8% annually). (The Fed stopped publishing M3 in March 2006.) • US per capita output grew 65% over the same period (5.4% annually). • The US economy seems to have needed a massive credit build‐up merely to maintain trend‐level nominal output growth .
0% Mar-70 Mar-74 Mar-78 Mar-82 Mar-86 Mar-90 Mar-94 Mar-98 Mar-02 Mar-06
Sources: St. Louis Fed; QBAMCO
554 trillion as of 4/1/11 QBAMCO 3 .Total Credit Market Debt Owed (Does not include unfunded liabili]es) TCMDO = $52.
Monetary Base is M0: currency in circula]on + bank reserves held at the Fed US Monetary Base = $2.68 trillion as of 9/21/11 QBAMCO 4 .
Louis Fed.42 $7.344 5.03 $6.208 39.22 $9.692 10.48 +81% +73% Total Credit Market Debt Owed TCMDO / MB $17.554 19.10 $14.704 5.89 $8.9% Total Bank Credit TBC / MB $3.93 $45.684 (1994 – 2006) Change +185% (2006 – 2011) Change +219% Total Bank Assets (Loans) TBA / MB $2.44 $5.281 3.507 2.507 10.43 +178% +9.46 +143% +20% Total Public Debt Outstanding TPDO / MB $4.355 53. QBAMCO 5 .87 $52. QBAMCO.921 7.762 9.198 7. Sources: St. TreasuryDirect.USD Systemic Leverage QBAMCO USD Monetary Base 1994 $431 2006 $842 2011 $2.58 +164% +16% All ﬁgures in billions.
The US economy must de‐lever and it can only do so two ways: 1. Allow credit deﬂa]on to occur naturally 2. Con]nue inﬂa]ng the monetary base QBAMCO 6 .
Expected Outcome: Con]nued Monetary Inﬂa]on Central bank administered debt deleveraging via the drama]c expansion of base money. which wipes out unlevered lenders in real terms. is far more socially acceptable than naturally‐occurring debt deﬂa]on that wipes out all lenders and borrowers in nominal terms. QBAMCO 7 .
is an index of real expenditures (on newly produced goods and services). is the price level.The Equa]on of Exchange Where for a given period: is the total nominal amount of money in circula]on on average in an economy. which means that total nominal economic output may increase or decrease with the general price level independent of changes in unit demand. Thus. PQ is the level of nominal expenditures. is the velocity of money. Changes in real (true inﬂa]on‐adjusted) economic output must also factor quan]ty. that is the average frequency with which a unit of money is spent. In ]me. QBAMCO 8 . boos]ng nominal price levels through monetary inﬂa]on diminishes demand. inﬂuence the price level to inﬂuence nominal output growth. This deﬁnes contemporary economic policy management.
Noise Inﬂa]on QBAMCO 9 .
policy makers have had to marginalize the one compe]ng currency capable of displacing it: gold. To do this.YEN AUD CAD EURO USD BRL GBP CHF YUAN Economic policy makers across the poli]cal spectrum have successfully maintained the debt‐based global monetary system since 1971. QBAMCO 10 .
Morgan) Rising gold prices in USD terms are projec]ng and discoun]ng necessary ﬁnancial system deleveraging via an ongoing and aggressive expansion of the global monetary base.” (J. Everything else is credit. QBAMCO (Paul’s Closet) 11 . “Gold and silver are money.P. They are not predic]ng rising or falling goods and service prices per se.
G o l d ’ s p e r f o r m a n c e i s p o s i ] v e l y correlated to nega]ve real returns. g o l d generally underperforms “risk” assets during periods of expanding leverage and outperforms during periods of deleveraging.) QBAMCO 12 . (Under gold standards. I n b a s e l e s s c u r r e n c y r e g i m e s . this would be axioma]c.
QBAMCO 13 .
‐50% ‐100% ‐150% QBAMCO 14 .125% 100% 75% 50% 25% 0% Sep‐81 ‐25% Sep‐87 CRB RIND in US Dollar Terms While commodity prices have risen for dollar holders… Sep‐93 Sep‐99 Sep‐05 Sep‐11 50% CRB RIND in Gold Terms 0% Sep‐81 Sep‐87 Sep‐93 Sep‐99 Sep‐05 Sep‐11 …commodity prices have fallen for gold holders.
QBAMCO 15 .
It does not include upwards of $70 trillion in US dollar‐denominated claims.5 261. meaning US oﬃcial gold holdings approximate 261. the method used to calculate the exchange rate of paper money to gold was to divide the US Monetary Base by oﬃcial US gold holdings.75 troy ounces.412 $2.000 / gold ounce.400 Oﬃcial US Gold Holdings (millions of ounces) 261.273 $15.224 $10. If this precedent were to be re‐established today. based on our Shadow Gold Price.5 261.144 $2.199 $9. and so we have kept US oﬃcial gold holdings constant. To put this table in perspec]ve.020 $5.948 $4. Such devalua]on would imply that US dollars would again be fully backed by Treasury assets. The US Treasury is believed to own 8.5 261. from about $850 billion ($3.) As per the Brepon Woods Monetary Agreement that lasted from 1945 to 1973 (the last global ﬁxed exchange rate system).5 tonnes (metric tons) of gold.497 $30. a signiﬁcant por]on of which conceivably must be ul]mately be repaid in money from the Monetary Base that does not yet exist.360 $8. current condi]ons imply a US dollar devalua]on to almost $10.249 $11. the Fed already increased the US Monetary Base over 200% since 2008.745 $51.5 Shadow Gold Price (in US dollars/ounce) $8. (The US gold hoard has been almost completely stable for forty years.251 implied SGP) to $2.133.5 261.040 $13.5 261.5 million ounces. QBAMCO Shadow Gold Price Change in USD Monetary Base Monetary Base (billions) ‐25% ‐10% FLAT +10% +50% +200% +300% +500% $2.150.5 261. It is important to note that the Monetary Base only cons]tutes systemic bank reserves held at the Fed and currency in circula]on. QBAMCO 16 .5 261.373 $20.68 trillion (following the comple]on of QE2).680 $2. Each tonne converts into 32.243 This table illustrates a poten]al metric for future US dollar devalua]on.
000 4. 10.000 6.000 3.000 2.000 5.000 1.000 QBAMCO Shadow Gold Price Spot Gold 8.000 ‐ Sep‐76 Source: QBAMCO Sep‐81 Sep‐86 Sep‐91 Sep‐96 Sep‐01 Sep‐06 Sep‐11 QBAMCO 17 .000 7.000 9.
50 0.50 Spot Gold / QBAMCO Shadow Gold Price 1. 1.00 0.25 ‐ Sep‐76 Source: QBAMCO Sep‐81 Sep‐86 Sep‐91 Sep‐96 Sep‐01 Sep‐06 Sep‐11 QBAMCO 18 .75 0.25 1.
Administered Dollar Devalua\on 1. the Fed would tender for privately‐held gold at or near the Shadow Gold Price (currently about $10. As the Fed purchases gold. The Fed would fund those purchases through newly‐digi]zed Federal Reserve Notes. This would be a discrete monetary inﬂa]on event (devalua]on) and a simultaneous deleveraging. QBAMCO 19 .000 / ounce). 2. Once the Fed acquires enough gold from the markets. 3. which would ﬂow to banks in the form of net new deposits. the gold would ﬂow to the asset side of its balance sheet. To remediate all past monetary inﬂa]on and reset the global monetary regime. a gold price peg for the US dollar would be established.
Prudence Fiduciary Responsibility Best Prac\ces Stability Diversiﬁca\on Growth & Value QBAMCO 20 .
Noise Inﬂa]on QBAMCO 21 .
com QBAMCO 22 .Paul Brodsky email@example.com QB Asset Management Company 535 Firh Avenue – 25th Floor New York.qbamco. NY 10017 www.