AproposofEverything

PaulBrodsky QBAssetManagementCompany(QBAMCO)

TheBigPictureConference NewYork,NY October11,2011

1800%

USM3growthUSGDP/Capitagrowth
1600%

1400%

1200%

From1994to2006,M3,whichwastheonlymonetary aggregate that included overnight repurchase agreementsamongbanks,grew142%from$4.3trillion to $10.4 trillion (11.8% annually). (The Fed stopped publishingM3inMarch2006.) US per capita output grew 65% over the same period (5.4%annually). The US economy seems to have needed a massive credit buildup merely to maintain trendlevel nominal outputgrowth.

1000%

800%

600%

400%

200%

0% Mar-70 Mar-74 Mar-78 Mar-82 Mar-86 Mar-90 Mar-94 Mar-98 Mar-02 Mar-06

Sources:St.LouisFed;QBAMCO

QBAMCO

TotalCreditMarketDebtOwed (Doesnotincludeunfundedliabili]es)

TCMDO=$52.554trillionasof4/1/11
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MonetaryBaseisM0:currencyincircula]on+bankreservesheldattheFed

USMonetaryBase=$2.68trillionasof9/21/11
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USDSystemicLeverage
QBAMCO
USDMonetaryBase

1994
$431

2006
$842

2011
$2,684

(19942006)

Change
+185%

(20062011)

Change
+219%

TotalBankAssets(Loans)
TBA/MB

$2,344
5.44

$5,921
7.03

$6,507
2.43

+178%

+9.9%

TotalBankCredit
TBC/MB

$3,198
7.42

$7,762
9.22

$9,281
3.46

+143%

+20%

TotalPublicDebtOutstanding
TPDO/MB

$4,692
10.89

$8,507
10.10

$14,704
5.48

+81%

+73%

TotalCreditMarketDebtOwed
TCMDO/MB

$17,208
39.93

$45,355
53.87

$52,554
19.58

+164%

+16%

Allguresinbillions. Sources:St.LouisFed;TreasuryDirect;QBAMCO.

QBAMCO

TheUSeconomymustdeleveranditcanonlydoso twoways:
1. Allowcreditdea]ontooccurnaturally2.Con]nueina]ngthemonetarybase

QBAMCO

ExpectedOutcome:Con]nuedMonetaryIna]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 dea]on that wipes out all lenders and borrowersinnominalterms.

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TheEqua]onofExchange

Whereforagivenperiod: isthetotalnominalamountofmoneyincircula]ononaverageinaneconomy.
isthevelocityofmoney,thatistheaveragefrequencywithwhichaunitofmoneyisspent. isthepricelevel. isanindexofrealexpenditures(onnewlyproducedgoodsandservices). Thus,PQisthelevelofnominalexpenditures,whichmeansthattotalnominaleconomicoutput may increase or decrease with the general price level independent of changes in unit demand. This denes contemporary economic policy management; inuence the price level to inuence nominaloutputgrowth.Changesinreal(trueina]onadjusted)economicoutputmustalsofactor quan]ty.In]me,boos]ngnominalpricelevelsthroughmonetaryina]ondiminishesdemand.
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NoiseIna]on
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YEN AUD CAD

EURO USD BRL

GBP CHF YUAN

Economicpolicymakersacrossthepoli]calspectrumhavesuccessfullymaintainedthedebtbasedglobal monetarysystemsince1971.Todothis,policymakershavehadtomarginalizetheonecompe]ngcurrency capableofdisplacingit:gold.

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Gold and silver are money. Everything elseiscredit.(J.P.Morgan)

Rising gold prices in USD terms are projec]ng and discoun]ng necessary nancial system deleveraging via an ongoing and aggressive expansionoftheglobalmonetarybase.Theyare notpredic]ngrisingorfallinggoodsandservice pricesperse. QBAMCO

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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 correlatedtonega]verealreturns.

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 outperformsduringperiodsofdeleveraging. (Under gold standards, this would be axioma]c.)

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QBAMCO

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125% 100% 75% 50% 25% 0% Sep81 25% Sep87

CRBRINDinUSDollarTerms

Whilecommodity priceshaverisenfor dollarholders

Sep93

Sep99

Sep05

Sep11

50%

CRBRINDinGoldTerms

0% Sep81 Sep87 Sep93 Sep99 Sep05 Sep11

commoditypriceshave fallenforgoldholders.

50%

100%

150%

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QBAMCOShadowGoldPrice
ChangeinUSDMonetary Base MonetaryBase(billions) 25% 10% FLAT +10% +50% +200% +300% +500%

$2,144

$2,412

$2,680

$2,948

$4,020

$5,360

$8,040

$13,400

OcialUSGoldHoldings (millionsofounces)

261.5

261.5

261.5

261.5

261.5

261.5

261.5

261.5

ShadowGoldPrice (inUSdollars/ounce)

$8,199

$9,224

$10,249

$11,273

$15,373

$20,497

$30,745

$51,243

Thistableillustratesapoten]almetricforfutureUSdollardevalua]on,basedonourShadowGoldPrice.TheUSTreasuryisbelievedtoown8,133.5 tonnes(metrictons)ofgold.Eachtonneconvertsinto32,150.75troyounces,meaningUSocialgoldholdingsapproximate261.5millionounces.(The USgoldhoardhasbeenalmostcompletelystableforfortyyears,andsowehavekeptUSocialgoldholdingsconstant.) AspertheBreponWoodsMonetaryAgreementthatlastedfrom1945to1973(thelastglobalxedexchangeratesystem),themethodusedtocalculate theexchangerateofpapermoneytogoldwastodividetheUSMonetaryBasebyocialUSgoldholdings.Ifthisprecedentweretobereestablished today,currentcondi]onsimplyaUSdollardevalua]ontoalmost$10,000/goldounce.Suchdevalua]onwouldimplythatUSdollarswouldagainbe fullybackedbyTreasuryassets. Toputthistableinperspec]ve,theFedalreadyincreasedtheUSMonetaryBaseover200%since2008,fromabout$850billion($3,251impliedSGP)to $2.68trillion(followingthecomple]onofQE2).ItisimportanttonotethattheMonetaryBaseonlycons]tutessystemicbankreservesheldattheFed andcurrencyincircula]on.Itdoesnotincludeupwardsof$70trillioninUSdollardenominatedclaims,asignicantpor]onofwhichconceivablymust beul]matelyberepaidinmoneyfromtheMonetaryBasethatdoesnotyetexist.

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10.000

9.000

QBAMCOShadowGoldPrice SpotGold

8.000

7.000

6.000

5.000

4.000

3.000

2.000

1.000

Sep76 Source:QBAMCO Sep81 Sep86 Sep91 Sep96 Sep01 Sep06 Sep11

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1,50

SpotGold/QBAMCOShadowGoldPrice
1,25

1,00

0,75

0,50

0,25

Sep76 Source:QBAMCO Sep81 Sep86 Sep91 Sep96 Sep01 Sep06 Sep11

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AdministeredDollarDevalua\on

1. Toremediateallpastmonetaryina]onandresettheglobalmonetaryregime,the FedwouldtenderforprivatelyheldgoldatorneartheShadowGoldPrice(currently about$10,000/ounce). 2. AstheFedpurchasesgold,thegoldwouldowtotheassetsideofitsbalancesheet. TheFedwouldfundthosepurchasesthroughnewlydigi]zedFederalReserveNotes, whichwouldowtobanksintheformofnetnewdeposits.Thiswouldbeadiscrete monetaryina]onevent(devalua]on)andasimultaneousdeleveraging. 3. Once the Fed acquires enough gold from the markets, a gold price peg for the US dollarwouldbeestablished.

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Prudence

FiduciaryResponsibility BestPrac\ces Stability Diversica\on Growth&Value

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NoiseIna]on
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PaulBrodsky pbrodsky@qbamco.com QBAssetManagementCompany 535FirhAvenue25thFloor NewYork,NY10017 www.qbamco.com

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