Economy Figures 2011

8/3/2019 Economy Figures 2011

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Apropos of Everything

Paul BrodskyQB Asset Management Company (QBAMCO)

The Big Picture Conference

New York, NY

October 11, 2011


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QBAMCO 2QBAMCO 2QBAMCO 2

0%

200%

400%

600%

800%

1000%

1200%

1400%

1600%

1800%

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

From 1994 to 2006, M3, which was the only monetaryaggregate that included overnight repurchase

agreements among banks, grew 142% from $4.3 trillionto $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 massivecredit buildup merely to maintain trendlevel nominaloutput growth .

US M3 growth US GDP/Capita growth


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Total Credit Market Debt Owed

(Does not include unfunded liabili]es)

TCMDO = $52.554 trillion as of 4/1/11


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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


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QBAMCO 1994 2006 2011 Change

(1994 2006)

Change

(2006 2011)

USD Monetary Base $431 $842 $2,684 +185% +219%

Total Bank Assets (Loans)TBA / MB

$2,3445.44

$5,9217.03

$6,5072.43

+178% +9.9%

Total Bank CreditTBC / MB

$3,1987.42

$7,7629.22

$9,2813.46

+143% +20%

Total Public Debt OutstandingTPDO / MB

$4,69210.89

$8,50710.10

$14,7045.48

+81% +73%

Total Credit Market Debt OwedTCMDO / MB

$17,20839.93

$45,35553.87

$52,55419.58

+164% +16%

All figures in billions.

Sources: St. Louis Fed; TreasuryDirect; QBAMCO.

USD Systemic Leverage


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The US economy must delever and it can only do so

two ways:

1. Allow credit defla]on to occur naturally 2. Con]nue infla]ng the monetary base


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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 naturallyoccurring

debt defla]on that wipes out all lenders and

borrowers in nominal terms.


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The Equa]on of Exchange

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is the total nominal amount of money in circula]on on average in an economy.

is the velocity of money, that is the average frequency with which a unit of money is spent.

is the price level.

is an index of real expenditures (on newly produced goods and services).

Thus, PQ is the level of nominal expenditures, which means that total nominal economic output

may increase or decrease with the general price level independent of changes in unit demand.

This defines contemporary economic policy management; influence the price level to influence

nominaloutput growth. Changes in real(true infla]onadjusted) economic output must also factor

quan]ty. In ]me, boos]ng nominal price levels through monetary infla]on diminishes demand.

Where for a given period:


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Noise Infla]on


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YUAN

USD

YEN EURO

CAD

AUD

GBP

BRL

CHF

Economic policy makers across the poli]cal spectrum have successfully maintained the debtbased global

monetary system since 1971. To do this, policy makers have had to marginalize the one compe]ng currency

capable of displacing it: gold.


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Gold and silver are money. Everythingelse is credit. (J.P. Morgan)

Rising gold prices in USD terms are projec]ngand discoun]ng necessary financial systemdeleveraging via an ongoing and aggressiveexpansion of the global monetary base. They arenot predic]ng rising or falling goods and serviceprices per se.

(Pauls Closet)


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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.

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 , g o l d

generally underperforms risk assets

during periods of expanding leverage and

outperforms during periods of deleveraging.

(Under gold standards, this would be

axioma]c.)

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25%

0%

25%

50%

75%

100%

125%

Sep81 Sep87 Sep93 Sep99 Sep05 Sep11

CRB RIND in US Dollar Terms

150%

100%

50%

0%

50%

Sep81 Sep87 Sep93 Sep99 Sep05 Sep11

CRB RIND in Gold Terms

While commodity

prices have risen fordollar holders

commodity prices have

fallen for gold holders.


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QBAMCO Shadow Gold Price

Change in USD Monetary

Base

25% 10% FLAT +10% +50% +200% +300% +500%

Monetary Base (billions) $2,144 $2,412 $2,680 $2,948 $4,020 $5,360 $8,040 $13,400

Official US Gold Holdings

(millions of ounces)

261.5 261.5 261.5 261.5 261.5 261.5 261.5 261.5

Shadow Gold Price

(in US dollars/ounce)

$8,199 $9,224 $10,249 $11,273 $15,373 $20,497 $30,745 $51,243

This table illustrates a poten]al metric for future US dollar devalua]on, based on our Shadow Gold Price. The US Treasury is believed to own 8,133.5

tonnes (metric tons) of gold. Each tonne converts into 32,150.75 troy ounces, meaning US official gold holdings approximate 261.5 million ounces. (The

US gold hoard has been almost completely stable for forty years, and so we have kept US official gold holdings constant.)

As per the Breon Woods Monetary Agreement that lasted from 1945 to 1973 (the last global fixed exchange rate system), 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. If this precedent were to be reestablished

today, current condi]ons imply a US dollar devalua]on to almost $10,000 / gold ounce. Such devalua]on would imply that US dollars would again be

fully backed by Treasury assets.

To put this table in perspec]ve, the Fed already increased the US Monetary Base over 200% since 2008, from about $850 billion ($3,251 implied SGP) to

$2.68 trillion (following the comple]on of QE2). It is important to note that the Monetary Base only cons]tutes systemic bank reserves held at the Fed

and currency in circula]on. It does not include upwards of $70 trillion in US dollardenominated claims, a significant por]on of which conceivably must

be ul]mately be repaid in money from the Monetary Base that does not yet exist.


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1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

10.000

Sep76 Sep81 Sep86 Sep91 Sep96 Sep01 Sep06 Sep11

QBAMCO Shadow Gold Price

Spot Gold

Source: QBAMCO


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0,25

0,50

0,75

1,00

1,25

1,50

Sep76 Sep81 Sep86 Sep91 Sep96 Sep01 Sep06 Sep11

Spot Gold / QBAMCO Shadow Gold Price

Source: QBAMCO


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Administered Dollar Devalua\on

1. To remediate all past monetary infla]on and reset the global monetary regime, theFed would tender for privatelyheld gold at or near the Shadow Gold Price (currently

about $10,000 / ounce).

2. As the Fed purchases gold, the gold would flow to the asset side of its balance sheet.The Fed would fund those purchases through newlydigi]zed Federal Reserve Notes,which would flow to banks in the form of net new deposits. This would be a discrete

monetary infla]on event (devalua]on) and a simultaneous deleveraging.

3. Once the Fed acquires enough gold from the markets, a gold price peg for the USdollar would be established.


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Growth & Value

Fiduciary Responsibility

Best Prac\ces

Diversifica\on

Prudence

Stability


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Noise Infla]on


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Paul Brodsky

[email protected]

QB Asset Management Company

535 Fih Avenue 25th Floor

New York, NY 10017

www.qbamco.com

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Documents

Economy Figures 2011