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Old 11-15-2012, 06:27 PM
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Gold: History Doesn't Repeat Itself, but It Does Rhyme

Gold: History Doesn't Repeat Itself, but It Does Rhyme

By: David Nichols | Thu, Nov 15, 2012

Mark Twain wasn't writing about the gold market when he made his famous quote about historical recurrence, but he could have been, as the gold market has been "rhyming" every 21 months.

Every 21 months there has been a major peak in the gold market, going back to the start of this bull market, over 13 years ago. Gold is now 8 months from the next scheduled 21-month peak, which should arrive in July 2013.

The gains in each cycle have ranged between 80% and 97%, from the low of each cycle up to the top. This is surprisingly little variation, at least as far as financial markets are concerned. This is about as steady as it ever gets.

If it happens again, gold will be around $2,700 in mid-2013.
So far this particular 21-month cycle is tracking well, as gold is primed and ready for launch into the final major growth phase.

This chart shows the monthly fractal dimension of the gold market, which is a specific measurement of the linearity of a price pattern. Essentially it is telling us whether a market's movements more resemble a line, with prices moving from Point A to Point B (fractal dimension of 1), or whether the movements are more haphazard, with the movement more resembling a plane (fractal dimension of 2).

Although not a lot of people stop to think about it, when we enter a market we are attempting to capture just this type of linear movement, with a market moving from our entry at Point A to a profitable exit at Point B. This is where the fractal dimension comes in, to let us know when the probabilities of capturing such a move are in our favor, and also when the linearity of a trend is "maxed out." It's very valuable information.

When the fractal dimension of a market is high, it is loaded with available energy and ready for a major trend. Right now the fractal dimension of the monthly gold chart is as high as it's been during the entire bull market, meaning there is more energy now embedded within the pattern to power a strong trend than at any other time in the past 13 years. An 80%+ rally is definitely within reasonable expectations for this cycle.
There are specific reasons why the number 21 is so important in market cycles, having to do with the fractal nature of financial markets. Something is fractal when it is self-similar in all sizes and time-frames -when the small parts look like the big parts. The patterns are the same at every scale.

A fractal system is therefore governed by scaling factors, and in markets these scaling factors describe the way prices expand and contract. But here's where it gets really interesting: time in markets also scales according to fractal patterns.

86.6 is the universal scaling factor for time in markets. I realize you have to take my word on this in such a short article, but it's not a coincidence that the human life span is 86.6 years, as we are also governed by this cycle. One-quarter of 86.6 is 21.65, which is why the drinking age is 21, and also why the retirement age is 65 years, the ¾ point of our human cycle.

Fortunately you don't have to just accept my word that the gold market is organized along this 86.6-based fractal time scale. The chart below shows a spectrum analysis of the cycles in the gold market, performed by a clever left-brained individual named Sergey Tassarov back in 2007.

In my opinion, the other cycles identified here are harmonics of the dominant 21-month cycle, similar to the way in which musical notes have overtones.

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Old 11-19-2012, 11:05 AM
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On Surviving The Monetary Meltdown

Via Detlev Schlichter of DetlevSchlichter.com,

Let us start by looking at the economy from 10,000 feet above: After 40 years of boozing on easy money and feasting on fantastical asset price inflations, the global monetary system is approaching catharsis, its arteries clogged and instant cardiac arrest a persistent threat. Most financial assets are expensive, and many appear to be little more than securitized promises with low probability of ever delivering payment in full. Around the globe, from Japan to the US, a policy of never-ending monetary stimulus consisting of zero interest rates and recurring rounds of ‘quantitative easing’ has been established aimed at numbing the market’s growing urge to liquidate. Via the printing press, the central banks, the lenders-of last resort, prop up banks and financial assets and simultaneously fatten the state, the borrower of last resort, which, despite excited editorials against the savage policy of ‘austerity,’ keeps going further into debt almost everywhere.

‘Muddling through’ is the name of the game today but in the end authorities will have two choices: stop printing money and allow the market to cleanse the system of its dislocations. This would involve defaults (including those of sovereigns) and some pretty nasty asset price corrections. Or, keep printing money and risk complete currency collapse. I think they should go for option one but I fear they will go for option two.

In this environment, how can people protect themselves and their property?

My three favourite assets

My three favourite assets are, in no particular order, gold, gold and gold. After that, there may be silver, and after a long gap of nothing there could be – if one really stretches the imagination – certain equities or commercial real estate.

Why gold?

We are, in my assessment, in the endgame of this, mankind’s latest and so far most ambitious, experiment with unconstrained fiat money. The present crisis is a paper money crisis. The gigantic imbalances that threaten to unravel the system momentarily are the direct consequences of years and decades of artificially cheap credit and easy money, and are simply unfathomable in a hard money system. Take away fiat money and central banks and our current problems would be inexplicable. (If you are still under the widespread but erroneous impression that the gold standard caused the Great Depression you may want to consider that the strictures of hard money were systematically disabled and the disciplinary power of a true gold standard increasingly weakened with the establishment of the Federal Reserve in 1913, and the introduction and spreading of lender-of-last resort central banking in the US financial system. In any case, we are now in the Greater Depression, and this one is entirely the responsibility of central banking and unlimited fiat money.)
Whenever paper money dies, eternal money – gold and silver – stage a comeback. We have already seen a major re-monetisation of gold over the past decade, as the metal again becomes the store of value of choice for many investors. This will continue in my view, and even accelerate.

Gold is money
A frequent allegation against gold is that its non-monetary applications are minor and do not justify the present price, and that gold doesn’t pay interest or dividends, quite the opposite, storing and insuring it incurs running expenses. Gold is an instrument with a negative cash yield.

None of these objections stand up to scrutiny. They are either wrong or irrelevant.

It is investment goods that are supposed to offer cash yields – interest income or dividends. But gold is not an investment good, it is a form of money. Gold is the oldest form of money still considered a monetary asset today, and the only truly global form of money (besides silver but silver is today still more of an industrial commodity than a financial one). Gold is – importantly – inelastic money. It cannot be created nor be destroyed by politicians and central bankers. It can, of course, be taxed and confiscated, and I come to that later.

The main alternative to gold is therefore not bonds, equities and commercial real estate but cash, i.e. state paper money. The person who ‘invests’ in gold is holding money. The cash in your wallet or under your mattress does not give you a cash return either. Neither does gold.

Sometimes I get asked, what if people suddenly stopped considering gold to be a monetary asset and a store of value? Would its price not drop steeply? – That is a fair point. But this applies to your paper money, too. In fact, it applies to paper money more so.

Every monetary asset – whether gold, paper tickets from the state, or electronic book-entries at your bank – receives its value (exchange value or purchasing power) from the trading public, and from nobody and nothing else, not from the state, nor from any non-monetary uses of the monetary asset, if it has any at all. If the public stops treating the item in question as money, or uses it less as money or only at a discount, it looses its monetary value. That is also always the case with state paper money. It is a sign of our hopelessly statist zeitgeist that many people believe that the state ‘assigns’ value to its paper money and somehow supports this value. This is not the case. The truth is that the paper tickets in your wallet have purchasing power (and thus have value beyond their paper content) for one reason and one reason only: the public accepts them as a medium of exchange, the public accepts them in exchange for goods and services. The public also determines what the exact purchasing power of those banknotes is at any moment in time and at any given place. The state does not even back its paper money with anything. If you take your paper tickets to the central bank, what do you get in return? – Change.

Paper monies come and go. In fact, throughout history every experiment with paper money has ended in failure, with over-issuance the predominant cause of death. Pound and dollar are the two oldest currencies around today but through most of their history they were linked to gold or silver, which restricted their issuance. Our system of hundreds of entirely unrestricted local fiat money monopolies dates back only to 1971, at least in its present form. In the 20th century alone, almost 30 hyperinflations of paper monies were recorded.

By contrast, gold has been money for 2,500 years at least. Should you be more concerned about the public not taking your gold any longer, or your paper money?

Gold is hard, apolitical, and global money, supported by an unparalleled history and tradition. That is the asset I want to own when our assorted finance PhDs in the central banks, the bureaucrats in the Treasuries and Ministries of Finance, and our sociopathic welfare politicians have manoeuvred the system to the edge of the abyss. Which is now.

Remember, paper money is always a political tool, gold is market money and apolitical. Paper monies come and go, gold is ‘eternal’ (as far as we can tell presently).

You have to be clear in your mind why you buy gold.

At every moment in time, all your possessions – all your wealth – can be split into three categories: consumption goods, investment goods, and money. For most of your possessions the category is pretty clear: The clothes you wear and the car you drive are consumption goods; your investment funds or your equity portfolios are investments; the banknotes in your drawer are money. For some things it is not so clear: An expensive painting might be an investment but if you hang it in your living room and enjoy looking at it, it is also a long-lasting consumption good. The house you live in could be both but in most cases it is more of a long-lasting consumption good than an investment: you use it up over time, albeit slowly, and you cannot easily liquidate it. You have to live somewhere.

The wealth you are not consuming in the here and now but want to maintain for the future can thus be held in the form of money or investment goods. Money gives you (usually) no return but has other advantages, namely that it allows you to maintain your purchasing power, at least if it is proper, hard money, and simultaneously retain complete flexibility. You are not committing yourself today to any investment good (or consumption good); you remain on the sidelines to wait how things turn out. But as you hold a monetary asset – a store of value and medium of exchange of (almost) universal acceptance – you can re-enter the markets quickly and easily. Somebody will always buy the gold from you in the future (which is far from certain in the case of most of your consumption and investment goods, and also in the case of that other form of money, state paper money).

Why gold now?
It seems that this is an opportune time to be on the sidelines, to be not engaged in the markets for equities, bonds and real estate, or to at least keep one’s exposure to these markets very low, since years and decades of unprecedented money growth have inflated and gravely corrupted the prices of standard investment goods. Sadly, these prices now rely increasingly on the kindness and efforts of manipulating bureaucrats to simply sit still and avoid a painful descent.

Central bankers state – openly and unashamedly – that they now consider it part of their mandate, if not the chief part of it, to keep asset prices at elevated levels and, if possible, even boost them further. Naturally, this will require ever more aggressive money printing and eternally super-low interest rates, and certainly argues against holding much paper money. Those who like to bet on the bureaucrats may claim that it makes sense to hold the very financial assets the prices of which central bankers are manipulating. As long as the central bankers are not ashamed of running the printing presses ever faster, they will simply get their way. Well, even under the rosiest of assumptions, this argument does not support investment in bonds. It could, in principle, be an argument for equities and real estate as ‘real assets’ of a sort but even in respect to these assets I consider it unsound, as I will explain later. Be that as it may, the beauty of gold is precisely that it allows you to remain on the sidelines and keep your powder dry. By holding gold you remove your wealth to a considerable degree from the rigged game of artificially inflated and openly manipulated financial markets. You commit internal capital flight from the fiat money system, and you simultaneously bet on the further debasement of paper money. The bet is this: The central bankers are trapped. The state, the banks, the pension funds, the insurance companies, the investment funds – they all would be in a right mess – or an even deeper mess than they already are – without cheap money from the central bank. Ergo, the policy of super-cheap money will have to continue until the bitter end.

There are a few more things to say about gold but before I do this let us talk about the worst asset.

Bonds – the worst asset class in my view
Bonds are ideal assets for you if you suffer from a financial death wish. Let me put it like this: After 40 years of almost relentless and of late accelerating money production we have too much debt. When you buy bonds you buy debt, and there is a lot of it to go around. And it is not even cheap. In most cases, it is ridiculously expensive, in particular when considering that most of it will never get repaid.

This is especially true of the sovereign bonds of major governments, which are probably among the worst ‘assets’ on the planet, yet are bizarrely still considered ‘safe haven’ assets, a ridiculous concept to begin with. What are the prospects in the long run for government bonds? Remember that most sovereign states are now credit-addicts, desperately relying on low rates and cheap credit to fund their incurable spending habits, and increasingly leaning on their central banks to provide the daily fixes. If the central banks stop printing money and thus stop funding the governments, they go broke. If the central banks keep funding the governments they will have to keep printing money, and this will certainly lead to higher inflation at some point, and that point may even be soon.

As an investor you will ultimately lose money through default or through inflation, and if it is a hyperinflation there will be default at the end of the hyperinflation. For the bond investor the choice is between death by hanging and death by drowning.

If that sounds overly dramatic then ask yourself in what scenario you win or even get your money back. Only if the present policies lead to a slow and steady return to self-sustaining growth that is inflation-free and allows the central banks to slowly and painlessly remove accommodation and deflate their overgrown balance sheets, and if the political class then grows up and gets sensible, departs from its free-spending ways, gets the fiscal house in order, and starts paring back the debt.

Yeah, and pigs might fly!

That this scenario is evidently the basis of much strategizing by professional money managers does not say much about its soundness or even remote probability. It is simply the scenario in which the financial industry comes out unscathed, with its size, reputation and income-stream intact. It is also the one scenario in which you need little money – neither paper money nor gold – but can stay fully invested in equities, bonds and real estate, as the rosy outlook of seamless crisis resolution and onwards growth forever will ultimately justify today’s lofty valuations. This is the scenario the financial industry favours and has an overwhelming desire to believe in – as do all politicians, central bankers and assorted Keynesians and other interventionists. Good luck to all of them! I fear this is wishful thinking rationalized with poor economics.

Every day that the markets are open the US government borrows an additional $4billion, roughly. For 5 years running the country’s budget deficits were considerably in excess of $1 trillion. Britain is among the world’s most highly indebted societies if you combine private and public debt, and despite all the blather in the press about ‘austerity’, the public sector keeps going more into debt. Japan has long been a bug in search of a windshield.

Bond investors may counter that it is all about the timing. Until death arrives, you collect coupons. – Well, hardly. With yields for the bonds of major bankrupt nations now in the 1 to 2 percent range, if that much, there is, in my view, little point in sitting on a gigantic powder keg and hoping the fuse is long enough. When this one blows, the fallout will be substantial.
Why are bonds not selling off?

As David Stockman has pointed out, much of the US Treasury market is not owned but rented. The big primary dealers and many hedge funds hold government bonds as trading positions funded with cheap money from the Fed. That is the true reason for the Fed’s new communications policy. Ben Bernanke now goes so far as to promise to keep rates and therefore the trading community’s funding costs near zero, not only for the near-term, but even beyond the tenure of his own chairmanship at the Fed. The goal is to make sure that these leveraged renters of Treasury debt stay engaged and help funding the state.

Then there are the big bureaucratic asset management entities that have historically always provided a reliable home for government bonds: insurance companies, pension funds, sovereign wealth funds, foreign central banks. Built-in risk-aversion and intellectual inertia are here working in support of over-valued bond markets. Here, the big investment decisions are made by committees of professional fund managers who are often in charge of obscenely large amounts of money. To beat the market and achieve superior returns is an objective located somewhere between the hugely improbable and the completely impossible. They are destined to fail, and in this position of nerve-shredding uncertainty they all cling to the same straws: 1) do what everybody else does; 2) stick to what has worked in the past; 3) stick to the industry’s assumed wisdom, such as ‘never fight the Fed’; ‘government bonds are safe assets because the government can always pay’, and so forth. The last point has no basis in theory and history, and looks increasingly like a heroic assumption today, but that is the fund manager’s line and he is sticking with it.

That government bonds are a safe investment can, of course, not be left a matter of simple opinion but has to be enshrined in the laws of the land, and the state’s rapidly expanding finance constabulary is already working on it. Via legislation and regulation, the state is busily building itself a captive investor base for its own debt.

The state regulates the banks and has long been telling them that if they want to lend their money securely they should give it to the state. Everywhere, state-imposed capital requirements for banks can best be met by buying government bonds. The advantages are obvious: Spanish banks heavily increased their exposure to ‘safe’ Spanish government bonds over the past year, from about 13 percent of their balance sheets to 31 percent. And what is safe for the banks is certainly safe for insurance companies, pension funds and other ‘socially important’ pools of saving. ‘Capital controls’ is such a nasty term. Much nicer to call it ‘regulation’, and the masses have now been sufficiently indoctrinated with the idea that the financial crisis was caused by lack of ‘regulation’ so that the state can now safely and calmly tighten the screws.

I fear that to a large degree this is even welcome by the asset management industry. In an unstable and increasingly uncertain world, being told what to buy lifts a great responsibility of one’s shoulders. Although individually many money managers complain about stifling restrictions and regulations, it is usually the case that any outsized boom industry, when faced with the end of its boom, happily embraces state involvement to avoid getting trimmed back by market forces too harshly. Rather than seeing the return of the ‘bond vigilantes’ who instilled fear and loathing in debtors in the 1970s and 1980s but who roamed the financial landscape of a different age, one in which grown-ups were still allowed to smoke in public, we will most likely be treated to the sad spectacle of timid money mangers being herded into officially sanctioned asset classes by the cocksure financial market police.

All of the above may help explain why expensive assets may keep getting more expensive but these are, in the end, mitigating factors only that will, at the most, postpone the endgame but not change it.

One popular way to rationalize investments in bonds is that they are deflation hedges. Whenever the forces of liquidation and cleansing get the upper hand, bonds do well. This may be the case in the short term but any extended period of deflationary correction must be poison for sovereign bonds in particular: tax receipts will drop, non-discretionary state spending will balloon, and credit risk will rise. The bond market’s pendulum of doom will simply swing from the risk of higher inflation to the risk of default.

Gold versus other ‘real assets’ (equities and real estate)

It is often argued that equities and real estate are also good inflation hedges, and I know many people who prefer them to gold. I see the rationale but disagree with the conclusion. Gold may no longer be cheap because what I explain here has been a powerful force behind gold for a decade. But I would argue that equities and real estate are in general much more overvalued as the current financial infrastructure is designed to channel new money into financial assets and real estate but not into gold, and our financial infrastructure has been operating on these principles for decades. How many people do you know who not only own gold but bought it on loan from their bank? Now ask yourself the same question with respect to real estate. – Gold is the great ‘under-owned’ asset. Its share in global portfolios is miniscule. It plays hardly any role in institutional asset management.

It is true that during deflationary phases when the inflationary impetus from central banks slackens a bit and the urge of the markets to liquidate comes to the fore again, gold often sells off in sympathy with equities. But I believe that any risk of a more extended period of deflationary correction poses a much bigger problem for equities, and by extension real estate, than for gold.

Additionally, ask yourself how equities and real estate will fare in an inflationary crisis or a currency catastrophe. Which companies will make money, pay dividends or even survive? Which tenants, whether residential or commercial, will keep paying the rent? I am not saying that all these equities and all the real estate will become worthless – far from me to forecast a ‘Mad Max’-style end of civilisation. It is indeed to be expected that certain equities and select pieces of real estate will turn out to be decent instruments for carrying wealth through the valley of tears, and for coming out at the other end with one’s prosperity intact. But which ones? It strikes me that the variance of outcomes is much greater in these hugely heterogeneous, highly inflated and widely held sectors than anything that can come from holding the eternal money and homogenous commodity gold. If you consider any major economic crisis, whether inflationary or deflationary, gold beats equities and real estate in my book. (Equities and real estate are superior to bonds and paper money, however, and this is why I listed them above as potential holdings.)

Additionally, there is one aspect of real estate investing that is, in my opinion, frequently overlooked or under appreciated, and that is this one: Your property is like a marriage agreement with the local taxman, as my friend Tristan Geschex keeps reminding me. The War On Wealth is intensifying, as are the fiscal problems of most states. Both go hand in hand. Real estate is low-hanging fruit for the state, and taxation on it will most certainly increase. What market value and rent-income your property will manage to sustain through the vagaries of the crisis will most probably be subjected to confiscatory taxation from a bankrupt state. The ownership of gold could potentially also be restricted or heavily taxed. This is certainly a risk. But as I said, gold is still the under-owned asset, and there is still a chance that you can find arrangements for your gold holdings that lessen the tax implications. When the winds of change alter the political landscape in your country of residence and bring the War On Wealth to a cinema near you, you may still – if you are quick and lucky – pack your things, take your gold and move somewhere else (as long as they let you), maybe even obtain a different citizenship (as long as they let you), but owning property means having nailed your wealth to the ground and having signed up for whatever the local purveyors of snake-oil (politicians) manage to sell your fellow voters.

Paper money versus gold
Under what scenario would paper money beat gold, i.e. would the paper-money-price of gold drop sharply? – The answer is clear, in my view: If the central banks stopped the printing press and stopped depressing interest rates artificially and fully accepted the consequences for other asset classes and the economy. If the central banks decided to defend the value of their paper money and credibly assigned a greater importance to this objective than to the now dominant ones, which are sustaining a mirage of solvency of banks and states, funding the governments, propping up asset prices, and creating short-term growth spurts.

The big gold bull market of the 1970s ended harshly in 1980, when then Fed-chairman Paul Volcker stopped the printing press, let interest rates shoot up, and looked on as the economy slipped into recession. The paper dollar enjoyed a revival and the gold price tanked.

My view is that this is exceedingly unlikely to happen today. The global financial system is considerably more leveraged than it was 32 years ago, and presently much more dependent on never-ending cheap money from the central bank. In 1980, the total debt of the US government was less than $1 trillion, today the annual budget deficits are bigger than that. The fallout from an end to free money would be huge, and most politicians would deem the consequences unacceptable. Today, there are also no other strategies available that could cushion the impact. In the early 1980s, then-president Reagan countered hard money with an easy fiscal policy, and simply let the budget deficit balloon throughout his tenure. Today, the bond market would be quickly in trouble without support from the central bank, and the government would soon face its very own Greece-moment.
But even if this were indeed to happen, I think that gold would still do better than equities and real estate, and certainly bonds, which would suffer hugely from rapidly rising default risk. The deflationary correction is also a huge threat to the over-stretched banking system, which means you may not want to hold your paper money in form of bank deposits. Again, gold seems to be a decent self-defence asset, even in this scenario.

How to own gold

Personally, I believe one should hold gold in physical form (bars and coins), not through ETFs, derivatives or gold accounts. If one wants to have it held within the banking system (not ideal but there could be reasons for it), one should insist on having it in allocated form, that is, clearly allocated to one’s name and identified by serial numbers. Or, have the gold delivered and keep it in a safety deposit at a bank. Alternatively, there are now a number of specialised asset managers or gold dealers around that offer storage facilities as well.

I think the risk of gold confiscation is small in most countries at present but things may change. The risk of taxation on gold or restrictions on gold ownership is somewhat higher. The safest places to hold gold are probably Switzerland (still) and Singapore at present but if you live in the wrong place or have the wrong passport, having your gold there may not protect you from the long arm of your government when it begins to show interest in your gold. It is no surprise that people who really care about their wealth, which are often people who are very wealthy, now consider changing residency and even changing citizenship as an important component of their estate planning. The last time the US government confiscated private gold, in April 1933, it only grabbed what was held within the territory of the United States, and many people probably kept their gold by simply burying it in the backyard. Believe me, the next time private property will be confiscated, the process will not be handled so amateurishly.

In any case, these are just my opinions. As I said, food for thought….

In the meantime, the debasement of paper money continues.
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Old 12-01-2012, 05:59 PM
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Collapse Is What Is Really Taking Place Around The World

Collapse Is What Is Really Taking Place Around The World

Fasten your seat belts, here is what Egon von Greyerz, founder of Matterhorn Asset Management in Switzerland, had this to say: “Eric, I’m looking around the world and what is happening in France is quite amazing. We all know Hollande is in charge and he is now threatening French steel producer ArcelorMittal. Business is weak and they are looking to lay off some employees.”

“ArcelorMittal is the biggest steel producer in the world, and Hollande is telling them if they lay off employees that he will nationalize the business. So if this steel producer moves to take normal action during a slowdown they are literally going to be nationalized. This is astounding.

A couple of days ago I spoke to an author and journalist in France who is very well known....

“He told me he is in Athens now and is observing what is going on in Greece. He said to me, ‘Athens is nothing compared to what we have in France now with the trouble we are seeing with the unions, poor people, people in the streets.’

Still, there is no austerity in France compared to Greece. He expects France to be a lot worse than Greece will ever be. That’s one European country and this will be the case in many other European countries. The UK will be terrible economically, but the social unrest will also be very, very severe and extremely difficult in the UK.

So we are seeing it everywhere. Mervyn King, head of the Bank of England, he now says UK banks will need another 35 to 50 billion pounds of capital. He says the banks in England are under capitalized and the risks are major. Here you have a central bank chief who openly says the banks are at risk of failing. Of course this is the risk worldwide with banks, but it is refreshing to see a central bank governor actually saying it officially. Sadly this is the case with almost all countries in the world.

Turning to Japan once again, as I said in the last few interviews, Japan is one of the biggest risks in the world because of their economic position. The Bank of Japan had a loss in the last quarter of 230 billion yen, which is about $3 billion. Their balance sheet is also continuing to expand, it’s up to roughly 156 trillion yen or about $2 trillion.

Moving to the US, GDP was better at 2.7%, but again that was just inventory buildup and government spending. GDP is still weak if you take those two elements out. Consumption is very weak and inflation in the US is running at 1.6%. Anyone who buys food and fuel knows inflation is a lot higher than 1.6%. Also, if you used the real ‘deflator,’ GDP would be negative.

Consumption will continue to head lower because people are worse off now. There are 127 million people in the US dependent on government welfare. This is against a full-time working population of 115 million people. So there are 115 million people working full-time and 127 million depending on the government.

The bottom line is there are less and less people to pay for the welfare. This is why the deficits will continue and grow much worse than they are today. Also, if you look at median income in the US, it’s down 8% in the last three years, and disposable income is down a staggering 25% if you adjust for inflation in the last ten years.

If you look at the real estate bust in the US, take states like Florida, California and Arizona, 50% of homeowners have negative equity. Las Vegas is as high as 70% negative equity. Again, it means that the banks are never going to get the money back. This simply means that the government has to print more money.

This is the same problem in developed countries all over the world. Therefore, governments will print increasing and virtually unlimited amounts of money. So currencies will continue to reflect that activity. The dollar, euro, yen, and the other currencies have already fallen 80% in real terms vs gold over the last ten years. These currencies will continue to fall another 80% to 100% vs gold in coming years.

So investors have to look at how to preserve their wealth and the way to do that is with physical gold. Investors are always asking, ‘What percentage of my money should be in physical gold?’ I told people in 2002 to put 50% of their money into gold. That would now total 85% since gold has gone up more than any other asset.

If you ask me today, ‘Is 85% a good level?’ I think it is because I don’t see any better way for people to protect their wealth against the wealth destruction and the risks we face going forward. But every investor has to decide for themselves what is best for them.

What is important here is whatever percentage the investors buy must not be paper gold. It must be physical gold and it must be outside of the banking system. Remarkably, only 1% of the world’s assets are in gold today, so, sadly, not many people are thinking about wealth preservation. This tells me we are still early in this bull market for both gold and silver.”
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Old 12-11-2012, 04:12 PM
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Gold is a Leading Indicator of Monetary Distress

Gold is a Leading Indicator of Monetary Distress

No matter what confidence game is being run, confidence is the necessary pre-requisite. This is why confidence indicators are so closely monitored by central bankers. If consumers and businesses lack confidence, they will not partake of the central banker’s credit; a necessary step in the indebting of otherwise willing victims. The credit trap is at the core of the bankers’ ponzi-scheme of credit and debt; and although today’s markets are awash with liquidity, bankers are increasingly loath to lend and customers are increasingly reluctant to borrow.

Central bankers are well aware of the precarious health of their illicit franchise. Credit and debt-based economies must constantly expand to pay constantly compounding debts; but now, instead of expanding, economies around the world are slowing and contracting.

This is why central bankers are concerned with a rising price of gold. After gold exploded upwards in 1980 during a virulent episode of inflation, the price of gold was understood to be an indicator of monetary distress.

The more distressed the bankers’ prey
They’re far less likely to borrow today

After gold’s explosive ascent in 1980, central bankers began seriously ‘manage’ the price of gold. A lower price of gold would indicate not only an abatement of monetary problems but investors would be less inclined to trade their paper banknotes for the safety of gold when they could more profitably leverage their paper banknotes in the bankers’ paper markets.

Since the early 1980s, supplies of newly mined gold have constantly fallen short of market demand for gold; but notwithstanding supply and demand fundamentals, gold prices nonetheless fell for 20 straight years. In 1980, the average price of gold was $615. By 2001, it was only $271. Clearly, the free market price of gold was being distorted by ‘outside’ forces.

This anomaly in the supply and demand dynamic that exists in free markets is explained by the research of Frank Veneroso, a little-known but very influential analyst. In my book, Time of the Vulture: How to Survive the Crisis and Prosper in the Process, I tell how Veneroso explained central banks’ collusion with ‘bullion banks’ to suppress gold.

This highly profitable collusion incentivised bullion banks to borrow large amounts of central bank gold; then sell it on the market allowing the banks to invest the funds in the interim and profitably exit the trade when the gold price was lower because of the artificial depression caused by the additional supplies of gold.

This constant downward pressure on the gold price continued from 1981 until 2001. Indications that the profitable gold-carry trade was coming to an end happened in 1999 when the Bank of England ‘inexplicably’ sold 415 tons of gold reserves at the then bottom of the market.

The sale of almost half, i.e. 40 %, of England’s gold reserves has been subsequently revealed to have been triggered by a large—probably American and probably Goldman Sachs—investment bank’s short position in the gold market.

The bank, expecting to profit from the continually falling price of gold, had made a large bet that gold prices would continue to fall; but, prices had stopped falling. This exposed the bank to losses so large that the bankers’ prevailed upon the Bank of England to sell 410 tons of its gold to force gold prices lower.

Cropped photo of Bank of England gold vault

The photo of the Bank of England’s gold reserves is intended to bolster the confidence of investors as to the supplies of gold held by central banks. In truth, the photo is cropped to make it appear that the bank’s gold supplies are larger than they actually are.

Photoshop version of perhaps the more likely size of Bank of England gold vault

The empty space to the left of the rows of gold bullion were once filled with rows of gold bars sold in 1999 to insure that bullion banks could exit their gold trades without taking massive losses. A photo of gold vaults at Fort Knox—and/or the New York Fed—would show an even greater erosion of gold stocks and similarly vacant storage space.

In 1949, US gold reserves totaled 21,775 tons. In 1971 when the US was forced to end the convertibility of US dollars to gold because of diminishing supplies, US gold reserves had declined to only 7,000 - 8,000 tons; the loss of America’s gold was due solely to the post-war US global military presence and to the overseas expansion of US corporations.

Even the sale of 415 tons of England’s gold in 1999 was unable to contain the growing demand for gold. This demand was exacerbated by the collapse of the US dot.com bubble in 2000. In the next few years, central bankers responded by selling 1300 tons of gold owned by the Swiss National Bank to suppress the now rising price of gold but to no avail—gold continued to rise.

Gold is a leading indicator of monetary distress

The price of gold has risen for 10 years as systemic monetary stress has increased. In July 2011, because of EU monetary disarray, the price of gold rose from $1500 to $1900 in only two months, an almost vertical 27% rise.

Since September 2011, however, gold has been in an extended trough. This is not due, however, to an abatement of systemic stress. It is due to measures central bankers put in place to prevent a wholesale flight to gold from developing at that time.

What happened in July and August 2011 is what central bankers had feared, an almost vertical ascent in the price of gold that could cause investors to exit the bankers’ paper markets and turn to gold in a lemming-like rush for the safety of gold bullion.

This would be the death knell in the bankers’ confidence game. In my article, Gold: Stage Three Up Down Up Down Up (October 22, 2012), I explained how the bankers moved to prevent this feared event from coming true. It worked—for awhile.

In December 2012, it is clear the bankers drew a ‘line in the sand’ in September 2011 to prevent another rapid ascent in the price of gold. To some, this ‘line in the sand’ presents a major barrier to gold’s advance. But, in reality, the bankers’ line in the sand represents the bankers’ desperate last ditch attempt to prevent the inevitable from happening.
The systemic distress that drove gold’s 27 % rise between July and September to $1900 has not abated although the lower price of gold would imply otherwise. The present price of gold below $1800 is due solely to central bank emergency measures to contain the price of gold and China’s reluctance to let gold rise too far too fast before China can buy as much gold as possible before the next economic crisis.

Speculation abounds as to the trigger event that will set off gold’s vertical ascent. It could be the collapse of the global derivatives market or a credit event such as Credit-Anstalt’s collapse in 1931, the Austrian bank owned by the Rothschilds or perhaps Japan’s inevitable descent into the deflationary conflagration it has resisted since 1990.

It could be any number of events or causes. It could be triggered by a black swan event, a geopolitical crisis or a natural disaster on the level of the earthquake that struck off the coast of Japan in March 2011. Whatever the trigger, in the end the banker’s 300 hundred year-old con game will collapse from a simple lack of confidence.

In my current youtube video, The Collapse and the Better World to Come, I explain why I’m so optimistic about what is about to happen.

Buy gold, buy silver, have faith

By Darryl Robert Schoon
Loves, Buy Physical Gold NOW Feel Your Pain
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Old 12-16-2012, 03:26 PM
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We Are Headed To A Historic Collapse Of The Financial System

We Are Headed To A Historic Collapse Of The Financial System

“Nobody who has ever watched the Navy’s Blue Angels acrobatic team perform ever walked away with anything but admiration and amazement. The performance showcases generations of technology, courage and skills of the pilots as well as the practiced teamwork and coordination that allow them to fly such tight patterns.

The separation of the planes during the formations and acrobatics can be as little as 18 inches. Pilots are trained to focus on the planes next to them to maintain the separation. It involves complete trust in the lead plane and it’s pilot....

“The monetary Blue Angels of our day have closed their formation. With our Federal Reserve in the lead plane, the major central banks have pulled into a tight formation with the Fed. We see such feats of daring do as interest rates being driven to zero.

We see currencies, countries and institutions that should have failed by now being supported by the unlimited printing of money. Budgets and debt ceilings are passé. Crises come and go. Fiscal cliffs, debt ceilings and the like come to the fore. Nothing is ever resolved, but deadlines are moved and new plans for resolution are just around the corner.

While the central bankers might see themselves as Blue Angel equivalents, the reality is that they are engaged in precision balloon acrobatics. That image might trigger a smile, and even thought we know that balloons cannot be flown with any precision, it still represents an appropriate analogy. The balloons do rise, but chaotically. The hot air that fills the balloons is the electronic printing press.

The precision monetary team is floating countries, companies and markets. There are a few balloons such as the gold, silver and oil markets that tag along, much to their dismay. Releasing hot air from those balloons is considered a necessity to keep all eyes focused on the “right” balloons. Gold and silver balloons tend to rise at a much faster rate under these circumstances throughout history, so great effort must be made to tether them as best is possible..

Nobody knows how high the central bank driven balloons can go. The supply of hot air once appeared to be limitless. Perhaps it is. At some altitude, however, a vessel under pressure will pop in the absence of the counter force of atmospheric pressure. To the central bankers, they are floating us skyward to a new reality. It is more likely that our fate will be the black emptiness of outer space or a quick return to earth as the balloons pop. Only time will tell.

In 1982, the Air Force’s Thunderbirds Air Demonstration Team was at an air base in Nevada, preparing for one of their shows in Arizona. They were practicing what is called a four-plane line abreast loop. The loop begins with the planes climbing together to a high altitude. They would next roll over backwards and then descend straight down toward to surface at a very high speed. The last phase of the stunt was to pull out of the dive and level off at 100 feet.

Tragically, that never happened. It was initially believed to be pilot error, but a subsequent investigation showed that it was a mechanical failure involving the lead plane. True to their training, the other pilots followed the lead plane into the ground. All of the brave and accomplished pilots involved died that day. All were justified in their belief that their technology and their skills would not fail them. In the end, it was a component failure in a very complex piece of machinery that triggered the accident, not lack of competence or design.

Our central bankers have similar convictions and beliefs that the monetary system is known and can be effectively guided by pulling various levers. Using these beliefs and tools, central bankers are maintaining a tight grip on markets. The continuation of the savage attacks on the gold and silver markets, the “successful” sovereign debt auctions, interest rates maintaining low to negative levels, as well as an elevated S&P 500 are all signs that they are firmly in control.

There are two likely resolutions to this death-defying monetary show. The first is that we experience an historic, catastrophic, global, monetary collapse caused by an unpredictable failure in the system. In that case, the central bank acrobatic team flies the global economy into the ground while never doubting the wisdom of their ways. Our monetary pilots, focused on maintaining formation with the Fed, plow us all into the economic terra firma.

The second is that the academics and bureaucrats take us into a post-sovereign, post-money world. In so doing, they show us that central planning was the correct way all along. Past attempts were just bungled. Control is maintained, and a new world financial order emerges. The accrued obligations on the books vanish. The distribution of resources and wealth are controlled and allocated by a central power, not markets.

There is no successful version in history of the second outcome. The first outcome is always the way. What people have done throughout history to protect their wealth is to own tangible assets. As central banks continue to inflate away the value of their currencies and assets tied to those currencies, they are simultaneously gobbling up tangible assets such as agricultural land, oil, gold and silver.

A growing population will maintain the long-term value of scarce resources even if there are declines following a monetary collapse. Gold and silver will return to the historic role of sound money. Holders of those metals will see a dramatic revaluation to the upside. If history is our guide, the new wealthy will be those who had the wisdom to get out of paper money before the end of the current system.

There is an historic race going on for access to and control of oil and precious metals. You need oil to have a functioning economy, and we are on a heading for a troubling confluence of declining global production and accelerating global demand. The price of energy must rise.

You need precious metals to reestablish a believable monetary system. For investors, your only protection is to imitate the behavior of the global powers. It is imperative that you acquire resource-based assets, gold and silver, as the smart money is doing. A wealth preservation approach of this kind is the only chance that your money will weather the turmoil and financial destruction that lies ahead.”

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Old 01-02-2013, 02:45 PM
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2013 Year Of The Window

Year of the Window

It is tempting to believe that extraordinary events must have been carefully orchestrated by someone. This is the main ingredient in conspiracy theories—denial that extraordinary events are caused by the ordinary.

The reason I bring this up is to help you put Freegold in the proper perspective to understand my use of the term "window" as in "window of opportunity". Freegold will certainly be a high impact, extraordinary event as I understand it, and completely unexpected by most people. But that doesn’t change the fact that it could be, and was, seen coming a mile away.

Extraordinary events are caused by the ordinary all the time, and Freegold will be a good example. It has been rolling in like the tide longer than most of us have been alive. If there was a "conspiracy" surrounding Freegold, it was a conspiracy to forestall the inevitable, by those who had the most to gain, until structural foundations could be retrofitted enough to withstand the storm of transition.

With a long view, we can see several times when massive amounts of resources were expended to keep the wheels on the bus at times when it looked like they were falling off. A popular view is that central bankers do this to retain their own power and influence. But a different view exposed by the Gold Trail reveals that it was being done for a purpose: to buy time in order to retrofit the system to withstand the inevitable transition to Freegold.

Look at this chart of the 1980 spike in the gold price. Notice the steep climb in September 1979 with a spike on October 2nd.

(Click to enlarge)

The wheels were coming off the bus. The general fear among European central bankers gathering on October 1st for an IMF meeting in Belgrade was that the global financial system was on the verge of collapse. You might recognize the names of some of the central bankers at that time. Jelle Zijlstra was the President of the Dutch central bank (DNB) and the BIS, and Alexandre Lamfalussy was an advisor to the BIS, soon to become its General Manager.

Fed Chairman Paul Volcker arrived in Belgrade early and left early, departing on the first day of the meeting, "his ears still resonating with strongly stated European recommendations for stern action to stem severe dollar weakness." [1] But don't think this was about the price of gold. Gold is the linchpin of the system, but that spike in gold was to the collapsing system like a fire alarm is to a raging inferno. You can't put the fire out by simply turning off the alarm.

Those central bankers looked into the abyss, and then took emergency measures to buy the time needed to retrofit the global monetary and financial system so that it could weather the storm they saw coming. One thing was that Volcker was pushed to take quick action that, reportedly, was not embraced by the Executive Branch. But that wasn't even the half of it. Those European central bankers also decided to support the dollar's exchange rate by buying dollars:

FOA: "My point was that their actions can only be justified from a position of "buying time". Most of the major World and European countries had economies and currencies that could stand on their own in a competitive world. Yes, their transition from a dollar reserve would have been painful. But, compare that loss to the percentage of lifestyle gain they paid as a tax to the US by artificially maintaining the dollar exchange rate. Their Central Banks support polices were a decision to waste their citizens' productive efforts in a process that held together a failing currency system.

It seems the only explanation for the continued support of the dollar came in the form of "buying time": time to recreate a world reserve currency. But this time, make it subject to a whole group of diverse nations of conflicting political wills. In this format no one country can call the shots for the world. In addition, take away the need to compete with gold. Let gold be a supporting "reserve asset" that trades in a free market, unlent and non monetary so as to circumvent its manipulation."

You can see that post-1980 European CB support for the dollar in stark relief here. And the other thing they did was to encourage and support the development and expansion of a vibrant and explosive paper gold marketplace for the purpose of absorbing the demand for gold in support of the dollar. Again, this was the European central bankers supporting the status quo in order to buy time for...

FOA: "On January 1 1999, the Euro was born. On the headlines of almost every paper, the new Euro currency immediately became the topic of speculation. How high or low would it go,,,,,,, will it last,,,,,, what good is it,,,, and on and on. Yet, completely hidden from view and outside most speculator interest, one important item was overlooked. Once this competing reserve currency was formed, the two major power blocks of the world no longer shared the purpose of maintaining a paper gold market! Established, maintained and supported for the purpose of absorbing the demand for gold, its price damping effects were no longer needed."

This is a good example of a major, multifaceted, coordinated, long term (20 years!) European central bank effort to forestall the inevitable transition for the good of the entire global monetary and financial system, and by none other than those who stood to gain the most from the transition. Evil bastards!

ANOTHER: "The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up… Westerners should not be too upset with the CBs actions, they are buying you time!"

Then came the 90s when, as ANOTHER stated above, those European CBs became suppliers to the gold market as the whole "paper gold thing" didn't work out quite like they thought it might:

ANOTHER: "The BIS and other various governments that developed this trade ( notice I didn't use conspiracy as it was good business, as the world gained a lot ) , thought that the paper gold forward market would have allowed the gold industry to expand production some five times over! Don't ask where they got this, as they are the same people that bring us government finance and such. But, without a major increase in gold supply, the paper created by this "gold control operation" will either be paid by, 1. new supply. 2. the central banks. 3. rollover existing. 4. cash? 5. or total default! As the Asians started buying up everything last year ( 97 ) , number 5 and 5 started looking like the answer! When the CBs started selling into this black hole of demand, the discussion of #5 started in their rooms also."

For example, Wim Duisenberg, who followed Jelle Zijlstra as the head of the Dutch CB and later became the first President of the ECB, oversaw the sale of Dutch gold in two significant tranches of 400t (announced January 1993) and 300t (announced January 1997), and by decade's end had allowed for the lending of up to 15% (150t) of CB gold reserves.

But then, in a surprising policy reversal, he led the European central bankers in their Joint statement on gold, also known as the CBGA or the WAG. This statement was a very simple press release which, in essence, reversed the gold policy of the previous two decades and put the paper gold market makers on notice that they (the European CBs) would no longer be the lender of last resort for gold:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.

3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.

4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.

5. This agreement will be reviewed after five years.

One could say that a window of opportunity for something had just opened. That was 9/26/99. On 9/29/99 the paper gold market imploded. The price of gold quickly rose 22% over a two week period (which would be like gold spiking to $2,030/oz. next week) and, for a brief moment in time, the lease rate spiked and the GOFO plunged signaling backwardation in the gold futures market.

There was a rumor that the Fed and the BOE were active in silencing the fire alarm that time:

"In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999. Mr. George said "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.

Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."

In 2004, the European CBs renewed their "Joint Statement on Gold" as promised, but for some reason the BOE didn't participate this time:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed 2,500 tons.

3. Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement.

4. This agreement will be reviewed after five years.

Then, in 2008, something happened.

2013 – Year of the Window

I'm pretty new to this trail. I only started hiking it in 2008, a year that, like 1979 and 1999, the wheels almost came off the bus. Were massive resources expended at a loss just to keep the wheels on the bus that year? You be the judge.

I have relayed my own personal experiences buying gold from my local dealer in October and November of 2008 as anecdotal evidence of a tight supply (that I encountered) while the price was plunging from $900/oz. down to a low of $713/oz., and then plentiful supply at the bottom. I don't know. Did someone go massively short physical and long paper gold (or futures) in November of 2008 in order to support the paper gold market as the linchpin holding the wheels on the bus? Did somebody willingly take losses in order to delay the inevitable a little bit longer?

These charts are like a seismograph that records an earthquake, an explosion or some abrupt disturbance in the force. I do not think they are predictive. I do not think they are even descriptive enough to tell us what happened. They simply show us, in hindsight, that something happened. It is up to us to decide what we think happened.

So what happened in late 2008 as a result of the financial market collapse that began two months earlier? And did the European CBs do anything to forestall the transition once again? I don't know. But it is noteworthy that when they renewed their Joint Statement on Gold eight months later the #3 line about limiting gold leasing was gone and in its place was a line about IMF gold sales:

In the interest of clarifying their intentions with respect to their gold holdings the undersigned institutions make the following statement:

1. Gold remains an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted program of sales over a period of five years, starting on 27 September 2009, immediately after the end of the previous agreement. Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes.

3. The signatories recognize the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings.

4. This agreement will be reviewed after five years.

One thing that I was missing back then (2008-2009) was the wider perspective of someone who had been hiking this trail a lot longer than I had been. Then, in late 2009 or early 2010, Belgian put me in touch with Aristotle and we started emailing.

Ari had been following ANOTHER and FOA since their very first comments on Kitco back in 1997, and he is also the only person I know of who exchanged private emails directly with FOA during the Gold Trail years. He is also the one commenter from "back then" who, in my opinion, "got it" better than anyone else.

Somewhere around the turn of the century, or perhaps even right after FOA disappeared, Ari decided to subscribe to the Central Banking Journal, a quarterly trade publication put out by and for central bankers. It costs about $800 per year to subscribe. He has read every single issue of this boring trade publication, cover to cover, for more than a decade now. And I mention this simply to illustrate for you his extreme focus on central banking policy discussions, at least since FOA went away.

Ari has been hiking this trail a lot longer than I have, he understands it better than I do, and he thinks that central bank policy discussions are relevant to the potential timing of FOA's "changing world financial architecture" aka Freegold. As I mentioned just last week, my July 2010 post Timing Is Everything came directly from a curious email exchange in which Ari introduced me to the idea that, perhaps, the European central banks are somehow supporting the paper gold market at certain times.

Then, later in 2010, he introduced me to another idea: that 2013 might be the new "window" being targeted by the central bankers for transition to the new "world financial architecture" (aka Freegold). So, yes, I have had my eye on 2013 for two years now, and I decided on this name (year of the window) back in November. Fonoah can vouch for that since I mentioned it in an email.

What I'm trying to do here in this post is to share with you the nuances of my perspective and my reasoning behind the chosen name. Being a "window of opportunity" does not mean that I think they plan to "pull the trigger" or "push the button" or whatever. Nor does it mean that I think the wheels will fall of the bus this year. It's more a question of whether "they" will sacrifice valuable resources in an increasingly costly attempt to forestall the inevitable next time the wheels start to come off this 100 year old bus. And as I mentioned last week, we may get a glimpse of their state of mind in this regard by the end of the week.

If you think that the IMF can unilaterally forestall the inevitable with more gold sales, consider that the IMF has "pledged" gold, similar to the ECB and the BIS. It is not a sovereign nation with its own reserves. When we see sales by these types of entities, they are likely the visible result of a group decision rather than a unilateral action, which would explain the mention of IMF sales in the most recent CBGA.

Could the Fed do it? No, only the U.S. Treasury could, and as FOA said they eventually would, that would be the sign we are looking for—the U.S. Treasury selling U.S. gold to defend its dollar! What about the BOE? What's Gordon Brown up to these days?

I'm going to share with you Aristotle's thoughts on this, beginning with that email back in 2010. I haven't heard a peep out of Ari in a few months, so I can't speak to his latest thoughts, but the following covers roughly the last two years on that ever-elusive topic – "timing":

ARI (via email Dec. 2, 2010) - For the past half-decade, many international policy stirrings gave every indication to me that 2010 was to be the targeted year for assertively rolling forth the freegold paradigm. But as I've said previously, I feel that the ongoing financial crisis that began with the subprime fiasco has caused instability of such magnitude that the central bankers have been forced to delay briefly and "play it safe" -- one does not dare rock the boat (if there remains any choice in deciding the matter) when the financial waters have become so turbulent and choppy. As for the new timeframe, I'd say that the reported EU plan "to make private bond holders shoulder some of the pain from any sovereign debt restructuring after mid-2013" is as good an indication of a benchmark as any I've seen. Plus, that timing nicely accommodates my additional view -- embracing a culturally significant standpoint -- that the December 2012 conclusion to The Hobbit will forever cement the desire for gold into the minds of all western moviegoers, resulting in a perfect storm of the golden variety. ;-)

On the point of the midyear "benchmark" mentioned above, it's almost spookily funny that the song lyrics mention "You just gotta ignite the light and let it shine; Just own the night like the Fourth of July". Indeed -- 2013. (Or sooner, if *necessity* precludes all freedom of choice in the matter!)


ARI (hinting at his "timing thoughts" in a comment on Mar. 14, 2012) - Gather up the last easy bits of your treasure seeking exploits... the next 24 months will bring reverberations through our (global) culture as profoundly as is yet possible in this largely jaded and detached age of ours. Even now, can you hear the distant pulsing of air beneath the dragon's wings?

Gold. Get you some. --- Aristotle

FOFOA (via email May 11, 2012) - In that 2010 email, I believe you had your eye on the ESM set to begin in July 2013 when the EFSM is set to expire. But did you know that the ESM is expected to be ratified this July and run concurrent for a year?

I was curious if you still had your eye on the ESM as a “window of opportunity” and if this hastened timeframe portends an earlier window.

ARI (via email May 20, 2012) - Spurred on by the inquiry of your May 11th email, I took some time to read the latest progress on these treaties (both the 2011 original and lately amended 2012 ESM, plus the auxiliary Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) last weekend, but somehow failed to get back with you on my thoughts. Probably because I came away with nothing very sound or profound as a result of my reading. I can't bring myself to imagine that the hastened timeframe for start of the ESM necessarily portends a more imminent transition to our freegold environment so much as it strikes me as a sign of how much the ongoing European ructions have kept the euro area member states focused and in frequent contact. Avenues for earlier-than-expected adoption were thus available and easily taken.

I took (and still do take) the facility of the initial European financial stability programs to make somewhat expedient new loans for the benefit of distressed euro member states until mid-2013 as an emergency measure and temporary bridge to give legacy bond holders (especially the banks) some time and space to regather their wits and come to better grips with the new reality. With the sunsetting of these expedient funds, the relatively cushioned ride of old bondholders on the backs of the stronger taxpaying populations should be nearing its end as any new funding (to be arranged now through the ESM) will come with stricter conditionality and will ensure the ESM holds preferred creditor status -- secondary only to the IMF.

Thus, banks (and any other sensible parties) who hold, or are potentially in the market for, European sovereign debt will be well advised to consider their place in the overall pecking order going forward, and of the real risk posed by national bonds after all.

A snip from The Telegraph today shows the likes of HSBC and Deutsche Bank still trying to think through it all and work out how to cope...
(Telegraph.co.uk) -- A note from HSBC staff this week said they are increasing their holdings of the yellow metal in the face of “deteriorating” economic momentum, in addition to adding cash and Treasuries (US government debt).

“In the continuing absence of plausible alternative growth drivers, we believe that this increases the chances that central banks will engage in further QE,” explained Fredrik Nerbrand, the bank’s global head of asset allocation.“This is likely to be accompanied by increased inflation expectations; hence, we increase our exposure.”

Not all are convinced gold is about to climb again, however. Analysts at Deutsche Bank think the increasing speculation about a Greek exit from the euro adds to the downside risks.

The argument is that, with gold showing a strong opposite correlation with the US dollar at the moment, if the euro falls, the dollar rises and gold drops backs.

However - stay with it - they see an actual 'Grexit’ as bullish for the euro. By implication, it would be for the gold price too.

The City is not singing gold’s swansong yet, but it is certainly braced for more volatility.

FOFOA (via email May 27, 2012) - Here’s a passage from your 12/2/10 email:

"For the past half-decade, many international policy stirrings gave every indication to me that 2010 was to be the targeted year for assertively rolling forth the freegold paradigm. But as I've said previously, I feel that the ongoing financial crisis that began with the subprime fiasco has caused instability of such magnitude that the central bankers have been forced to delay briefly and "play it safe" -- one does not dare rock the boat (if there remains any choice in deciding the matter) when the financial waters have become so turbulent and choppy. As for the new timeframe, I'd say that the reported EU plan "to make private bond holders shoulder some of the pain from any sovereign debt restructuring after mid-2013" is as good an indication of a benchmark as any I've seen."

Regarding the highlighted portion, check this out:

Sweeping reforms to shift the burden of rescuing failing banks from taxpayers to bondholders

It's from this…
Fresh fears as EU finalises reform plans
May 25, 2012 7:08 pm

Sweeping reforms to shift the burden of rescuing failing banks from taxpayers to bondholders are to be unveiled by the European Commission, despite fears it will further rattle nervous bank investors.
When a bank is deemed to be failing, regulators will win extensive powers to write down non-guaranteed deposits and senior unsecured bondholders, according to draft proposals obtained by the Financial Times.

While the broad thrust of EU bank resolution reforms are well known, its publication has been delayed for more than a year over fears the so-called “bail-in” tools would make it even harder and more expensive for banks to raise money.

There remain extreme sensitivities over the details. The FT has seen three recent drafts that show fundamental elements of the scheme are still being rewritten, with just a few weeks before the expected publication date.

The latest version includes one big political concession. Rather than forcing banks to raise an EU minimum of debt that can be “bailed in”, national authorities will have discretion to tailor requirements.
If approved in the final version, the increased flexibility could leave a patchwork of different regimes and requirements across Europe.

However, it would placate some countries opposed to the original commission measure, which forced big banks to raise bail-in debt covering 10 per cent of their liabilities. To meet this, Barclays Capital estimated listed banks would need to issue €600bn-€1tn of debt that can be bailed-in, which is more risky for investors.

Michel Barnier, who oversees EU financial services, is determined to unveil the plan in early June, within days of the Greek elections and at a time when most European banks are shut out of funding markets. He said the plans were “well thought through” and would not unsettle markets because they were “long term”.

“This is not a bad framework,” said one big European bondholder. “But it’s not going to be well received. This is a terrible time to release it.”

Experts on the reforms say the response will be unpredictable. “The commission may have decided that things are already so bad that nothing can make them worse,” said Bob Penn, a partner at Allen & Overy.

“But it is not going to help share prices or funding. It is not going to help ratings or funding costs. It will help the regulatory arbitrage business, as people duck and dive to avoid things.”

Under the plans, when a bank is judged to be failing and at the point of collapse, regulators will assume emergency powers to sack the management, restructure the bank’s assets and write down unsecured creditors.

EU members will also be required to establish resolution funds, which would be mainly bank funded and could include existing deposit guarantee schemes. National funds would, under normal circumstances, be required to lend to other country’s schemes if necessary.

Other draft changes include setting bail-in implementation for 2018, a later date than expected. Short term debt of less than a month maturity is protected, along with guaranteed deposits.

Regulators are also given some leeway in sparing derivatives counterparties should closing out positions during a debt writedown threaten financial stability or put a clearing house in danger.

ARI (via email May. 27, 2012) That article is a good catch, FOFOA. Much more so than the considerably less-consequential ESM treaty timeframe and implementation that we knocked about a few days ago, this article truly bites at the meat of the original matter mentioned in that 2010 email. And here we see how interminably these things can remain in flux, such that there is now in draft an extension of the timeframe from 2013 to 2018 as cited near the conclusion. You know... I can see where language to that effect could be more popular (among the banks and bondholders) from a simple delaying standpoint, but I would seriously question the likelihood that such a stretch could/would actually be made -- given the greater benefits to be had with fully-fledged freegold in the meanwhile coupled with the favorable cultural and political inertia to be had respecting the timeframe that commences mid- to late 2013 and into early 2014. But if we're looking at a serious attempt to hold the current course for five more years... jesus, that's a lot of stimulus and geopolitical rhetoric and nonsensical economic posturing just to get there -- not to mention five whole more years of the same ol' jaggedy march higher in MTM gold... (which is surely great for the young acquisition-minded, but equally frustrating for the established/retired gold holder.)

-- Ari

Well, there you have it, the full extent of my "timing" discussions with Ari. As most of you should know by now, I don’t do timing anymore. But seeing as the beginning of a new year is the traditional time to make (mostly failed) predictions, I do dip my big toe into the hazardous river of broken crystal balls once a year. And now, hopefully, you understand my reasoning for calling this The Year of the Window.

As for my specific prediction, here it is again from last week's post:

If the recorded price on Friday, January 4th, 2013 is EUR 1,246 or lower, it's game on for Freegold meaning that the window of opportunity is now open because official support for paper gold has apparently ended. In other words, there may be no system support the next time something breaks. But if the recorded price on January 4th is EUR 1,389 or higher, it's six more months of kick the can. And if it's anywhere between EUR 1,246 and EUR 1,389 (which it is today) then the €PoG will be too ambiguous to be predictive one way or the other.

For the full explanation you'll have to go read the post. But even if the €PoG doesn't hit one of those targets, whatever it does between now and Friday is still interesting to me (and I normally couldn't care less about the price of paper gold). So once again, here's a chart of euro gold so that we can keep an eye on it this week:

Once in a great while, perhaps, extraordinary events, say, caused by a century of the ordinary, cannot be delayed anymore, even by the most extraordinary efforts.

[1] federalreserve.gov/pubs/feds/2005/200502/200502pap.pdf

__________________________________________________ ________

New Year's Party Music!

This year I'm featuring the videos of Freegoldtube that I used in posts throughout the year. If you watch only one, make sure it is his magnum opus, The Ecstasy of Gold, at the bottom. And if you appreciate the very time consuming work he puts into these videos, please be sure to let him know because I think that his drive to continue making Freegold videos may have stalled. How many blogs have someone like Freegoldtube making videos like this?

From Peak Exorbitant Privilege:

Happy New Year to all of you and all the best in 2013... Year of the (now open?) Window!

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Old 01-05-2013, 12:58 PM
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Uncivilized Investing

Uncivilized Investing

by Dan Amos

Uncivilized times call for uncivilized investments.

Charlie Munger, Warren Buffett’s partner in crime at Berkshire Hathaway, told CNBC recently, “I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold. They invest in productive businesses.”

In a way, Munger is correct. Gold is uncivilized in the sense that it functions best when civilization functions worst. The more uncivilized a society becomes, the more civilized gold becomes.

So the easiest way to dismiss this statement is to say that maybe it’s 1939 again and maybe this time “we’re all Jewish families in Vienna.” But let’s not let Charlie off the hook so easily. Instead, let’s “unpack it,” in the words of our tutors at St John’s College in Santa Fe, New Mexico. To ‘unpack it’ we need to focus on two key words in Charlie’s statement: “productive” and “civilized.”

Charlie might be right if the world were, indeed, civilized. But maybe the modern world isn’t as civilized as he thinks. Part of what made the world so uncivilized in 1939 was unsound money. The abandonment of the classical gold standard in 1914 made the expansion of the Warfare state possible. The equally unsound system that emerged from World War I — including the Treaty of Versailles — virtually guaranteed that monetary and fiscal instability would lead to political instability. Radical parties like the Nazis flourished.

Gold, on the other hand, is sound money. You are not buying it for a capital gain. You are buying it, by our reckoning, as a way of preserving purchasing power. You extract paper from the fiat money system and turn it into something (bullion) you can later exchange for whatever currency emerges when the financial system becomes more civilized.

Interestingly, for more than a decade Berkshire has underperformed gold — the investment asset Buffett recently called “forever unproductive.”

Since 1997, Berkshire’s shares have declined relative to this forever unproductive asset. The nearby chart depicts the trailing 10-year return of gold since 2007. Thus, the first data point on this chart shows the return an investor would have received from buying gold or Berkshire Hathaway in 1997. Moving across the chart to the right shows subsequent 10-year time frames. Bottom line: Based on a 10-year holding period, there has not been a single moment since late 1997 what an investor would have been better off buying Berkshire Hathaway instead of gold.

No wonder Charlie is so cranky!

This lengthy underperformance by Berkshire may explain Buffett’s and Munger’s very vocal and public hostility toward gold. Or maybe that’s just a function of both men living most of their adult lives in an era where the monetary system was not disintegrating. They are unable to imagine it.

But the chart above isn’t an indictment of the investment acumen of Buffett and Munger. It’s an indictment of the world’s fiat monetary system! A civilized society with civilized people has sound money. An economy with sound money has price stability. This stability allows for long-term planning and investment. This stability rewards investors for identifying which businesses are the most productive and efficient users of shareholder capital.

For these exact reasons, William McKinley campaigned for President in 1896 and again in 1900 as a champion of the gold standard. He won...twice. But just 12 years after his assassination in 1901, the Era of Incivility began: The Federal Reserve came into being. Just 20 years after that, FDR confiscated all privately held gold. And 38 years after that, Nixon cut the dollar’s last remaining ties to gold, thereby establishing today’s very uncivilized “fiat money” system.

In an uncivilized society, where the value of your labor is stolen through inflation (made possible by an unsound money system) long- term planning and investment become much more difficult, if not impossible.

If you accept that we live in civilized monetary times where productive labor is actually rewarded, your brain has been tranquilized by the Big Lie of our times. Munger wants you right where you are. The less you think about how uncivilized the current monetary system is, the less likely you are to question it or disrupt it (which would be inconvenient for Charlie).

But if you live an era that subverts accurate valuation of productive businesses — an era that subverts the productivity of the economy itself by encouraging debt and consumption, owning gold seems prudent, not wacky.

Uncivilized times call for uncivilized investments.


Dan Denning
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Old 01-06-2013, 04:20 PM
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What’s the “Big Money” Doing?

What’s the “Big Money” Doing?

The following is an excerpt from Richard Russell's Dow Theory Letters

"If you don't know history, then you don't know anything. You are a leaf that doesn't know that it is a part of a tree." Michael Crichton

Question -- Central banks the world over are spewing out their respective currencies over the world. If this continues, won't there be an eventual panic out of fiat currencies?

Answer -- The answer is yes, but before that, interest rates will be rising, and that will halt the machinations of the various central banks. Political pressure will force the central banks to curb their currency creation.

But I want to talk about something else. The action of the big money, the sophisticated money, tends to lead the markets.

In view of that, let's ask ourselves what the "big money" is doing now. We hear that classic art pieces like the Klimpt painting and Munch's "The Scream" are going for well over $100 million. We hear of wealthy individuals buying wildly-priced apartments in New York and London and Hong Kong.

All of this adds up to the "big money" placing their paper money in rare one-of-a-kind tangible items. These are items that will be considered items of wealth even if their respective currencies go the way of all fiat currencies, which is a way of saying these items will be deemed items of great value even if their respective currencies become worthless.

But what of you and I, what of the man on the street? You and I can't afford to buy expensive collectibles. How can we protect our purchasing power if the purchasing power of our fiat currency continues to plunge? Ah, this is the basic question. You and I can't buy a thousand acres of land in Montana. What can we do instead? The answer is that we can do what the Chinese and the Indians and the Vietnamese are doing, we can go to what I call "the common man's rout," we can buy gold and silver.

Joe six-pack can buy one gold coin a month or an even smaller denominated coin. So in a strange way, gold is the "poor man's protection" against a collapse in the purchasing power of his respective fiat currency.

Think about it -- in the entire history of man, no fiat currency (with nothing but a government promise behind it) has ever survived! And you think our current Federal Reserve notes will be the great exception? If the current Federal Reserve notes survive for another sixty years they will be making history, they will be doing what no other intangible fiat currency has ever done.

Ah, you see, the smart money know this. Which is why you are seeing great works of art, rare collectibles, classic cars, arable land, apartments in upper East side Manhattan, gem quality rubies, emeralds, diamonds and sapphires going for prices that most experts can't believe.

Smart money doesn't care what a one-of-a-kind red diamond costs. Smart money knows that this same diamond will be an item of great value a hundred years from now.

So my advice to my beloved subscribers is -- follow the smart money, follow the people who can buy the best advice on the planet, and think ahead, think ahead to the time when there will be a panic out of Federal Reserve notes and a frenzy to own items of tangible value.

Think of "the poor man's item of eternal wealth," think of gold.

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Old 01-31-2013, 02:18 PM
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Paul Singer On How Money Is Created... And How It Dies

Paul Singer On How Money Is Created... And How It Dies

When we launched our series into the US Shadow Banking system in the summer of 2010 we had one simple objective: to demonstrate just how little the process of modern (and by modern we mean circa 2004 not 1981) money creation was understood. Here was just one example where some $17 trillion (back then, now less)in credit money was rapidly liquidating, an amount greater than the entire M2 and even M3 (had that series still be in circulation) and yet not one academic, pundit or self-professed money expert had or has still accounted for the massive impact of this monetary abstraction on the markets and the economy, which as most know "grows" (to use one of the most misunderstood words in all of economics) primarily by expansion (or contraction as the case may be) of credit, both traditional, which is Bernanke's domain, and "shadow", courtesy of America's #1 export: "financial innovation."

It is now three years later and we are happy to report that almost not one person, not those that hide their complete lack of understanding of the money creation process behind big words, circular arguments, and three letter "monetary theory" acronyms, and certainly not those who set monetary policy, have understood a single thing of what we have been trying to explain all this time, which is merely the modern monetary reality but not from some textbook theoretical perspective, but from a purely practical, where money is nothing more than 1s and 0s in some server, standpoint.

However, one person has. That one person is Paul Singer. Paul is not some fringe blogger, some academic with a chip on his shoulder and an inferiority complex, nor some lunatic gold bug. Paul runs Elliott Management, one of the five biggest hedge funds in the US, which at last check had some $21.1 billion under management. And having managed money successfully since 1977, and witnessed numerous cycles of growth and contraction, not to mention money creation and liquidation, we would argue that his opinion on virtually all matters finance and money-related is second to none. It is certainly orders of magnitude more relevant and correct than that of the shamanistic central planning hacks who sit down every month in Marriner Eccles building to form a circle of depraved (and arguably deferred genocidal) cluelessness, and after a theatrical vote a la Stalingrad circa 1954, determine the cost of money (at least they did in the Old Normal) without even understanding what money actually is.
So for anyone who wishes to know what really happens in the modern world when money is created - and that would be most people who pretend to be informed on this, and other modern financial topics as nowadays it is all about money creation (and soon, destruction) here is, from Paul Singer's latest monthly letter, an extended discussion on the nature of money, how it is created, and most importantly, how it dies.

Money Tsunami
The concept of “money” used to be simple: items of recognized value, initially in the form of shells, livestock, and then precious metals. At some point, someone decided to print currency on paper, but it was widely understood that it had to be backed by something real, like gold or silver. That history is oversimplified, but it illustrates this central truth: Money that is created at will, rather than grown in the field, mined from the earth, or otherwise subject to supply limitations, can be easily degraded. Nobody would want to own something that may or may not have value and purchasing power in the future. What, then, determines the value of money?

The worldview and ethics of those in charge of the printing presses are obvious answers that are often overlooked. Another is the confidence (or inertia!) of the people who hold and trade the money, or claims denominated in money.

Fast forward to the modern era, which features central banks, so-called “fractional reserve banking,” leverage, and derivatives. Central banks allowed commercial banks to create money by making loans while keeping small amounts of reserves on hand or at the central banks. As money market funds, bank CDs, and other like instruments were created and then became a sizeable portion of the global financial system, things got even more complicated. An obvious clue that the very definition of money, to say nothing of the appropriate ways to analyze and adjust monetary policy, have departed from the understanding and control of monetary authorities, can be found in the proliferation over time of acronyms to describe what used to be called simply “the money supply”: M1, M2, M2A, M3, MZM, and several others.

Add modern derivatives, which entered the scene in a significant way only some 30 years ago, and the picture becomes even murkier. To demonstrate this, in slow motion, consider the creation of a credit default swap (CDS), and then a mortgage collateralized debt obligation (CDO).
Assume an investor wants to be long the credit of IBM. The investor offers to sell to a dealer a CDS on IBM. The dealer purchases the CDS and either keeps it or lays off the risk by booking an offsetting transaction with someone else. Actual securities issued by IBM are not part of these transactions – the CDS is just a contract between the investor and the dealer. As IBM’s credit quality is perceived to change, the price of the CDS will fluctuate and money will change hands between the investor and the dealer (based on the “mark to market”). This position is basically a borrowing by the investor who now “owns” a security referencing the credit of IBM, and who has put up only a small deposit – a tiny fraction of the notional credit exposure that the investor is long. It also represents a highly-leveraged loan by the dealer. Although the investor/borrower does not receive the full proceeds of this “loan,” he or she bears the full risk of loss on the underlying asset. It is as if the investor borrowed money from the dealer, added a small amount of his or her own money, and purchased an IBM security with the total amount of money. Interestingly, such borrowings also have the effect of impacting the price of the actual underlying assets (in this case, IBM credit) due to arbitrage pressures. In effect, these transactions by investors and non-bank dealers represent many of the characteristics of the creation and dissipation of money, but they are outside the traditional and commonly-understood mechanics of fractional reserve banking. Most economists would not consider these transactions in the context of money supply, but we think that they are being mechanistic and not seeing the actual effects of the basically unlimited ability of private derivatives transactions to have many of the same effects as are caused by the creation and destruction of “money.”

The ecosystem of mortgage securitizations has similar characteristics. It starts with the tranching of pools of mortgages into mortgage-backed securities (MBS) and then the referencing (via derivatives) of low-rated tranches to form new securities called synthetic CDOs. Based upon fanciful assumptions about diversity that prevailed pre-2008, the bulk of synthetic CDOs that referenced low-rated mortgage-pool tranches magically turned into AAA-rated securities. These instruments, even in subprime mortgage securitizations, were consequently treated by regulators as zero-risk-rated. Until the music stopped, these high-rated securities had many of the powerful multiplier effects of money. Furthermore, the institutions that packaged and sold the MBS, and those that put together the synthetic CDOs, performed many of the functions of banks (conjuring credit out of small reserves) even if they weren’t banks. Finally, the entire process caused demand for houses to increase and prices to rise.

The purpose of this part of the discussion about money is to show that things have gotten really complex and subtle in the modern banking and derivatives era, and that the old model of money as being solely or mainly the product of bank reserves and bank loans is woefully inadequate.

Now one more element should be added to this mix: quantitative easing, or QE. The government spends money on roads, bureaucrats’ salaries, entitlements, etc. To pay for such spending, Treasury sells a security to the public, and it has an obligation to repay the purchaser when the security matures. The security might be a Treasury Bill, a 30-year bond, or anything in between. The Federal Reserve (or the Fed, as it is commonly known) has the ability to set short-term interest rates, which has incentive/disincentive effects on bank lending and consumer spending. In a nutshell, that model has prevailed as the status quo since the Fed was created in 1913, up until 2008.

Since the crash of 2008, there has been an additional dynamic at work. Namely, the Fed is purchasing massive amounts of Treasury securities, either directly or on the open market. To be clear, the cash outlays by Treasury for government spending are the same as in the preceding paragraph. The difference is that post-crash, there are far fewer securities outstanding that the Treasury must pay off at maturity, because trillions of dollars of such securities are owned by another department of the federal government. We think this process is the effective equivalent of money-printing.

For those who think otherwise, we pose the following question: If QE did not have the effect of printing money, why would the Fed do it? We do not think that QE is merely a duration swap. If the government simply wanted shorter duration and cheaper borrowing costs, the easy course would be for the Fed to set interest rates at zero and for the Treasury to issue only 30-day Treasury Bills to pay for government spending. One possible outcome of such an approach would be that the price of long-term bonds would be uncontrolled, and could possibly fall precipitously, thereby driving up long-term interest rates. Instead, the government adopted a zero interest rate policy, or ZIRP, and Treasury’s borrowing rates dropped as the Fed purchased its bonds, elevating the prices of virtually all other securities. All of this contrivance is intended to be an indirect way of supporting economic activity, and perhaps it has done that to some degree. But it is causing massive distortions of risk-reward in stocks and bonds, as well as significant expansion of future risks of both inflation and severe losses in asset prices. These losses would be experienced by both the Fed and by investors.

The Fed’s explanations of these policies are delivered with equanimity and aplomb. However, in our view, the inventions of modern finance have “gotten away from them” and are not adequately understood by the money-printing overseers. A “smoking gun” is the complete failure of policymakers (and financial-institution executives) to predict or understand the circumstances surrounding the 2008 financial crisis – neither the inner workings/interconnectedness of the institutions involved nor the risks inherent in the system.

Recently released minutes of Fed meetings in 2007 make it clear that they did not understand the modern financial system: its structure, the instruments that comprised it, the implications of the leverage and risk-taking afforded by untested derivative products, and the vulnerability and opacity of the major financial institutions. It does not mean that the Fed has no credibility when it acts or makes pronouncements today. But it certainly means that they should not have a great deal of presumptive credibility, especially about elements that are experimental and untested or that they got so wrong recently (like QE, and the risks of a system comprised of modern highly-leveraged financial institutions laden with derivatives positions, respectively).

It is critically important for investors to try to understand what global QE is actually doing, where it may lead, and what will happen when it slows, stops or shifts into reverse. What we urge most strongly is that the current atmosphere of calm and stability, and the lack of virulent inflation, must not be relied upon to continue forever.

There are certain words and phrases in official communications that give some hint of the uncertainty that exists about key elements of central-bank policies: confidence, anchored inflationary expectations, and velocity are prime examples. Our takeaway is that when investors lose confidence in ZIRP-soaked, QE-ridden, faith-based paper money, the consequences could be abrupt and catastrophic to societal stability. We do not know exactly what to do about it, except to urge policymakers to STOP substituting QE for sound tax, regulatory, labor, environmental, and fiscal policies.

Due to the combination of;

- the lagged nature of inflation in wages and consumer prices, - the vital (if possibly more ephemeral than policymakers think) role of “confidence,” and
- the fact that each particular brand of paper money is competing with other currencies that are similarly mismanaged

the world is in a position today in which the major central banks see only the beneficial effects of QE and not the risks. Bonds that otherwise might be collapsing and repudiated are at sky-high prices with stingy yields. Reported consumer inflation is near historic lows. Consequently, central bankers think that what they got away with yesterday will also work today and next week. Investors either have not figured out that they are long seriously overpriced promises or think that they will all have the luck and perspicacity to reject such instruments before they plunge in price.

The reason we combined derivatives and QE in this discussion is that both are proud inventions of modern financial science, both have many of the characteristics of money-creation, and both are undertaken without any real understanding by public or private sector leaders of their nature, power, interconnectivity, and ultimate consequences. QE is exceptionally dangerous and way past its tipping point. We do not believe it can be unwound without serious consequences. Central bankers think (hope?) that it can be easily unwound at some future date, but they may not be right.

When the rejection of long-term bonds and paper money starts at some unpredictable future time, it may be fast and difficult to contain or reverse. History is replete with examples of societies whose downfalls were related to or caused by the destruction of money. The end of this phase of global financial history will likely erupt suddenly. It will take almost everyone by surprise, and then it may grind a great deal of capital and societal cohesion into dust and pain.

We wish more global leaders understood the value of sound economic policy, the necessity of sound money, and the difference between governmental actions that enable growth and economic stability and those that risk abject ruin.

Unfortunately, it appears that few leaders do.

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Old 02-03-2013, 10:14 AM
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Gold Is Not Money - It's Something Better

Gold Is Not Money - It's Something Better

By Tom Luongo

In the comment thread to my last article I made the mistake of puncturing a misconception of many an ardent, if confused, gold investor by asserting without equivocation that gold (AMEX:GLD) is, in fact, not money.

I know I made some people angry with that statement. But to clarify I need to set the Way-Back Machine to last century and quote from Ludwig von Mises' The Theory of Money and Credit and Human Action wherein he defines money and credit.
It is the most marketable good which people accept because they want to offer it in later acts of impersonal exchange - Human Action (1949)

Credit transactions are in fact nothing but the exchange of present goods against future goods. - Theory of Money and Credit (1921)
To translate: money is the most liquid commodity. Credit is a promise to pay tomorrow for what I need today. Mises also went on to explain that the creation of more money confers no net benefit - just picking winners and losers based on who created the money. This is because money is not a store of value. Nothing is; not cowrie shells, gold, Bitcoins or Malaysian Ringgit. Money can only compare subjective values.

Let Them Eat Credit
Gold is capable of comparing values. All things are at some level. But all other things do so at a discounted rate versus the current item being used as money, because holding money should not incur any cost. Gold has a discounted price when trying to buy a car with it. That discount is 100%.

Gold is only money in transactions where the transaction is not allowed to take place with legal tender - think Iranian oil and you just won a prize. In that respect gold is money. In Singapore, bullion quality physical gold and silver (AMEX:SLV) trade without taxes or capital gains, which puts gold and silver on par with other currencies in the foreign exchange market. Up until recently, one could deposit gold in a Vietnamese bank and get paid interest on your savings. In only very limited circumstances and markets does gold flow as a money - a direct medium of exchange.

We are living through a time where we have credit deflation and monetary inflation. Nothing has changed since Lehman went bust. Asset prices want to deflate and the central banks are trying to prevent that from happening and are printing base money in the hopes that will spur credit inflation. Up until recently it hasn't worked because no one can take on more debt credibly. Why? Simple, too much risk for too little reward because no matter how far down the central banks push interest rates they can't force people to buy a loan they can't afford to pay back. There has been no demand for credit. The central banks are desperate to create that demand for credit. In the past, all they had to do was lower the cost of credit and it would flow. Not now. This is what most gold bears refuse to understand.

And The Fed is now pushing interest rates as low as they possibly can go. And they are printing base money to do so. They will continue to do so and punish savers and pensioners until they buy more mortgages. The plan may even be successful. But at what cost?

There may even be another big rally in U.S. Treasuries (AMEX:TLT) this year. the banks have reported earnings that look like they have room to fill up on Treasuries. The latest TIC Report certainly shows that through November there is no loss of appetite for Bonds-- except for August and December of 2011, right after QE 2 ended and the Chinese sold.

I fully expect to see China dumping and Japan buying to offset in the next two reports. The rest of Asia has stopped buying. Russia and most of the E.U. has stopped as well. The battle lines are being drawn pretty clearly of who is still willing to finance the Fed's dreams of recovery.

(click to enlarge)

So, like it or not, the dollar is still money in the U.S. as well as a lot of other places around the world. The euro (AMEX:FXE) functions in Europe. The baht functions in Thailand. And interest rates where there is a surfeit of debt are still zero.

Feh! Who needs risk assessment anyways!

The Hunger Games
So to repeat, gold is not money. It is a store of wealth. In this way, the Indians and the Vietnamese have it right. It is a means to preserve your wealth when money dies. They have watched their money die many times. The rupee and the dong just went through massive devaluations as demand for those currencies collapsed and other things tried to swoop in to fill the void. In both countries the demand for gold rose sharply and the government attempted to stop it from happening. But gold flowed not to restore the division of labor (medium of exchange) and keep commerce flowing, it did so to preserve the value of savings (wealth and capital preservation).

We in the U.S. have no concept of this. Vietnam is a three-currency economy - the dong, the U.S. dollar and gold- which the State Bank is now attempting to change by edict and mucking with interest rates and inter-bank rules. So watching the relative demand for money change is something alien to many commentators here at Seeking Alpha. Our experience is that the dollar will always have a bid, and not just any bid the biggest bid out there. Will we reject the Dollar in the U.S.? No. It'll happen overseas and some of that inflation we poured into foreign central banks will re-visit our shores, sending the dollar down sharply and gold along with bond yields up.

So many people are not prepared intellectually or financially for that possibility. Even if you aren't a gold bug, you should have some in your portfolio... because, you know, you may be wrong and hedging against your own limited knowledge of the Universe is never a bad strategy. I suggest a physical closed-end fund like the Sprott Physical Gold Trust (NYSE:PHYS) or stuff you can hold in your hand. There are other great investments out there but a good portfolio starts with gold.

Gold isn't money. It's something better than that. It is a form of savings that is protected from either inflation OR deflation because it is a near-zero-discount comparer of value that can be exchanged for any money anywhere in the world. And in an inflationary environment that value will always leak higher over time. The Fed wants inflation. It may risk a massive bubble in bonds to do it. The implications of that should be clear.

Additional disclosure: I own physical Gold and Silver and a more than a few Goats.

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Old 02-09-2013, 12:18 PM
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Locked and Loaded

The point is this: periodically there is a need to change the system, if only for change’s sake, because there comes a need for the masses to believe – truly believe – that change equals more fairness. The answer is not in which direction it changes, only that indeed it changes.

In Macro Polo last month we sought to make a general case for the inevitability of monetary system devaluation. Were he alive and active today we believe Lord Keynes would also argue for the same inevitable solution he knew was necessary in the 1930s – administered currency devaluation. Why? Not only is devaluation necessary and already underway in the marketplace, thereby giving it a sense of inevitability, but its proclamation would legitimize its public claim on fairness.
We think JMK would say it is time to devalue and reconcile accounts and he would use the same arguments today that he used in 1930 for government intervention.

Policy Administered Gold Monetization

Currency devaluation may be achieved through rotating currency interventions by treasury ministries and central banks or through a one-time coordinated asset monetization.

(Current debt monetization in the form of QE is NOT asset buying. To the contrary, it is central bank credit extension.)

When it comes to asset monetization, gold – rather than corporate shares, real estate or consumable commodities – is clearly the most established, convenient and socially acceptable medium for fiscal agents and monetary authorities to endorse. Why?

First, gold is equity already held on official balance sheets – treasury ministries and/or central banks.

Second, the purchase of gold through a currency devaluation process would not necessarily be an unfair confiscation of popular wealth, which is critical in democracies where governments and their agents are not supposed to take ownership of private property.

Through policy-administered currency devaluation, fiscal agents and monetary authorities would bid for gold in terms of their currencies.

Imagine the following pronouncement, if you will:

“Today, the Federal Reserve System announces a program of gold monetization in which the Fed offers to tender for any and all gold in qualifying forms at a price of US $20,000 per troy ounce. The program will be conducted through participating U.S. chartered banks, which will be instructed to properly assay gold and exchange it for U.S. dollars to be placed in customer bank accounts as deposits. Deposit holders will be entitled to make withdrawals in the form of dollars or gold at the fixed exchange rate.

By establishing the fixed exchange rate substantially above past market prices for spot gold, the Board of Governors believes enough gold will be tendered to produce a supply of new base money sufficient to adequately reserve the stock of U.S. dollar-denominated deposits in the global banking system. The Fed will monitor the tender process to ensure the soundness of the exchange rate and the ongoing viability of the US dollar.”


-The trillions in net unreserved bank obligations, including those appearing and not appearing on bank balance sheets, would be fully reserved.

-Banks would be healthier than ever and ready to lend.

-The debt on the balance sheets of businesses, homeowners, consumers, college graduates and car owners would still be there but would pale next to their new incomes, which would multiply more or less by the same amount as the currency devaluation.

-Tax receipts would multiply in kind – without raising marginal income tax rates – swiftly closing budget deficits without cutting spending (seriously).

-With coordinated and administered monetary devaluation all balance sheets would once again be leverage-able.

- The global economy would be almost immediately ready to grow. It would be economically stimulative.

We think administered currency devaluation must and will occur, as it is already occurring less formally. Banks and central banks would endorse it; their profitability would soar as lending soars and interest rates would remain low and stable. Politicians would happily champion it, as it would seem to the majority of the indebted and increasingly under-employed electorate to be a windfall solution.

Okay Smarty-Pants, When?


The Play
We think there are two almost riskless investment schemes to consider presently for levered portfolio managers that cocktail with central bankers and fiscal agents:

1) Mismatched duration carry trades (requires the knowledge that short term funding will never exceed the yield on portfolio longs)
2) FX cross rate positions (requires knowledge related to intervention timing and targets)

And there are two general investment areas to consider for the great unwashed investment class:

1) Long stocks/housing and other beneficiaries of leverage (only for those that think the global economy can lever more from current levels)

2) Long precious metals (if one does not think the global economy can lever more).

We think there is one play unlevered investors should avoid unambiguously:

1) Long cash and/or bonds as a secular holding.

Our overwhelming preference for precious metals and consumable inelastic resources stems from our view that the global economy is not yet in the process of de-levering (leverage is merely shifting), but that the markets will soon understand that it must de-lever soon through highly inflationary gold monetization.

We believe such a portfolio is the least risky, best risk-adjusted portfolio construction in the current environment because:

• the general performance of financial asset markets has become contingent upon maintaining low nominal (and negative real) global interest rates
• interest rates can be maintained at current levels only by growing central bank balance sheets
• the pricing of precious metals, precious metal miners, and consumable resource producers are significantly more undervalued within this context.

We think the table is set for certain precious metal mining stocks to begin outperforming most all other instruments in 2013. Not only have they been thoroughly discarded by investors over the last two years in spite of what we believe is a building perfect storm to send them much higher, but;

1) they have streamlined their resource targets and fortified their balance sheets;
2) marginal US capital gains tax rates were set in January at lower-than-collectible tax rates (including bullion and ETFs); and
3) it seems the world’s most sophisticated investors have already begun taking a decent slug of their market caps.

The fundamentals of their underlying product could not be better. Central banks cannot stop growing their balance sheets via debt monetization because higher nominal rates would force governments into bankruptcy and would kill the banking system before it is better reserved. The cost of this ongoing bailout is the slow death of un-levered savers and fixed income investors in real terms.

Through negative real rates, bond holders are effectively being cordially invited to sell their bonds to central banks, and to place the proceeds into equity in the form of corporate shares and real estate. Meanwhile, savers are being given the clear message to convert their cash from Dollars, Euros, Yen, etc. to precious metals. We think that what will eventually (or soon) occur will be the rare occasion when return-on-savings trounces return-on-investment, implying precious metals will outperform the great majority of financial assets (except for shares in precious metals miners and natural resource producers .

As the song goes: “you gotta know when to hold ‘em; know when to fold ‘em; know when to walk away and know when to run.” Most investors, by definition, will hold ‘em. Wealth has already flowed from the great majority holding unreserved paper claims to those that helped them leverage their balance sheets in return for fees. Bonds at current valuations are certainly not safe-havens, nor are the great majority of stocks “the new gold.” Looking forward, we think windfall profits – real profits adjusted for necessary currency devaluation – will flow to savers of scarce treasure and ownership shares in it.

Kind regards, Lee Quaintance & Paul Brodsky pbrodsky.qbamco.com

Dons Note: I don't believe that exactly this will unfold but my gold mentor FOFOA and I are certain that something similar and with the same effect will occur Globally when the gold price resets to its' real intrinsic value as a result of essentially a panic into real wealth (Gold), as investors/producers lose faith in fiat currencies. Gold may play a major role in that process as already there is a major and rapidly growing move by big players into PHYSICAL GOLD from unallocated gold accounts. (example see even countries either buying {China/Russia/Korea/etc etc} or repatriating {Germany/Venes} their gold.

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Old 02-16-2013, 02:47 PM
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Witches Brew, Collapse of the Keynesian Ponzi Economic Model

Fiat Currency Witches Brew, Collapse of the Keynesian Ponzi Economic Model

By: Ty_Andros

Throughout history Fiat currency and credit systems have failed upon the greed and avarice of those who controlled them and this episode will be no different. The currency and bomb...er...bond markets are GROUND ZERO of the unfolding Societal and financial system destruction. The money printed to date will be dwarfed by what is to come.

This is the greatest OPPORTUNITY in HISTORY for applied Austrian investing and the demise of the KEYNESIAN PONZI model.

The greatest transfer of wealth from those that hold/store it in paper to those that don't is underway!

Trillions and trillions of bombs...er...bonds (IOU's denominated in IOU's: doubly dangerous) and IOU's known as currency's have created a pile of inextinguishable and unpayable DEBTS and future LIABILITIES that are inconceivable to the minds of men. Here is a peek of the WORLDWIDE debts accumulated to this point from a recent missive by Kyle Bass:

Notice how debt is up 300% since just 2002. In 2012 this measure EXCEEDED $220 TRILLION DOLLARS. This pile is compounding at approximately 11% per year. This is income brought forward from the future and requires economic growth to be repaid. Do you think the global economy can repay interest and principle over the next 30 or 100 years? NO. How can a global $60 trillion dollar economy growing 3 to 3.5% service this debt? It can't. Some of it will default and the rest will be printed out of THIN air.

While growth properly adjusted for inflation is UNDERSTATED by 6 to 8% depending on who is doing the calculating chart 1 is from Dr. Tim Morgan of Tullet Prebon in London:

Now from www.shadowstats.com

Two different WELL DOCUMENTED methodologies coming to the SAME CONCLUSIONS!

This is the face of the soft default of the printing press (Adam Smith, Wealth of Nations) which is set to accelerate as Developed world welfare states run out of OTHER PEOPLES MONEY. If inflation is 6 to 8% greater than reported the value of global credit market debt is being reduced by the equivalent amount. This is called FINANCIAL REPRESSION and is set to continue and inflation has now become the core policy of GOVERNMENT!

To complicate the situation currency wars are raging across the globe with politicians trying to "Beggar thy Neighbor" to devalue their currencies to gather what little REAL economic activity is being created worldwide. Thirty-eight countries have negative or zero rates and they are all actively involved in devaluating and manipulating their currencies, take a look:

Source: Raoul Pal, Global Macro Investor

Rather than embrace reformation of Tax, regulatory and government policies to restart REAL growth. As Quantitative Easing to infinity escalates the reason to reform economies DISAPPEARS from politicians radar screens.

The banking systems and welfare states of the developed world are hopelessly INSOLVENT, wealth creation in real terms has collapsed and been replaced with nominal growth through runaway money printing out of thin air creating illusions of growth for the citizens of the respective governments.

Take a look at the Jaws of death (courtesy of www.zerohedge.com) representing the unfolding demise of the US dollar as RESERVE currency to the world:

Remember as the world reserve currency approximately 62% of CENTRAL bank reserves are DOLLAR DENOMINATED CASH and BOMB'S...er...Bonds. As Obamacare, Dodd-frank,exploding regulatory expenses and the NEW TAX RATES kick in ECONOMIC ACTIVITY and thus TAX revenue will plummet and SPENDING will skyrocket. This is true in Europe and Japan as well.

The Jaws of death is the black swan of black swans, it is the coming destruction of all fiat currencies as THE DOLLAR is the PRIMARY RESERVE behind them, along with other worthless paper RESERVE currencies: Euros, British pounds, Yen. All have governments and financials systems VERIFIABLY INSOLVENT, Running deficits of up to 10% and banking systems many multiples of the GDP. This is known as a death...er...debt spiral.

The world is caught in a currency and financial system EXTINCTION event which will be written about and studied for centuries into the future. Normally these episodes occur as an anecdote to prudent financial systems in other corners of the world. This episode is a global insanity at work and the bust will be PROPORTIONAL.

This FINAL destination was SET IN STONE on August 15th 1971 when President Richard Nixon closed the gold window to stop a GOLD run on the central bank of the United States. At that time he changed the US dollar from money to DEBT. The proverbial ROAD to SERFDOM began on that day. Here is what transpired on that day:

It is ground ZERO and source of the moral and fiscal insolvency of the developed world's politics and financial systems. On that day governments and bankster's dreams of unlimited expansion, redistribution from the private sector to the public sectors and theft of wealth through debasement became reality! FIAT CREDIT MONEY IS A WEALTH CONFISCATION DEVICE!

And here is the result:

This is the face of runaway central government courtesy of runaway LEVIATHAN credit creation. Properly adjust the median family income to the REAL CPI numbers and incomes in terms of real purchasing power has FALLEN 80%! Government has grown 12 times faster than NOMINAL income. It's why the middle class is desperate for sound money and the policies of GROWTH, SOUND MONEY and REAL wealth creation. Impoverished by the printing press and declining REAL wealth creation.

In order to sustain their living standards (as the money they are paid and store their wealth in loses purchasing power) the middle class has borrowed the money (printed out of THIN AIR) from the financial industry and become DEBT SLAVES to the banks.

For thousands of year's bankers and their government handmaidens have preyed upon the masses with PAPER currency systems until their actions hit the endpoint (debt compounds faster than money can be created and taxes collected fail to create the means to service it), the conflagration ignites (the public WAKES UP), and the stampede collapses their nations/empires into the dustbins of history. The operating statement then and now is:
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." ~ Ludwig von Mises
The elites are taking the latter route which they have throughout history. The outcome will be no different. For centuries POLITICIANS (Psychopaths and sociopaths) have risen to power and met their demise on the shoals of inflation and deflation.

Puppets of a global banking cartel that play the banjo of these cycles to gather wealth and power inconceivable to many and familiar to a few historians and Austrian economists. Investors need to learn how to fix their paper money (stop the theft of purchasing power) and play the banjo with them... This is what I do for a living!!!

REAL Wealth creation (producing more than you consume within a SOUND money economy creating capital to fuel savings and investment) has died in the developed world and in its place a PRINTING press has been substituted. It has created ILLUSIONS of growth during periods of economic collapse masking the truth to the broad publics of the developed world.

Additionally with the loss of PRIVATE property rights has destroyed the incentives to produce essential to MOTIVATE people to produce REAL wealth. Let's look at a bedrock of TRUTH:
  • Gold is the currency of KINGS
  • Silver is the currency of MERCHANTS
  • Credit is the currency of SLAVES
The unavoidable cleansing depression rolls on as the powers that be fight Mother Nature and Darwin tooth and nail to protect themselves and their entourage (public servants, leviathan government, crony capitalists, special interest elites) from the consequences of their greed, immorality and ignorance of the PAST history of man.

There is NO AVOIDING the final denouement as the developed world has slipped below the proverbial event horizon of a BLACK hole. The only question is when? How long will it take and how low will economic growth fall before the political and financial system policies in effect today are ABOLISHED.
It will only happen after the collapse. China had to descend to a level of economic collapse that caused an epiphany for Deng Xiao Ping as he declared "To get rich is glorious" in 1989, once private wealth rather the collective wealth was embraced human behavior took over and an economic GROWTH miracle has unfolded. The developed world is now ALL about collective wealth and until this changes the crisis of REAL wealth creation collapse will CONTINUE.

The developed world will sink into collapse until common sense becomes common again. Only a collapse which forces the changes necessary

In today's world ECONOMIC growth is a function of a printing press, consumption presented as production and credit creation versus the economic formulas that created the REAL wealth created by their descendants. REAL wealth can only be created by;
  • Growing it
  • Mining it
  • Building it
  • Manufacturing it
  • Being rewarded for providing more goods and services for less to consumers (aka Capitalism) (crony capitalism is More money for less goods and services mandated and controlled by government policies/central planning)
  • Having a sound or semi sound money financial system.
In order to do these things governments must create the conditions which allow these things to thrive. The elimination of the conditions for growth is what is driving the ECONOMIC collapse and have been PILING UP since Bretton Woods II on that fateful day in August 1971. Hedge fund giant Paul singer commented about the monetary tsunami recently:
"We do not know exactly what to do about it, except to urge policymakers to STOP substituting QE for sound tax, regulatory, labor, environmental, and fiscal policies."

Unfortunately this approach is NOTHING NEW as BIG GOVERNMENT progressives in the developed world have been using that recipe for over 40 plus YEARS. Bretton Woods II and the run on the bank was a result of substituting money printing for sound policies.

Now those unsound economic policies have COMPOUNDED since that time and are woven deeply into the developed world's economies and societies. What policy changes needed to restore growth in 1971 can be considered a roadside bomb next to the nuclear bomb of the policy changes required today.
"We all know what to do, we just don't know how to get re-elected after we have done it." " When it gets serious, you have to lie" ~ Jean Claude Juncker, prime minister of Luxembourg
Fixing the bad policies is NOW impossible until the pain of economic and societal failure FORCES the public servants and their handmaidens (crony capitalists, banksters, special interest elites) to change them or be destroyed. A real Marie Antoinette moment approaches. The GLOBAL elites have painted themselves into a corner from which there is only ONE ESCAPE ROUTE. THE PRINTING PRESS!

YOU must understand CURRENCIES DON'T FLOAT they just SINK at different rates! Here is an illustration:

Notice how uniform the debasement is between the various currencies? If your investment portfolios did not rise roughly the same amount in those years YOU LOST MONEY. This is a controlled DECLINE in value orchestrated by the BIS and global central banks in COORDINATED fashion.

Globally currencies are no more than JUNK BOND markets vying with each other to see which country have the least damaging policies inhibiting growth and attacking capital and investment. It is why China, Switzerland, Japan, South Korea, Australia and many others have a massive bid on them.

Additionally, the floats in these currencies are dwarves compared to the dollar. The US primary export is worthless dollars and as currency holders flee the printing press those currencies are bid to the moon; it is one of the reasons for CURRENCY wars to PRESERVE competitiveness.

Gresham's law (bad money pushes out good money) written large. Gresham's law applies to government and investing policies as well. Which side are you on? The bad "Keynesian" decisions or the sound "Austrian" ones?

Unsound money (money printed out of thin air, backed by nothing, yields nothing, always losing purchasing power and redeemable in nothing) is the father of the something for nothing societies we live in today. It is the impoverishment of the middle class as the money they are paid and store their wealth in is debased as is their future prospects. Lord Keynes and Vladimir Lenin knew this clearly (thank you Paul Brodsky of www.qbamco.com for the expanded quote):
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some (authors note: banksters, leviathan government, crony capitalists, and special interest elites).
The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.
As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose"
Of course, we can see this in every corner of the developed world today as they expand the money supply geometrically so do these DESTRUCTIVE PATHOLOGIES grow and destroy what created the wealthy societies with vibrant middle classes we once were. Our societies and standards of living are being DEBAUCHED courtesy of the institutions and governments you have placed your FAITH in! They are preying on you and eating you and your CHILDRENS futures.

As more generations pass away the new ones DO NOT KNOW sound policies from the unsound . THEY THINK MONEY and WEALTH can be PRINTED or confiscated from the producers of wealth (this used to be called SLAVERY) at the point of a government gun! Today's citizens are product of GOVERNMENT public schools which under central planning have created what Lenin called "USEFUL IDIOTS".
Adam Smith detailed how the skills and educations of countries citizens are a VERY IMPORTANT part of the WEALTH of Nations. China is now #1 and the United States has slid into the 30's. CAPISCH?

The REAL crisis began in 2001-2001 but was quickly PAPERED over by the maestro Alan Greenspan. Central bank balance sheets are UP approximately 600 to 700% since 1999 and will double or triple from here or we will all be thrown into the barter system when sovereigns and their financial and monetary systems collapse into BANKRUPTCY. Notice what money creation does for REAL money gold!!!

Meanwhile money creation has gone BALLISTIC (dwarfing previous episodes) to service the debt outlined at the beginning of this commentary to prevent the collapse of the PONZI economies they have created:

Now for the United States:

Do you think economic activity has GROWN 500 to 600% as base money supply has? This is how much money has been created to support PONZI values of FINANCIAL ASSETS also known as your stocks bonds and real estate. This is substitution of the printing press and asset inflation to MASK NO REAL ECONOMIC GROWTH only nominal growth from the illusions created FIAT currency. What has the purchasing power of your credit masquerading as money done?

Notice how all the runaway growth in government, banking, and asset prices begins in 1971? How has this affected your REAL portfolios?

The result of this is a number of illusions about the REAL value of your stocks and bombs...er...bonds. Take a look at how your portfolio looks when denominated in Fake Credit money versus REAL money (gold and black gold/oil).

Notice how the rally from the 2000 low's DISAPEARS? These illusions are all courtesy of the shrinking of the purchasing power of the currency they are denominated in. If most people who hold their wealth in stocks and bombs understood this there would be rioting in the street.

Take a look how (Malinvestments caused by runaway leverage) markets have FAILED at lower and lower rates of return since 1980 and debt to GDP (from www.myrmikan.com ) FAR exceeds the great depression era:

Interest rates are now zero, easing now comes from the printing press and negative real rates to KEEP THE ILLUSIONS INTACT. And the public is PILING into bonds and accumulating cash balances in inconceivable amounts take a look at this BUBBLE forming (courtesy of www.streettalklive.com) courtesy of fright of governments and distrust of WALL STREET:

Trillions and trillions of dollars have RUSHED into the bomb...er...bond markets worldwide. Junk, investment grade, sovereign bonds are at all-time values and issuance as CASH chases TRASH. Desperate for yield, perceived safety and not knowing what money is and the functions it must PERFORM to allow for wealth storage. Bonds are IOU's denominated in IOU's and if one borrower doesn't get you the other one WILL. What is a Sovereign, investment grade or Junk bond worth if it is denominated in a paper currency that is losing 6 to 10% a year in purchasing power?

Von Mises explains the dash for cash during this period:
"This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy." ~ Ludwig Von Mises
There are TWO reasons why INFLATION has not really accelerated to hyperinflation as all this money has been PRINTED and it is:

The second reason is the real economic activity must collapse as you saw in Zimbabwe, Weimar Germany, and as you see TODAY in socialist paradises known as Venezuela and Argentina. The developed world is just a step or two behind them, but rapidly following the same path...

In closing: Unsound FIAT/CREDIT money PRINTED OUT OF THIN AIR is the source of the crisis. It is all the public servants and banksters know, expect NO solutions other than this. They have no new tricks up their sleeves. They have a gun pointed at their heads. So it's inflate or die. You can count on them ducking and the PUBLIC (You) TAKING THE BULLET...

TRILLIONS and TRILLIONS of Dollars, Yen, Pounds, and Euros have piled up in banks and BOMBS...er Bond markets and sit directly in the path of the most destruction also known as central bank printing presses. At least 15% (low ball estimate) of the interest rate instruments in chart number 1 of this missive are WORTHLESS and sit as assets on the books of the financial systems and lender/savers.

Keep in mind ALL DEBT is PAID either by the lender or the borrower. By that calculation well over $36 trillion dollars (36,000 billion, also known as 36,000,000 million) has to default or have money printed to preserve it on the balance sheets of the financial systems. Can you see a "Crack up Boom" on the horizon? You can bet on it...

The public and institutions are in bomb...er...bonds at overvaluations which seldom if ever been seen. They are holding the BAG AT THE TOP. Can bonds go higher go higher? Yes. You cannot store wealth in them and you are losing 2 to 8% compounded annually, ditto for CASH. When the debasement has finally been achieved to RESCUE the sovereign's and their financial systems you will probably lost 40 to 90% of the wealth you stored in them.

Now Quantitative easing is limitless, the starts and stops are ending and the debasement is daily FOREVER to keep their illusions from being DISCOVERED by the public. In fact the public is demanding it, the financial industry is demanding it, the MAIN STREAM media is demanding it, and the OTHER predators throughout the system are demanding it.

They can never raise INTEREST rates again, to do so a collapse in assets will ensue. Even the mention of withdrawing the STIMULUS from a credible source will collapse asset markets. They use the threat of withdrawal to cool off markets knowing full well they can never do so. Overtly or covertly interest rates will be kept negative and financial repression will only mushroom.

Your stocks and bombs will APPEAR to hold or rise in value while continuing their crash in REAL purchasing power terms. 90% of the investors of the world are on the wrong side of the fence. They hold it in paper or HIGHLY leveraged investments. The baby boomers WILL NOT escape with their lifetimes worth of wealth creation in stocks, bombs...er...bonds and real estate!

To fail to re-inflate is to recognize the insolvency of the developed world sovereigns and banking systems. You can expect the banksters, crony capitalists, and special interest elites to fight REALITY tooth and nail to preserve the ability to victimize you as they have for DECADES.

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Old 02-19-2013, 08:59 AM
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QE & Gold Revaluation

QE & Gold Revaluation

Stewart Thomson
email: stewart@gracelandupdates.com
email: stewart@gracelandjuniors.com

Feb 19, 2013
  1. Staring all day long at the supposed “super top” head and shoulders pattern in place on the HUI index is a good way to create fear, but I doubt it will create any lasting wealth. It certainly won’t build any gold mines.

  2. Markets are ruled by fundamentals, not charts. The largest institutional liquidity flows occur when key fundamental reports are released.

  3. Fundamentally, gold stock investors need to focus on the history of quantitative easing.

  4. As the year 1933 began, the great depression was reaching its point of maximum intensity. To view that intensity, please click here now .

  5. Although official unemployment was approaching 25% then, the central bank of the United States was growing increasingly reluctant (much like the situation today) to accelerate quantitative easing, despite pressure from the US government.

  6. In a 1933 nutshell, the bank wanted to print less money, and the US government wanted more.

  7. By November of 1933, a frustrated central bank brought quantitative easing to a complete halt. How did the US government respond to that?

  8. The answer is that just two months later, on January 30, 1934, it passed the Gold Reserve Act. The US government revalued gold about 70% higher, and then continued purchasing it aggressively at that price, using printed money.

  9. The QE baton was thereby passed from the government T-bond “runner”, to gold bullion!

  10. In the mainstream media, a similar halt to quantitative easing is being widely discussed now. You should probably view quantitative easing, targeted at corporate & government debt instruments, as the ultimate central bank conventional weapon.
  11. In contrast, gold revaluation and money printing are the nuclear weapons arsenal held by government treasury departments.

  12. In a showdown between central banks and governments, governments win. They won in the 1930s depression, and they will win in this super-crisis.

  13. The days of Ben Bernanke demanding that President Obama “get the government’s financial house in order” before he ramps up QE more, are coming to a quick ending. The only question is, will it be a painful ending for Chairman Bernanke?

  14. His counterpart in Japan, Governor Masaaki Shirakawa, learned the power of government, the hard way. He resigns on March 19. Shinzo Abe essentially slapped the Governor’s face publicly, and is now demanding “performance” from the Bank of Japan.

  15. The bank is now claiming it’s not sure what new measures it could take, to expand the balance sheet. I assure you that Shinzo Abe is fully aware of the power he has, to order the Bank of Japan to begin significant purchases of gold with printed money.

  16. Gold is going higher, much higher. It’s going higher because government treasury departments are moving away from quantitative easing involving bonds, and towards QE involving gold. The gold bears will be destroyed, and everything they made you afraid of will seem ridiculous, in hindsight. There will be no currency war, but there will be co-ordinated devaluation of all G20 currencies against gold, just like there was in the 1930s.

  17. Gold won’t be confiscated in this crisis, for two reasons. First, the average person doesn’t own any gold, so there’s nothing to confiscate. Second, the crisis hasn’t produced the kind of breadlines that occurred in the 1930s, because OTC derivatives were marked to model in October of 2008. If they were marked to market, the system would soon close down, and massive breadlines would form very quickly.

  18. I consider the idea that the gold bull market is over to be “beyond ridiculous”. I would argue that for all practical government intents and purposes, it’s barely started.

  19. Ben Bernanke will soon have a hard decision to make. He can either accelerate QE, or he can pout in a corner, while President Obama dons a gold revaluation mask. Ben just watched Shinzo Abe dispose of Masaaki Shirakawa, like a child disposes of a broken tinker toy. Ben also knows what President Roosevelt did in the great depression, when the central bank played “tough guy” with government. He knows his history very well.

  20. Ben Bernanke is pushing his luck with President Barack “the O Man” Obama, and tomorrow’s ultra-important Fed minutes report is going to tell you whether he has pushed just a little too hard, or if he’s ready to follow the orders of the President of the United States.

  21. I would argue that Chairman Bernanke is pushing President Obama deliberately, because he wants the Treasury to take QE to the next level, but he can’t say so publicly.
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Incredible confusions Part 1: ‘Positive Money’ and the fallacy of the need for a state money producer

By Detlev Schlichter On January 29, 2013

Photographer Graeme Weatherston.

I am usually inclined to encourage the inquiry of the fundamental aspects of money and banking. This is because I tend to believe that only by going back to first principles is it possible to cut through the thicket of widely accepted but deeply flawed theories that dominate the current debate in mainstream media, politics and the financial industry. From my own experience in financial markets I can appreciate how convenient and tempting it is in a business context, where quick and easy communication is of the essence, to adopt a certain, widely shared set of paradigms, regardless of how flimsy their theoretical foundations. Fund managers, traders and financial journalists live in the immediate present, preoccupied as they are with what makes headlines today, and they work in intensely collaborative enterprises. They have neither the time nor inclination to question the body of theories – often no longer even perceived as ‘theories’ but considered accepted common wisdom – that shapes the way they view and talk about the outside world. Thus, erroneous concepts and even outright fallacies often remain unquestioned and, by virtue of constant repetition, live comfortably in the bloodstream of policy debates, economic analysis, and financial market reportage.

This goes a long way in explaining the undeserved survival of a number of persistent modern myths: deflation is the gravest economic danger we face; Japan has been crippled by deflation for years and would grow again if it only managed to create some inflation; lack of ‘aggregate demand’ explains recessions and must be countered with easy monetary policy; and money-printing, as long as it does not lead to higher inflation, is a free lunch, i.e. we can only expect good from it. None of these statements stand up to scrutiny. In fact, they are all utterly absurd. Yet, we can barely open a newspaper and not have this nonsense stare us in the face, if not quite as bluntly as stated above, than at least as the intellectual soil from which the analysis or commentary presented has sprung. Deep-rooted misconceptions can only be dismantled through dissection of their building blocs and a discussion of basic concepts.

The dangers of going back to basics
However, going back to basics and to first principles, analyzing critically the fundamental aspects of our financial system, is not free of danger. Here, too, lies a minefield of potentially grave intellectual error, and when things go wrong here, at the basic level, the results and policy recommendations derived from such analysis are bound to be nonsensical too, if not even more nonsensical than what the mainstream believes. In this and the following essays I am going to address some of the erroneous notions at the fundamental level of money and banking that seem to have gained currency in the public debate of late.

I get periodically confronted with these confusions through readers’ comments on my website. Some of the questions and suggestions expressed there reveal the same, or very similar, errors and misunderstandings, and these often seem to have their origin in other publications circulating elsewhere on the web. Among them are the following fallacies, in no particular order:
  • The idea that the charging of interest, or in particular the charging of interest on money, is a fundamental problem in our financial system.
  • The notion that there must be a systematic shortage of money in the economy because banks, through fractional-reserve banking, bring into circulation only amounts of money equivalent to the principal of the loans they create but not the necessary amount to pay the interest on these loans.
  • The notion that it is a problem that money-creation is tied to debt-creation (again, as a consequence of fractional-reserve banking) and that it would be possible and advantageous to have the state issue money directly (debt-free) rather than have the banks do it.
  • The idea that schemes are feasible that allow the painless shrinkage or even disappearance of the national debt.
All these ideas are nonsensical, based on bad economics and fundamental logical flaws, and to the extent that they entail policy proposals, these policies, if enacted, would not only not give us a stable and more prosperous economy but would surely lead to new instabilities or even outright chaos.

None of these misconceptions originate, or even resonate, as far as I can tell, with the ‘mainstream’. The mainstream– the financial market professionals, the central bankers, financial regulators, and the media – remain resolutely uninterested in dealing with fundamental questions of money and banking for the reasons given above. Here, the discussion continues to center on how the economy can be ‘stimulated’ more, what ‘unconventional’ policies the central banks may still have up their sleeves, and if the central banks need new targets or better central bankers. Icebergs or no icebergs, these deckchairs need re-arranging.

But, outside the mainstream, among certain think tanks, ‘activists’, bloggers and some economists, even those at the IMF, the appetite for fundamental analysis has grown. In many cases this has led to utter confusion, as I will show in this set of essays.

I should declare a personal interest here. I feel the need to make my disagreements with these ideas and the resulting policy proposals as clear as I can as, on more than one occasion, casual readers of my website seemed to have assumed some sympathy on my part with the erroneous ideas put forward by others. The mere fact that somebody else also focuses his or her attention on the system’s same fault-lines, such as, for example, the instabilities created by fractional-reserve banking, has led them to believe that we must share considerable intellectual ground and arrive at similar conclusions and policy recommendations. Sometimes this confusion may be the result of a lack of familiarity with my work, sometimes with a lack of knowledge of or attention to the precise concepts articulated by others. In any case, this confusion needs to be cleared, partly because I do not want to be associated with what I consider economic nonsense, and partly because articulating the differences – and highlighting what, in my view, are the mistakes of the other side – should further clarify the issues and improve the debate. As I already said, the mix-up is usually greatest when the topic is fractional-reserve banking.

So let me start right here:

Fallacy 1: As fractional-reserve banking is a source of economic instability, it would be better to force the banks to become fully-reserved banks with no ability to create money, and have the state create all money directly and inject it – wisely – into the economy. This would allow us to enjoy the benefits of more money without suffering the disadvantage of more debt. We may even use this process to reduce or eliminate existing debt.

This is the position of UK ‘think tank’ – or pressure group? – Positive Money, which has proposed legislative changes in the UK based on its analyses. Positive Money enjoys the support of the UK’s left-leaning ‘new economics foundation (nef)’ (so egalitarian and new age is nef that it doesn’t allow any capital letters undue dominance in the writing of its name) and of the Centre for Banking, Finance and Sustainable Development at the University of Southampton. Together these organizations have submitted a policy proposal to the Independent Commission on Banking.

The starting point of ‘Positive Money’s’ thesis – namely, that fractional-reserve banking is a source of economic instability – is essentially correct. But – as I will show in this essay – their analysis of fractional-reserve banking is incomplete, and their view lacks entirely any deeper understanding of money demand and of how changes in money demand are being met naturally in a market economy. Moreover, Positive Money has no perception of the necessary – and necessarily disruptive – effects of money-injections into the economy, regardless of who injects the money, and seems completely blind to the obvious disadvantages of channeling all new and free money through the state bureaucracy. Having shown – a bit flimsily and without resorting to any theories of capital or business cycles – that fractional-reserve banking is problematic Positive Money seems to have exhausted its critical faculties and jumps hastily to the conclusion that the privilege of money-creation should be given to a wise, independent and benevolent state agency. The arguments of Positive Money are economically unsound and politically naïve and dangerous.
If these resolutely anti-banking and pro-government proposals sound familiar to readers of this website, it is because they resemble the ones put forward by economists Benes and Kumhof in their widely quoted, less widely read and apparently even less understood IMF working paper 12/202, which I attempted to dissect here.

In the following I will not repeat my criticism of Benes/Kumhof. Neither Benes/Kumhof nor Positive Money provide a single economic argument to support the claim that the state is a superior guardian of the privilege of money creation. This is not surprising because there is no such argument. Yet, we have to be grateful to Positive Money for at least not resorting to the bizarre line of reasoning that Benes and Kumhof came up with, namely that in order to improve upon our modern monetary order we have to first discover the ‘true nature of money’, which is apparently not open to the theoretical investigation of economists but can only be unlocked by anthropologists who tell us how money came about in primitive society thousands of years ago, and by certain monetary historians who re-interpret the historical record to tell us that the privilege of money creation has always been safe – and thus, in a logical jump of breathtaking audacity, is assumed to always be safe in the future – in the hands of government. Such mysticism is an insult to any true historian and to any proper economist. Sometimes it may be better to have no explanation at all than to put forward such rubbish. So thank you, Positive Money, for sparing us this nonsense.

Some thoughts on fractional-reserve banking
Let us start by briefly sketching the key problems with fractional-reserve banking.

Most of what we use as ‘money’ today is deposit-money and thus an item on a balance sheet of a bank. This form of money has come into existence through the banking system’s lending activities, i.e. through fractional-reserve banking.

Banks, for as long as they have been around, have never only just channeled saved funds into investments, such as fund management companies do today. Banks have always also been in the business of creating money derivatives (or fiduciary media), that is, financial instruments that are treated as money proper by the public (usually because they were issued with a promise of instant redemption in money proper), and thus circulate in the economy next to money proper. This process allows banks to fund a portion (and potentially a large one) of their lending through their own issuance of money derivatives, although today hardly anybody even distinguishes any longer between money proper and bank-created money derivatives. In a way, it can be said that the banks extend loans by drawing cheques on themselves and having these cheques circulate in the economy as money (and in the hope that they won’t be cashed!). These ‘cheques’ used to be the banknotes of the olden days, when banks were still allowed to print them, today they are deposit money, items on a bank balance sheet, like your current account balance.

This form of banking has made a considerable expansion of money in the economy possible. Fractional-reserve banking has been conducted in some shape or form for 300 years, and its effects on the economy have been the focus of the attention of economists for about as long (Cantillon, Ricardo, Mises – to name just some of the most outstanding social scientists dealing with it). Economists have long suspected, and over time have become ever more successful in demonstrating, that this activity is the source of economic instability. Fractional-reserve banking – and the elasticity of the supply of money that it creates – helps explain business cycles.

In my book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown – I explain in some detail why elastic money is so undesirable, making use of the seminal work of Ludwig von Mises, in particular. In order to understand the full range of problems with fractional-reserve banking in a modern economy, we need some knowledge of the origin and role of interest rates, of the nature of what is called ‘money demand’, of investment and saving, and thus the rudimentary elements of a theory of capital. I cannot provide this in a blog post and I am not going to try. Let it suffice to say that the extra money created by banks lowers interest rates on credit markets and expands the supply of investable funds beyond the volume of available true savings.

Thus, investment and saving get out of line, mis-allocations of capital ensue, and what appears like a solid economic expansion for a while is ultimately revealed as an artificial and unsustainable credit boom that will end in a recession.

Sustainable growth requires investment funded by proper saving, i.e. by the voluntary reallocation of real resources from present consumption to future consumption (that is saving). Bank credit expansion creates a dangerous and fleeting illusion of the availability of more savings, which means more resources for investment projects that are in fact not there.

Should fractional-reserve banking be banned?
Do I have some sympathy for the proposal to ban fractional-reserve banking? Well, I do agree that an inelastic monetary system, for example a 100% gold standard, would be the most stable (least disruptive) monetary system. (Interestingly, this is not what Positive Money suggests, but more about that later.) But I do not believe that fractional-reserve banking should be and can realistically be banned. Not only because it has been around for so long but also because the exact definition of what is being used as money by the public in a dynamic monetary economy at any moment in time must remain fluid. Financial intermediaries will always succeed in periodically bringing ‘near-monies’ into circulation and thus become de facto money producers, at least for a while.

Furthermore, there is no legal case for banning fractional-reserve banking. It is, in my view, not fraudulent (as some modern Austrian School writers maintain) and there is no basis for banning it on standard property rights considerations. Moreover, there is also little need to ban it, as we can, in my view, rely on market forces and the superior regulators of capitalism – profit and loss – to ultimately keep it in check. (Some economists dispute this but here is not the place to discuss this point in detail. I will argue my case below. However, it is not even essential for a critique of the ideas of Positive Money.)

I think that the most straightforward and most obvious solution to these problems is that we remove the extensive framework – erected and maintained by the state – to actively support and systematically subsidize fractional-reserve banking. This means removing the institutions – implemented through acts of politics and maintained through acts of politics- of unlimited fiat money, which means unlimited bank reserves, and of lender-of-last-resort central banks that have the power to issue such unlimited bank reserves. Unlimited state fiat money and central banks are today the indispensable backstops for large-scale fractional-reserve banking activities of the nominally ‘private’ banks.

If fractional-reserve banking is disruptive – and I agree with Positive Money that it is – should we not – as a first step and before we even consider such authoritarian measures as universal bans – take away the state-run support system for fractional-reserve banking by which the banks and their clients are systematically shielded from the consequences of their activities, and through which the true costs of fractional-reserve banking are persistently being socialized?

Fractional-reserve banking and the state
What the folks at Positive Money fail to appreciate is that in a free market the ability of banks to create money is severely restricted. A deposit at bank X is only considered ‘money’ by the public to the extent that this deposit can be used for transactions with potentially everybody else in the economy, that is, not just with other customers of bank X but also any non-customers of bank X, and this is only the case if the deposit remains instantly redeemable in money proper (let’s say, gold or, in today’s world, state paper money) or can be transferred to any other bank. Thus, bank X runs the constant risk that its customers demand redemption of the type of money it CAN create (the deposit that sits on its own balance sheet) in a form of money that it CANNOT create: gold, state paper money or deposits at the central bank that are required for transfers to other banks. (Hint: these are the ‘reserves’ from which fractional-reserve banking gets its name!)

In an entirely free market, in which the state does not interfere in the economy and in which there is no central bank and no fiat money but in which money proper is necessarily a commodity chosen by the market, one the supply of which is outside political control or anybody else’s control for that matter, such as is the case with gold, in such a system fractional-reserve banking is an inherently risky enterprise.

The constant fear of requests for large redemptions will severely restrict the ability of private banks to lower their reserve ratios and fund large parts of their lending by issuing ever more money derivatives. Each additional bank deposit that is created out of thin air will increase the risk of a bank run, which, in a world without central banks, bailouts and state deposit insurance, must lead to the failure of the bank.

Sure, banks may still be tempted to issue more deposit money but it requires a somewhat strange view of human nature to expect that even after a number of bank runs, in which bank shareholders and most depositors were wiped out, financially speaking, fractional-reserve banking would merrily continue and could in total be conducted at anywhere near the scale it is today, when banks do not have to content themselves with strictly limited reserves and do not have to operate under the constant risk of business failure but can safely rely – or, at least rely to a much larger degree than in a free market and a hard currency system - on an unlimited and constantly expanding pool of fiat reserves provided by lender-of-last resort central banks, and where depositors need to pay no attention to the soundness of the various deposit-taking institutions as they simply rely on the blanket cover provided by the state.

Positive Money’s account of fractional-reserve banking makes it appear as if the state and its agencies were simply innocent and powerless bystanders in the business of money creation, rather than active promoters of and eager and indeed indispensable accomplices in the exercise. Positive Money creates the impression that bloated bank balance sheets, real estate bubbles and excessive debt levels had all been created by scheming and out-of-control private banks, entirely on their own accord and behind the back of an unwitting and clueless state, rather than constitute the inevitable consequences of an institutional framework built on the widespread belief that constant bank credit expansion is a boon to the economy.

The truth is that the state, beholden to the generally accepted fallacy that cheap money – and even artificially cheapened money- is a source of prosperity and that we should never allow credit contraction or deflation, has actively supported the gigantic money creation of recent decades. Without an essentially unlimited and ever cheaper supply of bank reserves from the state central banks, private banks could never have expanded their balance sheets so aggressively and issued such vast amounts of deposit money.

Or, to put this differently, had the state wanted to stop or restrict the creation of deposit money by the banks at any point, the state – in form of the central bank – could have done this at the drop of a hat. Restricting the availability of new bank reserves and/or making bank reserves more expensive would have instantly put the brakes on fractional-reserve banking. Not only did the state not choose to do this (at least not for the past few decades), to the contrary, whenever the banks had maneuvered themselves into a position where they thought it themselves prudent to stop or at least slow down their balance sheet expansion for a while in order to protect limited capital or their limited reserves, the central banks invariably cheapened bank reserves further, specifically to encourage further deposit money creation.

In the present context, any criticism of fractional-reserve banking must include, in order to be consistent and complete, a rebuttal of the false beliefs in the benefits of cheap money and criticism of the state’s systematic support for this activity. Positive Money evidently fails to appreciate the role of state institutions and government policy in the present process of money creation or it would argue much more simply and straightforwardly for the voluntary restriction or abandonment of these policies first, and it would be less eager to hand full control over monetary affairs to the state.

Money injections must result in resource re-allocations and mis-allocations
Furthermore, a proper understanding of fractional-reserve banking, one that is based on monetary economics and that does not stop at the most apparent symptoms of bank credit expansion, reveals that its core problem is its disruption of the pricing process that would normally co-ordinate economic activity smoothly (in this case, the co-ordination through market interest rates of voluntary saving with investment activity). The problem with fractional-reserve banking is precisely that it leads to persistent misallocation of resources. Would it not be sensible to ask if money injections through the state bureaucracy would also result in very similar or maybe even larger misallocations of resources or misdirection of economic activity?

This seems indeed very likely. We all know that whenever the market is replaced with administrative decisions by a bureaucracy, the results will be suboptimal as the bureaucrat has to make his decisions without the help of market prices, for if he would allow market prices to guide resource use and economic activity there would be no reason for his intervention in the first place. He might then as well leave everything to the market. It is precisely the political decision that the market should not be allowed to allocate resources through market prices and the profit and loss calculations of private enterprises that is the excuse for state involvement in the economy. According to the proposal by Positive Money, a state agency would determine centrally how much money the economy needs and then give this money to other departments of the state, which would spend it according to how it sees fit.

Positive Money does not provide any mechanism for how the state agency might determine who in the economy experiences a higher demand for money, and how the money would get to where it is needed. This is not surprising because there can be no such process, as I will explain shortly.

According to Positive Money, the state agency would simply make a macro-level decision as to the amount of new money supposedly needed and hand the necessary amount over to other departments of the state (without the standard process of double-entry bookkeeping that is used today, I might add, by money-creating central banks. According to Positive Money’s proposal, the money is simply created and handed over to the state bureaucracy as a gift.) By putting this money into the economy the state will, of course, exert a tremendous influence on the pricing and the allocation of resources and the direction of economic activity. This does not bother Positive Money. It is simply assumed that this must be better than having private banks do this via the credit market.

It is clear that Positive Money has not fully understood why fractional-reserve banking is harmful. For a functioning economy an uninhibited pricing process for all resources is required in order to direct the use of these scarce resources in accordance with the preferences and demands of consumers. Fractional-reserve banking systematically distorts the pricing process (it corrupts the coordinating properties of interest-rates) but Positive Money suggests to replace it with a process that does away with market prices altogether, and that consists of the arbitrary and politically motivated allocation of resources through a state bureaucracy (even if the central bank is, as Positive Money naively assumes, ‘politically independent’ the departments of the state that are the first recipients of the new money and that decide how the money gets injected into the economy are certainly not).

Apart from the well-established and justified reasons to be suspicious of substantial state control over any part of the economy, there are other reasons to reject this proposal. As I have shown in Paper Money Collapse, EVERY injection of new money into the economy, regardless by whom, has to occur at a specific point from where the new money will disperse through a number of transactions. This process must always – from the point of view of a smoothly functioning, uninhibited market economy – lead to disruptions. It can never be neutral and it can certainly never enhance the functioning of the economy, or lead to a better plan-coordination between economic actors. Money injections always lead to arbitrary changes in relative prices, reallocations of resources and redistribution of wealth and income, without ever enhancing the wealth-generating properties of the economy overall.

Money injections never benefit everyone, they always create winners and losers. It does not matter who injects the money.

Is a money producer needed at all?
Given all these problems, is it really necessary that anybody in the economy has the privilege of creating and allocating new money? Once fractional-reserve banking has been banned and money-creation by the banks has ceased (or, in my scenario, once the support for fractional-reserve banking has stopped and money-creation by banks has been much reduced), why not leave the economy to operate with a given and stable quantity of money?

Positive Money:
“But that doesn’t necessarily mean that the economy will run smoothly on a fixed amount of money – we may still need to increase the amount of money in the economy in line with rises in population, productivity or other fundamental changes in the economy.”
Positive Money does not explain why this should be the case, simply because there is no reason why this should be the case. The quote above reflects another widespread fallacy about money, namely that a growing economy somehow needs a growing supply of money. Many people will find intuitively that this makes sense. Yet, on further reflection anybody who thinks for a minute about the purpose of money and about how we all use money every day can see quickly that this statement is without any basis in fact and lacks any economic logic.

A growing economy does not need a growing supply of money and therefore does not need a money producer. On the basis of a stable and given supply of widely accepted money the public can satisfy ANY demand for money it may have.


The person who has demand for money never has demand for a specific quantity of money. Nobody who demands money has demand for a specific number of paper notes or a specific weight in gold coins or a certain quantity of bits on a computer hard drive (or whatever is used as money). We have demand for a certain quantity of money because of what we can buy with it, and this depends not on the quantity of the monetary asset as such but on its exchange ratio versus non-money goods. We always have demand for money’s exchange value, for what we can buy with it, for its REAL purchasing power. The value that money has for us, it has because of its purchasing power in trade. Money does not have direct use value, such as any other good or service.

Whether a certain quantity of cash is sufficient for me to carry with me for a good night out in London, depends on what that quantity of money can buy, that is, its real purchasing power. My demand for money is always a function of its exchange value, but money’s exchange value is necessarily subject to constant change as a result of the constant buying and selling of money versus non-money goods by the trading public.
If the public at large has an additional demand for money (i.e. an additional demand for purchasing power in the form of money) what will the public do? – Answer: the public will do what every individual does who wants to increase his or her holding of money, the public will reduce its present ongoing money-outlays on non-money goods (i.e. spend less and accumulate cash) and/or sell non-money goods for money (i.e. liquidate assets). This process will immediately exert a downward pressure on the money-prices of non-money goods and an upward pressure on the purchasing power of the monetary asset (the result is deflation, if you like, but in contrast to all the excited scaremongering about deflation in the media this is a normal market process and nothing to be scared of). By raising the exchange value of each unit of money this process will satisfy the additional demand for money naturally and automatically. The same physical amount of money is circulating in the economy but now this same amount can satisfy a larger demand for money.

Of course, the reverse will happen if the public lowers its demand for money. The purchasing power of money will drop (inflation) and the same amount of (physical) money will still be held but now at a lower exchange value per unit reflecting the lower demand for money.

These processes do not work for other goods or services. If the public has a higher demand for cars, somebody has to produce more cars. This is because the demand for cars is demand for the use-value that cars provide. Additional demand for cars cannot be satisfied simply by raising the prices of cars. But money is demanded for its exchange value, and additional demand for money can be satisfied (and is in fact satisfied) by a higher exchange value of money, i.e. lower money-prices of non-money goods.

Importantly, the processes described here would not just commence once we converted to a system of inelastic money. These processes are by necessity at work all the time – even now in our economy of constantly expanding fiat money and excessive fractional-reserve banking where they are, of course, usually overshadowed by the inflation from constant monetary expansion.

Money qua money has two characteristics: it is the most fungible good in the economy and it is demanded exclusively for its exchange value. From this follows that every individual can hold exactly the desired portion of his or her wealth in the form of money at any moment in time, and it equally follows that the public at large can hold exactly the desired portion of its wealth in the form of money at any time.

If more economic transactions are to occur in a given period of time money can circulate faster, and in fact, money then IS GOING TO circulate faster. If the demand for money holdings rises, this demand can be satisfied automatically and naturally by a rise in the purchasing power of the monetary unit, and in fact, the purchasing power of the monetary unit IS THEN GOING TO rise.

Via the constant buying and selling of money versus non-money goods the public automatically adjusts the velocity of money and the exchange value of the monetary unit, and thus the public is always in possession of precisely the amount of money purchasing power it needs. It is in the very nature of a medium of exchange that any quantity of it – within reasonable limits – is sufficient (and indeed optimal) to satisfy ANY demand for money.

There is no need to fear that this process would lead to undue volatility in money’s purchasing power, to constant fluctuations between inflation and deflation. If some people have a higher demand for money and start selling non-money goods for money, and this is beginning to lift the purchasing power of the monetary unit, then those who have an unchanged demand for money will readily sell some of their money for non-money goods in order to merely maintain the same real purchasing power in the form of money that they had before. Nobody can say that this process will lead to complete stability of money’s purchasing power. Such stability is unachievable in human affairs. But dramatic swings in money’s purchasing power can reasonably be expected to be rare.

Be that as it may, there is certainly no process available by which even the most dedicated, smartest and impartial monopolist money producer could anticipate the discretionary changes in the public’s desire for money balances and neutralize the resulting changes in money’s purchasing power through pre-emptive money injections or withdrawals. Once the changing demand for money has articulated itself in any statistical variables (and, in particular, in rising or falling prices) the public will already have satisfied its changed money demand through the processes described above. The whole idea of superior monetary stability through a central state monopolist is entirely absurd.

Equally absurd is the idea – this one not being advocated by Positive Money, I shall add – that fractional-reserve banks could play a role in satisfying the public’s demand for money. This is, I fear, another widespread fallacy, and it has its origin in a confusion of demand for loans with demand for money. Banks are not in the business of meeting their customer’s money demand (which they could not do even if they tried) but in the business of meeting their clients’ loan demand. Banks conduct fractional-reserve banking in order to extend more loans (on which they collect interest!), not in order to bring more money into circulation. The deposit money that is also created in the process (the ‘cheques’ the banks write to fund the loans) is simply a by-product of their expanded lending business (and this money is absorbed by the public through inflation).

By the same token, nobody (or at least hardly anybody) who has a higher demand for money will go to a bank, take out a loan and pay interest just to hold a higher money balance. Demand for money is not demand for loans. The people who take out loans do not have a high demand for money. To the contrary, they have a high demand for the goods and services that they quickly spend the borrowed money on. That is why they are willing to incur the extra expense of interest. As explained above, people who have a high demand for money cut back on spending or sell assets.

Positive Money starts with a correct observation, namely that today’s large-scale fractional-reserve banking is unnecessary and destabilizing for the economy. However, their suggestion of a ban on fractional-reserve banking strikes me as overly authoritarian, unnecessary and probably unpractical and unrealistic. Simply removing the state-run support infrastructure for fractional-reserve banking would be sufficient, in my view. Where the ideas of Positive Money become bizarre and dangerous is when they propose to install the state as an all-powerful central money creator. There is absolutely no justification whatsoever for such a function in a market economy. It is entirely unnecessary and would probably entail the same, if not worse, misallocations of capital that we suffer now. We would be guaranteed to stumble from one dysfunctional system into another dysfunctional one. The lessons from a proper understanding of fractional-reserve banking and of money demand are very different from what Positive Money suggests.

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Incredible confusions, Part 2: Of interest and the dangerous habit of suppressing it

Incredible confusions, Part 2: Of interest and the dangerous habit of suppressing it

By Detlev Schlichter On February 16, 2013

Usury; woodcut attributed to Albrecht Duerer

The idea that the charging of interest is unethical and should be banned has a long tradition in the history of human civilisation. It seems to have played a role at some point in all the major religions, certainly in Christianity, Judaism and Islam, and it is today promoted most strongly by advocates of Islamic banking.

As an economist I cannot (and should not) comment on matters of religion. Religion and economics deal with completely different aspects of human existence. Religion is about ‘ultimate ends’ and ‘personal values’. Economics does not deal with ends but with means. Economics does not tell anybody what his or her values should be. Contrary to what is frequently claimed – usually by those who do not understand economics – economics does not tell you that you should strive for more material goods and more services at your disposal.

But it so happens that we live in a world in which most people have personal aims or goals that involve having at least a certain material wealth, and in which most people prefer the possession of more material goods to less material goods; and the science of economics – for economics is a science, and in fact an objective, wertfreie (value-free) science – can then explain why people have a better chance of achieving these (material) aims if they use such social institutions as the division of labor, private property, trade, money, and many others. Additionally, the science of economics can show how these social institutions work, demonstrate the laws and regularities inherent in them, and can develop rules for their most appropriate use. Economics is purely about the means of social cooperation for the attainment of material goals. It never concerns itself with ultimate ends.

If most of the population became Buddhist monks tomorrow and would lose any interest in accumulating material wealth, would happily withdraw into monasteries and dedicate themselves to meditation, none of the principles and laws of economics would have suddenly become less true or invalid. The law of comparative advantage as articulated by David Ricardo would be as true on that day as on any other. The laws of economics would still apply just as the laws of gravity would. Of course, the interest in economic studies would probably diminish rapidly but that is all. Or, not quite all: Society would also be rapidly impoverished in material terms – even to the point of mass starvation –, and this the economist can ascertain with certainty, although nothing can be said about any compensating gains in spiritual wealth, of course.

If you believe that your God demands that if you lend money you should not charge interest, than there is nothing that I, as an economist, can say to you – other than, maybe, give me a call whenever you have some extra cash. The point at which I can – and should – comment is when you were to claim in addition that the observance of this rule would lead to a more stable and better functioning economy, that the non-charging of interest would not diminish society’s wealth but even increase it, or that the resulting economic structure would at least conform better to some generally accepted notion of fairness. Here we have reached a point where debate has become possible, not because I, as an economist, have intruded onto the religious ground of values and ultimate ends but because the advocate of religion has intruded onto the economists’ ground of the study of the laws for wealth creation.

I am not saying that all advocates of the non-charging of interest for religious reasons also claim that this would fix the economy. I assume that in the case of most religious rules the goal is spiritual not material, meaning the objective is to make the follower a better person, not better off. But in the wake of the financial crisis interest in fundamental aspects of our economy has increased, and within the ensuing debate it has certainly been argued by some that non-interest models of finance and banking could address fundamental problems of our present system, or even provide a functioning alternative to present arrangements. I have also encountered skepticism to the charging of interest, or, as it is often put, ‘interest on money’, by apparently non-religious commentators to my website.

Usury and the mainstream
To many readers this debate may at first appear as a bit of a sideshow. It does not appear to be one of the main areas of debate between economists, policy makers and financial market participants right now, at least outside Islamic finance. However, I fear that the representatives of today’s economic and political mainstream have much more in common with those who want to reintroduce usury laws than might at first appear. The vast majority may not ask for the banning of interest per se. However, it is today certainly the view of the vast majority that interest can and should be depressed to low levels in order to squeeze more growth out of the economy. It is today generally believed that, as long as inflation is not a major problem, policy makers may manipulate interest rates to lower levels with impunity. In fact, almost our entire financial infrastructure is designed for the utmost flexibility in the production of money under the guidance of the central bank, and this is done almost for the sole purpose of being able to ‘guide’ interest rates to the benefit of economic growth, which almost always means guiding them downwards. That is why the inelastic monetary base that once formed the foundation of finance and banking and that consisted of gold or silver, was replaced with the fully elastic base of limitless fiat money as the new bank reserves; and why in every economic downturn it is now the unquestioned obligation of monetary authorities to lower interest rates and to keep them low.

The advocates of the banning of interest (a minority in the present debate) argue that no interest makes for a better economy; the advocates of the periodic but frequently long-lasting artificial depressing of interest rates (an overwhelming majority in the present debate) argue that low interest makes for a better economy.

Both are wrong.

The answer from the economist should be this: Interest rates are market prices and they express, like all market prices do, the subjective valuations and preferences of market participants. In order for economic processes to be guided ultimately by the valuations and preferences of the public, prices need to remain completely uninhibited in their formation and in whatever impact they may exert on the employment of resources, including labor.

The financial crisis is not the result of the habit of charging interest but the inevitable consequence of the systematic distortion of interest rates– usually to the downside – through our fiat money arrangements and our monetary policy of making credit artificially ‘cheap’ in the mistaken belief that this aids economic performance.

Time preference
Interest is not confined to a monetary economy and not exclusive to the lending of money. Even in a society that does not know and use money, we could observe the phenomenon of interest. At its most basic level, interest is the difference between the present price of a good that is available today and the present price of a good of the same kind that is only available later. An apple today is worth more than an apple next week or next month. The ratio between these two prices is interest and it is an expression of time preference.

Time preference is not a psychological phenomenon in the sense that some people may have it and others do not. If you want something – and ‘wanting something’ is in fact the precondition for considering this something to be a ‘good’ – then you will value you it higher at a nearer date than at a date further in the future. As George Reisman put it so well: “All else being equal, to want something means to want it sooner rather than later.”

Let us assume you claimed to have no time preference in respect to a specific good. That would mean that you were indifferent as to whether you could obtain that good today or tomorrow; and tomorrow you would be indifferent as to whether you could have it that day or the next. Logically, this means you would be indifferent as to whether you obtained it at all, which means you wouldn’t really want it and it was therefore not a ‘good’ to you. (Quod erat demonstrandum.)

This would also mean you would never feel the urge to act to obtain it. Economics deals with action and action requires ‘wanting’ and ‘wanting’ logically entails time preference and time preference is the core element of interest.

There is nothing mysterious, suspicious, sinister or wicked about the phenomenon of interest.

If you lend a consumption good or a small amount of money to a close friend or a close relative, you may not ask to be compensated for not having this good at your disposal for some time, or for departing with some of your purchasing power for a while, but in the more extended network of human cooperation among otherwise unconnected individuals that makes for the modern society you would probably expect most people to ask for some compensation when lending to others, and for their counterparts to grant them some compensation, and none of this would appear irrational, unjust or forced.

The height of time preference is subjective and will be different from person to person, and different for the same person at different moments in time. Time preference and therefore interest is always an expression of personal, subjective valuation.

Market interest rates
The interest rates we observe daily in markets contain, of course, certain other elements in addition to time preference, although time preference remains the core ingredient. These other elements are usually a risk premium for the risk that the borrower cannot repay (credit risk) and a premium that money will have lost some of its purchasing power by the time the loan gets repaid (inflation risk). Thus, when lending to entities with non-negligible risk of default (most private entities) and in a currency that has a tendency to inflate (most paper monies), market interest rates will be higher than would be justified by time preference alone.

Under certain circumstances, these ‘premiums’ may actually turn into ‘discounts’. If the period for which the loan is agreed is expected to be a period of general deflation, than the nominal loan rate could actually be lower than justified by time preference, as the expected rise in the purchasing power of money during the life of the loan already constitutes a form of compensation. Under a strict gold standard the monetary unit could reasonably be expected to gradually gain in purchasing power over time (secular deflation, which means money has an inherent real rate of return), and loans to borrowers with relatively low default risk would be extended at very low nominal rates of interest.

Negative interest rates
Certain interest rates are presently very low, zero or even negative. To the extent that they are policy rates we have no trouble explaining them. They are not market rates and not even ‘prices’ in the strict economic definition. They are administrative decrees, determined by central bank bureaucrats, and not the outcome of the voluntary interaction of market participants. For what it is worth, I expect some of these rates to be lowered again, probably from near-zero into negative territory. But this is entirely a political phenomenon.

However, certain government securities, usually in the so-called safe-haven markets and usually those with shorter maturities, have also been trading at zero interest rates or even at negative interest rates (yields) lately. Very low administrative rates (policy rates) may have helped here but on their own they cannot cause this phenomenon. How can we explain it?

Deflation could be one explanation but I do not think it is the main driver, as other indicators of inflation expectations often still point to ongoing declines in money’s purchasing power. I think that in these instances the ‘credit risk premium’ has actually been turned into a ‘credit risk discount’.

Government bonds, in particular those with shorter maturities, are often held not for their return but their liquidity and safety. In these instances, they do not compete directly with equities or corporate bonds or real estate but with money. In the present environment there is, I believe, a strong demand for money holdings. Holding cash or cash equivalents allows investors to remain on the sidelines, to keep their firepower dry and wait how things pan out. But for many institutional investors holding large sums of money inevitably means holding sizable bank deposits and thus incurring considerable counterparty risk in respect to the fragile banking sector. Government bonds are expected to be (almost) as liquid as money proper or deposits, and to have lower counterparty risk than bank deposits. The demand for them is so considerable that investors even accept a negative yield, which means they are willing to pay a fee rather than collect a return for the privilege of ‘parking’ funds with the state.

A personal comment here: I think that these investors are sitting on a powder keg as I expect inflation to rise and concerns over sovereign solvency to intensify. But I have no problem understanding why certain market rates can become negative under certain conditions. It has to be stressed, however, that none of this means that the public’s time preference has disappeared or has even become negative. Time preference is always positive.

‘Interest on money’
Money – or at any rate, money proper – does not earn interest or any other income. Money is a medium of exchange. It has no direct use-value, only exchange value. Gold used to be money and gold does not pay interest (other than its inherent real rate of return in the case of deflation). Today, otherwise worthless pieces of paper are used as money and these paper tickets do not pay interest, either.

Already, the Romans knew that pecunia pecuniam parere non potest, money doesn’t beget money. You have to invest money to make a return, that is, you have to spend it.

If you pay money into a bank, ownership of that money passes on to the banker. You no longer own money proper but you now own a claim against the banker for the payment of money proper. You own a monetary derivative. For obvious reasons, the public today considers these derivatives as good as money proper (at least most of the time) but they are certainly not the same thing. If you hold money proper (cash) you hold a form of money that is not somebody else’s liability. Also, your bank deposit does not constitute a contract for safekeeping, as in that case you would have to pay the banker a fee rather than the banker paying you interest.

There is no such thing as interest income from holding money.

The manipulation of interest rates
There can be no doubt that a lot of the blame for the deterioration in the quality of economic debate can safely be put at the feet of Keynesianism’s half century of intellectual domination. Today, many people still seem to perceive the main economic problem to be one of a lack of overall activity, so the government should boost that aggregate by adding its own activity (through deficit spending) or by providing an extra dose of caffeine for the private sector in the form of low interest rates. Any activity seems to be better than too little activity, although nobody can explain how activity came to be so insufficient all of a sudden.

The key challenge for any economy, however, is not the aggregate level of activity but the coordination of the activities of diverse and usually unconnected individuals with different ideas, values, plans and objectives. Nobody participates in the economy for the sake of a higher GDP but only for the fulfilment of personal plans. A well-functioning economy is not one that delivers a certain aggregate of activity but that allows its individual participants to achieve their own individual objectives in the best possible way. (Remember the Buddhist monks.) For that we need uninhibited markets with unobstructed price-formation.

One of the important challenges of coordination for any economy is this one: To what extent should society’s available pool of resources be employed for the satisfaction of immediate consumption needs, and to what extent can resources be used to meet consumption needs in the more distant future, that is, to what extent can they become capital goods in the meantime? Evidently, this should be determined by the public’s time preference, and this is communicated to all actors in the economy via interest rates.

If the public has a high time preference it means it values present goods particular highly relative to future goods; it has a strong urge for present consumption; it has a low tendency to save; and market interest rates will tend to be relatively high. Every one of these sentences is simply a different way of describing the same phenomenon: the public has a high time preference.

Low savings availability on capital markets and high interest rates mean that entrepreneurs can only realize investment projects with the highest prospective returns. This changes naturally if the public lowers its time preference, increases savings, which lowers interest rates and encourages extra investment. Real resources are being shifted from present consumption to investment and allow for future consumption.
Saving and investing are the key inter-temporal decisions in an economy, and they are being coordinated by interest rates. Low interest rates are not necessarily good or bad. What matters is that they correctly reflect the preferences of the public.

The temptation to artificially lower interest rates is understandable. Investment increases the capital stock, and raising the amount of capital per worker is one of only two means we know of, of how to increase overall prosperity (the other being the division of labour). But a proper capital stock requires real resources, and those can only be made available through acts of real saving from real income. Printing more money and lowering interest rates on loan markets artificially creates the illusion of savings and it must lead to the dis-coordination between real saving and real investment, and thus to economic imbalances. Those are the true cause of financial crises and economic recessions.

Interest is an essential component of human action and the charging of interest rates an integral component of human cooperation on markets. Abolishing interest rates or depressing them through policy intervention will never make markets work better, will never make financial markets more stable, and will never make society more prosperous.

In the meantime, the debasement of paper money continues.

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