Re-Imagining Exter’s Pyramid In Today’s Panicked Market

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This is a summary re-post of our April 2019 Newsletter, with some minor updates. The reason I am reposting is timeliness with the current crisis to help people while the health crisis turns into an economic one.


  • Exter’s pyramid was developed by a central banker a long time ago.
  • Things have changed drastically in the financial world, where central planners struggle to cope with issues at hand in this market.
  • I have designed my own version of the pyramid to help investors in the current market bloodbath, one that focuses on individuals instead of macroeconomic policy.
  • I believe gold and silver will shine and once again become the true safe havens in times of crisis.

We will be discussing John Exter’s pyramid and its role in assessing market investment value and risk. However, though I like Exter’s pyramid from a macroeconomic perspective, it is not necessarily designed to help individual investors plan their portfolios around market liquidity and risks in the system.

It does however, give us a really, really good place to start discussing just how to do that. We just need to make some modifications to the existing pyramid to make it more investor-friendly in today’s markets.

Who Was John Exter?

John Exter was an advisor to Paul Volcker in his time at the Fed. His theory on the liquidity of market investments, and how much risk they carry, have often been cited by market observers who wanted to show where money flows to during economic crises.

Exter's Pyramid Notional

Image Source: Silver Bullion Knowledge Center

Volcker presided as the Chairman of the Board of Fed Governors from 1979 to 1987. His policies are largely connected with saving the US economic system from the recession of the late 1970s and early 80s. US inflation in 1980 was 14.8 percent, a far cry from the low interest rate policies that have existed for the majority of many investors’ lives today.

Volcker raised the Federal Funds rate, which averaged 11% in 1979, to 20% in June 1981. The high interest rates slowed down the rampant speculation in real estate and other areas of finance, which had led to an enormous speculative debt boom, strong rise in consumer price inflation, and high unemployment. While the rise in interest rates affected farmers, machinists, and other blue-collar workers, the impact of the Fed interest rate policy was to cool the speculative areas of the economy off enough to stabilize it.

What most people don’t know is that Volcker had called upon his friend John, a former New York Fed colleague, to help him work his way through the economic crisis the country was experiencing. Volcker’s fight had peaked with the 20% Fed funds rate, but price inflation was initially still strong. John advised Volcker when to ease his monetary policy to stabilize the economy, and his advice worked.

John himself retired after setting up two foreign central banks, serving as governor of one of them, and ending up in charge of gold and silver operations at the Federal Reserve Bank of New York.

John also advised Volcker and the rest of the Fed Board members that gold was the basis of a sound monetary system. He warned that Keynesian economists failed to understand money and debt. John Exter predicted that the US would suffer a deflationary depression, and the Fed would be unable to prevent it with their monetary tools.

Exter Develops His Economic Pyramid Model

It was from this realization that Exter developed his pyramid, with true money on the bottom and all derivative financial products on top. In his original pyramid, he included junk bonds, illiquid debtors, commercial paper, bankers acceptances, developing economies’ debts, CDs, federal government debt, corporate and municipal bond debt and finally paper currencies. Modern versions of his pyramid include commodities, private business, and real estate.

Exter's Pyramid Modern


mage Source: 321gold

The version above depicts a recent accounting of how much of these various Ponzi financial instruments exist in the world. The way John Exter advised reading his pyramid was that both the amount of the instrument, as well as its overall risk increased as you moved up from the base of the gold and silver money.

This is where we separate from Exter’s pyramid and begin to form our own version for the purposes of determining which investments are best to hold in the hyper-risked state our banking and currency system now lives.

Individual Investor Risk

My primary complaint with Exter’s pyramid is that it approaches financial investments from a central planner’s perspective. However, it fails to advise individual investors how to approach saving and growing their individual estate.

For example, the Founding Fathers of this great country equated land ownership to freedom. They reasoned that not owning land made one the slave or servant of someone else. They were right, but you won’t see that fact reflected in Exter’s pyramid.

Exter’s model is great for the central economic planner that looks at the economy from the top down, addressing with policy only the largest classes of financial vehicles. As investors, we are much more suited to look at investments and risk from the bottom up. We don’t take on the aggregate risk of every investment in the economy with each of our individual decisions.

The first change in the new model is to place people immediately above gold and silver. The collection of skills and talent, along with their labor, make up the value of people. It is safe to say that gold and silver will not get mined, houses will not be built, and derivative contracts will not be written without the labor and expertise of humans. Therefore, I argue that each person forms the second base level of their individual financial system.

So why are people not at the base? Because risk increases as we move up the base, and mined gold and silver reflect past human skills and labor already spent after all risks have been realized.

Non-residential Land

The next level up the pyramid becomes non-residential land, which includes farm-able and ranch-able land that can produce food, minerals, and commodities. This land does not have buildings or other infrastructure improvements on it which have been financed with debt.

Farm and ranch land are limited in supply which often decreases for every property development that springs up over time.

Non-monetary Commodities

This change may generate a lot of argument, because Exter had commodities placed very high on his pyramid. That is largely because commodities derivative price contracts are heavily influenced by speculative investment, where the contracts are not settled in the actual commodity, but instead in cash.

Commodities are primarily risky if one is buying an indexed commodity fund at the top of a commodity price market cycle. However, real commodities are also growing increasingly scarce. Therefore, scarcity factors ensure that the base price of commodities will rise over time despite monthly speculative activities of the paper traders.

Private Business

Next up I would add private businesses. This means any business you have set up to generate income. Wouldn’t business income DECREASE during a recession? The trick is to be in a business that will produce in both good times and bad.

For example, food is a staple that is always in demand. The coronavirus pandemic has taught many the value of food and staple goods as shelves are being emptied across the nation as shelter in place orders are increasing in more and more local municipalities.

Paper Money (Physical Notes)

This one is a bit confusing at first, and the value depends largely on timing. For example, the US dollar will be under extremely heavy pressure during the next deep recession. Many countries are dumping their dollar reserves while also negotiating trade agreements in alternative currencies. Less demand equals less value.

That being said, dollars will be in heavy demand within the US at the onset of the recession. Incomes will have fallen and more people will be unemployed. Any paper money is better than none, up until a hyper-inflationary episode occurs.

Bonds And Treasuries Of All Types

Any type of debt instrument will be severely devalued in the next big recession. The current system is absolutely flooded with debt that cannot be paid back mathematically without hyperinflation, default, or both. Literally, debt exists in many magnitudes the size of available physical cash or bank deposit money. The government would have to print excessive amounts of money to pay off this debt, which will devalue the currency to the point the strategy falls apart.

Do not fall for the idea some financial types use to claim municipal or local bonds are safe and will not be affected. Many local cities and states are completely financially insolvent. And unlike the national government, they cannot print more currency to cover their financial obligations.

US Stocks – And Many International Ones

This section will surely shock readers more than any other. This is because the mainstream financial media has brainwashed investors on the value of stocks for far too long. Any stock that does not pay a dividend is part of a Ponzi Scheme. Tan Liu and I cover the four factors making stocks a Ponzi in our interview, so be sure to listen to it.

From a timing perspective, stock can be the absolute worst investment to hold during an economic crash. Values go down, and the only real chance an investor has in getting real cash is waiting for companies to fail, or maybe, get taken over by a bigger one. In reality, recessions cause stock holders to take cents on the dollar. This is not unlike the game of musical chairs, where someone is left out each time the music stops.

Derivatives And Unfunded Liabilities

I grouped these together because the risk is so high that it won’t matter. These will never be paid back. The unfunded liabilities of the US government, which include entitlement programs such as welfare programs and Medicaid, will become completely insolvent. This is why taking care of your own financial and healthy well-being are so crucial while you have time. The government will not be able to pay for those promises they made without funding them ahead of time.

Derivatives are paper leverage, and in many cases are worth little to nothing today. The initial first few investor claims on those derivatives will bankrupt them, causing the vast majority of the remaining ‘value’ to simply disappear where they came from – into nowhere!

Comparing The Pyramids

The primary purpose of re-engineering the pyramid is to blend the size of the financial vehicle with the risks of owning them during a major economic crash.

Exter's Pyramid Gold Silver Pros

The differences in the pyramids are immediately obvious. In Exter’s pyramid, physical paper money is listed right above gold and silver. The reason is because we live in a fiat paper system based upon debt. And all central bankers consider the currency to be legitimate accounts of exchange and stores of wealth, though history has disproved this notion thoroughly.

The second major difference are non-monetary commodities. These have a lot of longer-term value, and make good strategic investments especially when you can hold them in physical form. Beware holding funds based on commodities because it may be exposed to paper derivatives that don’t tie directly to their physical counterparts.

Next, I moved private businesses out into its own layer. Individual businesses can generate long-term wealth for their owners. But, it depends on what your business is, and when. Timing is the biggest risk, so it resides just below paper money on the wealth generation pyramid.

Stocks with dividends don’t pay back for an average of about 20-25 years, so you have to be really comfortable holding them for any length of time. Given that business cycle corrections happen every 4-10 years, you are basically guaranteeing two major investment losses over that 20-25 year period that dividend stocks need to be paid fully back. Real inflation almost always dissolves stock gains, which is why gold has outperformed stocks since 2000. Gold prices rise long term by the amount of monetary inflation in the system. That is why it resides at the bottom of the chart.

Lastly, and perhaps most importantly, is the inclusion of the individual in our version of Exter’s Pyramid. Most governments and financial pundits will never tell you that you have the keys to your financial success in your own hands. Nor do they counsel you to develop your skills in trade to increase your income. They need to be the experts to make that commission from you, which is one reason you come to Gold Silver Pros – to obtain information for your own investment goals.

The Final Word

The market meltdown that we are experiencing was foreseeable, even if the COVID-19 virus was not. If the market fundamentals were strong, then the volatility we see in the exchanges, along with the level of drop, would be much less severe. We haven’t even seen the top end of the infection curve in the US; yet, Wall Street investors are clearly panicking.

The flight to bonds and the dollar continues unabated, but low yields mean that pensions and other funds will need to find better investments than treasuries and corporate debt to meet their projected obligations. That is when money will flood into the precious metals, much as it did between 2009 and 2011. But this time, both gold and silver will see much higher highs than in 2011, because the problems underneath the financial system are much worse than before.

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