The world is awash with debt which must and will be destroyed. This is natural, part of the ebb and flow of business. Unfortunately, there is so much debt that destroying enough to make a difference would trigger a run from the debt. There is no such thing as destroying just a little bit of debt.

The economy/output sets the price of things longer term. Finance can distort prices by adding credit which it is doing in PMs. In this case the large and growing ‘paper’ analogs are setting the price of PMs and other commodities as well. The scarcity of physical is self- amplifying as the paper alternatives (Gresham’s ‘bad money’) drive out the physical (the ‘good money’). Physical scarcity increases physical price which increases demand for paper which drives up the price increasing scarcity, etc.

The PMs are hostage to their paper cousins who grow like monsters. Increasing paper ‘value’ increasingly weighs on physical as metal becomes the collateral for the paper. PM derivatives are basically PM- backed debt. The derivatives are analogous to hard- money regimes of PM- backed ‘convertible currencies’. The paper contracts circulate as debt- claims which continually increase against the physical collateral.

At the same time, the paper iterations of PMs are intertwined with other debt issues in other parts of the world’s economies.

When the next deleveraging begins (next week?) the paper empires will collapse and collateral will be dumped onto any markets that appear to offer a bid. Cash will vanish and that will be the only item that anyone in the universe of debt will want or need. People will starve for lack of a dollar or two while businesses that are ‘worth’ millions will be available for the price of a meal. Nobody will have any cash. This is what happens in deflation.

This is simply a continuation of what has been taking place for many years. There is nothing that can change this dynamic … except the arrival of four or more Saudi Arabias pumping oil … and a partridge in a pear tree.

The world is going broke. It’s running out of cash.

I see this all the time: “The central banks are printing money!” “There is going to be hyper- inflation!”

The estimable Nicole Foss says it best: “The bailouts are never for the little guy.” What money- printing there is lives in the form of bailouts to banks and finance institutions. Much of the printed money resides in accounts @ the central banks as reserves. Much of this printed money is skimmed off and held in tax havens overseas safely out of reach of the little guy. Printing too much cash bailout money would devalue the funds held in  these tax havens, printing too little would leave too many financiers without the opportunity to ‘cash out’.

Hyperinflation is when ‘printed’ money enters circulation, that is, the bailout reaches the bottom of the economic food chain. It only does so for a reason; to allow the elites to rob the bottom- dwellers of their savings. This is a problem in China, a nation of savers. Not so in America which has experienced inflation since the end of World War Two and has thoroughly adjusted to it. There is almost zero savings in America for elites to steal. The best hedge against inflation is for individuals/entities to fall into debt: this is what Americans have done with abandon. If inflation was to appear, existing debt would first have to be ‘rationalized’ as Americans and their businesses cannot support the debt that exists now and consequently cannot add to it.

Could this be done, inflation would manifest in America’s favored inflation hedge, real estate lending. Real estate prices would increase, which is clearly not happening: (Case- Shiller house price chart by Redfin)

If there was inflation finance would enable the hedge as it did during the period leading up to the summer of 2006. Finance acts for its own benefit and inflation hedging is good business for finance. That was what the global debt bubble was all about in the first place! The creation of a hedge and keeping it going as long as possible. Only when the hedge started to fail did finance start to ‘short’ it.

Which leads to something I see this over and over, with regards to silver and other precious metals. Nobody gives with the good answer:

Why would JPM or any other business entity want to suppress the price of an asset?Mark McHugh @ Zero Hedge:

JP Morgan is the custodian of the ishares Silver Trust (SLV), which now holds over 350 million ounces of silver, provides sovereign and corporate investors with precious metals solutions (JP’s website), and is the largest short seller of silver in the history of the world. Berkshire Asset Management’s Eric Fry writes:

Based on some of the latest conjecture, Morgan’s short position totals a whopping 3.3 billion ounces. If, therefore, the buzz about J.P. Morgan and silver is even half true, the prestigious investment bank could be cruisin’ for bruisin’.

For perspective, 3.3 billion ounces is roughly equal to:

1) One third of all the world’s known silver deposits;

2) Two times the world’s approximate stockpiles of silver bullion;

3) Four times the annual mined supply of silver;

4) 30 times the inventory of silver at the COMEX.

If you can, forget about the conflict of interest, and ponder the enormity of the explosion.

The theory is that a rise in the gold or silver price will destroy the dollar while conveniently destroying JPM in the process. Consequently, JPM needs to manipulate the price down.

Why would it? People want to buy silver and if JPM cannot deliver the real thing it can certainly deliver a commonly accepted substitute: electronic dollars credited to the buyer’s account! If the buyer is squeamish about ‘non- monetary’ paper money, JPM has no qualms and neither do the vast majority of its other customers who will and do accept it in the squeamish buyer’s place. This part of finance is democratic: the dollar acceptors outvote the ‘specie’ customers so as to support JPM’s finance activities including creating ‘worthless’ paper analogs to silver. Silver and gold exist in finance markets to support JPM’s and other banks’ finance activities. The majority of paper- dollar acceptors rules, even if they are ‘stupid’!

One can argue with aspects of JPM’s representations within markets but the FACT of JPM’s dominance of the market Morgan itself largely defines cannot be disputed. To some degree, JPM is the market and existential arguments made against JPM are quixotic and counter to what the market and its vast customer base decrees.

The ‘short bullion’ position does not jeopardize JPM, it really cannot. A market has no restrictions upon where and when it will emerge. COMEX can suspend silver sales and these will emerge, later. The market will discover value somewhere and some time, even if that time is in the (distant) future and the place is Antarctica. This bit of human nature gives continuity to markets and the values these markets discover.

Howcum Picassos priced @ $20 million don’t destroy the dollar? Anyone who buys the Picasso wants to sell it for more. This ‘more’ does not represent a value decline for the dollar but is instead a ‘profit’ to the seller.

If there are no Picassos on the market at any given time, the price does not shoot up to a billion- gazillion dollars due to mismatches between supply and demand. Buyers simply wait for more Picassos to appear. There can be no Jackson Pollocks available for years and a painting will cost more or less the same as a similar painting by Pollock cost during the time one was on the market. Why would a market shortage of gold cause the gold market to crash the economy or cause the price to shoot up by orders of magnitude? The persistence of markets and their value- discovering ability maintains a value ‘memory’ that carries from one market to another over decades if need be.

If a mechanical calculation was made of every relative value over any span of time, no good would be sold! How could it, as the chance of devalue in some aspect would outweigh any other consideration? Since goods are indeed sold, the relative value over time calculations are secondary considerations, relative currency values are rationalized. Indeed, commerce activity rendered ‘dead’ by overvalued currency is restored by deliberate ‘devaluations’. Such a remedy Ireland prays for as it is saddled with currency calculations that stifle commerce.

Analysts claim that the same dollar does not purchase the amounts of goods and it did when the Picasso was bought, certainly not what it could purchase in 1913!

What of it? We live in the present, not in 1913. A Picasso’s nominal value may indeed vary in inflation- adjusted terms. This is as much matter of circumstance rather than anything else. Currencies are a tool, not a cosmic axis around which the worlds spin. A good Picasso is worth more than a ‘bad’ one. A good thief can get a good Picasso for free.

Since 1913, the world’s inflation or decline in quantity purchasing power is the footprint of progress, which has expanded the scope and utility of products and services available. There is little argument to be made against the utility of flush toilets, running hot water, electronic computers, hand- held telephones, antibiotics and other improvements. Who cares if the dollar buys less bully- beef than it did in 1913 … or 1813, for that matter?

Who would trade today’s products and dollars for 1913’s products and dollars? This is what the China ‘modernization’ experiment is all about, to trade 1913 China for 2010 America! China would not be able to perform this experiment without American dollars with 2010 values.

It is indeed the value of the dollar — either over- or undervalued — that both enables AND undermines the China modernization experiment. ‘Hard’ or valuable dollars constrains China trade, threatening to collapse the Chinese Ponzi economy. Cheap dollars amplify Chinese inflation: the US exports any dollar inflation it generates to China by way of the dollar carry trade. China is trapped by its massive dollar surplus, the cost of managing it has grown to condemn the Chinese economy! They cannot afford to relinquish the surplus as it alone allows China to afford raw materials. It cannot afford to expand it as it is a form of savings sitting in the crosshairs of China’s hyper- inflating elite.

People — farmers — need wheat, corn and soybeans, economies need crude oil. If all the gold in the world were to vanish tomorrow, it would not be missed. If all the farmers disappeared tomorrow, the human race would certainly follow the farmers into oblivion within a few weeks or months.

Invaluable crude oil is constrained in price by economic output. There is an upper limit to the price of crude; the price where it causes the economy to crash (which drives the crude price lower). $10,000 gold would be a curiosity. $300 oil would not happen as output and final demand would vanish before the price increased to anywhere near that price level.

Believe it or not, the Fed is pimping gold and silver. It is in the cash money business and needs ‘hot’ asset markets so it can trade other — worthless — assets for cash. The ‘kill the dollar’ propaganda is just that. You can tell by watching other markets; the Fed is pumping cash into these markets to raise the indexes and allow his money- laundering racket to operate.

The world is not on any informal gold standard. The hard currency is the dollar: priced in crude oil the dollar has real value. To the waste- based economy such as ours a gold standard is death. The world had gold standard in the early 1930’s and maintaining it amplified the Depression, destroyed productive business and led to dictatorships.

Gold/silver standards have no better record for inflation/deflation or defaults than the fiat regimes of today. In fact, the fiat dollar has been an essential tool to keep the US out of a greater recession. Unfortunately, the de- facto crude- backed hard dollar will do its dirty work and destroy the US economy as it will destroy all the other ‘modern’ economies. This is what hard currencies do. Modern economies require increases in liquidity at all times. Hard currencies are hoarded and fall out of circulation. The intrinsic value of the gold ‘currency’ makes it an asset rather than ‘money’.

(Sigh …) Still no answer as to why JPM or any other business entity would want to suppress the price of an asset?

Not surprising. There is no answer. No bank will suppress an asset because they are in the asset business. Just as the central bank(s) are in the cash business. Higher prices mean more. More means bigger bonuses for bankers. No banker is going to reduce the ‘price value’ of an asset because doing so will adversely effect his bonus. The only exception is hedging: here, the ‘hedge’ in operation will have a greater value than the asset being hedged. The net value of the hedge is what matters, not the value of one side or another of it.

Arguably, the desired net value of a well- designed and executed hedge is zero.

The banks’ commodity short positions are offset by equally large long positions on futures markets. The major banks are the bankers for the exchanges, themselves.

There is also a ‘volatility premium’ (VP) which is behind some kinds of hedges but this is a premium … higher price. I don’t know if there is a volatility premium added to PMs; I don’t think JPM or another bank would create a large, naked position in a thinly traded market. Individuals within banks do so and these are uncovered frequently when the naked positions result in huge losses for the bank: the Barings incident comes to mind.  The VP does exist in petroleum which is a vastly larger and more important market.

In a perfect world, a currency has negative value, this is inflation in the ordinary sense. What has value in an economy is commerce not money: commerce’s value increases at the expense of the currency that measures it. This fact is hard to grasp but self- evident. The common error that metals investors make is to confuse monetary devices (currency, credit, coupons, ‘money’) with assets and to do so when it is convenient. Assets have intrinsic value while the monetary tools do not. When the tools gain intrinsic value they cease to be tools and become assets.

The issue in an economy then is the value of assets versus the value of commerce.

Currency enables commerce; increased value of the currency/asset means less value to commerce. When the currency obtains intrinsic value for any reason it ceases to enable commerce. It becomes a collectible. Assets are useless as money as they do not circulate, they are hoarded. This is what undermines intrinsic monetary regimes, the intrinsic is hoarded and the outcome is deflation.

“Wealth” and “stores of wealth” are collective suspensions of disbelief. They are promises. What is taking place in the greater world is the unraveling of promises. The promises made for precious metals are no more or less valid that any of the other finance promises.

When promises themselves lose value — that is, they mean different things to different people — what denotes each individual promise becomes irrelevant. In this (apocalyptic) situation, few if any counters will have much currency or meaning whether these be metals or letters of credit or anything else. Context is what matters: it sets primary values of the different forms of promises.

This is the difference between metals and crude right now. Crude has economic value and is priced by what the economy produces with that oil plus a profit, if any. Metals have fallen into the JPM context of finance/Ponzi enablers. Finance has inflated the value of metals to the point where they are uneconomical. The fantastic desires of PM investors gear into the promotion of finance- created Ponzi schemes, multiplied by the Ponzi- driven increase in dollar price.

As a Ponzi operator, JPM nor any other bank will short- sell an asset to the public although they may ‘claim’ by way of ‘third parties’ to do so for marketing reasons. This is the real answer to the JPM question. Think about it. Gullible PM investors are up against the bank’s advertising departments.

The characteristic that metals have that other assets do not share is accessibility to those with less than great wealth. They are ‘redneck wealth’ in this age when real finance wealth is expressed in $10 billion notational swaps or multi- billion dollar blocks of stock. A gold or silver coin can be had for a few hundred dollars on Ebay or at a pawn shop. At the same time, the vast majority of the world’s citizens do not have silver or gold in any form. This relationship of haves- versus- have nots reflects the social structure of wealthy but on a much smaller scale. This is really not a ‘wealth’ issue but rather a metallic form of polemic or revolutionary expression. Silver becomes the means to attack an unresponsive institution by the ‘mob’. So sez Max Keiser on teevee!

But … this is also absurd, using the instruments of ‘wealth’ (not commerce) against the entity that confers value to the instrument in the first place! If gold or silver actually represented a threat to the establishment, there would be no gold or silver available to anyone at a price, just like there is little or no weapons- grade Uranium or Plutonium or high explosives available except at stratospheric prices that only the ‘safely wealthy’ can afford.

Having said all this, a careful investor looks at all sides of an investment without staking a polemical position or becoming emotional about it. The question of why a bank would suppress asset value is crucial. Without the emotional baggage that attaches to the hoped- for demise of a hated institution, metals have investment utility and nothing more. Adding the baggage makes metals another currency/liquidity trap that will surely and effectively destroy what (small) wealth the precious metal investor possesses. Here, the ‘JPM silver short’ is a comforting rationalization that obscures what is plainly visible to anyone looking out the window:

America is going broke the old fashioned way, it’s running out of cash. Whether Americans have gold or silver or not is largely irrelevant.

EDIT: Here’s another take from Andrea Hotter @ the Wall Street Journal.