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Out of My Cold, Dead Hands

24 Jun

John Exter

John Exter

John Exter (A.D. 1910 – A.D. 2006) was an American economist, member of the Board of Governors of the United States Federal Reserve System, founder of the Central Bank of Sri Lanka, vice president in charge of international banking and precious metal operations for the Federal Reserve Bank of New York, senior vice president of the First National City Bank of New York (then the world’s second largest bank; now Citibank) and a member of Council on Foreign Relations.

Mr. Exter was “connected” to banking.  He worked the banking industry around the world and was equipped by education, intelligence and position to truly know how the “system” works.

•  Exter is best known for creating “Exter’s Inverted Pyramid”—a graphic used to illustrate the organization and comparative value of asset-classes measured in terms of risk and size.

In Exter’s theory, gold forms the Inverted Pyramid’s small base as the most reliable value.  Successively higher “asset classes” are increasingly larger (in terms of nominal value) but also increasingly risky.  At the broad top of the Pyramid, investors may have almost no chance of being paid in full.

Although gold is always at the bottom “peak” of Exter’s Inverted Pyramid, the other asset classes have varied in size and risk over the years.  Exter’s original pyramid (circa A.D. 1970) placed third world debt at the top as the world’s largest and most risky asset class.  Today, however, the world’s $800 trillion in derivatives are deemed the largest and most risky asset-class.

Here’s a modern example of Exter’s Inverted Pyramid:

Exter's Inverted Pyramid

Exter’s Inverted Pyramid

If I were designing my own “Inverted Pyramid,” I’d clarify that the “Gold” at the bottom peak was Physical-Gold, and I’d probably add another “asset class” between “Paper Money” and “Government Bonds” for “Paper-Gold”.  Some might agree with my proposed modifications.  Some might disagree.

In fact, the size and order of the various asset classes is somewhat subjective.  There’s room for some debate as to which asset classes should higher or lower.

• But the fundamental principles of Exter’s Inverted Pyramid remain the same, regardless of the absolute order of the various asset classes:

1. Physical gold is the smallest, safest and most liquid asset class.

Some might argue that paper dollars are more “liquid” (easily spent) than gold.

I.e., I can walk into any American super-market with paper dollars and purchase a loaf of bread.  If I walk into most American super-markets with a gold coin, I’ll probably have to get lucky before I can persuade any teller to accept gold for bread.  Therefore, I may have to first sell my gold coin to a gold coin dealer so I can acquire paper-dollars to purchase the loaf of bread.   Within the U.S., paper-dollars are more liquid than gold coins.

However, I can take my gold coin to virtually any market on the globe and either buy bread directly or find someone willing to buy my gold coin for the local currency.  There are places on earth where paper-dollars are not only no longer “good as gold” but increasingly disrespected.  If you go to such foreign markets with a fistful of paper dollars, you might not find anyone willing to trade their bread for paper-dollars.  But, you’ll always find someone willing to take gold in payment for bread or anything else. On a global basis, nothing is more liquid than gold.

Besides, the Inverted Pyramid’s vertex not only measures “liquidity,” it also measures safety (store of value).   Paper-dollars are subject to depreciation due to inflation.  Today’s paper-dollars have lost 95% of their purchasing power since A.D. 1971.  No such loss has been suffered by gold.  Gold is more valuable than paper dollars and thus belongs at the inverted peak of Exter’s Pyramid.

2.  As the remaining asset-classes are represented higher and higher on the Inverted Pyramid, they are also more and more risky.

Two years ago, it was estimated that there were over $1 quadrillion in “derivatives” floating around the globe.  Last I’ve heard, the size of the derivative market is now estimated to be around $800 trillion.  In a world where the global GDP is $85 trillion, it makes no difference whether the derivatives total is $800 trillion or $1 quadrillion. There’s no way in the world that all of those derivatives can or will ever be paid.  Dollar for dollar, Confederate money is worth more than derivatives.

Those asset classes towards the middle of the Inverted Pyramid are less risky than derivatives, but still riskier than gold.

3.  Virtually all of the asset classes other than gold are paper debt-instruments. 

Some asset classes are called “bonds,” others “stocks,” also “unfunded government liabilities,” “securitized debt,” “treasury bonds and even “paper money”—but most of these asset classes are paper debt-instruments and mere promises to pay.  As such, most of these “asset classes” are only nominal “assets” in that they are based on debt (promises) rather than tangible reality.

4.  In a debt-based monetary system, the amount of debt must continually grow.

The debt-based monetary and banking system is a Ponzi-scheme.  Thanks to fractional-reserve banking, a debt-instrument for $100 can be used as collateral for a bank to justify lending another $900 in credit.  The resulting $900 in debt-instruments (promises to pay) can then be used as collateral to justify lending another $8,100 in credit, and so on.  Thanks to the leverage provided by fractional-reserve banking, a small debt-instrument can be multiplied into seemingly spectacular amounts of loans.

The fractional-reserve banking system works great—unless people begin to default on their loans/debts.  Then, the same leverage that allowed $100 to grow into $900 and then $8,100, will allow a default on $100 in debt to cause the bank to call in $900 in loans which can cause another bank to call in $8,100 in loans, etc.

If the number of debt defaults exceeds a certain presumed and minimal limit, the result can be a cascade of defaults, the destruction of many, most or nearly all of the paper debt-instruments that have been masquerading as “assets,” and the vaporization of trillions of dollars of “paper wealth”.  We saw this process play out in the home mortgage debacle of A.D. 2008.

Result?  Economic collapse.

We have a debt-based monetary system.

As seen in the chart below, after rising persistently from A.D. 1975 through A.D. 2010, the amount of US domestic debt has begun to decline.

If Exter’s theory is right, the inevitable result will be an economic crash.

Debt Decline--Beginning of the End?

Debt Decline–Beginning of the End?

5.  In the event of widespread debt default, investors will flee, even stampede, from the higher, riskier asset-classes in Exter’s Inverted Pyramid to the lower, safer asset-classes like cash and gold.

As the riskier assets are abandoned and demand for gold soars, a little bit of gold will be able to buy a whole lot of stocks or bonds, land, factories or other asset classes that may be dirt cheap in midst of the stampede for gold, but will one day regain their value.  Implication?  Those who are still holding gold when the Inverted Pyramid collapses will be able to make some incredible, once-in-a-lifetime buys.

•   Exter argued that whenever asset values are inflated and risk is perceived as low, currency moves up the inverted pyramid (away from cash and gold) into his Pyramid’s higher asset-classes.

However, during a debt repudiation and resulting deflation, a panic, or a perceived high risk environment, currency moves down the inverted pyramid—towards cash and gold.  That’s where we are today.

In order to forestall the Inverted Pyramid’s inevitable collapse, the Powers That Be (“PTB”) will try to shore up the higher asset-classes in the Pyramid and attack the price of gold at the Pyramid’s bottom.  That’s exactly what we see today.  If Exter’s theory was correct, then we’re at the threshold of a deflationary depression.

•  Exter was interviewed by Moneychanger [“MC”] in A.D. 1991.  Here are a few excerpts from that interview:

Exter:  Since 1968 I had been recommending a 100% gold position. That has proven absolutely fabulous advice for those few who took it. . . . this present world-wide fiat paper money—what I call “IOU nothing” money—is going to break down. We’re headed for the worst economic catastrophe in all of history.

MC: You make a point that is extremely important historically: since 8/15/1971 the entire world has been on an unbacked paper money system. That has never before happened in history.

Exter: That’s why we are heading into such a catastrophe: the whole world has gone off gold.  Without central banks, such a catastrophe could not be possible. Single paper currencies without gold backing have always collapsed, going way back to John Law in France, our own continental dollar, and the French Revolutionary assignat, all in the 18th century.

That’s what my upside-down debt pyramid is all about. The debt burden at some point becomes unsustainable . . . .

MC: Exactly. . . . most people . . . saw our inflation ending in a hyperinflation. You have steadily insisted that our inflation would end in a deflation and a debt collapse.

Exter: Yes . . . This will be a deflationary collapse rather than an inflationary blow-off because creditors in the debt pyramid will move down the pyramid out of the most illiquid debtors at the top of the pyramid—junk bonds, failing banks, savings & loans and insurance companies. Creditors will try to get out of those weak debtors and go down the debt pyramid, to the very bottom: currency (dollar bills), even though they pay no interest. . . . Creditors will move out of debtors high in the debt pyramid as many of those debtors fail through defaults and bankruptcies. That is very deflationary.

 

Virtually all of the asset-classes in Exter’s Inverted Pyramid are paper debt-instruments.  Gold is a real asset.   The sum of these paper debt-instruments far exceeds that of gold and other tangible assets.

The debts are all promises to pay.  The gold is a payment.

Given that there might be over $2 quadrillion in promises (derivatives, and public and private debts) for a world that has an annual GDP of perhaps $85 trillion, there’s no way that all the debts can ever be repaid in full.  The majority of existing debts are irredeemable in that they’ll never be, can’t be, paid in physical-gold or any other tangible substance.  They can only be “paid” by issuing additional debt-instruments—new and ever-larger “promises to pay”.

It’s not just true that the higher levels “asset classes” in Exter’s Pyramid can’t be paid in gold, they can’t be paid in anything.  Virtually all of the higher asset classes are lies, fraud, promises to pay that can’t ever be kept in full—but are absolutely necessary to feed the debt-based monetary system.

If “consumers” lose their willingness or capacity to go ever-deeper into debt, then there’ll be no new debt-instruments to “pay” the existing debt instruments, and the fractional-reserve Ponzi-scheme will begin to collapse.

The mathematical reality is that the upper asset-classes in Exter’s Inverted Pyramid can’t possibly be paid in full.  Sooner or later, everyone will try to cash all of their upper asset-classes at the same time and we’ll see a debt defaults and a deflationary collapse.  In the context of that deflationary collapse, the price of virtually all asset-classes will plummet while the purchasing powers of paper dollars (maybe) and physical-gold (definitely) rise explosively.

 

MC: What signs make you think we’re getting close to the collapse of the debt pyramid?

Exter: The most important one is this flight to currency. . . . At some point people will go to gold.  When they go to gold instead of currency or Treasury bills, the price of gold will take off. It will be a bandwagon everyone will want to get on. Then even those who have bought currency will see how foolish they were and that gold is far better to hold than currency, that it is the best store of value money man has ever found. It’s stupid for people to hold currency. The Fed can simply print all they want at very low cost. Paper money is as abundant as leaves on trees.  People don’t realize that gold is money, the best store of value money that man has ever found over thousands of years.

 

But, since WWII, Americans haven’t generally wanted to “store” whatever “value” or wealth they’d accumulated.  In their greed for more currency, they forgot to protect the wealth they’d already acquired.  They wanted to speculate.  They wanted to gamble in expectation of “making a killing” and generating unearned wealth.  In the pursuit of the seemingly “sure things” of investing in homes and stocks, Americans lost their memory and understanding of a need to “store” whatever real wealth they’d already accumulated.

 

MC:  You’re looking for a world-wide depression. How long will that last?

Exter: It’ll be decades. This will be an economic catastrophe on a scale never before seen in history. We can see it coming now. . . . We’ve had more than three decades of heady expansion. We’ve now entered a merciless contraction from which gold is by far the best escape.

•  The higher debtors sit in the pyramid, the less liquid and riskier their investments.  But if people lose confidence in those upper asset-classes, they won’t invest in them.  If they won’t invest, they won’t create the new and additional debt-instruments required to feed the fractional-reserve Ponzi scheme.   That’s why the Federal Reserve has become the “buyer of last resort.”  No rational investor wants to buy any of the “toxic assets” like sub-prime mortgages of A.D. 2008 but now including US Treasuries (75% of which are being purchased by the Fed).

So long as the someone (in this case, the Fed) continues to buy the upper asset-classes in Exter’s Inverted Pyramid, those “toxic” paper-debt instruments still appear to have some value—even though they’d be nearly worthless in a true free market.

The Fed buys toxic assets (like mortgage-backed bonds or US Treasuries) in order to maintain the illusion that the upper reaches of Exter’s Inverted Pyramid are still somewhat valuable.  This illusion is required to stem to tide of investors moving from the Pyramid’s top asset-classes to the bottom (physical gold).

Similarly, the PTB are driving the price of gold down to discourage people from abandoning the higher, paper-debt-instrument asset-classes to invest in gold.

The Fed is artificially supporting some of the top asset-classes and artificially suppressing the price of gold.  From this perspective, it appears that Mr. Exter’s diagram and theory may be correct.

If so, it also appears that we may be on the threshold of the deflationary depression that Exter predicted.

•  Ironically, as the PTB push the price of gold lower on US markets (in order discourage Americans from fleeing from paper debt-instruments and running to gold), the low, fire-sale prices are causing an enormous increase in gold sales in Asia.  We can wonder if the enormous increase in Asian demand will ultimately foil the PTB’s attempts to suppress the rising domestic demand for gold.

In fact, we can even wonder if the purpose of suppressing the price of gold in this country is intended to make it easier (cheaper) for the PTB to get out of paper-derivatives and move into gold.  Are we seeing the price of gold suppressed to stop average people from moving from paper debt-instruments into gold?  Or are we seeing the price of gold suppressed in order to make it easier/cheaper for the elite to abandon their paper debt-instruments and move into gold?

We are certainly seeing a Gold War.  I’ve watched the price of gold fall by over 30% in the past twenty months.  In a true free (unmanipulated) market, there’s no rational reason to justify that price decline.  Instead, it’s certain that this price decline has been largely orchestrated and caused by the PTB for their own self-interests and/or to sustain the fiat dollar and the debt-based monetary system illustrated in Mr. Exter’s Inverted Pyramid.

The price decline in gold has annoyed me, disturbed me and even depressed me.  At times, it’s almost shaken my confidence in gold as an investment.

But in the last two days, gold’s price decline has finally made me mad.  The sonsofbitches in Washington DC and on Wall Street are robbing me—and robbing you, too.  Those of us with enough brains and courage to try to escape the world of paper-debt instruments are being plundered by the PTB.  This is not a game.  This is a g.d. WAR.

OK.  Thanks to Exter’s Pyramid, I get it.  Finally.

Since we’re at war, gold is no longer simply an “investment”.  Gold is ammunition.  In this war, every gold coin is a “bullet”.  Owning gold is no longer a question of whether we make a 20% annual profit or suffer a 20% annual loss.  It’s not a question or profit or loss.  It’s a question of survival.

Understanding that there’s a Gold War going on—not a misunderstanding, not a blip on the charts—but a WAR, complete with casualties, ruined lives and even ruined nations . . .  and understanding that gold is no longer an investment so much as the ammunition that’s every bit necessary to our survival as bullets are to the survival of soldiers in Viet Nam, Afghanistan or Iraq . . . then, we can ask what is the true price of ammunition in a war?   Sure, ammunition for your rifle might be selling for fifteen cents a round back at Walmart, but what’s that ammunition worth in the midst of a firefight in a war?  It’s priceless.

Same principle applies to gold.

Gold is the basic ammunition in our current war with the PTB.  You don’t dare sell it unless you absolutely must. You buy more whenever you can.

I don’t give a damn if the price of gold falls to $1,000 per ounce.  I’ll hold my gold just as Charlton Heston held his firearms.

If the bastards want my gold, they can pry it out of my cold, dead hands.

I’m sure John Exter would agree with that attitude.

 

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18 responses to “Out of My Cold, Dead Hands

  1. mikeck44

    June 24, 2013 at 2:10 PM

    “Since we’re at war, gold is no longer simply an “investment”. Gold is ammunition.” Actually, I no longer think of gold as an investment at all…gold is the store of value par excellence. Nothing else even comes close. Gold, in hand, depends upon nothing else for its value. Ammo would be a close second in my basket of valuables, but it does not stand stand alone nor is it “forever” like gold.

    As long as one has the ounces it really does not matter where they put the “price” via their paper games, except that the lower the price, the more ounces you can get with your paper. BTW, paper gold is already in your updated pyramid…at the very top with all the other derivatives.

    Mike

     
    • mikeck44

      June 24, 2013 at 2:13 PM

      Make that a “distant” second.

       
  2. Martens

    June 24, 2013 at 2:32 PM

    @Adask “In a debt-based monetary system, the amount of debt must continually grow.”

    Monetary systems that are not debt-based will also experience a continual growth of debt, if a significant portion of the money supply is loaned at compound interest.

    The inevitability of this every-increasing debt ultimately concentrates all wealth in the hands of the bankers, regardless of the monetary system you started out with.

    This continual, and ultimately fatal, growth of debt is not unique to debt-based monetary systems. It’s the fate of all economies that fail to keep usury on a short leash.

     
  3. pop de adam

    June 24, 2013 at 3:38 PM

    If someone or everyone chose the security of gold, the paper currency is going to reflect a negative movement. If the dollar shrinks it requires more of them to purchase the same quantity of gold, gold thus appears to rise in price. As these prices for gold rise many are inclined to sell it to recieve the windfall of depreciated dollars. The defect as I see it is most people evaluate their gold in dollars, when they should really choose some third manner of evaluating both dollars and gold. To pursue gold to spite dollars, and then assess it in dollars again seems to be asking for a distorted mangle.

     
    • IbFreeAmerican

      June 25, 2013 at 10:16 AM

      I try to value gold per ounce to the cost of milk per gallon, they stay connected pretty good. If an ounce of silver today buys about 9 gallons of milk then when milk go0es to 20 dollars a gallon the same ounce of silver will still buy 9 gallons as it increases in value against debt instruments..

       
  4. Yartap

    June 24, 2013 at 9:05 PM

    What does the future hold for us? I’m a believer in metals, but to a point. Part of our problem is that the dollar is not backed by gold. Thus, gold and other metals are just a commodity like any other hard physical commodity, which is subject to demands and supply, and we have seen its manipulation with paper gold by bankers. In other words, just like dollars, gold is now leveraged beyond its supply to keep the price low through the use of paper gold. And a lot more leveraging can be done on the metals.

    The questions for us are: “What do we need if the dollar crashes?” and “What do we need if the Federal Reserve expands the supply of dollars with more QE’s?”

    To answer the first question, if the dollar crashes, then a new currency will be needed, thus gold stands ready and would be the right play or investment. But, do you think that the Federal government would allow a crash with their spending habits? They don’t care if they carried an ONE HUNDRED TRILLION dollar debt! And they know the Fed Reserve can figure that high. It is us that can’t fathom or believe that high. Remember: Our government will borrow the money to just pay the interest, and the Fed Reserve is just happy to loan it to them.

    To answer the second question, if the Fed continues to expand the supply of dollars, then inflation will continue and goods will cost more, thus food, fuel, clothing, utilities, shelter, guns and ammo would be the right play or investment.

    Even with Uncle Ben leaving the Fed, I still see more QE’s coming. Thus, guns and ammo make a better commodity than gold. For me, I have gold and silver (mostly silver dimes), if the dollar crashes, so I can trade; but I’m accumulating the other needed commodities to fight off inflation which is our enemy RIGHT NOW!

    So, hold your gold and silver, but start getting the other commodities to fight off inflation.

     
  5. Michael Kivinen

    June 25, 2013 at 7:53 AM

    If you have gold and silver you will live, anything else will be subject to its value to its usefulness to live. Paper money future will be only good for burning it to keep warm and using it for toilet paper.
    Gold and Silver for Kings and Gods of the world, and paper IOU money for the rest of the so called educated Monkeys.

     
    • mikeck44

      June 25, 2013 at 8:48 AM

      There was a time I would have agreed. Now I think fiat can serve very well as a medium of exchange and a unit of account, but not a store of value…gold will be perfect as a store of value once the physical metal separates from the paper price.

      The main problems with fiat arise when it is used for savings. When physical gold is used for storing wealth in a Freegold world, i.e. not valued by paper markets, fiat will work fine for greasing the skids of the economy.

       
  6. Martens

    June 25, 2013 at 1:42 PM

    mikeck44 makes a valid point.

    It’s unclear why one medium should be required to do two jobs: “medium of exchange” and “store of value”.

    Rather than making a single medium pull double duty, why not get the best of both worlds by using one medium for exchange (e.g. fiat currency) and another medium for storing value (e.g. gold)?

    Hopefully one of the gold bugs will comment, because this question goes to the core of their case.

     
    • mikeck44

      June 25, 2013 at 3:26 PM

      Actually, when I thought of myself as a “gold bug” i wanted gold and silver to be used for all purposes. After studying Freegold at FOFOA’s blogspot, I now understand that is not the ideal world. The following comment helped me realize that I needed a better understanding, “The Gold Standard appears virtuous until you understand Freegold. Fiat currency appears evil until you understand Freegold.” – Blondie in a comment on FOFOA’s blog March 2011

      What we really need now is to separate the pricing of paper gold from the real thing, i.e. Freegold!

       
  7. Peter Q

    June 26, 2013 at 6:38 PM

    What do you tell the fella that bought gold at 1900 or silver at 49 ,what was moving up in parabolic fashion is moving down in a parabolic fashion. No matter how you try to explain the bullish backdrop for holding metals they are some of the most horribly performing asset class in the short to medium term. Maybe my entry at this time may be indicative of a possible bottom. Maybe as the meltdown that is currently underway in the indexes worldwide, especially China (LOOK AT ANY CHINESE INDEX), a squeeze via margin calls may intensify more with additional declines in gold and silver .It may be wise to lighten up on you metals and position yourself in some inverse index funds to capture profits from the collapse .This drop may have everything getting tossed including gold and silver due to margin calls ,it happened in 08.There are many you cannot trust out there …As for me i’m holding what I got and betting on the Dow Jones to rollover. Confirmation will be when Starbucks rolls over ,the 5.00 dollar a cup coffee crowd should be the last to see it. Leveraged short funds may do good (in this state).
    Sitting here watching DUST and DSLV look toppy, one positive for gold and silver, the selling seems a little overdone at this juncture, well see.

    The boyz need a war!! Can’t get money supply moving fast enough here.

     
    • Jetlag

      June 26, 2013 at 7:36 PM

      “What do you tell the fella that bought gold at 1900 or silver at 49 ,what was moving up in parabolic fashion is moving down in a parabolic fashion.”

      Wait, the news isn’t all bad.

      Just call up the dealer who sold you that gold at 1900, and ask how he’s enjoying the money you sent him.

       
      • mikeck44

        June 26, 2013 at 8:10 PM

        I see a serious disconnect with reality here…or is it buyers remorse? $2000 frn will soon look like a bargain for a one ounce yellow stone. “Gold, git you some.” HT ari!

         
      • Adask

        June 26, 2013 at 9:52 PM

        You tell him the same thing you tell a man who’s been mugged and robbed in an ally. There’s a war against gold going on. Watch yourself.

         
  8. Peter Q

    June 26, 2013 at 9:46 PM

    Yea, smart individuals in the markets that are long in uptrends make money, you don’t make money being long in downtrends .We are in a downtrend until it changes trend.

     
    • mikeck44

      June 27, 2013 at 6:57 AM

      The beauty/advantage of holding physical metal is the reluctance to part with it because it may, for a period of time, be worth less FRN than it previously was worth…it still weights the same. Those FRN are also worth less than they were previously worth if one wants to buy things that they need.

       
  9. Jetlag

    June 26, 2013 at 11:05 PM

    The smart money is reading the signs from Obama, the BIS, etc. and therefore expects that Bernanke and the QE helicopter he rode in on will soon be replaced in favor of a different policy.

    This is why the US dollar index and the interest rate on the 10-year bond started to rise, and the price of gold started to decline, all at the same time recently.

    Coincidence it ain’t.

     
  10. Peter Q

    June 27, 2013 at 8:10 PM

    Heads up, Japanese Yen looks like it wants to go up,gold follows Yen .

     

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