[Originally posted on iTulip.com]

Our dollar is not a simple fiat currency. It is not just monopoly money that Parker Brothers can print by the truck load for the cost of wood pulp, printers ink and rental time on the printing press.

Our dollar is a convertible currency. Gold certificates were convertible to gold, and held value so long as the Kings store of gold was not near depletion. Dollars are convertible to Treasuries, and hold value so long as the burden of interest payments on those Treasuries is not so honerous on the American tax payer as to be put in doubt.

Total debt, public and private, on the American taxpayer is two or three times GDP, which is starting to get up there, but still not presenting immediate risk.

What is collapsing now is the massive bubble of finanicial paper built on top of this currency, including domestic and foreign debt, derivative, stock, bond and asset valuations.

Yes, that collapse of bubble paper can take "seven years", though gloomy me tends to expect that collapse to be harder and faster, with a long depressing bottom.

It seems, from what we are learning now, that so long as the dollar remains strong (Treasuries are the preferred "safe" store of wealth), then the collapse of the financial bubble built on top of the dollar is good for the dollar. This is to be expected, now that I think about it. When bubbles collapse, the underlying "safe" currency becomes more valued.

What will drive gold up is the recognition of a serious threat to the underlying "coin of the realm", the worlds reserve currency, the dollar.

One cannot anticipate the timing of such a gold boom by looking at how much longer it will take the financial derivative bubble to burn out. The dollar could start to collapse while we're still shredding the financial derivative bubble paper, or it could collapse later on,due to other strains.

Just as one looks to see how much gold remains in the Kings treasure to estimate how near the threat of collapse is to gold certificates, similarly one must look to how soon the convertible base of dollars, the reliable interest income on Treasuries from the taxes on American taxpayers, is at risk of depletion or collapse, if one is to determine when the dollar starts melting down, and gold becomes much more valuable.

Predicting runs on the bank, which in this instance would be a spiralling collapse of confidence in Treasuries, is not easy. The events can be sudden, and involve the extremes of human emotion. The events will certainly involve massive, deceptive, almost inescapable (for us little people) actions by the largest holders of Treasuries, as they decide, one way or another, to rid their coffers of Treasuries.

I'd first look for Treasury rates to reverse their long term (since early 1980's) decline in yield, which will cause holders of existing Treasuries to start to lose, rather than gain, profit on the principal value of their Treasuries, and start to escalate the burden of the interest payments on the American tax payer. This is rather like noticing when your Credit Card company starts raising the interest rates it offers you, as you become a less worthy credit risk. If you are rolling over your credit card debt, as we are our American Treasury debt, rather than paying it down, this can be a good sign of the beginning of the end.

The unfunded liabilities of Social Security and Medicare payments to Baby Boomers, the increasingly outrageous corruption and profligacy of our political representatives, the costs of bailing out the bankers, the costs of a Military that would make the Roman Empire jealous and of wars past and likely future, the direct and indirect costs of a massive and corrupt federal bureacracy, and the lowering of GDP due to a serious depression (seemingly imminent) all look to put Treasuries under further strain, as paying the interest on them becomes an increasingly large proportion of American cash flow.