(Excerpt)

Well, I hope you can clearly see the problem here. When the bank run finally begins people and entities will want real physical gold, not paper longs, or liabilities from credible sources.

It all comes down to gold, the actual physical stuff. That's what the people wanted during the bank runs of the 1930's. It is what brought down the London Gold Pool. It is what forced the closing of the Nixon gold window. And it will be what people want this time too. That's the real bank run... to actual physical gold in your own possession.

Think back to Exter's pyramid, and how demand collapses downward during a crisis. Think about "commercial bank credit money" as being higher on the pyramid than FRNs, actual physical cash. This is true. As we collapse downward to gold the banks themselves will shun each other's credit receipts in favor of central bank liabilities.

This is where all those excess reserves held at the Fed will finally come into play.

Not through economic lending, but through interbank clearing preference, as the banks first try to jettison each other's "digits" as fast as possible. Once the bank run on physical gold begins, these banks are going to be very nervous about holding each other's liabilities, even over night. They will only "sleep well" holding Central Bank liabilities.

This is how the transition from plastic to wheelbarrow begins. We may not see a bank run on Fed cash by the people before we see it within the banks themselves, as interbank faith vaporizes during the run on gold.

By this time, the bond will be gone. As the people are running on the Bullion Banks the Fed is going to be very busy monetizing the entirety of US federal spending, from Social Security to Medicare, national defense and even Nancy Pelosi's entourage's per diem. It will all have to be monetized. Meanwhile the Fed will have to keep its remaining banks happy with Fed liabilities to clear the private liabilities, or else they will cease to circulate. Printing dollars and buying up private equity so that each bank only has to hold Fed liabilities.

And as the US Government starts spending its fresh new Fed credit, the Fed will have to supply the banks receiving those trillions in USG payment transfers fresh cash to back the massive inflow of new Fed liabilities.

You see, this is what hyperinflation is all about. It is about not only demand collapsing down the pyramid, but the system itself also collapses down a pyramid, from modern monetary theory on down to Austrian monetary theory. What seems antiquated in today's digital age still lies dormant beneath the surface, just waiting to emerge with a vengeance.

Our physical world didn't change just because we invented the 1971 purely symbolic fiat dollar or the fictional reserve banking system. These were merely derivative layers atop an inverse pyramid no different than CDS or IRS, and just as fragile in times of systemic collapse.


Alternatives?

Jim Rickards gave another fantastic interview with King World News this week. Here's the link...

Jim Rickards interview on KWN

In it he makes a very convincing argument for the US dollar to return to a gold standard, backed by the physical gold the US still owns. He explains that the remaining US gold hoard, assuming it is not encumbered and/or swapped for paper longs from "credible sources", mining operations or Germany, is enough at present market values to back the M1 monetary measurement at a 20% fractional reserve (5:1).

And furthermore, that a full 1:1 backing of the M1 would restore the credibility of the $-global reserve currency so that the US could resume rolling over its insurmountable debt until it finally reaches infinity. And that this 1:1 backing of M1 would require only a 5-fold increase in price, to say $5,500/ounce or so.

Now I do agree with Jim that full backing is not necessary under normal circumstances, but that it would be necessary in order to repair severely damaged credibility. I am not one of the "hard shell gold standard people", but instead, I look for what actually can work, and what will happen.

The first problem that struck me with this idea of repairing US credit with a gold revaluation was the use of M1 as the measuring stick of dollars in existence. Again, this could work under normal circumstances, but most of the world's perceived wealth held in dollars is not in M1 holdings. And in the case of credit reparation, I intuit that M3 would be the bare minimum starting point. And to his credit, Jim points out that a mere $20,000/ounce would take care of this concern.

But this is not the big problem I see with this plan. The biggest problem is what stands in the way of this controlled revaluation. And that is the paper gold market that is already fractionally reserved at 100:1 if we define reserves strictly as physical gold in immediate possession.

A Fed revaluation of gold is different than Freegold because it aims to control the revaluation and set a new fixed parity. As nice as this sounds to those of us with some gold, it will always be unsustainable and in the case of today's gold market, is completely impossible without wiping out all of Wall Street and the dollar in the process.

Don't get me wrong. I'm not saying that NOT doing it will save Wall Street and the dollar. I am simply saying that this Catch-22, no-win situation the dollar finds itself in just doesn't have an out as easy as this.

Here's what would happen if the Fed tried this tomorrow: For those that own gold today, gold would suddenly become their most prized possession. And all of those paper gold holders would suddenly start thinking about what we have been saying for 12 years now. There would be a run on the Bullion Banks and the scramble to find physical gold and stay alive would drive its price well above $5,500 or even $20,000/ounce, driving the dollar and the Fed/US credibility into the dirt simultaneously.

Or the Bullion Banks would be backstopped by the Fed and delivery made in paper currency at the new price. Again, people would start to take seriously what we and so many others have been saying and at least some would decide, just to be on the safe side, to turn that paper money into physical.

And just imagine, paper delivery being needed even at $5,500 or $20,000 per ounce would destroy the new image the Fed was trying to establish of 1:1 gold backing. How is that going to help the crippled US credit rating in its resumption of debt rollover?

Jesse suggests it is more likely the US will issue a new dollar, let's call it an "Amero" for lack of a better name, at 100:1 parity with the old dollar. This is certainly possible. Every fiat currency in all of history has had "an unknown expiration date" as Aragorn III put it above.

The point of doing something like this would be to keep some things at nominal parity while devaluing others 100x. Obviously the debt would be devalued, otherwise what would be the point? And this would include the savings of those who held debt. Of course it would give the government the power to pick and choose who and what suffered the devaluation, printing new currency for a few special friends.

But again, the biggest problem with a scheme like this is the paper gold market, presently leveraged 100:1 under a strict physical perspective. One would assume a reset of gold at 100x the current price in old dollars if this was attempted. In other words, gold would still be $1,150 in new Ameros, while a debt of 100 old dollars is now only $1 (new Amero). So what happens to a debt denominated in gold instead of dollars?

A Bullion Bank that is short an ounce of gold before the reset owes the equivalent of $1,150 old dollars. After the reset it owes the equivalent of $1,150 Ameros. At 100:1 old dollar:Amero exchange that is $115,000 old dollars, for one ounce of gold. So while debt in dollars drops by a factor of 100, debt in gold does the exact opposite, it RISES 100x! Buh bye Wall Street... buh bye reserve status... buh bye USG credibility.

The bottom line is that any debt denominated in gold must be unwound BEFORE the Fed or the USG even THINK about something like this. Otherwise it is "advance to Freegold and collect wealth transfer as you pass Go". And to unwind the paper gold market today means exactly "advance to Freegold and collect wealth transfer as you pass Go". The only alternative, pretend and extent, what the Fed is doing right now, means only one thing...... wait for it...
"Advance to Freegold and collect wealth transfer as you pass Go".

This is The 21st Century Bank Run! It is a run on the gold banks, which is a run on Wall Street (because they are the bullion banks), which is a run on the entire $IMFS and on the dollar itself in the end. And for those of you inside the US, this will be the second best thing that ever happened to America, because it will kill the long march toward socialism dead in its tracks. Just be sure to protect your own wealth so that you can be part of the rebuilding effort.

http://fofoa.blogspot.com/2010/04/21st-century-bank-run.html