30 May 2009
US exporting Gold bigtime....
Over the course of 2007 / 2008 – more than 5,000 metric tonnes of “Gold Compounds” have been exported from the United States of America representing more than 62 % of reported sovereign U.S. gold reserves or about 24 times annual U.S. mine production.
5000 metric tonnes = 160 753 733 troy ounces [$128 billion+ at today’s prices]
The fact that industry funded trade groups like the World Gold Council and other professional gold consultancies, who shall remain nameless, have not reported these facts negates their credibility and illuminates them as dupes or willing shills. These fraudulent or ignorant organizations deserve to be shuttered and disbanded.
U.S. Trade Data Is Bogus
The value of these bullion exports significantly “skew” the doctored U.S. Trade numbers [coincidentally, also prepared by the U.S. Census Bureau] in an attempt to convey a picture that the U.S. financial position is improving.
The reality is this, when gold exports are backed-out, the U.S. Trade picture is decidedly worse.
The United States of America claims to possess a little more than 8,100 metric tonnes of sovereign gold stored principally at Fort Knox, Kentucky, West Point, N.Y., the Denver Mint and The New York Fed. The sovereign U.S. gold reserve has not been independently audited since the 1950’s during the Eisenhower Administration. GATA’s freedom of information requests are all about ensuring that the 8,100 metric tonnes of U.S. sovereign gold is still owned by the U.S.
In April, 2008 the Federal Reserve responded to GATA’s request, releasing hundreds of pages of worthless information with significant portions redacted. They also claimed that they were withholding hundreds of additional pages of documents. The status of the withheld documents is currently under appeal.
These stonewalling tactics – withholding details - are eerily similar to those employed by Messer’s Bernanke, Paulson and Geithner refusing to divulge frank details as to “who” the beneficial recipients were of TARP and TALF funds.
No credible audit of the Sovereign U.S. Gold Reserve will EVER be allowed – because the gold is simply not there.
Hope you have some.
Rob Kirby is proprietor of Kirbyanalytics.com and sales agent for Bullion Custodial Services.
http://news.goldseek.com/GoldSeek/1243605552.php
29 May 2009
Repeat after me, Money is not wealth ~ Liu
The conventional terms of inflation and deflation are no longer adequate for describing the overall monetary effect of excess liquidity recently released by the US Federal Reserve, the nation's central bank, to deal with the year-long credit crunch.
This is because the approach adopted by the Treasury and the Fed to deal with a financial crisis of unsustainable debt created by excess liquidity is to inject more liquidity in the form of both new public debt and newly created money into the economy and to channel it to debt-laden institutions to reflate a burst debt-driven asset price bubble.
The Treasury does not have any power to create new money. It has to borrow from the credit market, thus shifting private debt into public debt. The Fed has the authority to create new money. Unfortunately, the Fed's new money has not been going to consumers in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed institutions to allow them to deleverage from toxic debt. Thus deflation in the equity market (falling share prices) has been cushioned by newly issued money, while aggregate wage income continues to fall to further reduce aggregate demand.
Falling demand deflates commodity prices, but not enough to restore demand because aggregate wages are falling faster. When financial institutions deleverage with free money from the central bank, the creditors receive the money while the Fed assumes the toxic liability by expanding its balance sheet. Deleverage reduces financial costs while increasing cash flow to allow zombie financial institutions to return to nominal profitability with unearned income and while laying off workers to cut operational cost. Thus we have financial profit inflation with price deflation in a shrinking economy.
What we will have going forward is not Weimar Republic-type price hyperinflation, but a financial profit inflation in which zombie financial institutions turn nominally profitable in a collapsing economy. The danger is that this unearned nominal financial profit is mistaken as a sign of economic recovery, inducing the public to invest what remaining wealth they still hold, only to lose more of it at the next market meltdown, which will come when the profit bubble bursts.
Hyperinflation is fatal because hedging against it causes market failures to destroy wealth. Normally, when markets are functioning, unhedged inflation favors debtors by reducing the value of liabilities they owe to creditors. Instead of destroying wealth, unhedged inflation merely transfers wealth from creditors to debtors. But with government intervention in the financial market, both debtors and creditors are the taxpayers. In such circumstances, even moderate inflation destroys wealth because there are no winning parties.
Debt denominated in fiat currency is borrowed wealth to be repaid later with wealth stored in money protected by monetary policy. Bank deleveraging with Fed new money cancels private debt at full face value with money that has not been earned by anyone, that is with no stored wealth. That kind of money is toxic in that the more valuable it is (with increased purchasing power to buy more as prices deflate), the more it degrades wealth because no wealth has been put into the money to be stored, thus negating the fundamental prerequisite of money as a storer of value.
This is not demand destruction because decline in demand is temporarily slowed by the new money. Rather, it is money destruction as a restorer of value while it produces a misleading and confusing effect on aggregate demand.
Thinking about the value of any real asset (gold, oil, and so forth) in money (dollar) terms is misleading. The correct way is to think about the value of the money (dollars) in asset (gold, oil) terms, because assets (gold, oil, and so on) are wealth. The Fed can create money, but it cannot create wealth.
Central bankers are savvy enough to know that while they can create money, they cannot create wealth. To bind money to wealth, central bankers must fight inflation as if it were a financial plague. But the first law of growth economics states that to create wealth through growth, some inflation needs to be tolerated.
The solution then is to make the working poor pay for the pain of inflation by giving the rich a bigger share of the monetized wealth created via inflation, so that the loss of purchasing power from inflation is mostly borne by the low-wage working poor and not by the owners of capital, the monetary value of which is protected from inflation through low wages. Thus the working poor loses in both boom times and bust times.
Inflation is deemed benign by monetarism as long as wages rise at a slower pace than asset prices. The monetarist iron law of wages worked in the industrial age, with the resultant excess capacity absorbed by conspicuous consumption of the moneyed class, although it eventually heralded in the age of revolutions. But the iron law of wages no longer works in the post-industrial age in which growth can only come from mass demand management because overcapacity has grown beyond the ability of conspicuous consumption of a few to absorb in an economic democracy.
That has been the basic problem of the global economy for the past three decades. Low wages even in boom times have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007. The whole world is now producing goods and services made by low-wage workers who cannot afford to buy what they make except by taking on debt on which they eventually will default because their low income cannot service it.
All the stimulus spending by all governments perpetuates this dysfunctionality. There will be no recovery from this dysfunctional financial system. Only reform toward full employment with rising wages will save this severely impaired economy.
How can that be done? Simple. Make the cost of wage increases deductible from corporate income tax and make the savings from layoffs taxable as corporate income.
Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com.
This is because the approach adopted by the Treasury and the Fed to deal with a financial crisis of unsustainable debt created by excess liquidity is to inject more liquidity in the form of both new public debt and newly created money into the economy and to channel it to debt-laden institutions to reflate a burst debt-driven asset price bubble.
The Treasury does not have any power to create new money. It has to borrow from the credit market, thus shifting private debt into public debt. The Fed has the authority to create new money. Unfortunately, the Fed's new money has not been going to consumers in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed institutions to allow them to deleverage from toxic debt. Thus deflation in the equity market (falling share prices) has been cushioned by newly issued money, while aggregate wage income continues to fall to further reduce aggregate demand.
Falling demand deflates commodity prices, but not enough to restore demand because aggregate wages are falling faster. When financial institutions deleverage with free money from the central bank, the creditors receive the money while the Fed assumes the toxic liability by expanding its balance sheet. Deleverage reduces financial costs while increasing cash flow to allow zombie financial institutions to return to nominal profitability with unearned income and while laying off workers to cut operational cost. Thus we have financial profit inflation with price deflation in a shrinking economy.
What we will have going forward is not Weimar Republic-type price hyperinflation, but a financial profit inflation in which zombie financial institutions turn nominally profitable in a collapsing economy. The danger is that this unearned nominal financial profit is mistaken as a sign of economic recovery, inducing the public to invest what remaining wealth they still hold, only to lose more of it at the next market meltdown, which will come when the profit bubble bursts.
Hyperinflation is fatal because hedging against it causes market failures to destroy wealth. Normally, when markets are functioning, unhedged inflation favors debtors by reducing the value of liabilities they owe to creditors. Instead of destroying wealth, unhedged inflation merely transfers wealth from creditors to debtors. But with government intervention in the financial market, both debtors and creditors are the taxpayers. In such circumstances, even moderate inflation destroys wealth because there are no winning parties.
Debt denominated in fiat currency is borrowed wealth to be repaid later with wealth stored in money protected by monetary policy. Bank deleveraging with Fed new money cancels private debt at full face value with money that has not been earned by anyone, that is with no stored wealth. That kind of money is toxic in that the more valuable it is (with increased purchasing power to buy more as prices deflate), the more it degrades wealth because no wealth has been put into the money to be stored, thus negating the fundamental prerequisite of money as a storer of value.
This is not demand destruction because decline in demand is temporarily slowed by the new money. Rather, it is money destruction as a restorer of value while it produces a misleading and confusing effect on aggregate demand.
Thinking about the value of any real asset (gold, oil, and so forth) in money (dollar) terms is misleading. The correct way is to think about the value of the money (dollars) in asset (gold, oil) terms, because assets (gold, oil, and so on) are wealth. The Fed can create money, but it cannot create wealth.
Central bankers are savvy enough to know that while they can create money, they cannot create wealth. To bind money to wealth, central bankers must fight inflation as if it were a financial plague. But the first law of growth economics states that to create wealth through growth, some inflation needs to be tolerated.
The solution then is to make the working poor pay for the pain of inflation by giving the rich a bigger share of the monetized wealth created via inflation, so that the loss of purchasing power from inflation is mostly borne by the low-wage working poor and not by the owners of capital, the monetary value of which is protected from inflation through low wages. Thus the working poor loses in both boom times and bust times.
Inflation is deemed benign by monetarism as long as wages rise at a slower pace than asset prices. The monetarist iron law of wages worked in the industrial age, with the resultant excess capacity absorbed by conspicuous consumption of the moneyed class, although it eventually heralded in the age of revolutions. But the iron law of wages no longer works in the post-industrial age in which growth can only come from mass demand management because overcapacity has grown beyond the ability of conspicuous consumption of a few to absorb in an economic democracy.
That has been the basic problem of the global economy for the past three decades. Low wages even in boom times have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007. The whole world is now producing goods and services made by low-wage workers who cannot afford to buy what they make except by taking on debt on which they eventually will default because their low income cannot service it.
All the stimulus spending by all governments perpetuates this dysfunctionality. There will be no recovery from this dysfunctional financial system. Only reform toward full employment with rising wages will save this severely impaired economy.
How can that be done? Simple. Make the cost of wage increases deductible from corporate income tax and make the savings from layoffs taxable as corporate income.
Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com.
Willie sees COMEX default ahead
Well, so much for my timing calls day before yesterday. As we like to say elsewhere it was a case of the "sliver shrots geting curshed".
The financial cartel dominated by the United States and United Kingdom is soon to suffer some serious blows. The list of their financial crimes is as magnificent as it is long. Its list of victims is as prominent as it is long. The harbored resentment is great by many global players. They waited patiently for the Obama Admin to install a new group, but the old group remains due to a revolving door from the same smoky club, dominated by Goldman Sachs once more. Their influence, if not bribery, of the USCongress is in continuation, sufficient for unwanted obsequious approval. The regulatory agencies are from the same encrusted chambers replete with stench. The Coup d’Etat of the USGovt financial offices has not changed with Obama, who sounds like a refreshing leader but who is actually a marionette under control by those who selected him, favored him with publicity, then enabled his election. Nothing has changed except the rhetoric of change and the pace on the path to bankruptcy for a few icon firms like General Motors and Chrysler, if not the desperate cries from the 50 states suffering from insolvency. More prominent failures will follow, since nothing has been remedied. The channeled funds directed to Wall Street firms continue unabated. The bread crumbs to Main Street and the people continue unabated. Even the war continues unabated. Forget not that Marie Antoinette once said “Let them eat cake” before the French Revolution and the Storming of the Bastille. Today, the Bastille is the entire USEconomy where insolvent Americans are stuck.
Some might wonder what was the turning point that resulted in hired hitmen to be under contract against certain US financial markets. Some might say the failures of Lehman Brothers, American Intl Group, and Fannie Mae. Not so! In my opinion, it was the invasion in the South Osettia region of Georgia in August 2008. The events around Georgia, with the United States Military deeply involved, along with a certain tiny mischievous ally nation, lit a fuse that set off a chain of events. In time, events led to orders given by high level powers, for the US fraud kings on Wall Street to swallow the medicine no later than first thing Monday morning on September 15th. When the Jackass inquired as to the nature of the urgency leading into that understood stated deadline date, no answer was given. The guess of the Bank For Intl Settlements was submitted by me, and it was confirmed. Other sources, the USTreasury Bond creditors, also applied the pressure, it was told. Rumor was thick that death threats had been delivered to certain Wall Street executives, such as Paulson. Thus the pressure passed on to the USCongress for passage of T.A.R.P. funds. The disbursement of those funds have not been made public partly because Wall Street (read Goldman Sachs) does not want the US people to be aware of payoffs for bond fraud under death threats. Also, the Congressional Inspector has cited a few dozen recommendations for criminal fraud investigations of the same T.A.R.P. funds. The US financial sector has become a den of vipers, no longer the bastion of gentlemen, but rather of syndicate bosses.
COMEX STRESS NEAR A BREAKING POINT
Sources from GATA (the Gold Anti-Trust Action committee) report growing distress for participants in the COMEX gold contracts, where a commercial party is very short and in deep trouble. They have sold more gold bullion than they can deliver. They are likely one of the big banks who violate the law with impunity, with USGovt sanctioned protection. By that is meant they routinely do not post 90% of the metal as collateral that they illegally sell. This is naked shorting by any other name. There are reports of grave concern over the upcoming June gold option expiration. If too many deliveries are ordered, then the commercial shorts would be under stress for exposure for naked shorting. They will eventually be caught in a bind and default on contracts. The important loaded monthly contracts are March, June, September, and December. The COMEX has tried to limit the ability of buyers to take delivery, running them around in circles, and entangling them in red tape, all clearly restraint of trade endorsed by the USGovt. Such rules are not in effect for cotton or soybeans or crude oil or pork bellies. After all, a financial crime syndicate has taken control of the USGovt, ever since Robert Rubin took charge at the USDept Treasury in 1992. His major project was to gut the nation of its gold, for the private profit of his friends. Recall Rubin came from Goldman Sachs. Rubin was the author of the Strong Dollar Policy which brought ruin to the nation. Hey, just my opinion!
Background inventory strain has come from unexpected sources. The Germans have demanded that gold bullion held in US custodial accounts be returned to their owners, with physical gold shipped back to Germany. The Dubai bankers have demanded that gold bullion held in London custodial accounts be returned to their owners, with physical gold shipped back to the United Arab Emirates. They are following the hired German counsel. In all likelihood, neither US nor London sources are in possession of all the gold held in those custodial accounts, since at least some of it probably was improperly leased. By that is meant without owner permission or knowledge. So an uproar could come soon with charges of gold bullion theft, or at least failure of fiduciary responsibility. Theft is a simpler description.
China is the biggest gold producer in the world now, but none of its output is directed to the open market. Russia is a significant gold producer also, but none of its output is directed to the open market either. A near default occurred in early April from a close call to Deutsche Bank on 850 thousand ounces of gold. The tarnished bankers at D-Bank dug up over a million ounces on the quick from the ready Euro Central Bank mine shifts in the nick of time. Never ignore the basic fact that COMEX lies through its teeth about the gold bullion in its vaults, since audits do not occur, some is leased (replaced by paper certificates), and some is committed in some fashion to very wealthy parties (unavailable). Far less gold bullion rests in COMEX vaults than is advertised. All signals point to serious strain in COMEX gold supply.
FEEDERS FOR GOLD FULLY LOADED
Two important feeder systems continue to be USDollar weakness and USTreasury Bond weakness. More important than these is the systematic ruin of the major global currencies generally, but a convenient chart is not offered to track it. Just note the near 0% official rates dictated by the failed franchised Politburos known as central banks in most countries, or the movement toward 0%. The USDollar has broken below important support at 81. Expect it to fall further after more dithering. The long-term USTreasury Note has suffered a fast rising surge in its bond yield. Its target from different perspectives is 4.1%, and right quick. These two highly favorable charts will power the gold price to new highs very soon. Nobody knows how soon, but soon. Rarely does one see both the USDollar and USTreasurys fall in value simultaneously. They are now, and will provide a jet assist to gold, which is held back only by COMEX corruption. Their illicit maneuvers are more obvious and desperate with each passing week. Someday their actions might even be on the news. The imminent Standard & Poors debt downgrade of the UKGilt (bonds from British Govt) hit the credit market last week like a bolt of lightning. My belief is that it might have short-circuited the US-UK financial foundation, and burned out some major circuit boards. The US and UK share Third World finance characteristics. If a Fourth World existed, the US would merit it.
The gold price is on the verge of a breakout to new nominal highs. The chart demands it. It needs only a trigger, in a land where potential triggers dot the charred landscape. A gold event will be unavoidable. Its chronic strain has derived from the extreme disparities between the physical market mired in shortage, versus the paper market with unlimited supply. The tail is wagging the dog here, as it has been for years, soon to end. The silver price will easily recover to the 17 level in a flash. It has already surpassed the February high. It is loading up for the next little surge to resistance that awaits at the 17-19 range. The potential sling shot momentum boost for silver will be powerful, enough to send its price to 30 with ease. Think pendulum.
http://www.financialsense.com/fsu/editorials/willie/2009/0528.html
The financial cartel dominated by the United States and United Kingdom is soon to suffer some serious blows. The list of their financial crimes is as magnificent as it is long. Its list of victims is as prominent as it is long. The harbored resentment is great by many global players. They waited patiently for the Obama Admin to install a new group, but the old group remains due to a revolving door from the same smoky club, dominated by Goldman Sachs once more. Their influence, if not bribery, of the USCongress is in continuation, sufficient for unwanted obsequious approval. The regulatory agencies are from the same encrusted chambers replete with stench. The Coup d’Etat of the USGovt financial offices has not changed with Obama, who sounds like a refreshing leader but who is actually a marionette under control by those who selected him, favored him with publicity, then enabled his election. Nothing has changed except the rhetoric of change and the pace on the path to bankruptcy for a few icon firms like General Motors and Chrysler, if not the desperate cries from the 50 states suffering from insolvency. More prominent failures will follow, since nothing has been remedied. The channeled funds directed to Wall Street firms continue unabated. The bread crumbs to Main Street and the people continue unabated. Even the war continues unabated. Forget not that Marie Antoinette once said “Let them eat cake” before the French Revolution and the Storming of the Bastille. Today, the Bastille is the entire USEconomy where insolvent Americans are stuck.
Some might wonder what was the turning point that resulted in hired hitmen to be under contract against certain US financial markets. Some might say the failures of Lehman Brothers, American Intl Group, and Fannie Mae. Not so! In my opinion, it was the invasion in the South Osettia region of Georgia in August 2008. The events around Georgia, with the United States Military deeply involved, along with a certain tiny mischievous ally nation, lit a fuse that set off a chain of events. In time, events led to orders given by high level powers, for the US fraud kings on Wall Street to swallow the medicine no later than first thing Monday morning on September 15th. When the Jackass inquired as to the nature of the urgency leading into that understood stated deadline date, no answer was given. The guess of the Bank For Intl Settlements was submitted by me, and it was confirmed. Other sources, the USTreasury Bond creditors, also applied the pressure, it was told. Rumor was thick that death threats had been delivered to certain Wall Street executives, such as Paulson. Thus the pressure passed on to the USCongress for passage of T.A.R.P. funds. The disbursement of those funds have not been made public partly because Wall Street (read Goldman Sachs) does not want the US people to be aware of payoffs for bond fraud under death threats. Also, the Congressional Inspector has cited a few dozen recommendations for criminal fraud investigations of the same T.A.R.P. funds. The US financial sector has become a den of vipers, no longer the bastion of gentlemen, but rather of syndicate bosses.
COMEX STRESS NEAR A BREAKING POINT
Sources from GATA (the Gold Anti-Trust Action committee) report growing distress for participants in the COMEX gold contracts, where a commercial party is very short and in deep trouble. They have sold more gold bullion than they can deliver. They are likely one of the big banks who violate the law with impunity, with USGovt sanctioned protection. By that is meant they routinely do not post 90% of the metal as collateral that they illegally sell. This is naked shorting by any other name. There are reports of grave concern over the upcoming June gold option expiration. If too many deliveries are ordered, then the commercial shorts would be under stress for exposure for naked shorting. They will eventually be caught in a bind and default on contracts. The important loaded monthly contracts are March, June, September, and December. The COMEX has tried to limit the ability of buyers to take delivery, running them around in circles, and entangling them in red tape, all clearly restraint of trade endorsed by the USGovt. Such rules are not in effect for cotton or soybeans or crude oil or pork bellies. After all, a financial crime syndicate has taken control of the USGovt, ever since Robert Rubin took charge at the USDept Treasury in 1992. His major project was to gut the nation of its gold, for the private profit of his friends. Recall Rubin came from Goldman Sachs. Rubin was the author of the Strong Dollar Policy which brought ruin to the nation. Hey, just my opinion!
Background inventory strain has come from unexpected sources. The Germans have demanded that gold bullion held in US custodial accounts be returned to their owners, with physical gold shipped back to Germany. The Dubai bankers have demanded that gold bullion held in London custodial accounts be returned to their owners, with physical gold shipped back to the United Arab Emirates. They are following the hired German counsel. In all likelihood, neither US nor London sources are in possession of all the gold held in those custodial accounts, since at least some of it probably was improperly leased. By that is meant without owner permission or knowledge. So an uproar could come soon with charges of gold bullion theft, or at least failure of fiduciary responsibility. Theft is a simpler description.
China is the biggest gold producer in the world now, but none of its output is directed to the open market. Russia is a significant gold producer also, but none of its output is directed to the open market either. A near default occurred in early April from a close call to Deutsche Bank on 850 thousand ounces of gold. The tarnished bankers at D-Bank dug up over a million ounces on the quick from the ready Euro Central Bank mine shifts in the nick of time. Never ignore the basic fact that COMEX lies through its teeth about the gold bullion in its vaults, since audits do not occur, some is leased (replaced by paper certificates), and some is committed in some fashion to very wealthy parties (unavailable). Far less gold bullion rests in COMEX vaults than is advertised. All signals point to serious strain in COMEX gold supply.
FEEDERS FOR GOLD FULLY LOADED
Two important feeder systems continue to be USDollar weakness and USTreasury Bond weakness. More important than these is the systematic ruin of the major global currencies generally, but a convenient chart is not offered to track it. Just note the near 0% official rates dictated by the failed franchised Politburos known as central banks in most countries, or the movement toward 0%. The USDollar has broken below important support at 81. Expect it to fall further after more dithering. The long-term USTreasury Note has suffered a fast rising surge in its bond yield. Its target from different perspectives is 4.1%, and right quick. These two highly favorable charts will power the gold price to new highs very soon. Nobody knows how soon, but soon. Rarely does one see both the USDollar and USTreasurys fall in value simultaneously. They are now, and will provide a jet assist to gold, which is held back only by COMEX corruption. Their illicit maneuvers are more obvious and desperate with each passing week. Someday their actions might even be on the news. The imminent Standard & Poors debt downgrade of the UKGilt (bonds from British Govt) hit the credit market last week like a bolt of lightning. My belief is that it might have short-circuited the US-UK financial foundation, and burned out some major circuit boards. The US and UK share Third World finance characteristics. If a Fourth World existed, the US would merit it.
The gold price is on the verge of a breakout to new nominal highs. The chart demands it. It needs only a trigger, in a land where potential triggers dot the charred landscape. A gold event will be unavoidable. Its chronic strain has derived from the extreme disparities between the physical market mired in shortage, versus the paper market with unlimited supply. The tail is wagging the dog here, as it has been for years, soon to end. The silver price will easily recover to the 17 level in a flash. It has already surpassed the February high. It is loading up for the next little surge to resistance that awaits at the 17-19 range. The potential sling shot momentum boost for silver will be powerful, enough to send its price to 30 with ease. Think pendulum.
http://www.financialsense.com/fsu/editorials/willie/2009/0528.html
28 May 2009
"Gold's in a major 3" say the Gold Guru, the jailed long waver and the technician
They said that housing was a bubble and that the stock market was doomed so they might be right, but like then, early. But they likely have the big picture plain. Peter over at arabian money sumarises the last few penny drops as follows...
1. Gold reacts as currency support for the dollar enters mid June to a slow decline (that is the official definition of a strong dollar policy, really).
2. End of 2nd week going into the beginning of the 3rd week of June Gold launches towards and this time through the neckline of the reverse head and shoulders formation.
3. Gold rises to $1224 where it hesitates.
4. The OTC derivative market takes on the dollar as short sellers into dollar support.
5. This OTC derivative currency short position builds.
6. It is the US dollar where Armstrong will get his WATERFALL.
7. The main selling takes place when Israel makes a major miscalculation.
8. Hyperinflation is always and will continue to be a currency event.
9. Hyperinflation will be a product of the upcoming massive OTC derivative short dollar raid.
‘Should I be correct in the gold price action going into late June, it will fit Armstrong’s criterion for a move to $5,000′, adds Mr. Sinclair whose predictions are not always right, and who got similarly carried away last summer.
But there is the old mantra in forecasting that if you repeat something often enough then it will be bound to happen in the end. And to be fair to Mr. Sinclair the gold positive scenario stacking up right now does look unstoppable.
http://arabianmoney.net/2009/05/27/jim-sinclairs-immediate-predictions-on-the-gold-price/
1. Gold reacts as currency support for the dollar enters mid June to a slow decline (that is the official definition of a strong dollar policy, really).
2. End of 2nd week going into the beginning of the 3rd week of June Gold launches towards and this time through the neckline of the reverse head and shoulders formation.
3. Gold rises to $1224 where it hesitates.
4. The OTC derivative market takes on the dollar as short sellers into dollar support.
5. This OTC derivative currency short position builds.
6. It is the US dollar where Armstrong will get his WATERFALL.
7. The main selling takes place when Israel makes a major miscalculation.
8. Hyperinflation is always and will continue to be a currency event.
9. Hyperinflation will be a product of the upcoming massive OTC derivative short dollar raid.
‘Should I be correct in the gold price action going into late June, it will fit Armstrong’s criterion for a move to $5,000′, adds Mr. Sinclair whose predictions are not always right, and who got similarly carried away last summer.
But there is the old mantra in forecasting that if you repeat something often enough then it will be bound to happen in the end. And to be fair to Mr. Sinclair the gold positive scenario stacking up right now does look unstoppable.
http://arabianmoney.net/2009/05/27/jim-sinclairs-immediate-predictions-on-the-gold-price/
Lets invest in the American bubble ~ German Banks
The German banks became uneducated investors in US toxic waste with a sideline in eastern europe. While Germany avoided a housing bubble and did all sorts of interesting things in terms of energy policy it was the fatal mistake of state guarantees for the banks that had perverse consequences..
... thx to Charles Powell for the link and this vital debate....
To get a better understanding of the situation in Germany and the growing financial crisis affecting that nation's banks, we spoke last week with Hans-Joachim ("Achim") Dübel, CEO of FINPOLCONSULT (http://www.finpolconsult.de ) in Berlin, one of the leading and relatively few independent voices in the German housing finance community.
The IRA: Tell our readers about yourself and why your views on Germany and the financial markets there are well informed. We worked in the market for German bunds and other European government bonds from London years ago, so we know a little about the local banking scene.
Dübel: I started my professional career working in housing policy and eventually began to focus on housing finance. I worked at the World Bank focused on housing finance policy globally and even worked for Westdeutsche Landesbank for a few months where I had a pretty traumatic experience. The traders basically dismissed all of the bank's economists and risk managers. They said they were running the bank properly using purely tactical, short-term trading methods. They would draw triangles on charts of market data and call that risk management. These were the types of strategies that eventually sunk the bank. You will recall from the 1980s onward that WestLB was recapitalized every few years, they have four historic state aid cases with EU competition authorities from the last 15 years. I got a very quick introduction to the real role of an economist in a German financial institution.
The IRA: Well, maybe the German traders have it right. Most contemporary risk management tools used in banks were designed by financial economists and are entirely ineffective. The whole Basel II framework, for example, is an economist's model, that is, a fantasy that has no link to the real world of finance and commerce. Professor Dick Richardson of the University of Texas wrote in 2001: "Economics is an artifact of human imagination, and the agreement among certain humans who "play the games" together -- thereby it is a social technology." But we digress. What did you do after WestLB?
Dübel: I pursued the housing field as a private consultant economist to agencies such as the World Bank and the EU Commission. My role here in Germany is somewhat that of the critic. Since I have worked outside of Germany and have relative freedom, I decided to use my perspective to provide an independent voice here. The sad fact is that there is virtually no discussion in the policy community in Germany regarding the financial crisis. Most of the professors in the universities in Germany that work in finance have their chairs co-sponsored by banks, so they are effectively gagged in many cases. It is easy to become a critic in Germany because there are so few independent voices. The political parties are deeply involved in finance through the state sector banks, (Landesbanken and Sparkassen ) and the private financial community takes its lead from Deutsche Bank (NYSE:DB), which has decided not to make a public issue out of the problems in the state sector institutions.
The IRA: Wait a minute! Was it not DB that sold most of the toxic waste to the Landesbanks? Our recollection is that it was DB, Merrill Lynch and Lehman who were the key perpetrators in stuffing the Landesbanks with toxic waste. No wonder the DB does not want to talk about it! We have the same problem in the US, namely that the larger banks have taken control over the federal government, leaving the real economy and the population at the mercy of Wall Street. Our colleagues who work in the financial world are mostly employees and thus are cowed into silence. The lack of critical debate in the US financial community regarding the crisis is stunning.
Dübel: I am familiar with the problem in the US from colleagues who ran into problems with the GSEs, particularly Fannie Mae. Funnily enough, we have the same problem in Germany with most bank lobby groups, and public banks are not different from private in that respect. They are very aggressive in going after independent economists to attack their reputations if they have the temerity to criticize them. I think both countries have a serious oversupply of bank lobbying groups, which mostly are staffed with aggressive lawyers.
The IRA: We used to get a lot of flak from Fannie and Freddie, but this is not a problem now. In fact, after we published a brief comment about the role of Peer Steinbrück in creating Germany's financial crisis, we started getting calls from the German press before we even ran this interview. One reporter from the German edition of the Financial Times called last week demanding to know the identity of our sources. We gave our usual reply: "Foxtrot Oscar."
Dübel: What Fannie Mae did in her worst days, which I think are behind us, was to put indirect pressure on people who were critical, usually to try to get them fired. German banks play the same games, some as direct as Fannie, but most are more subtle, working behind the scenes to undermine critics. The fact is that everything in Germany is public; all of the data that I use in my work is freely available, yet nobody looks at it or uses it in the public debates. The Brussels declaration of 2001 that allowed the Landesbanken to issue dozens of billions of state-guaranteed bonds without any other purpose than regulatory arbitrage clearly names the German politicians who were the negotiators. Each of these men are also the key figures in creating the problems within the Landesbanks in each state, but still there is virtually no debate in Germany regarding these issues.
The IRA: You stated that you think that the Germans are not given sufficient credit for their role in creating the subprime crisis. Start from the beginning of the story and explain for our readers how Germany reached its present predicament. We notice that Germany has moved forward with a very watered down version of its own plan for dealing with problem toxic assets in the banks. We also saw that Günter Verheugen, the EU commissioner from Germany, has been attacking the German banks and Finance Minister Peer Steinbrück. Is he a critic?
Dübel: Verheugen is at the end of his career. German politicians only speak up before retirement, if at all. It must be added here that we are currently in a state of "omertà" to use the Sicilian term - i.e. no politician of the coalition government will speak about the scandal before this fall's Bundestag elections. Both main parties are afraid of another Berlin. After the Bankgesellschaft Berlin scandal earlier this decade the CDU was reduced from governing party to near-oblivion status. It is a classical prisoners dilemma, nobody wins politically from a debate. And what the main political parties do not want to be debated does not make it into the public media, and even most private media.
The IRA: Sicilians say: "He who is deaf, blind, and silent will live a hundred years in peace." What was the condition of the German housing market in 2005? Was there a boom in housing prices or was the crisis purely caused by poor investment decisions by the state banks?
Dübel: The level of housing prices in Germany was relatively stable and - as German economic conditions in general - had no serious impact on the Landesbanken. During the current decade, the Landesbanken were not lending at home, but rather converted themselves into mutual funds to invest in international securities. The crisis started with the decision in the 1990s by the EU Commission, which had launched an EU Treaty violation process against Germany after the protest of German private banks against one of WestLBs recapitalizations. The EU argued that the state guarantees for the Landesbanken were illegal. Many publications such as the Financial Times and The Economist wrote about this extensively. We had the great Milan-based economics professor, Mario Monti, as the head of the EU competition authority. He pushed through the proposal against the combined weight of the German public bank lobby and both levels of government - state and federation. There was a protracted debate and finally, in early 2001, the EU decided to terminate the use of state guarantees by 2002. However, the public bank lobby in Germany continued to fight the proposal and basically sent federal and state government representatives to negotiate with Brussels.
The IRA: Was the counter-attack successful?
Dübel: Partly. The result was a postponement of the end of issuance of state guaranteed debt for all banks from 2001 to 2005, where the last bonds guaranteed would have to mature by 2015. The salient point is that there was only a time limit set in the agreement, but there was no volume limit, so the German state banks started to issue massive amounts of state-guaranteed debt after 2001. This money was not used to finance German or even European lending but simply to park funds in investment vehicles and make more money on it to boost their bottom lines. A nice euphemism they found for this is 'Kreditersatzgeschäft' (credit substitution business). If you look at research reports in the period, you will see that the volume of guaranteed bonds shot up dramatically after 2001 and especially during 2004 and early 2005. Critically, every guarantee given by the Landesbanken themselves would benefit from the guarantee standing behind the Landesbanken , so they kept guaranteeing ABCP-conduits and other off-balance sheet vehicles such as SIVs that boomed precisely during the critical period.
The IRA: So the German Landesbanks started to issue debt and buy toxic assets from DB, Merrill and Lehman? Great. Was there any legitimate purpose for this debt? How much are we talking about?
Dübel: The direct extra issuance by the banks following the EU transition period decision was already massive and totaled probably €100 billion. However, if you consider guarantees given by Landesbanken you might well end up at €200, perhaps €300 billion in total exposure. Those guarantees were called upon when the banks and investors funding ABCP and SIV called in their capital during 2007. Moreover, there was a considerable balance sheet shift inside Landesbanken in particular from interbank market exposures to securities holdings. All in all, the data leaking out of various sources suggest that Landesbanken today sit on problem assets of €300-500 billion, much of them funded effectively with German government debt. Individual banks, such as WestLB, LBBW, BayernLB, HSH Nordbank sit on high double-digit € billion exposure positions. Compare these pictures to peak outstandings of US high-risk markets in €, e.g. Subprime RMBS of € 575 billion in 2007, and you get an idea about to what extent the Landesbanken funded Wall Street. Take all high-risk securities markets at peak levels together - from leveraged loan CLOs to Alt-A RMBS, and I think we are looking at some 15% of the Buy Side demand.
The IRA: Do you think that the Landesbank management just abused the political system?
Dübel: Politicians were always broadly in the picture regarding strategy; remember that they staff the boards (Verwaltungsrat) of the Landesbanken against good remuneration. They knew that the typical loan portfolio for a Landesbank was only 20-25% of total assets, so the rest of the structure was typically securities. Before 2001, the pressure set by the EU had lead to all types of strategies to spur loan growth. For example, the HSH Nordbank based in Hamburg and Kiel focused on ship finance, WestLB had an aircraft engine finance business. There were also regional expansion strategies, with HSH investing in Scandinavia, WestLB in Britain, BayernLB in South-Eastern Europe. Some have entered retail banking by acquiring other banks (e.g. BayernLB), so the business models were not homogeneous. But these markets were already overcrowded, and nobody in the political system dared to put pressure on the Sparkassen to accept the transfer of retail business to the Landesbanken to stabilize their business models. The Brussels agreement reached by German politicians against a reluctant EU was just the final nail in the coffin: it is like a parent who gets a child to finally focus on studies, only to have a rich uncle show up, give the child $1,000 in cash and says "do what you want" with the money. A political decision completely destroyed market discipline.
The IRA: Well, we know that story. Citigroup (NYSE:C) was doing precisely the same thing in the US during that timeframe under the direction of board members like Robert Rubin. The US banks also expanded their leverage via the issuance of non-guaranteed structures such as SIVs. At the end of this year, assuming that the FASB does not get rolled again a la fair value accounting, all US banks must repatriate hundreds of billions of dollars in off-balance sheet ("OBS") assets, which will drive down capital levels dramatically. The notion of banks repaying their TARP equity this year is ridiculous if you include OBS assets in the analysis. Yet isn't it remarkable that C and the German banks were essentially all doing the same stupid things? The common denominator must the global sales push from the large Sell Side dealers like DB, Merrill and Lehman, among others.
Dübel: The dealers in Germany, DB included, are certainly co-responsible. The dealers always looked at the Landesbanken with their distorted incentives as easy prey. C surely fell into the same trap after Glass-Steagall was repealed; to me the important Citi analogy there is rather the Garn-St.Germain Act of 1982 that allowed the US S&Ls to expand into commercial lending. To me it looks as if C and Landesbanken are not very far apart in their clout on their domestic political system, just the flavors of the favors differ.
The IRA: There are no coincidences on Wall Street. Whatever toxic waste the dealers are feeding to Buy Side firms in the US is also being offered around the world. The Sell Side firms are not clever enough to have a different sell message for each market. We can recall the first adventures of Solomon Brothers in Europe selling CMOs to Belgian dentists in the 1980s. It was a slaughter, but none of the regulators in EU or US ever said a word.
Dübel: In the US and particularly with C, the problems in the asset-backed commercial paper or ABCP market was very similar to what was happening in Germany. This was very typical of the Landesbanken, who basically have no set business model. They saw the yield curve and played the markets. They demanded "AAA" ratings with a juicy spread pickup, which means squaring the circle. If you put together all of the factors, the lack of limits on state guarantees, the lack of controls on the activities of the Landesbanks, and the sales pressure from the global securities dealers, you have a real toxic mix.
The IRA: What we find startling about your tale is the EU here is the more conservative, fiscally responsible party, while the German bankers, who are reputed to be so conservative, seem instead to be completely reckless cowboys. It's as though the entire German financial system was run like Fannie Mae, with the Barney Frank (D-MA) and other American politicians making financial decisions from Capitol Hill and carving out special slush funds for their own personal use. Is this a fair comparison?
Dübel: Yes, absolutely. And it is a complete conflict of interest. The typical German savings or state bank has 25-30 board members. This becomes a harbor for politicians, who are given sinecures on these boards when they retire. The campaign finance system in Germany is under continuous scrutiny, but meanwhile practices like packing the boards of banks with retired politicians continues. But we see some change: there is a big uproar currently as BAFIN has started calling for minimum banking qualifications of supervisory board members, which typically excludes your local mayor.
The IRA: This is why we constantly lecture our fellow citizens in the US about the threat of the Democrats and their plans to supplant American democracy with a Euro-style corporate state. If you want to see how the nationalization of Chrysler and General Motors (NYSE:GM) will affect American politics and push the US further in the direction of authoritarianism and political dysfunction, it seems that Germany provides a case in point.
Dübel: The other issue besides the practice of parking politicians on the boards of the banks is the role of municipal and state finance. The German municipalities own the Sparkassen, which in turn own as a rule of thumb half of the Landesbanken. And then you have the states owning the other half. Both are notoriously cash strapped and have been forced to make painful cutbacks, but the seeming profitability of the state banks provided at least the appearance of cash flow, which is now gone. That invites the use of greater leverage, of course.
The IRA: Of course.
Dübel: Take the example of Saxony, with a €16 billion state budget of which only half is financed by taxes - the rest comes from block grants, which are politically painful to acquire. Saxony's Landesbank SachsenLB ran off-balance sheet vehicles three times the size of the state budget before it collapsed in 2007. One single rescue loan arranged for LBBW's takeover of SachsenLB after the collapse was larger than the entire state budget. There is in theory a regulatory framework for the state and municipal finances, as every layer of government in Germany guarantees the next lower layer, but in practice there is no limit on the actions of the politicians much less disclosure.
The IRA: So it sounds like the situation in Germany was not about a bubble in the housing market but instead failed financial engineering motivated by the wrong incentives set by politicians.
Dübel: Yes, you must forget the word "mortgage" when you are looking at Germany. I am a housing expert, but this problem comes down to a lack of basic prudential and political controls in German banks. The state banks have entered and exited the mortgage market several times in the past few decades. Most recently, there has been a proliferation of direct banks providing mortgages, ING from the Netherlands and even the Postal Bank is involved. The irony of the Landesbanks is that they did not lose a penny on investments and loans Germany. All of the losses were caused by investments in foreign assets, primarily from the US. The overhang of assets was caused by the failure of the EU Commission to limit debt issuance by the German banks. Thus the question came: where to put the money raised via the issuance of debt? The US was the choice. Had there been a capital markets boom in China, the Germans would have invested there instead. The choice of asset selection was completely opportunistic and engineered by Wall Street. Don't forget that many other nations in Asia and the Middle East were given the same treatment by the American banks.
The IRA: Even the Chinese? We have not really heard much noise coming from China, but then again, data from Chinese governmental and financial institutions is not really credible.
Dübel: Actually the Chinese were relatively more clever than the Germans! The Chinese basically invested almost nothing in subprime or alt-a or zeros. A typical German Landesbank would be full of these securities.
The IRA: In the form of collateralized debt obligations? Wonderful. So we put the German banks in the same category as the US banks and Buy Side funds that ate all of the CDOs and other toxic waste produced in the US and the City of London?
Dübel: Exactly. The Landesbank is the prototypical example of an uneducated investor, because of lack of incentives to really develop an interest in education.
The IRA: We call it "institutional retail," which are basically Buy Side shops that do not have the ability to independently rate or analyze securities and must therefore depend upon the Sell Side dealers for pricing. The Sell Side dealers prey upon these public and private funds, but regulators in the US do nothing.
Dübel: This is an international problem, and it seems exacerbated with financial globalization. The second-rate people who could not work on Wall Street or New York ended up at WestLB and immediately began to interact with their colleagues in New York or London and thus spread the contagion.
The IRA: They were hoping move up to the big time. It does rather sound like a financial version of the swine flu. The political conflict you describe in Germany seems every bit as serious here in the US as well, yet the authorities take no action. Is this a fair analogy? You have spoken a great deal about the current German finance minister and his role in creating the German financial crisis. Can you expand on this a bit?
Dübel: Peer Steinbrück comes from Hamburg and was also active politically in Northrhine-Westphalia, which is the home of WestLB. In 1993 Steinbrück became Secretary for Economy and Infrastructure in the State of Schleswig-Holstein until he changed to go on with his career in the State of North Rhine-Westphalia, where he became Secretary of Infrastructure in 1998 and Financial Secretary in 2000. Steinbrück was selected as one of the five negotiators dealing with the EU on the question of end state guarantees for the Landesbanks. Berlin selected three state finance ministers, the other two were Bavaria where Bayerische Landesbank is located and Baden-Württemberg with Landesbank Baden-Württemberg. The irony is that all three states are now among the big losers of the subprime crisis as a result of their own lobbying!
The IRA: During the height of the subprime mania in the US, LBBW's German staff were apparently buying toxic waste from the DB and the US dealers, but hiding the purchases from the LBBW staff in NY. When several traders we know raised issues about the activities by the German-based staff, several of the more senior traders at LWWB reportedly were fired for raising the alarm. The situation tracks almost precisely your earlier experience with WestLB in terms of traders making ill-informed investment decisions about credit and structured products that they did not understand.
Dübel: The head of LBBW, a capital market expert, was sacked just this month after reporting €2.1 billion in losses for 2008 and €90 billion of toxic assets. The state of Baden-Württemberg was asked to provide another €5 billion guarantee shield in support for LBBW. The Landesbanks have always tried to conceal their risks and periodically have to be bailed out with taxpayer money. Some have done well over the years - e.g. Helaba and NordLB -, but most have done badly. But nobody in Germany ever complains about the mismanagement of the Landesbanks because most of the media is controlled by the politicians! By law the TV channels must be independent, but the reality as with the banks is dictated by the politicians who sit not only on the boards of banks but also on the boards of the public media networks. If a journalist is too focused on investigative reporting or financial scandals in this particular area, it will definitely damage his career.
The IRA: So where does Steinbrück go from here in terms of policy choices? The latest German proposal for dealing with the crisis has been described in the media as "watered down." What does this mean for foreign investors who are looking at Germany?
Dübel: He has been in power since 2005. Steinbrück probably is the last finance minister for the grand coalition that has been ruling Germany. With the elections this year we will likely see a new political formulation. Steinbrück was notorious when he was in State of North Rhine-Westphalia for not attending board meetings of WestLB and generally neglecting his responsibilities for overseeing the bank, so given that issue and his participation in the Brussels deal in 2001, it may be that his political career is probably over. Being from Hamburg, a center of commerce which has a reputation for producing good merchants, I would not have expected Steinbrück to perform so poorly. To his credit it may be said that he came into a minefield: the savings banks in North Rhine-Westphalia have a well-deserved reputation for treachery and they have sabotaged creating a viable business model for WestLB for years, hence the above-average number of public rescues of that bank. But even if he was right to not even try - lacking a local powerbase, I don't know what happened to cause him to act so irresponsibly in relation to Brussels. After all, he is an economist and thus I am sympathetic to him on a personal level, but frankly Steinbrück screwed up.
The IRA: So where does Germany stand today given the announcement of the rescue plan? How much of an impact will the crisis in the German banks have on the economy?
Dübel: It has a very serious impact on both growth and the fiscal situation. It is no small irony that we now have in Peer Steinbrück one of the people who lead us into the crisis now leading the effort to resolve it. And we now have one of the other negotiators from Baden-Württemberg, Gerhard Stratthaus, is now co-steering the SoFFin, the bank rescue fund. Generally that fund is staffed by old Landesbanken hands, which has added to the reluctance of private banks to ask for bailouts. The only person who has distanced himself from the previous acts is Kurt Faltlhauser of the Christian Social Party in Bavaria. In December, the State of Bavaria needed to provide a €25 billion rescue package for BayernLB, the Landesbank in Bavaria. Again, the losses here have nothing to do with the German economy. Seehofer, the new prime minister in Bavaria, which is essentially a single party state, comes from the left wing of the party. He was greeted with great reluctance as a quasi-social democrat. But he cleverly used the discovery of the holes in BayernLB to force the finance minister of the former state government headed by right party wing representative Stoiber, to publicly admit his mistakes. This provides him with political cover against his inner party foes. In fact it is a hidden attack on the person or Stoiber, who put a very aggressive speculator at the head of BayernLB and also was involved in the downfall of Hypovereinsbank earlier in the decade. In addition to €15 billion in guarantees, BayernLB needed a €10 billion recapitalization in December and has cut 30% of its staff.
The IRA: Listening to you almost makes us feel better about the goings on in Washington. It sounds like the political class in Germany is less responsible and less responsive to the needs of voters than America's corrupt political class. Is this fair?
Dübel: Well, you have Fannie and Freddie and the Wall Street lobby, which are huge problems. And as you have written in The IRA, America is rapidly accumulating a large crowd of state-owned enterprises, including Chrysler and GM.
The IRA: We like to tell our readers that the US is becoming very European. Maybe this discussion will help to illuminate that distinction. If you think of Barack Obama as Silvio Berlusconi without a media empire, it all seems to make sense.
Dübel: Well, the politics are amusing at a certain level, but the economic implications are not. We have a shocking culture in German banks of hiding problems and keeping things under the lid that goes beyond public banks. Dresdner Bank for example took similar risks like the Landesbanken and for years failed to properly disclose this to her owners at Allianz. German banks hide their business activities, which is why you saw a proliferation of unrelated strategies, and the use of derivatives and offshore vehicles to hide these strategies. Some of the strategies were couched as loans, in other cases direct investments, so nobody really knows the true exposure of the German banks, public and private, to toxic and underperforming assets. The government admits to an aggregate figure of €800 billion or so, but there are no bank-by-bank figures. The assumption is that two-thirds of that amount is in the Landesbanks.
The IRA: So if the deposit base in all German banks is about €2 trillion, then banking system has essentially taken up bad assets equal to half of deposits? The Landesbanks fund off the bond market, but this is still a very ugly macro situation. In the US we have parked the toxic waste at the Fed. Is that the situation in Germany?
Dübel: The ECB made their own mistakes, but they are not allowing themselves to be as openly abused as the Fed. The situation differs from the US in that the German states began early to create bad banks for the Landesbanken. However, most are financially not in the position to bear the losses, so the search is on for a deal which would create a single Landesbank bad bank in exchange for structural reforms - in particular mergers and downsizing of the business. The good news is that after the German crash the interest of the EU Commission and the federal Ministry of Finance are broadly realigned. That changes the picture. But it is still not a pretty one. The ECB wrote down $5 billion on $10 billion in British mortgage assets following the Lehman collapse alone. Using that benchmark, the losses to the public sector in Germany will be huge. Using what public sources we have available, taking the exposure of the Landesbanks of some €300-500 billion from that source alone we could see losses exceeding €100 billion. The merger of Dresdner Bank and Commerzbank, which was only made possible with SoFFin intervention in the form of Tier-1-capital at Commerzbank, is another fallout from the crisis. Both banks were overstaffed and poorly managed, and now they are merging to an entity run to a great extent by the government. Dresdner had similar business model problems as the Landesbanken and may have lost some € 10 billion in the US. A large mortgage bank, Eurohypo, will be spun off which likely will not find a buyer other than government. Then there is another large mortgage bank Hypo Real Estate, in which the federal government already invested some € 100 billion in guarantees and equity. And we have the Mittelstand lending bank IKB, which was the first failure of the crisis. The Landesbanken are likely to have bought IKB's paper, which allowed IKB to invest in US mortgage assets. And IKB learned from them and set up her own ABCP conduits.
The IRA: Great. Another example of the benefits of a free market in OTC financial instruments.
Dübel: Another one of the German stories that connect with the global crisis and nobody here wants to tell is de-facto collapse of local financial centers such as Düsseldorf or Munich. The entire European leg of the crisis is the story of the ambition of smaller banking centers, backed ultimately by local taxpayers. You have Reykjiavik, Dublin, Edinburg with Royal Bank of Scotland (NYSE:RBS), Dusseldorf, Leipzig, Stockholm with Swedbank, Budapest with OTP, you have Lisbon with Millennium Bank losing money in Poland, Belgium with both Fortis and KBC and so on - the axis of the insolvent is longer than most people imagine. So the smaller European banks went on a speculative spree where, the believed, they were becoming regional and even international players. The results are very serious for smaller European jurisdictions, such as Belgium which has 25% of GDP in loan exposure in Central and Eastern Europe. And there was lots of local contagion. Everybody knows the Iceland story, but few know that, for example, basically all of the banks in Düsseldorf went bankrupt in the crisis. My suspicion is that they all talked to the same investment bankers on road shows.
The IRA: Of course.
Dübel: Long story short, the total back of the envelope figure for Germany in terms of rescues so far is already safely in the 10% of GDP range. SoFFin, the federal rescue fund, has provided alone about €190 billion or roughly 7.5% of GDP; add to this the state rescue programs, which are basically SoFFin cofinancing shares, for the Landesbanken. Are some €250-300 billion in protection enough to address a problem calibrated semi-officially in the €800-€900 billion range? Probably not, especially considering the high toxic asset shares at the Landesbanken .
The IRA: What impact do you think that the rescue plan now under formulation will have on this situation? Will the German economy start to improve by the end of the year or continue to struggle?
Dübel: My guess is that the Landesbanken alone will cause ultimate losses of 8-10% of German GDP, which is real money. Compare that sum with the 5% of GDP costs for the US S&L crisis.
The IRA: How much do you think the cost of the cleanup plus the end to the use of state guarantees is going to affect visible GDP in the EU? In the US, our assumption has been that as much as 5-10% of reported GDP was not income as much as the increased flow of funds due to debt issuance. If Germany and the other EU nations are forced to forego such borrowings, what will the reported GDP in the EU look like in 2010 and beyond?
Dübel: Yes, the flow stops and the loan demand also falls, well below what the Fed and the ECB would like it to be. And higher savings rates in the US and EU will contribute to this shrinkage in GDP as well. I think that the Fed is wrong to try and restore previous levels of consumption. There needs to be an adjustment. The further you push the bubble, the bigger the adjustment. But there is another question with serious implications for our growth prospects, which is: who bears the losses, taxpayers or debt investors in banks.So far, the rescue operations in both the US and Germany are heavily biased against taxpayers. This needs to change, if we do not want public investment and private consumption (via cutbacks in transfer programs) to heavily suffer.
The IRA: Precisely. Thanks Achim. Be well.
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
... thx to Charles Powell for the link and this vital debate....
To get a better understanding of the situation in Germany and the growing financial crisis affecting that nation's banks, we spoke last week with Hans-Joachim ("Achim") Dübel, CEO of FINPOLCONSULT (http://www.finpolconsult.de ) in Berlin, one of the leading and relatively few independent voices in the German housing finance community.
The IRA: Tell our readers about yourself and why your views on Germany and the financial markets there are well informed. We worked in the market for German bunds and other European government bonds from London years ago, so we know a little about the local banking scene.
Dübel: I started my professional career working in housing policy and eventually began to focus on housing finance. I worked at the World Bank focused on housing finance policy globally and even worked for Westdeutsche Landesbank for a few months where I had a pretty traumatic experience. The traders basically dismissed all of the bank's economists and risk managers. They said they were running the bank properly using purely tactical, short-term trading methods. They would draw triangles on charts of market data and call that risk management. These were the types of strategies that eventually sunk the bank. You will recall from the 1980s onward that WestLB was recapitalized every few years, they have four historic state aid cases with EU competition authorities from the last 15 years. I got a very quick introduction to the real role of an economist in a German financial institution.
The IRA: Well, maybe the German traders have it right. Most contemporary risk management tools used in banks were designed by financial economists and are entirely ineffective. The whole Basel II framework, for example, is an economist's model, that is, a fantasy that has no link to the real world of finance and commerce. Professor Dick Richardson of the University of Texas wrote in 2001: "Economics is an artifact of human imagination, and the agreement among certain humans who "play the games" together -- thereby it is a social technology." But we digress. What did you do after WestLB?
Dübel: I pursued the housing field as a private consultant economist to agencies such as the World Bank and the EU Commission. My role here in Germany is somewhat that of the critic. Since I have worked outside of Germany and have relative freedom, I decided to use my perspective to provide an independent voice here. The sad fact is that there is virtually no discussion in the policy community in Germany regarding the financial crisis. Most of the professors in the universities in Germany that work in finance have their chairs co-sponsored by banks, so they are effectively gagged in many cases. It is easy to become a critic in Germany because there are so few independent voices. The political parties are deeply involved in finance through the state sector banks, (Landesbanken and Sparkassen ) and the private financial community takes its lead from Deutsche Bank (NYSE:DB), which has decided not to make a public issue out of the problems in the state sector institutions.
The IRA: Wait a minute! Was it not DB that sold most of the toxic waste to the Landesbanks? Our recollection is that it was DB, Merrill Lynch and Lehman who were the key perpetrators in stuffing the Landesbanks with toxic waste. No wonder the DB does not want to talk about it! We have the same problem in the US, namely that the larger banks have taken control over the federal government, leaving the real economy and the population at the mercy of Wall Street. Our colleagues who work in the financial world are mostly employees and thus are cowed into silence. The lack of critical debate in the US financial community regarding the crisis is stunning.
Dübel: I am familiar with the problem in the US from colleagues who ran into problems with the GSEs, particularly Fannie Mae. Funnily enough, we have the same problem in Germany with most bank lobby groups, and public banks are not different from private in that respect. They are very aggressive in going after independent economists to attack their reputations if they have the temerity to criticize them. I think both countries have a serious oversupply of bank lobbying groups, which mostly are staffed with aggressive lawyers.
The IRA: We used to get a lot of flak from Fannie and Freddie, but this is not a problem now. In fact, after we published a brief comment about the role of Peer Steinbrück in creating Germany's financial crisis, we started getting calls from the German press before we even ran this interview. One reporter from the German edition of the Financial Times called last week demanding to know the identity of our sources. We gave our usual reply: "Foxtrot Oscar."
Dübel: What Fannie Mae did in her worst days, which I think are behind us, was to put indirect pressure on people who were critical, usually to try to get them fired. German banks play the same games, some as direct as Fannie, but most are more subtle, working behind the scenes to undermine critics. The fact is that everything in Germany is public; all of the data that I use in my work is freely available, yet nobody looks at it or uses it in the public debates. The Brussels declaration of 2001 that allowed the Landesbanken to issue dozens of billions of state-guaranteed bonds without any other purpose than regulatory arbitrage clearly names the German politicians who were the negotiators. Each of these men are also the key figures in creating the problems within the Landesbanks in each state, but still there is virtually no debate in Germany regarding these issues.
The IRA: You stated that you think that the Germans are not given sufficient credit for their role in creating the subprime crisis. Start from the beginning of the story and explain for our readers how Germany reached its present predicament. We notice that Germany has moved forward with a very watered down version of its own plan for dealing with problem toxic assets in the banks. We also saw that Günter Verheugen, the EU commissioner from Germany, has been attacking the German banks and Finance Minister Peer Steinbrück. Is he a critic?
Dübel: Verheugen is at the end of his career. German politicians only speak up before retirement, if at all. It must be added here that we are currently in a state of "omertà" to use the Sicilian term - i.e. no politician of the coalition government will speak about the scandal before this fall's Bundestag elections. Both main parties are afraid of another Berlin. After the Bankgesellschaft Berlin scandal earlier this decade the CDU was reduced from governing party to near-oblivion status. It is a classical prisoners dilemma, nobody wins politically from a debate. And what the main political parties do not want to be debated does not make it into the public media, and even most private media.
The IRA: Sicilians say: "He who is deaf, blind, and silent will live a hundred years in peace." What was the condition of the German housing market in 2005? Was there a boom in housing prices or was the crisis purely caused by poor investment decisions by the state banks?
Dübel: The level of housing prices in Germany was relatively stable and - as German economic conditions in general - had no serious impact on the Landesbanken. During the current decade, the Landesbanken were not lending at home, but rather converted themselves into mutual funds to invest in international securities. The crisis started with the decision in the 1990s by the EU Commission, which had launched an EU Treaty violation process against Germany after the protest of German private banks against one of WestLBs recapitalizations. The EU argued that the state guarantees for the Landesbanken were illegal. Many publications such as the Financial Times and The Economist wrote about this extensively. We had the great Milan-based economics professor, Mario Monti, as the head of the EU competition authority. He pushed through the proposal against the combined weight of the German public bank lobby and both levels of government - state and federation. There was a protracted debate and finally, in early 2001, the EU decided to terminate the use of state guarantees by 2002. However, the public bank lobby in Germany continued to fight the proposal and basically sent federal and state government representatives to negotiate with Brussels.
The IRA: Was the counter-attack successful?
Dübel: Partly. The result was a postponement of the end of issuance of state guaranteed debt for all banks from 2001 to 2005, where the last bonds guaranteed would have to mature by 2015. The salient point is that there was only a time limit set in the agreement, but there was no volume limit, so the German state banks started to issue massive amounts of state-guaranteed debt after 2001. This money was not used to finance German or even European lending but simply to park funds in investment vehicles and make more money on it to boost their bottom lines. A nice euphemism they found for this is 'Kreditersatzgeschäft' (credit substitution business). If you look at research reports in the period, you will see that the volume of guaranteed bonds shot up dramatically after 2001 and especially during 2004 and early 2005. Critically, every guarantee given by the Landesbanken themselves would benefit from the guarantee standing behind the Landesbanken , so they kept guaranteeing ABCP-conduits and other off-balance sheet vehicles such as SIVs that boomed precisely during the critical period.
The IRA: So the German Landesbanks started to issue debt and buy toxic assets from DB, Merrill and Lehman? Great. Was there any legitimate purpose for this debt? How much are we talking about?
Dübel: The direct extra issuance by the banks following the EU transition period decision was already massive and totaled probably €100 billion. However, if you consider guarantees given by Landesbanken you might well end up at €200, perhaps €300 billion in total exposure. Those guarantees were called upon when the banks and investors funding ABCP and SIV called in their capital during 2007. Moreover, there was a considerable balance sheet shift inside Landesbanken in particular from interbank market exposures to securities holdings. All in all, the data leaking out of various sources suggest that Landesbanken today sit on problem assets of €300-500 billion, much of them funded effectively with German government debt. Individual banks, such as WestLB, LBBW, BayernLB, HSH Nordbank sit on high double-digit € billion exposure positions. Compare these pictures to peak outstandings of US high-risk markets in €, e.g. Subprime RMBS of € 575 billion in 2007, and you get an idea about to what extent the Landesbanken funded Wall Street. Take all high-risk securities markets at peak levels together - from leveraged loan CLOs to Alt-A RMBS, and I think we are looking at some 15% of the Buy Side demand.
The IRA: Do you think that the Landesbank management just abused the political system?
Dübel: Politicians were always broadly in the picture regarding strategy; remember that they staff the boards (Verwaltungsrat) of the Landesbanken against good remuneration. They knew that the typical loan portfolio for a Landesbank was only 20-25% of total assets, so the rest of the structure was typically securities. Before 2001, the pressure set by the EU had lead to all types of strategies to spur loan growth. For example, the HSH Nordbank based in Hamburg and Kiel focused on ship finance, WestLB had an aircraft engine finance business. There were also regional expansion strategies, with HSH investing in Scandinavia, WestLB in Britain, BayernLB in South-Eastern Europe. Some have entered retail banking by acquiring other banks (e.g. BayernLB), so the business models were not homogeneous. But these markets were already overcrowded, and nobody in the political system dared to put pressure on the Sparkassen to accept the transfer of retail business to the Landesbanken to stabilize their business models. The Brussels agreement reached by German politicians against a reluctant EU was just the final nail in the coffin: it is like a parent who gets a child to finally focus on studies, only to have a rich uncle show up, give the child $1,000 in cash and says "do what you want" with the money. A political decision completely destroyed market discipline.
The IRA: Well, we know that story. Citigroup (NYSE:C) was doing precisely the same thing in the US during that timeframe under the direction of board members like Robert Rubin. The US banks also expanded their leverage via the issuance of non-guaranteed structures such as SIVs. At the end of this year, assuming that the FASB does not get rolled again a la fair value accounting, all US banks must repatriate hundreds of billions of dollars in off-balance sheet ("OBS") assets, which will drive down capital levels dramatically. The notion of banks repaying their TARP equity this year is ridiculous if you include OBS assets in the analysis. Yet isn't it remarkable that C and the German banks were essentially all doing the same stupid things? The common denominator must the global sales push from the large Sell Side dealers like DB, Merrill and Lehman, among others.
Dübel: The dealers in Germany, DB included, are certainly co-responsible. The dealers always looked at the Landesbanken with their distorted incentives as easy prey. C surely fell into the same trap after Glass-Steagall was repealed; to me the important Citi analogy there is rather the Garn-St.Germain Act of 1982 that allowed the US S&Ls to expand into commercial lending. To me it looks as if C and Landesbanken are not very far apart in their clout on their domestic political system, just the flavors of the favors differ.
The IRA: There are no coincidences on Wall Street. Whatever toxic waste the dealers are feeding to Buy Side firms in the US is also being offered around the world. The Sell Side firms are not clever enough to have a different sell message for each market. We can recall the first adventures of Solomon Brothers in Europe selling CMOs to Belgian dentists in the 1980s. It was a slaughter, but none of the regulators in EU or US ever said a word.
Dübel: In the US and particularly with C, the problems in the asset-backed commercial paper or ABCP market was very similar to what was happening in Germany. This was very typical of the Landesbanken, who basically have no set business model. They saw the yield curve and played the markets. They demanded "AAA" ratings with a juicy spread pickup, which means squaring the circle. If you put together all of the factors, the lack of limits on state guarantees, the lack of controls on the activities of the Landesbanks, and the sales pressure from the global securities dealers, you have a real toxic mix.
The IRA: What we find startling about your tale is the EU here is the more conservative, fiscally responsible party, while the German bankers, who are reputed to be so conservative, seem instead to be completely reckless cowboys. It's as though the entire German financial system was run like Fannie Mae, with the Barney Frank (D-MA) and other American politicians making financial decisions from Capitol Hill and carving out special slush funds for their own personal use. Is this a fair comparison?
Dübel: Yes, absolutely. And it is a complete conflict of interest. The typical German savings or state bank has 25-30 board members. This becomes a harbor for politicians, who are given sinecures on these boards when they retire. The campaign finance system in Germany is under continuous scrutiny, but meanwhile practices like packing the boards of banks with retired politicians continues. But we see some change: there is a big uproar currently as BAFIN has started calling for minimum banking qualifications of supervisory board members, which typically excludes your local mayor.
The IRA: This is why we constantly lecture our fellow citizens in the US about the threat of the Democrats and their plans to supplant American democracy with a Euro-style corporate state. If you want to see how the nationalization of Chrysler and General Motors (NYSE:GM) will affect American politics and push the US further in the direction of authoritarianism and political dysfunction, it seems that Germany provides a case in point.
Dübel: The other issue besides the practice of parking politicians on the boards of the banks is the role of municipal and state finance. The German municipalities own the Sparkassen, which in turn own as a rule of thumb half of the Landesbanken. And then you have the states owning the other half. Both are notoriously cash strapped and have been forced to make painful cutbacks, but the seeming profitability of the state banks provided at least the appearance of cash flow, which is now gone. That invites the use of greater leverage, of course.
The IRA: Of course.
Dübel: Take the example of Saxony, with a €16 billion state budget of which only half is financed by taxes - the rest comes from block grants, which are politically painful to acquire. Saxony's Landesbank SachsenLB ran off-balance sheet vehicles three times the size of the state budget before it collapsed in 2007. One single rescue loan arranged for LBBW's takeover of SachsenLB after the collapse was larger than the entire state budget. There is in theory a regulatory framework for the state and municipal finances, as every layer of government in Germany guarantees the next lower layer, but in practice there is no limit on the actions of the politicians much less disclosure.
The IRA: So it sounds like the situation in Germany was not about a bubble in the housing market but instead failed financial engineering motivated by the wrong incentives set by politicians.
Dübel: Yes, you must forget the word "mortgage" when you are looking at Germany. I am a housing expert, but this problem comes down to a lack of basic prudential and political controls in German banks. The state banks have entered and exited the mortgage market several times in the past few decades. Most recently, there has been a proliferation of direct banks providing mortgages, ING from the Netherlands and even the Postal Bank is involved. The irony of the Landesbanks is that they did not lose a penny on investments and loans Germany. All of the losses were caused by investments in foreign assets, primarily from the US. The overhang of assets was caused by the failure of the EU Commission to limit debt issuance by the German banks. Thus the question came: where to put the money raised via the issuance of debt? The US was the choice. Had there been a capital markets boom in China, the Germans would have invested there instead. The choice of asset selection was completely opportunistic and engineered by Wall Street. Don't forget that many other nations in Asia and the Middle East were given the same treatment by the American banks.
The IRA: Even the Chinese? We have not really heard much noise coming from China, but then again, data from Chinese governmental and financial institutions is not really credible.
Dübel: Actually the Chinese were relatively more clever than the Germans! The Chinese basically invested almost nothing in subprime or alt-a or zeros. A typical German Landesbank would be full of these securities.
The IRA: In the form of collateralized debt obligations? Wonderful. So we put the German banks in the same category as the US banks and Buy Side funds that ate all of the CDOs and other toxic waste produced in the US and the City of London?
Dübel: Exactly. The Landesbank is the prototypical example of an uneducated investor, because of lack of incentives to really develop an interest in education.
The IRA: We call it "institutional retail," which are basically Buy Side shops that do not have the ability to independently rate or analyze securities and must therefore depend upon the Sell Side dealers for pricing. The Sell Side dealers prey upon these public and private funds, but regulators in the US do nothing.
Dübel: This is an international problem, and it seems exacerbated with financial globalization. The second-rate people who could not work on Wall Street or New York ended up at WestLB and immediately began to interact with their colleagues in New York or London and thus spread the contagion.
The IRA: They were hoping move up to the big time. It does rather sound like a financial version of the swine flu. The political conflict you describe in Germany seems every bit as serious here in the US as well, yet the authorities take no action. Is this a fair analogy? You have spoken a great deal about the current German finance minister and his role in creating the German financial crisis. Can you expand on this a bit?
Dübel: Peer Steinbrück comes from Hamburg and was also active politically in Northrhine-Westphalia, which is the home of WestLB. In 1993 Steinbrück became Secretary for Economy and Infrastructure in the State of Schleswig-Holstein until he changed to go on with his career in the State of North Rhine-Westphalia, where he became Secretary of Infrastructure in 1998 and Financial Secretary in 2000. Steinbrück was selected as one of the five negotiators dealing with the EU on the question of end state guarantees for the Landesbanks. Berlin selected three state finance ministers, the other two were Bavaria where Bayerische Landesbank is located and Baden-Württemberg with Landesbank Baden-Württemberg. The irony is that all three states are now among the big losers of the subprime crisis as a result of their own lobbying!
The IRA: During the height of the subprime mania in the US, LBBW's German staff were apparently buying toxic waste from the DB and the US dealers, but hiding the purchases from the LBBW staff in NY. When several traders we know raised issues about the activities by the German-based staff, several of the more senior traders at LWWB reportedly were fired for raising the alarm. The situation tracks almost precisely your earlier experience with WestLB in terms of traders making ill-informed investment decisions about credit and structured products that they did not understand.
Dübel: The head of LBBW, a capital market expert, was sacked just this month after reporting €2.1 billion in losses for 2008 and €90 billion of toxic assets. The state of Baden-Württemberg was asked to provide another €5 billion guarantee shield in support for LBBW. The Landesbanks have always tried to conceal their risks and periodically have to be bailed out with taxpayer money. Some have done well over the years - e.g. Helaba and NordLB -, but most have done badly. But nobody in Germany ever complains about the mismanagement of the Landesbanks because most of the media is controlled by the politicians! By law the TV channels must be independent, but the reality as with the banks is dictated by the politicians who sit not only on the boards of banks but also on the boards of the public media networks. If a journalist is too focused on investigative reporting or financial scandals in this particular area, it will definitely damage his career.
The IRA: So where does Steinbrück go from here in terms of policy choices? The latest German proposal for dealing with the crisis has been described in the media as "watered down." What does this mean for foreign investors who are looking at Germany?
Dübel: He has been in power since 2005. Steinbrück probably is the last finance minister for the grand coalition that has been ruling Germany. With the elections this year we will likely see a new political formulation. Steinbrück was notorious when he was in State of North Rhine-Westphalia for not attending board meetings of WestLB and generally neglecting his responsibilities for overseeing the bank, so given that issue and his participation in the Brussels deal in 2001, it may be that his political career is probably over. Being from Hamburg, a center of commerce which has a reputation for producing good merchants, I would not have expected Steinbrück to perform so poorly. To his credit it may be said that he came into a minefield: the savings banks in North Rhine-Westphalia have a well-deserved reputation for treachery and they have sabotaged creating a viable business model for WestLB for years, hence the above-average number of public rescues of that bank. But even if he was right to not even try - lacking a local powerbase, I don't know what happened to cause him to act so irresponsibly in relation to Brussels. After all, he is an economist and thus I am sympathetic to him on a personal level, but frankly Steinbrück screwed up.
The IRA: So where does Germany stand today given the announcement of the rescue plan? How much of an impact will the crisis in the German banks have on the economy?
Dübel: It has a very serious impact on both growth and the fiscal situation. It is no small irony that we now have in Peer Steinbrück one of the people who lead us into the crisis now leading the effort to resolve it. And we now have one of the other negotiators from Baden-Württemberg, Gerhard Stratthaus, is now co-steering the SoFFin, the bank rescue fund. Generally that fund is staffed by old Landesbanken hands, which has added to the reluctance of private banks to ask for bailouts. The only person who has distanced himself from the previous acts is Kurt Faltlhauser of the Christian Social Party in Bavaria. In December, the State of Bavaria needed to provide a €25 billion rescue package for BayernLB, the Landesbank in Bavaria. Again, the losses here have nothing to do with the German economy. Seehofer, the new prime minister in Bavaria, which is essentially a single party state, comes from the left wing of the party. He was greeted with great reluctance as a quasi-social democrat. But he cleverly used the discovery of the holes in BayernLB to force the finance minister of the former state government headed by right party wing representative Stoiber, to publicly admit his mistakes. This provides him with political cover against his inner party foes. In fact it is a hidden attack on the person or Stoiber, who put a very aggressive speculator at the head of BayernLB and also was involved in the downfall of Hypovereinsbank earlier in the decade. In addition to €15 billion in guarantees, BayernLB needed a €10 billion recapitalization in December and has cut 30% of its staff.
The IRA: Listening to you almost makes us feel better about the goings on in Washington. It sounds like the political class in Germany is less responsible and less responsive to the needs of voters than America's corrupt political class. Is this fair?
Dübel: Well, you have Fannie and Freddie and the Wall Street lobby, which are huge problems. And as you have written in The IRA, America is rapidly accumulating a large crowd of state-owned enterprises, including Chrysler and GM.
The IRA: We like to tell our readers that the US is becoming very European. Maybe this discussion will help to illuminate that distinction. If you think of Barack Obama as Silvio Berlusconi without a media empire, it all seems to make sense.
Dübel: Well, the politics are amusing at a certain level, but the economic implications are not. We have a shocking culture in German banks of hiding problems and keeping things under the lid that goes beyond public banks. Dresdner Bank for example took similar risks like the Landesbanken and for years failed to properly disclose this to her owners at Allianz. German banks hide their business activities, which is why you saw a proliferation of unrelated strategies, and the use of derivatives and offshore vehicles to hide these strategies. Some of the strategies were couched as loans, in other cases direct investments, so nobody really knows the true exposure of the German banks, public and private, to toxic and underperforming assets. The government admits to an aggregate figure of €800 billion or so, but there are no bank-by-bank figures. The assumption is that two-thirds of that amount is in the Landesbanks.
The IRA: So if the deposit base in all German banks is about €2 trillion, then banking system has essentially taken up bad assets equal to half of deposits? The Landesbanks fund off the bond market, but this is still a very ugly macro situation. In the US we have parked the toxic waste at the Fed. Is that the situation in Germany?
Dübel: The ECB made their own mistakes, but they are not allowing themselves to be as openly abused as the Fed. The situation differs from the US in that the German states began early to create bad banks for the Landesbanken. However, most are financially not in the position to bear the losses, so the search is on for a deal which would create a single Landesbank bad bank in exchange for structural reforms - in particular mergers and downsizing of the business. The good news is that after the German crash the interest of the EU Commission and the federal Ministry of Finance are broadly realigned. That changes the picture. But it is still not a pretty one. The ECB wrote down $5 billion on $10 billion in British mortgage assets following the Lehman collapse alone. Using that benchmark, the losses to the public sector in Germany will be huge. Using what public sources we have available, taking the exposure of the Landesbanks of some €300-500 billion from that source alone we could see losses exceeding €100 billion. The merger of Dresdner Bank and Commerzbank, which was only made possible with SoFFin intervention in the form of Tier-1-capital at Commerzbank, is another fallout from the crisis. Both banks were overstaffed and poorly managed, and now they are merging to an entity run to a great extent by the government. Dresdner had similar business model problems as the Landesbanken and may have lost some € 10 billion in the US. A large mortgage bank, Eurohypo, will be spun off which likely will not find a buyer other than government. Then there is another large mortgage bank Hypo Real Estate, in which the federal government already invested some € 100 billion in guarantees and equity. And we have the Mittelstand lending bank IKB, which was the first failure of the crisis. The Landesbanken are likely to have bought IKB's paper, which allowed IKB to invest in US mortgage assets. And IKB learned from them and set up her own ABCP conduits.
The IRA: Great. Another example of the benefits of a free market in OTC financial instruments.
Dübel: Another one of the German stories that connect with the global crisis and nobody here wants to tell is de-facto collapse of local financial centers such as Düsseldorf or Munich. The entire European leg of the crisis is the story of the ambition of smaller banking centers, backed ultimately by local taxpayers. You have Reykjiavik, Dublin, Edinburg with Royal Bank of Scotland (NYSE:RBS), Dusseldorf, Leipzig, Stockholm with Swedbank, Budapest with OTP, you have Lisbon with Millennium Bank losing money in Poland, Belgium with both Fortis and KBC and so on - the axis of the insolvent is longer than most people imagine. So the smaller European banks went on a speculative spree where, the believed, they were becoming regional and even international players. The results are very serious for smaller European jurisdictions, such as Belgium which has 25% of GDP in loan exposure in Central and Eastern Europe. And there was lots of local contagion. Everybody knows the Iceland story, but few know that, for example, basically all of the banks in Düsseldorf went bankrupt in the crisis. My suspicion is that they all talked to the same investment bankers on road shows.
The IRA: Of course.
Dübel: Long story short, the total back of the envelope figure for Germany in terms of rescues so far is already safely in the 10% of GDP range. SoFFin, the federal rescue fund, has provided alone about €190 billion or roughly 7.5% of GDP; add to this the state rescue programs, which are basically SoFFin cofinancing shares, for the Landesbanken. Are some €250-300 billion in protection enough to address a problem calibrated semi-officially in the €800-€900 billion range? Probably not, especially considering the high toxic asset shares at the Landesbanken .
The IRA: What impact do you think that the rescue plan now under formulation will have on this situation? Will the German economy start to improve by the end of the year or continue to struggle?
Dübel: My guess is that the Landesbanken alone will cause ultimate losses of 8-10% of German GDP, which is real money. Compare that sum with the 5% of GDP costs for the US S&L crisis.
The IRA: How much do you think the cost of the cleanup plus the end to the use of state guarantees is going to affect visible GDP in the EU? In the US, our assumption has been that as much as 5-10% of reported GDP was not income as much as the increased flow of funds due to debt issuance. If Germany and the other EU nations are forced to forego such borrowings, what will the reported GDP in the EU look like in 2010 and beyond?
Dübel: Yes, the flow stops and the loan demand also falls, well below what the Fed and the ECB would like it to be. And higher savings rates in the US and EU will contribute to this shrinkage in GDP as well. I think that the Fed is wrong to try and restore previous levels of consumption. There needs to be an adjustment. The further you push the bubble, the bigger the adjustment. But there is another question with serious implications for our growth prospects, which is: who bears the losses, taxpayers or debt investors in banks.So far, the rescue operations in both the US and Germany are heavily biased against taxpayers. This needs to change, if we do not want public investment and private consumption (via cutbacks in transfer programs) to heavily suffer.
The IRA: Precisely. Thanks Achim. Be well.
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
The bullish bullionaire ~ Repost
PORTFOLIO POINT: Four decades of prospecting for and investing in gold have made Mark Creasy seriously wealthy. And he’s never been stronger on the yellow metal.
If anyone in Australia deserves the title of “Mr Gold” it is Mark Creasy, a prospector for 40 years and, more importantly, someone who knows the value of gold as an investment and as a hedge against economic uncertainty.
Famous for slipping under the guard of the Australian Taxation Office in a 1991 deal that netted him a tax-free $120 million, thanks to a Depression-era tax break awarded to prospectors selling mineral claims, Creasy is much more than a man armed with a pick, a shovel and a copy of Tax Act.
A graduate in mining engineering from London’s Royal School of Mines, Creasy is a deep-thinker on the subject of gold and its historic role as the ultimate form of money.
When Eureka Report popped into his West Perth office, it didn’t take him long for the conversation to drift to the subject of historic economic crises and how gold has held its position as the value of other assets has crashed, or been destroyed by inflation.
With the world facing its greatest financial challenge since the 1930s, Creasy’s theme of making gold part of all investment portfolios carries added strength.
Ranked last year by BRW magazine ranked as Australia’s 143rd richest person with a fortune estimated at $284 million, Creasy has put much of his money where his mouth is with an extensive share portfolio that includes large holdings in small to medium mining stocks.
Included among his holdings, which can change quickly, are Lihir Gold, OceanaGold, Apex Minerals, Dominion Mining and Medusa Mining. A search of ASIC records two years ago showed that Creasy and his main investment vehicle, Yandal Investments, appeared on the share registers of 44 listed mining companies.
Over the past decade Creasy’s faith in gold has been well rewarded. Since 2001, gold has been one of the world’s most stable investments, opening higher every year.
London Bullion Market records show gold started 2001 at $US272.80 an ounce, and then progressed year-by-year, to an opening price of $US278.10 in 2002, $US342.20 in 2003, $US415.25 in 2004, $US427.75 in 2005, $US520.75 in 2006, $US640.75 in 2007, $US846.75 in 2008, and this year opening at $US869.75.
Price fluctuations during those years, including a three-day peak above $US1000 an ounce in 2008, have made some investors wary of gold, but in terms of a consistent rising trend no other investment class can claim a decade of improvement, and none has held its ground as firmly during the global financial crisis.
As an investment, gold has two primary attractions: it offers stability during time of economic uncertainty; and it is an asset beyond the reach of government, and the inflationary effects of excessive printing of paper (fiat) money.
The major detractions are that gold, when held as metal, does not generate a financial return, and during periods of economic stability that lack of a dividend sees it fade in popularity.
Gold plays its best role as an anchor in an investment portfolio, and as an asset for troubled times.
This is how Mark Creasy sees gold.
The interview
Tim Treadgold: Why have you concentrated so heavily on gold prospecting?
Mark Creasy: Well, I believe the rate at which money has been created by governments in response to the global financial crisis is highly inflationary. We have a bias in the economy towards inflation. We don’t really live in a democracy. We live in a system of auction politics with more people relying on government handouts than who don’t rely on government.
Can you can see parallels between the 1970s and today’s economy?
I’ve believed for some time that we’re going to have a repeat of the 1970s when we saw a dramatic outbreak of inflation. This time, however, I believe the action of government is far more intrusive and far greater. I’m not 100% sure that we’ll have the same result, but we have sown the seeds of a major inflationary outbreak.
And inflation is a trigger for a rush into gold?
What happened in the 1970s is that the Bretton-Woods agreement ended in 1971 and the Americans stopped guaranteeing to exchange their dollars for gold. The price of gold rose strongly … peaked in 1975 at $US196 an ounce. It then collapsed, with the real boom starting in 1977 and rushing up to $US840.
And the driver for that eight-fold rise in the gold price over a few years was inflation?
Correct. It was driven by inflation which was, in turn, driven by the economic policies of the Western world, and the second oil crisis when the price of oil soared.
Looking at today’s financial world, is wholesale printing of paper money, or quantitative easing as it’s called, adding to your belief in gold?
I don’t think the world has ever seen a worse situation. The reaction of government to the 1970s crisis was to splatter money all over the place. This time around, you can add a nought to the number.
One of the problems for gold is that tough times always brings a flood of scrap gold on to the market, counteracting the price rise. Why won’t that happen again?
Scrap gold, and even mine-supply, aren’t really the big players in the (gold) market. There’s about 160,000 tonnes of gold in existence, and the world produces about 2000 tonnes of freshly-mined gold a year, and about 1000 tonnes is generated as scrap. The total amount of mined gold and scrap is less than 1% of the overall gold market. The mine supply isn’t all that important in the gold price. It’s all about sentiment. The people who will influence the value of that 160,000 tonnes are the biggest shareholders, and they are the central banks, which own about 30,000 tonnes.
Gold is a bit like a company which has a dominant shareholder. If everyone believes the dominant shareholder is selling the price drops like you wouldn’t believe. A major influence is how people see the biggest shareholders handling their gold.
And recently we’ve seen the Chinese central bank buying gold.
Correct. The best way is look at gold is not on the peripheral, say the scrap market or even mine supply; it’s to ask what are the big shareholders doing. In the past we’ve seen big holders such as the Bank of England and the Swiss National Bank selling, and people think we’re out of this. When they see a big new buyer, people want in.
Is part of what we’re seeing a result of countries such as China losing faith in the US dollar?
It seems to me the difference between this decade and the 1970s is that back then we had a very large part of the world uninvolved. We had the communist world. South America was closed off. Africa and India were not included. Today, virtually the whole world has joined in, with one of the big unknowns being what China does with its $US2 trillion in US assets. It is a very delicate situation.
Surely the problem is also one for the Chinese because they can’t sell or they crystallise a huge loss?
Whichever way you look at it it’s very delicate and badly handled; it’s going to have repercussions. If it happens it will certainly be good for gold.
Your outlook for the gold price seems to be that we’re likely to see a flat period, like the mid-1970s, before an upward surge?
If we play out like the 1970s we are going to have a flat period. Right now people seem to believe that the stockmarket crash is over and we’re on the recovery track.
And you don’t believe that?
I’m not sure. All I know is that if we are on the recovery track the price of gold is definitely going to go down. We had an apparent recovery in 1976, and everything looked OK for about a year. Then along came the second oil shock, and along came massive inflation. That’s when people realised it hadn’t been sorted and that’s when the gold price went berserk.
So the key to watching the gold market is to watch for signs of an outbreak of inflation?
Yes that’s right, though I haven’t seen those signs yet.
What are the best ways to gain exposure to gold?
It’s a question of risk profile. If you’re a person with a high risk profile you would buy explorers. Drop it down a notch and you would buy junior producers. Down another notch and you would buy a major gold producer. Drop it right down to the bottom and you would buy physical gold.
http://www.eurekareport.com.au/iis/iis.nsf/lpages/RWIE-7N92AE?opendocument
If anyone in Australia deserves the title of “Mr Gold” it is Mark Creasy, a prospector for 40 years and, more importantly, someone who knows the value of gold as an investment and as a hedge against economic uncertainty.
Famous for slipping under the guard of the Australian Taxation Office in a 1991 deal that netted him a tax-free $120 million, thanks to a Depression-era tax break awarded to prospectors selling mineral claims, Creasy is much more than a man armed with a pick, a shovel and a copy of Tax Act.
A graduate in mining engineering from London’s Royal School of Mines, Creasy is a deep-thinker on the subject of gold and its historic role as the ultimate form of money.
When Eureka Report popped into his West Perth office, it didn’t take him long for the conversation to drift to the subject of historic economic crises and how gold has held its position as the value of other assets has crashed, or been destroyed by inflation.
With the world facing its greatest financial challenge since the 1930s, Creasy’s theme of making gold part of all investment portfolios carries added strength.
Ranked last year by BRW magazine ranked as Australia’s 143rd richest person with a fortune estimated at $284 million, Creasy has put much of his money where his mouth is with an extensive share portfolio that includes large holdings in small to medium mining stocks.
Included among his holdings, which can change quickly, are Lihir Gold, OceanaGold, Apex Minerals, Dominion Mining and Medusa Mining. A search of ASIC records two years ago showed that Creasy and his main investment vehicle, Yandal Investments, appeared on the share registers of 44 listed mining companies.
Over the past decade Creasy’s faith in gold has been well rewarded. Since 2001, gold has been one of the world’s most stable investments, opening higher every year.
London Bullion Market records show gold started 2001 at $US272.80 an ounce, and then progressed year-by-year, to an opening price of $US278.10 in 2002, $US342.20 in 2003, $US415.25 in 2004, $US427.75 in 2005, $US520.75 in 2006, $US640.75 in 2007, $US846.75 in 2008, and this year opening at $US869.75.
Price fluctuations during those years, including a three-day peak above $US1000 an ounce in 2008, have made some investors wary of gold, but in terms of a consistent rising trend no other investment class can claim a decade of improvement, and none has held its ground as firmly during the global financial crisis.
As an investment, gold has two primary attractions: it offers stability during time of economic uncertainty; and it is an asset beyond the reach of government, and the inflationary effects of excessive printing of paper (fiat) money.
The major detractions are that gold, when held as metal, does not generate a financial return, and during periods of economic stability that lack of a dividend sees it fade in popularity.
Gold plays its best role as an anchor in an investment portfolio, and as an asset for troubled times.
This is how Mark Creasy sees gold.
The interview
Tim Treadgold: Why have you concentrated so heavily on gold prospecting?
Mark Creasy: Well, I believe the rate at which money has been created by governments in response to the global financial crisis is highly inflationary. We have a bias in the economy towards inflation. We don’t really live in a democracy. We live in a system of auction politics with more people relying on government handouts than who don’t rely on government.
Can you can see parallels between the 1970s and today’s economy?
I’ve believed for some time that we’re going to have a repeat of the 1970s when we saw a dramatic outbreak of inflation. This time, however, I believe the action of government is far more intrusive and far greater. I’m not 100% sure that we’ll have the same result, but we have sown the seeds of a major inflationary outbreak.
And inflation is a trigger for a rush into gold?
What happened in the 1970s is that the Bretton-Woods agreement ended in 1971 and the Americans stopped guaranteeing to exchange their dollars for gold. The price of gold rose strongly … peaked in 1975 at $US196 an ounce. It then collapsed, with the real boom starting in 1977 and rushing up to $US840.
And the driver for that eight-fold rise in the gold price over a few years was inflation?
Correct. It was driven by inflation which was, in turn, driven by the economic policies of the Western world, and the second oil crisis when the price of oil soared.
Looking at today’s financial world, is wholesale printing of paper money, or quantitative easing as it’s called, adding to your belief in gold?
I don’t think the world has ever seen a worse situation. The reaction of government to the 1970s crisis was to splatter money all over the place. This time around, you can add a nought to the number.
One of the problems for gold is that tough times always brings a flood of scrap gold on to the market, counteracting the price rise. Why won’t that happen again?
Scrap gold, and even mine-supply, aren’t really the big players in the (gold) market. There’s about 160,000 tonnes of gold in existence, and the world produces about 2000 tonnes of freshly-mined gold a year, and about 1000 tonnes is generated as scrap. The total amount of mined gold and scrap is less than 1% of the overall gold market. The mine supply isn’t all that important in the gold price. It’s all about sentiment. The people who will influence the value of that 160,000 tonnes are the biggest shareholders, and they are the central banks, which own about 30,000 tonnes.
Gold is a bit like a company which has a dominant shareholder. If everyone believes the dominant shareholder is selling the price drops like you wouldn’t believe. A major influence is how people see the biggest shareholders handling their gold.
And recently we’ve seen the Chinese central bank buying gold.
Correct. The best way is look at gold is not on the peripheral, say the scrap market or even mine supply; it’s to ask what are the big shareholders doing. In the past we’ve seen big holders such as the Bank of England and the Swiss National Bank selling, and people think we’re out of this. When they see a big new buyer, people want in.
Is part of what we’re seeing a result of countries such as China losing faith in the US dollar?
It seems to me the difference between this decade and the 1970s is that back then we had a very large part of the world uninvolved. We had the communist world. South America was closed off. Africa and India were not included. Today, virtually the whole world has joined in, with one of the big unknowns being what China does with its $US2 trillion in US assets. It is a very delicate situation.
Surely the problem is also one for the Chinese because they can’t sell or they crystallise a huge loss?
Whichever way you look at it it’s very delicate and badly handled; it’s going to have repercussions. If it happens it will certainly be good for gold.
Your outlook for the gold price seems to be that we’re likely to see a flat period, like the mid-1970s, before an upward surge?
If we play out like the 1970s we are going to have a flat period. Right now people seem to believe that the stockmarket crash is over and we’re on the recovery track.
And you don’t believe that?
I’m not sure. All I know is that if we are on the recovery track the price of gold is definitely going to go down. We had an apparent recovery in 1976, and everything looked OK for about a year. Then along came the second oil shock, and along came massive inflation. That’s when people realised it hadn’t been sorted and that’s when the gold price went berserk.
So the key to watching the gold market is to watch for signs of an outbreak of inflation?
Yes that’s right, though I haven’t seen those signs yet.
What are the best ways to gain exposure to gold?
It’s a question of risk profile. If you’re a person with a high risk profile you would buy explorers. Drop it down a notch and you would buy junior producers. Down another notch and you would buy a major gold producer. Drop it right down to the bottom and you would buy physical gold.
http://www.eurekareport.com.au/iis/iis.nsf/lpages/RWIE-7N92AE?opendocument
27 May 2009
Everything will correct for a month or two....
Stocks, gold, silver. Dollar may rally a tad, bonds may, or may not. I wait to buy gold and silver and the equities on the next correction.
It can be legal and still evil ~ Quinn
The system is strong and respected. The system is tested and proves resilient. The system is taken for granted. The onerous parts of the system are modified for the ease of major players. The system is loaded up for failure by those who forget the whys and hows of why the system was set up in a particular way in the first place...
Quinn on the evil in the system.....
Evil Words & Actions
“False words are not only evil in themselves, but they infect the soul with evil.”
Socrates
CEO’s of banks and financial institutions going on TV and lying that their firms were strong and viable. (Angelo Mozilo, Jimmy Cayne, Ken Lewis, Robert Steele, Charles Prince, John Thain)
The President and Vice President of the United States lying to the American people that there were WMD in Iraq and proclaiming that Iraq was involved in the 9/11 attack.
The Secretary of the Treasury lying to the American people and Congress regarding the banking system in order to ram the TARP bill through Congress.
The Secretary of the Treasury and Federal Reserve Chairman threatening the CEO of Bank of America and forcing him to lie about the true losses of Merrill Lynch.
Mortgage brokers lying to their clients regarding the terms of the toxic mortgage products they were peddling.
Homebuyers who lied about their income and/or assets in order to qualify for a mortgage.
Alan Greenspan urging Americans to take out an adjustable rate mortgage when rates were at all time lows, while simultaneously saying that home prices on a national basis would never fall.
Treasury Secretaries and other high officials lying on their tax returns.
Financial advisors telling their clients to invest in a financial product because it makes the advisor more money, versus being in the best interest of the client.
Being politically correct in your speech rather than truthful because a constituent might be offended.
Politicians making promises to voters while trying to be elected which they never intend to keep.
When the President of the United States commits adultery in the Oval office and then lies to the American public.
Creative Evil
“Ignorance, the root and stem of all evil.Knowledge becomes evil if the aim be not virtuous.”
Plato
When the highly educated use their knowledge to keep the ignorant from understanding the truth about the financial condition of the country.
When the Federal Reserve Chairman withholds the names of the banks that have received billions in taxpayer funds with no accountability.
The MBA genius or geniuses who created the stated income, no documentation mortgage loan in order to enrich themselves and their leaders.
The millions of Americans who accepted loans for homes, cars, and home furnishings that they knew they could never repay.
The bankers who made loans to people who they knew could never repay them, because they would earn all of their money upfront and would sell the loans to someone else.
The executives of AIG who silently allowed twenty employees in their Financial Products Group, led by Joseph Cassano, to gamble and lose $500 billion while paying Mr. Cassano $280 million in compensation.
Alan Greenspan for allowing moral hazard to grow to immense proportions due to the unspoken Greenspan Put. Every financial institution knew he would come to their rescue if their risky bets blew up. Therefore, they had no reason not to leverage 40 to 1.
The bank executives who allowed their trading desks to use derivatives to make huge bets on currencies, interest rates, default rates, and mortgages in order to generate obscene salaries, bonuses and stock option awards. The original purpose of derivatives was to hedge risks.
The rating agencies Moody’s and S&P who took blood money from banks and other financial institutions to rate packages of subprime mortgages, credit card debt, and car loans as AAA without ever examining the assets or real potential for default.
The Accounting Firms that will sell audit opinions based on the amount of fees they receive. This leads to the logical conclusion that no financial statements can be relied upon.
The bank executives who knowingly sold toxic worthless assets to pension funds, insurance companies, municipalities and senior citizens because of their desire for short-term profits and obscene bonuses.
Government Evil
“Society in every state is a blessing, but government, even in its best stage, is but a necessary evil; in its worst state an intolerable one.”
Thomas Paine
When elected government officials secretly collude with bankers to create a non-governmental Federal Reserve Bank that controls the currency of the country and systematically generates inflation to allow government to spend at an ever increasing rate.
Taxing citizens to create bureaucratic government agencies and programs that fail to accomplish their mission while continuing to grow in size as politicians use them to reward the contributors to their re-election campaigns.
Congressmen allowing 40,000 highly paid corporate lobbyists in Washington DC to write laws and buy votes because it will keep them in power.
Putting thousands of earmarks into every Congressional spending bill to benefit your supporters to the detriment of the country.
When government employees leave government service and accept high paying jobs with the companies they previously regulated.
The SEC hierarchy ignoring the conclusive evidence provided by Harry Markopoulos about the Bernie Madoff Ponzi scheme because Madoff was respected, connected and had friends in high places at the SEC.
Low paid SEC investigators are purposely less stringent in their investigations because they want high paying jobs on Wall Street with the firms they are regulating.
The Federal Reserve has purposely taken worthless assets onto their balance sheet from insolvent banks in order to fraudulently portray the U.S. banking system as healthy. They have committed billions of taxpayer funds with no oversight or audit of their activities.
Taxing citizens to use the money to create offensive weapons of war and using them to preemptively invade a sovereign country with no Constitutionally required declaration of war.
Launching hundreds of cruise missiles from a thousand miles away into a city of six million people, knowing thousands of innocent people would be murdered.
Torturing human beings at Abu Ghraib and Guantanomo, thereby winning the fight, but losing the war. The U.S. will have no moral authority when American soldiers are captured and tortured.
Invading a country under false pretenses in order to enforce our world view on a sovereign nation to secure billions of barrels of oil.
Selling weapons of mass destruction to other nations.
Convincing the majority of the population through manipulative means to give up freedoms and liberties in the name of safety and security.
Monitoring the phone conversations, emails, and movements of American citizens without their knowledge.
Paying farmers to not grow food, while millions in the world starve to death every year.
Encouraging the poorest Americans to gamble what little they have at State sponsored casinos and in State run lotteries to pay for ever increasing State spending.
Politicians spend money today in order to bribe their constituents for votes, while passing the bill onto future unborn generations.
Politicians pass laws that reallocate wealth from producers to the takers in society and create a class of societal dependents who will continue to vote for more goodies and benefits.
The FASB allows financial firms to value “assets” at whatever price they choose in order to mislead investors.
Media Evil
“Young people are threatened... by the evil use of advertising techniques that stimulate the natural inclination to avoid hard work by promising the immediate satisfaction of every desire.”
Pope John Paul II
Advertising by the National Association of Realtors in 2005 and 2006 after home prices had doubled in five years telling all Americans it was the best time to buy and that buying a house is always a great investment.
Both liberal and conservative ideologue pundits skewing every issue in order to prove their pre-ordained position.
Corporate titans like GE own TV networks and slanting the reporting of the news in a way that aligns with their corporate interests.
Paid political consultants train politicians to not answer the questions they are asked. They are trained to repeat their talking points, not answer questions truthfully.
The mainstream media use their power and influence to mislead the public regarding the true state of the economy and the truth about the future finances of the country.
Companies like GMAC/Ditech used misleading TV commercials to lure the ignorant and poor into loans which they could never repay.
The negative ads run during political campaigns are made up of smears, innuendo, half truths, and bold faced lies intended to destroy the character of opponents.
Using polls in order to slant your message in a way that appeals to the most voters.
Using advertising techniques to convince people to buy products they can’t afford by appealing to their emotions and biases.
TV shows that glorify killers, immoral lifestyles, crime, drug use, etc. in order to push their agenda on children.
The media exaggerating risks of pandemics, terrorism, crime, and weather events in order to increase ratings.
http://www.financialsense.com/editorials/quinn/2009/0526.html
Quinn on the evil in the system.....
Evil Words & Actions
“False words are not only evil in themselves, but they infect the soul with evil.”
Socrates
CEO’s of banks and financial institutions going on TV and lying that their firms were strong and viable. (Angelo Mozilo, Jimmy Cayne, Ken Lewis, Robert Steele, Charles Prince, John Thain)
The President and Vice President of the United States lying to the American people that there were WMD in Iraq and proclaiming that Iraq was involved in the 9/11 attack.
The Secretary of the Treasury lying to the American people and Congress regarding the banking system in order to ram the TARP bill through Congress.
The Secretary of the Treasury and Federal Reserve Chairman threatening the CEO of Bank of America and forcing him to lie about the true losses of Merrill Lynch.
Mortgage brokers lying to their clients regarding the terms of the toxic mortgage products they were peddling.
Homebuyers who lied about their income and/or assets in order to qualify for a mortgage.
Alan Greenspan urging Americans to take out an adjustable rate mortgage when rates were at all time lows, while simultaneously saying that home prices on a national basis would never fall.
Treasury Secretaries and other high officials lying on their tax returns.
Financial advisors telling their clients to invest in a financial product because it makes the advisor more money, versus being in the best interest of the client.
Being politically correct in your speech rather than truthful because a constituent might be offended.
Politicians making promises to voters while trying to be elected which they never intend to keep.
When the President of the United States commits adultery in the Oval office and then lies to the American public.
Creative Evil
“Ignorance, the root and stem of all evil.Knowledge becomes evil if the aim be not virtuous.”
Plato
When the highly educated use their knowledge to keep the ignorant from understanding the truth about the financial condition of the country.
When the Federal Reserve Chairman withholds the names of the banks that have received billions in taxpayer funds with no accountability.
The MBA genius or geniuses who created the stated income, no documentation mortgage loan in order to enrich themselves and their leaders.
The millions of Americans who accepted loans for homes, cars, and home furnishings that they knew they could never repay.
The bankers who made loans to people who they knew could never repay them, because they would earn all of their money upfront and would sell the loans to someone else.
The executives of AIG who silently allowed twenty employees in their Financial Products Group, led by Joseph Cassano, to gamble and lose $500 billion while paying Mr. Cassano $280 million in compensation.
Alan Greenspan for allowing moral hazard to grow to immense proportions due to the unspoken Greenspan Put. Every financial institution knew he would come to their rescue if their risky bets blew up. Therefore, they had no reason not to leverage 40 to 1.
The bank executives who allowed their trading desks to use derivatives to make huge bets on currencies, interest rates, default rates, and mortgages in order to generate obscene salaries, bonuses and stock option awards. The original purpose of derivatives was to hedge risks.
The rating agencies Moody’s and S&P who took blood money from banks and other financial institutions to rate packages of subprime mortgages, credit card debt, and car loans as AAA without ever examining the assets or real potential for default.
The Accounting Firms that will sell audit opinions based on the amount of fees they receive. This leads to the logical conclusion that no financial statements can be relied upon.
The bank executives who knowingly sold toxic worthless assets to pension funds, insurance companies, municipalities and senior citizens because of their desire for short-term profits and obscene bonuses.
Government Evil
“Society in every state is a blessing, but government, even in its best stage, is but a necessary evil; in its worst state an intolerable one.”
Thomas Paine
When elected government officials secretly collude with bankers to create a non-governmental Federal Reserve Bank that controls the currency of the country and systematically generates inflation to allow government to spend at an ever increasing rate.
Taxing citizens to create bureaucratic government agencies and programs that fail to accomplish their mission while continuing to grow in size as politicians use them to reward the contributors to their re-election campaigns.
Congressmen allowing 40,000 highly paid corporate lobbyists in Washington DC to write laws and buy votes because it will keep them in power.
Putting thousands of earmarks into every Congressional spending bill to benefit your supporters to the detriment of the country.
When government employees leave government service and accept high paying jobs with the companies they previously regulated.
The SEC hierarchy ignoring the conclusive evidence provided by Harry Markopoulos about the Bernie Madoff Ponzi scheme because Madoff was respected, connected and had friends in high places at the SEC.
Low paid SEC investigators are purposely less stringent in their investigations because they want high paying jobs on Wall Street with the firms they are regulating.
The Federal Reserve has purposely taken worthless assets onto their balance sheet from insolvent banks in order to fraudulently portray the U.S. banking system as healthy. They have committed billions of taxpayer funds with no oversight or audit of their activities.
Taxing citizens to use the money to create offensive weapons of war and using them to preemptively invade a sovereign country with no Constitutionally required declaration of war.
Launching hundreds of cruise missiles from a thousand miles away into a city of six million people, knowing thousands of innocent people would be murdered.
Torturing human beings at Abu Ghraib and Guantanomo, thereby winning the fight, but losing the war. The U.S. will have no moral authority when American soldiers are captured and tortured.
Invading a country under false pretenses in order to enforce our world view on a sovereign nation to secure billions of barrels of oil.
Selling weapons of mass destruction to other nations.
Convincing the majority of the population through manipulative means to give up freedoms and liberties in the name of safety and security.
Monitoring the phone conversations, emails, and movements of American citizens without their knowledge.
Paying farmers to not grow food, while millions in the world starve to death every year.
Encouraging the poorest Americans to gamble what little they have at State sponsored casinos and in State run lotteries to pay for ever increasing State spending.
Politicians spend money today in order to bribe their constituents for votes, while passing the bill onto future unborn generations.
Politicians pass laws that reallocate wealth from producers to the takers in society and create a class of societal dependents who will continue to vote for more goodies and benefits.
The FASB allows financial firms to value “assets” at whatever price they choose in order to mislead investors.
Media Evil
“Young people are threatened... by the evil use of advertising techniques that stimulate the natural inclination to avoid hard work by promising the immediate satisfaction of every desire.”
Pope John Paul II
Advertising by the National Association of Realtors in 2005 and 2006 after home prices had doubled in five years telling all Americans it was the best time to buy and that buying a house is always a great investment.
Both liberal and conservative ideologue pundits skewing every issue in order to prove their pre-ordained position.
Corporate titans like GE own TV networks and slanting the reporting of the news in a way that aligns with their corporate interests.
Paid political consultants train politicians to not answer the questions they are asked. They are trained to repeat their talking points, not answer questions truthfully.
The mainstream media use their power and influence to mislead the public regarding the true state of the economy and the truth about the future finances of the country.
Companies like GMAC/Ditech used misleading TV commercials to lure the ignorant and poor into loans which they could never repay.
The negative ads run during political campaigns are made up of smears, innuendo, half truths, and bold faced lies intended to destroy the character of opponents.
Using polls in order to slant your message in a way that appeals to the most voters.
Using advertising techniques to convince people to buy products they can’t afford by appealing to their emotions and biases.
TV shows that glorify killers, immoral lifestyles, crime, drug use, etc. in order to push their agenda on children.
The media exaggerating risks of pandemics, terrorism, crime, and weather events in order to increase ratings.
http://www.financialsense.com/editorials/quinn/2009/0526.html
26 May 2009
Got to repost the latest Keen, its too good not to...
NEVER MIND THE NEOCLASSICAL BOLLOCKS.......
Writing in the New York Times, Gregory Mankiw could see some need to modify economics courses a bit in response to the GFC, but overall he felt that:
“Despite the enormity of recent events, the principles of economics are largely unchanged. Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses.” (That Freshman Course Won’t Be Quite the Same, New York Times May 23 2009)
Writing on a blog The East Asia Forum, authors Doug McTaggart, Christopher Findlay and Michael Parkin wrote that:
“The crisis has also brought calls for the heads of economists for failing to anticipate and avoid it. That idea, too, is wrong: much economic research pointed to the emerging problem.
More economic research (and teaching), not less, is the best hope of both emerging from the current crisis and of avoiding future ones.” (The state of economics, East Asia Forum, May 21 2009)
What a load of bollocks.
The “principles of economics” that Mankiw champions, and the ”More economic research (and teaching)” that McTaggart et al are calling for, are the major reason why economists in general were oblivious to this crisis until well after it had broken out.
If they meant “Principles of Hyman Minsky’s Financial Instability Hypothesis”, or “More Post Keynesian and Evolutionary economic research”, there might be some validity to their claims. But what they really mean is “principles of neoclassical economics” and ”More neoclassical economic research (and teaching)”–precisely the stuff that led to this crisis in the first place.
Neoclassical economic theory supported the deregulation of the financial system that helped set this crisis in train. See for example this New York Times report on the abolition of the Glass-Steagall Act in 1999 “CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS” (New York Times November 5th 1999). The reporter Stephem Labaton noted that:
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly…
Then he observed that
Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.
This is a very apt description of the role of neoclassical economists over the last 40 years: every step of the way, they have argued for deregulation of the financial system. Now we have McTaggart and colleagues making the self-serving claim that:
The current crisis is a failure of regulation that calls for not more regulation, but the right regulation.
So the same economic theory that supported the abolition of Glass-Steagall, amongst many other Depression-inspired controls, is suddenly going to be able to do a volte-face and tell us what “the right regulation” might be? Garbage.
What is really needed is a thorough revolution in economic thought. First and foremost this has to be based on empirical reality, and from this perspective almost everything that current textbooks treat as gospel truth will end up in the dustbin.
Coincidentally, many non-neoclassical economists whose writings have been put into the dustbin by today’s economics orthodoxy will be back on the shelves once more. Minsky, Schumpeter, Keynes, Veblen and Marx don’t rate a mention in in most current economic textbooks; they had better feature in future texts, or by 2060 or so we’ll be back here again.
Though I’m clearly annoyed at Mankiw’s and McTaggart’s drivel, I’m not surprised by it–in fact I predicted it (I doubt that they can point to anything they wrote prior to the GFC that predicted it!). I said the following in an article “Mad, bad, and dangerous to know” published on March 12 2009 in issue 49 of the Real World Economics Review:
Despite the severity of the crisis in the real world, academic neoclassical economists will continue to teach from the same textbooks in 2009 and 2010 that they used in 2008 and earlier…
they will interpret the crisis as due to poor regulation,…
They will seriously believe that the crisis calls not for the abolition of neoclassical economics, but for its teachings to be more widely known. The very thought that this financial crisis should require any change in what they do, let alone necessitate the rejection of neoclassical theory completely, will strike them as incredible.
Sometimes, I would like to be wrong…
Finally, what lesson did neoclassical economists take from the Great Depression? That the Federal Reserve caused it via poor economic policy. Who do current neoclassical economists blame for this crisis? The Federal Reserve of course, for poor economic policy:
By 2007, fuelled by the Federal Reserve’s egregious policy errors, markets were moving into unsustainable bubble territory. The Fed by this time had realized the problem was getting out of hand and had moved interest rates up sharply—too sharply—and burst the house price bubble. (McTaggart et al).
But who staffs the Federal Reserve? Neoclassical economists of course…
Please, let’s not fall for this nonsense a second time. Keynes tried to free us from neoclassical economic thinking back in the 1930s, only to have neoclassical economists like John Hicks and Paul Samuelson eviscerate Keynes’s thought and re-establish a revitalised neoclassical economics after the Depression was over. This time, let’s do it right and get rid of neoclassical economics once and for all.
http://www.debtdeflation.com/blogs/2009/05/25/what-a-load-of-bollocks/
Writing in the New York Times, Gregory Mankiw could see some need to modify economics courses a bit in response to the GFC, but overall he felt that:
“Despite the enormity of recent events, the principles of economics are largely unchanged. Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses.” (That Freshman Course Won’t Be Quite the Same, New York Times May 23 2009)
Writing on a blog The East Asia Forum, authors Doug McTaggart, Christopher Findlay and Michael Parkin wrote that:
“The crisis has also brought calls for the heads of economists for failing to anticipate and avoid it. That idea, too, is wrong: much economic research pointed to the emerging problem.
More economic research (and teaching), not less, is the best hope of both emerging from the current crisis and of avoiding future ones.” (The state of economics, East Asia Forum, May 21 2009)
What a load of bollocks.
The “principles of economics” that Mankiw champions, and the ”More economic research (and teaching)” that McTaggart et al are calling for, are the major reason why economists in general were oblivious to this crisis until well after it had broken out.
If they meant “Principles of Hyman Minsky’s Financial Instability Hypothesis”, or “More Post Keynesian and Evolutionary economic research”, there might be some validity to their claims. But what they really mean is “principles of neoclassical economics” and ”More neoclassical economic research (and teaching)”–precisely the stuff that led to this crisis in the first place.
Neoclassical economic theory supported the deregulation of the financial system that helped set this crisis in train. See for example this New York Times report on the abolition of the Glass-Steagall Act in 1999 “CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS” (New York Times November 5th 1999). The reporter Stephem Labaton noted that:
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly…
Then he observed that
Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.
This is a very apt description of the role of neoclassical economists over the last 40 years: every step of the way, they have argued for deregulation of the financial system. Now we have McTaggart and colleagues making the self-serving claim that:
The current crisis is a failure of regulation that calls for not more regulation, but the right regulation.
So the same economic theory that supported the abolition of Glass-Steagall, amongst many other Depression-inspired controls, is suddenly going to be able to do a volte-face and tell us what “the right regulation” might be? Garbage.
What is really needed is a thorough revolution in economic thought. First and foremost this has to be based on empirical reality, and from this perspective almost everything that current textbooks treat as gospel truth will end up in the dustbin.
Coincidentally, many non-neoclassical economists whose writings have been put into the dustbin by today’s economics orthodoxy will be back on the shelves once more. Minsky, Schumpeter, Keynes, Veblen and Marx don’t rate a mention in in most current economic textbooks; they had better feature in future texts, or by 2060 or so we’ll be back here again.
Though I’m clearly annoyed at Mankiw’s and McTaggart’s drivel, I’m not surprised by it–in fact I predicted it (I doubt that they can point to anything they wrote prior to the GFC that predicted it!). I said the following in an article “Mad, bad, and dangerous to know” published on March 12 2009 in issue 49 of the Real World Economics Review:
Despite the severity of the crisis in the real world, academic neoclassical economists will continue to teach from the same textbooks in 2009 and 2010 that they used in 2008 and earlier…
they will interpret the crisis as due to poor regulation,…
They will seriously believe that the crisis calls not for the abolition of neoclassical economics, but for its teachings to be more widely known. The very thought that this financial crisis should require any change in what they do, let alone necessitate the rejection of neoclassical theory completely, will strike them as incredible.
Sometimes, I would like to be wrong…
Finally, what lesson did neoclassical economists take from the Great Depression? That the Federal Reserve caused it via poor economic policy. Who do current neoclassical economists blame for this crisis? The Federal Reserve of course, for poor economic policy:
By 2007, fuelled by the Federal Reserve’s egregious policy errors, markets were moving into unsustainable bubble territory. The Fed by this time had realized the problem was getting out of hand and had moved interest rates up sharply—too sharply—and burst the house price bubble. (McTaggart et al).
But who staffs the Federal Reserve? Neoclassical economists of course…
Please, let’s not fall for this nonsense a second time. Keynes tried to free us from neoclassical economic thinking back in the 1930s, only to have neoclassical economists like John Hicks and Paul Samuelson eviscerate Keynes’s thought and re-establish a revitalised neoclassical economics after the Depression was over. This time, let’s do it right and get rid of neoclassical economics once and for all.
http://www.debtdeflation.com/blogs/2009/05/25/what-a-load-of-bollocks/
China selling US denominated Bonds and liberalises financial system further
This is an interesting development but it has been reported from one of Weiss's pony's so seperating fact and pitch is impossible. But still.
By announcing the launch of a new market for dollar-denominated bonds that are issued by non-financial firms, China has now taken a major step toward modernizing its capital markets. The move hasn’t made much of a splash here in the United States. But I was in China, heading my annual investment tour of that country, when the announcement was made. And believe me when I tell you that China’s company executives, investors and government officials fully understand the implications of what’s just been done.
The move is very shrewd, for it brings about the confluence of highly complimentary trends.
For China-based companies that want to invest abroad, or that want to buy foreign companies, product lines, or other assets, these new dollar-denominated bonds will make it possible to do these deals more easily, and at a much lower cost.
Beijing had already launched an official campaign that urges “Corporate China” to acquire overseas companies and assets. But there had to be a liberalization of the financial system for this to happen. So back in August, in fact, for the first time in 11 years, China’s government eased rules governing its foreign-exchange systems.
These new regulations permit companies to retain foreign-exchange income offshore, if they want, and thus helped pave the way for the new bond market because it stokes potential demand for dollar-denominated investments.
And that comes at a perfect time for - up until now - the ongoing global financial crisis, which has made Chinese investors wary of buying foreign-currency bonds that were issued outside China. But these dollar-denominated bonds will be created inside China, effectively short-circuiting that worry.
Given what we know about China’s global natural-resource-acquisition ambitions, the first entrants into this new market will likely be one or more of China’s huge natural-resource concerns that are presently scouring the globe, creating captive supplies of the very commodities that will be necessary to ensure China’s future growth. My experience here suggests that high-tech and infrastructure companies will follow almost immediately. Many of those firms may head straight for Taiwan, thanks to newly inked agreements that make it easier for Mainland China companies to invest across the Taiwan Straits for the first time in decades. After that, these firms will direct their appetites for acquisitions elsewhere around the world.
Just how big could this new dollar-denominated financing market turn out to be?
At a time when Western debt markets remain mired in muck, it’s too soon to tell for certain. But Bank of China Ltd. analyst Shi Lei estimates that non-financial Chinese firms may issue as much as $30 billion during the next two quarters alone
By announcing the launch of a new market for dollar-denominated bonds that are issued by non-financial firms, China has now taken a major step toward modernizing its capital markets. The move hasn’t made much of a splash here in the United States. But I was in China, heading my annual investment tour of that country, when the announcement was made. And believe me when I tell you that China’s company executives, investors and government officials fully understand the implications of what’s just been done.
The move is very shrewd, for it brings about the confluence of highly complimentary trends.
For China-based companies that want to invest abroad, or that want to buy foreign companies, product lines, or other assets, these new dollar-denominated bonds will make it possible to do these deals more easily, and at a much lower cost.
Beijing had already launched an official campaign that urges “Corporate China” to acquire overseas companies and assets. But there had to be a liberalization of the financial system for this to happen. So back in August, in fact, for the first time in 11 years, China’s government eased rules governing its foreign-exchange systems.
These new regulations permit companies to retain foreign-exchange income offshore, if they want, and thus helped pave the way for the new bond market because it stokes potential demand for dollar-denominated investments.
And that comes at a perfect time for - up until now - the ongoing global financial crisis, which has made Chinese investors wary of buying foreign-currency bonds that were issued outside China. But these dollar-denominated bonds will be created inside China, effectively short-circuiting that worry.
Given what we know about China’s global natural-resource-acquisition ambitions, the first entrants into this new market will likely be one or more of China’s huge natural-resource concerns that are presently scouring the globe, creating captive supplies of the very commodities that will be necessary to ensure China’s future growth. My experience here suggests that high-tech and infrastructure companies will follow almost immediately. Many of those firms may head straight for Taiwan, thanks to newly inked agreements that make it easier for Mainland China companies to invest across the Taiwan Straits for the first time in decades. After that, these firms will direct their appetites for acquisitions elsewhere around the world.
Just how big could this new dollar-denominated financing market turn out to be?
At a time when Western debt markets remain mired in muck, it’s too soon to tell for certain. But Bank of China Ltd. analyst Shi Lei estimates that non-financial Chinese firms may issue as much as $30 billion during the next two quarters alone
Fisher grilled by Chinese about dollar printing ~ Ambrose
Richard Fisher, president of the Dallas Federal Reserve Bank, said: "Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature."
"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States," he told the Wall Street Journal.
His recent trip to the Far East appears to have been a stark reminder that Asia's "Confucian" culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons.
Mr Fisher, the Fed's leading hawk, was a fierce opponent of the original decision to buy Treasury debt, fearing that it would lead to a blurring of the line between fiscal and monetary policy – and could all too easily degenerate into Argentine-style financing of uncontrolled spending.
However, he agreed that the Fed was forced to take emergency action after the financial system "literally fell apart".
Nor, he added was there much risk of inflation taking off yet. The Dallas Fed uses a "trim mean" method based on 180 prices that excludes extreme moves and is widely admired for accuracy.
"You've got some mild deflation here," he said.
The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of "creative destruction", has been running a fervent campaign to alert Americans to the "very big hole" in unfunded pension and health-care liabilities built up by a careless political class over the years.
"We at the Dallas Fed believe the total is over $99 trillion," he said in February.
"This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them," he said.
His warning comes amid growing fears that America could lose its AAA sovereign rating.
"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States," he told the Wall Street Journal.
His recent trip to the Far East appears to have been a stark reminder that Asia's "Confucian" culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons.
Mr Fisher, the Fed's leading hawk, was a fierce opponent of the original decision to buy Treasury debt, fearing that it would lead to a blurring of the line between fiscal and monetary policy – and could all too easily degenerate into Argentine-style financing of uncontrolled spending.
However, he agreed that the Fed was forced to take emergency action after the financial system "literally fell apart".
Nor, he added was there much risk of inflation taking off yet. The Dallas Fed uses a "trim mean" method based on 180 prices that excludes extreme moves and is widely admired for accuracy.
"You've got some mild deflation here," he said.
The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of "creative destruction", has been running a fervent campaign to alert Americans to the "very big hole" in unfunded pension and health-care liabilities built up by a careless political class over the years.
"We at the Dallas Fed believe the total is over $99 trillion," he said in February.
"This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them," he said.
His warning comes amid growing fears that America could lose its AAA sovereign rating.
An American abroard see it all clearly ~ Pedro speaks
We are witnessing the end of a very long phase in history. As a result there is a mass insecurity amongst the dominant nations of the past 300-years that is bordering on hysteria. This insecurity manifests itself in many different ways and markets are reflecting this. Gold prepares to soar, reflecting this insecurity, as gold is a barometer of fear.
Within the English-speaking world it is evident that “foreigners” are to blame. In the UK it is both the Poles and the “Pakis”. In America it is initially revealed via a general population viewing the Kyoto Protocol as a Chinese-led trick to destroy our economy. Then it is the belief that Mexicans are “invading” and Arabs are trying to kill us all. One has to stop and ask what the root of this paranoia really is.
As the American power structure tries to prepare for “inevitable conflict” with world Islam (c.f. Huntington, Clash of Civilizations) it also tries to hide its obsequious relationship with the Saudi Royal Family, which is incestuous at best, and perhaps more symbiotic than most would want to know. The financial population cannot reconcile this anymore than they can the fact that (perhaps apart from Jim) the accurate, unblended analysis of this crisis seems to have been foreshadowed by a two people with names: Nouriel Roubini and Naseem Taleb. People remain confused by the fact that the American power structure lacks patriotism and seems to favor its own interests over the interests of the country. They lash out at everyone, including, now, their own leaders. People don’t know whether to “blame” Obama’s socialism or Bush’s self-serving capitalism. Their foreign policies seem different but the rest appears the same. Major banks appear to have more control than we thought….even while teetering on bankruptcy.
This is reflected in markets. Currencies gyrate wildly. As Jim has noted many times, anybody trying to fathom the FX markets and trade them is likely to be carried out of the pit on the proverbial trader’s stretcher with a coronary. First the Euro is finished – its break-down elucidating thoughts of its demise – but then the belief that jettisoning the PIGS (Portugal, Italy (Ireland?), Greece, Spain) might be causing it to rise. The markets are schizophrenic. They don’t know what to think. The dollar and sterling take the brunt. There are reasons for this.
This is a system headed for breakdown. The established historical order is drifting to a close, and nothing can stop it. Changes in policy are manifestations of history – alter it they cannot. Gold’s rise becomes inevitable as countries who have ruled the Imperial phase of history try and resist their diminishment in status. Markets are manipulated as they try and hold on to power, while history shifts under their feet. China and Brasil cut deals that don’t include the USA and UK…the UAE starts to view separate currency arrangements with Russia, foregoing overtures by Saudi Arabia for a Gulf wide (GCC-led) monetary regime. Riyadh’s relationship is too close to Washington. Washington is yesterday’s news. (So much for the conspiracy of Islam.)
The end of an era is upon us. That is the era of the Global hegemon. The first phase took place in Britain, the second in the Soviet Union, and the third in America. Fukayama’s theory of history’s end is immolated on its very alter. The debacle of Iraq, as well as Afghanistan stand as testimony. The dominant powers simply cannot draw borders they way they did at San Remo in 1920 or via the Red-lines which economically created Kuwait. We seem to be unsure if we should break Iraq up, or let it be unified. Is it even our business, or has history out-run us and we have failed to acknowledge it? As the global hegemon is characterized through the Imperial phase of history, now draws to a close, people stand confused and amazed. The rulers of the dominant nations appear ready to sell them out…and this appears as “news” to educated observers.
Nobody can be sure of any currency regime any longer. The markets gyrate wildly. As fear and insecurity mount, Gold prepares for take off.
Within the English-speaking world it is evident that “foreigners” are to blame. In the UK it is both the Poles and the “Pakis”. In America it is initially revealed via a general population viewing the Kyoto Protocol as a Chinese-led trick to destroy our economy. Then it is the belief that Mexicans are “invading” and Arabs are trying to kill us all. One has to stop and ask what the root of this paranoia really is.
As the American power structure tries to prepare for “inevitable conflict” with world Islam (c.f. Huntington, Clash of Civilizations) it also tries to hide its obsequious relationship with the Saudi Royal Family, which is incestuous at best, and perhaps more symbiotic than most would want to know. The financial population cannot reconcile this anymore than they can the fact that (perhaps apart from Jim) the accurate, unblended analysis of this crisis seems to have been foreshadowed by a two people with names: Nouriel Roubini and Naseem Taleb. People remain confused by the fact that the American power structure lacks patriotism and seems to favor its own interests over the interests of the country. They lash out at everyone, including, now, their own leaders. People don’t know whether to “blame” Obama’s socialism or Bush’s self-serving capitalism. Their foreign policies seem different but the rest appears the same. Major banks appear to have more control than we thought….even while teetering on bankruptcy.
This is reflected in markets. Currencies gyrate wildly. As Jim has noted many times, anybody trying to fathom the FX markets and trade them is likely to be carried out of the pit on the proverbial trader’s stretcher with a coronary. First the Euro is finished – its break-down elucidating thoughts of its demise – but then the belief that jettisoning the PIGS (Portugal, Italy (Ireland?), Greece, Spain) might be causing it to rise. The markets are schizophrenic. They don’t know what to think. The dollar and sterling take the brunt. There are reasons for this.
This is a system headed for breakdown. The established historical order is drifting to a close, and nothing can stop it. Changes in policy are manifestations of history – alter it they cannot. Gold’s rise becomes inevitable as countries who have ruled the Imperial phase of history try and resist their diminishment in status. Markets are manipulated as they try and hold on to power, while history shifts under their feet. China and Brasil cut deals that don’t include the USA and UK…the UAE starts to view separate currency arrangements with Russia, foregoing overtures by Saudi Arabia for a Gulf wide (GCC-led) monetary regime. Riyadh’s relationship is too close to Washington. Washington is yesterday’s news. (So much for the conspiracy of Islam.)
The end of an era is upon us. That is the era of the Global hegemon. The first phase took place in Britain, the second in the Soviet Union, and the third in America. Fukayama’s theory of history’s end is immolated on its very alter. The debacle of Iraq, as well as Afghanistan stand as testimony. The dominant powers simply cannot draw borders they way they did at San Remo in 1920 or via the Red-lines which economically created Kuwait. We seem to be unsure if we should break Iraq up, or let it be unified. Is it even our business, or has history out-run us and we have failed to acknowledge it? As the global hegemon is characterized through the Imperial phase of history, now draws to a close, people stand confused and amazed. The rulers of the dominant nations appear ready to sell them out…and this appears as “news” to educated observers.
Nobody can be sure of any currency regime any longer. The markets gyrate wildly. As fear and insecurity mount, Gold prepares for take off.
25 May 2009
On Europe and European Banks vis a vis US Banks
A mate of mine Charles Powell, and I, have been having a minor dissagreement with the prospects for Europe going forward vis a vis the United States.
I have looked at the terms of trade and the energy efficiency of GNP and the unleveraged households as very positive for Europe and that notion extended to the banks, the assumption being that no one could be worse off than the yanks. I excude UK, Spain and emerging Europe, but I assumed French and German Banks would be solid.
I still think Europe has a future, but it appears that Charles was far more correct about the banks.... thanks for the forward and the debate, Charles.
"As we have repeatedly said, Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level, a real estate collapse and general banking insolvencies. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That's almost 50% of Spanish GDP. Most of these loans will go bad.
"Spanish banks are now facing a very bleak outlook. Spain's unemployment rate reached over 17% last month; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family. Spain and Ireland had the worst housing bubbles in the world and now Spain has as many unsold homes as the US, even though the US is about six times bigger.
"Why are Spanish banks not insolvent? Spanish banks are not marking their real estate loans to market. We've often wondered how it is that our thesis for Spanish real estate and industrial collapse has not created more victims. The answer is simple according to an article in Expansion, the Spanish equivalent of the Financial Times, from the 19th of April titled 'Spanish banks control half of all real estate appraisals.' You can't make this stuff up. We haven't even begun to see the worst in Spain yet."
European banks are in far worse shape than their US counterparts. That is because they utilize far more leverage, on an average about 30 times leverage. How can that be, in what is supposed to be a conservative industry?
"European banks were only restricted on the basis of risk-weighted assets, unlike the US where it is the total leverage ratio that matters, so most European banks bought assets that were rated by Moody's and S&P, who couldn't rate their way out of a paper bag, and for anything that wasn't highly rated, they bought credit default swaps or guarantees from AIG and MBIA. Because of that European banks were able to lever up a lot more than their US counterparties. Given the much higher leverage levels and general worsening of collateral values, we think that all the shoes in Europe have not dropped."
European banks have assets of about 330% of their GDP, compared to US banking assets, which are about 50%. They have over $700 billion in loans to Asian businesses (which are watching their exports collapse) and $1.3 trillion in loans to Eastern Europe, which is in a very serious recession, and so many of those loans are simply not going to be worth anything. Simply put, there is going to be a need for massive amounts of money to bail out European banks, or we'll watch their economies simply implode.
Where is the money for the bailouts going to come from? Germany? That will be a tough sell politically in a country that is in a much worse recession than the US. How do you tell your citizens you need to bail out banks in other countries with their tax dollars? Italian and Austrian banks are going to need a lot of capital, more than their governments can pay. It is going to be a very tough problem.
Governments around the world are responding to the global recession by running massive deficits. In addition to the US, the UK, Japan, Russia, Spain, and Ireland are all running deficits of over 10%.
And, as in the case of the US, these are not going to be one-time deficits. The IMF predicts that England will shrink again next year and the recovery in the US will be modest at best. The US economy is expected to grow by 0.2% (far from the optimistic projections of various US government agencies), the 16-nation eurozone will eke out a modest gain of 0.1%, and the Group of Seven (G7) leading industrial economies will, as a whole, only grow by 0.2 percent. They project that Japan's economy will stagnate next year.
Where Will the Money Come From?
And now let's look at what is bumping in my worry closet. The world is going to have to fund multiple trillions in debt over the next several years. Pick a number. I think $5 trillion sounds about right. $3 trillion is in the cards for the US alone, if current projections are right.
Just exactly where is that money going to come from? The US trade deficit is now down to under $350 billion a year. The Fed can monetize a trillion. Maybe. Look at the yield curve on US government debt below (Bloomberg). US savings are going to go up, but where is the incentive to buy ten-year debt at 3.5%? Four-year debt under 2% doesn't do much for your savings growth. Even with monetization and the Chinese buying our debt with the dollars we send them, that still leaves the bond market about $1.5 trillion short, give or take $100 billion.
http://www.highyieldblog.com/2009/05/european-banks.html
I have looked at the terms of trade and the energy efficiency of GNP and the unleveraged households as very positive for Europe and that notion extended to the banks, the assumption being that no one could be worse off than the yanks. I excude UK, Spain and emerging Europe, but I assumed French and German Banks would be solid.
I still think Europe has a future, but it appears that Charles was far more correct about the banks.... thanks for the forward and the debate, Charles.
"As we have repeatedly said, Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level, a real estate collapse and general banking insolvencies. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That's almost 50% of Spanish GDP. Most of these loans will go bad.
"Spanish banks are now facing a very bleak outlook. Spain's unemployment rate reached over 17% last month; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family. Spain and Ireland had the worst housing bubbles in the world and now Spain has as many unsold homes as the US, even though the US is about six times bigger.
"Why are Spanish banks not insolvent? Spanish banks are not marking their real estate loans to market. We've often wondered how it is that our thesis for Spanish real estate and industrial collapse has not created more victims. The answer is simple according to an article in Expansion, the Spanish equivalent of the Financial Times, from the 19th of April titled 'Spanish banks control half of all real estate appraisals.' You can't make this stuff up. We haven't even begun to see the worst in Spain yet."
European banks are in far worse shape than their US counterparts. That is because they utilize far more leverage, on an average about 30 times leverage. How can that be, in what is supposed to be a conservative industry?
"European banks were only restricted on the basis of risk-weighted assets, unlike the US where it is the total leverage ratio that matters, so most European banks bought assets that were rated by Moody's and S&P, who couldn't rate their way out of a paper bag, and for anything that wasn't highly rated, they bought credit default swaps or guarantees from AIG and MBIA. Because of that European banks were able to lever up a lot more than their US counterparties. Given the much higher leverage levels and general worsening of collateral values, we think that all the shoes in Europe have not dropped."
European banks have assets of about 330% of their GDP, compared to US banking assets, which are about 50%. They have over $700 billion in loans to Asian businesses (which are watching their exports collapse) and $1.3 trillion in loans to Eastern Europe, which is in a very serious recession, and so many of those loans are simply not going to be worth anything. Simply put, there is going to be a need for massive amounts of money to bail out European banks, or we'll watch their economies simply implode.
Where is the money for the bailouts going to come from? Germany? That will be a tough sell politically in a country that is in a much worse recession than the US. How do you tell your citizens you need to bail out banks in other countries with their tax dollars? Italian and Austrian banks are going to need a lot of capital, more than their governments can pay. It is going to be a very tough problem.
Governments around the world are responding to the global recession by running massive deficits. In addition to the US, the UK, Japan, Russia, Spain, and Ireland are all running deficits of over 10%.
And, as in the case of the US, these are not going to be one-time deficits. The IMF predicts that England will shrink again next year and the recovery in the US will be modest at best. The US economy is expected to grow by 0.2% (far from the optimistic projections of various US government agencies), the 16-nation eurozone will eke out a modest gain of 0.1%, and the Group of Seven (G7) leading industrial economies will, as a whole, only grow by 0.2 percent. They project that Japan's economy will stagnate next year.
Where Will the Money Come From?
And now let's look at what is bumping in my worry closet. The world is going to have to fund multiple trillions in debt over the next several years. Pick a number. I think $5 trillion sounds about right. $3 trillion is in the cards for the US alone, if current projections are right.
Just exactly where is that money going to come from? The US trade deficit is now down to under $350 billion a year. The Fed can monetize a trillion. Maybe. Look at the yield curve on US government debt below (Bloomberg). US savings are going to go up, but where is the incentive to buy ten-year debt at 3.5%? Four-year debt under 2% doesn't do much for your savings growth. Even with monetization and the Chinese buying our debt with the dollars we send them, that still leaves the bond market about $1.5 trillion short, give or take $100 billion.
http://www.highyieldblog.com/2009/05/european-banks.html
24 May 2009
A potted history of offical gold price guidance
Gold is the flip side of debt based fractional reserve fiat based systems because it is a financial asset in its own right, the physical embodiment of the work required to extract it that becomes the economic embodiment of the same because of its properties and the fact that its value is intrinsic; not a claim subject to default by economic collapse, the revolt of the serfs or rent strikes or sovereign default. It is an put option on the credibility of dollar hegemony and had not officials put coins in the fusebox, it would have signaled we were in trouble years ago.
Since the invention of agriculture and the city state the real game has been keeping elites mindfull of their duties; addressing the issues of those who do the work and containing the manipulation and misuse of the magical power of abstraction enabled by numbers and writing. The computer network and the spreadsheet and their descendants have enabled vast new abstractions and hubris in the offical money sector but those same technologies are also disintermediating all of the old relationships between institutions and flows. We move to a new order.
Gold and silver are real money and the price locus of the realities of energy and geology as well as money, power and politics.
The study of gold is the study of civilisations. Kevin NK
By Andy Hoffman MidasLetter.com Monday, April 6th, 2009
The past week marked an acme in the U.S. government's Orwellian tactics of fooling the "proletariat" into believing the G-20 meeting was, in Obama's words,
"the turning point in our pursuit of global economic recovery."
How any can believe that a meeting of the very same people that caused this mess, of which the only material conclusion was to print another $1 trillion,
was a success is another story. But I digress.
Birth of the Ruse
Such market manipulation, not just in gold but all financial markets, were officially endorsed in the U.S. when the "The President's Working Group on
Capital Markets" (aka the PPT) was established in 1987 as a response to the stock market crash. However, the 'spirit' of these tactics turned to the 'dark
side of the force' in 2001, essentially at the time of 9/11.
In other words, what was once a defensive, overt policy created to enable action in the face of near-term issues, at that point morphed into a 24/7 covert
action targeting the long-term manipulation of public perception.
And it's no surprise that under this ruse a monstrous housing bubble was born, as well as the birth of the financial engineering (such as OTC derivatives)
that has directly caused the economic calamity we are facing today. With the "gold alarm bell" turned off by its illegal suppression, the capping of
interest rates, the support of stock markets (via the PPT), and unending bailouts of insolvent entities, the resulting financial imbalances have pushed the
U.S. into an economic abyss that it will likely never re-emerge from. Around that 2001 time frame, a number of forces converged to mark the peak of U.S.
global hegemony, including: the top of the dollar index, the accelerated loss of the U.S.'s manufacturing base, particularly to China the top of the stock
market the bottom of the commodities market the bottom in inflation, both "officially" (via the massaged CPI) and practically the bottom of the gold price
the beginning of Bush's "war on terror", yielding the subsequent acceleration of worldwide anti-American sentiment
It was also around that time that the U.S. "Strong Dollar Policy" started to rear its ugly head from the obscurity which it came from.
Any of these quotes ring a bell?
January 2009: In his confirmation hearing with the Senate Finance Committee, Treasury Secretary Nominee Tim Geithner said that a "strong dollar is in
America's National Interest."
January 2009: "A strong dollar is clearly in our nation's interest," U.S. Treasury Secretary Henry Paulson repeated last Thursday at a White House briefing
on the economic stimulus package.
October 2007: U.S. Treasury Secretary Henry Paulson said on Friday that he believes a strong dollar is in our nation's interest".
January 2005: US Treasury Secretary John Snow said on Friday that the US government remains committed to the so- called "strong dollar" policy.
December 2004: President Bush said Wednesday "The policy of my government is a strong dollar policy."
February 2001: Treasury Secretary Paul H. O'Neill insisted today that the Bush administration is committed to maintaining a strong dollar policy.
September 1999 (for historical context): In his speech yesterday and in a separate interview, Treasury Secretary Summers repeated word for word former
Treasury Secretary Rubin's mantra that a strong dollar is in the interests of the United States.
Notwithstanding, the U.S. dollar index has fallen by roughly 35% during this period due to the seven aforementioned factors, not to mention government
monetary and fiscal policies that easily challenge the most inflationary of recorded history (which are becoming more maniacal with each passing day).
As GATA, or the Gold Anti-Trust Action Committee, has detailed for a decade now, the "Strong Dollar Policy" is nothing more than a ruse aimed at
maintaining confidence in an "emperor with no clothes", in other words the dollar. The linchpin of this "policy", of course, is to artificially suppress
the price of gold, principally with paper positions in the futures and OTC derivatives markets, based on Larry Summers' interpretation of "Gibson's
Paradox" a 1930s Keynesian doctrine essentially stating that inflation expectations move inversely to the gold price.
Summers, the U.S. Treasury Secretary in 1999-2001 and currently Obama's chief economic advisor, is, together with ex-Treasury Secretary Robert Rubin, the
father of the gold suppression scheme. This "policy" thrived under Federal Reserve Chairman Alan Greenspan, who overtly stated in 1998 that "central banks
stand ready to lease gold in increasing quantities should the price rise". And of course, current Treasury Secretary Geithner was head of the New York
Federal Reserve during this time, while current Fed Reserve Chaiman Bernanke (remember him?) was Greenspan's protégé.
Anyhow, regarding the "Strong Dollar Policy", clearly the actions of the past three administrations speak a lot more loudly than those hollow words. Which
brings me to the topic of this article, the ongoing "threat" of IMF gold sales?
The IMF and its Gold Holdings
For backdrop, the IMF, or International Monetary Fund, describes itself as "an organization of 185 countries, working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". This catch-all description essentially enables it to be a behind the scenes clearinghouse of whatever illicit policies its masters are interested in
undertaking, and make no mistake its most powerful members have historically dictated what official IMF policy will be.
The U.S., of course, has a dominant 17% of the IMF's voting power, with no other country holding more than 6%. So it's no surprise that this "international organization" is typically held hostage by the wants of American politicians and bankers, particularly when one realizes that major IMF policy decisions(including proposals to sell gold) require an 85% majority vote to pass. In other words, the U.S. can veto any proposal by its 185-member body.
This reminds me of Robocop's classified "Directive 4", which would not enable him to arrest an officer of the Company that created him!
Anyhow, the IMF theoretically holds 3,217 tonnes of gold (103.4 million ounces), 88% of which (2,814 tonnes) was supposedly acquired more than 30 years
ago, upon the IMF's creation, by pledges from its initial members. The remaining 12%, or 403 tonnes (13.0 million ounces), was supposedly acquired in "off-market gold transactions" in 1999-2000 to repay credit extended by the IMF.
It should be no surprise that the IMF is also charged with creating the 'official rules' of Central Bank gold reserve accounting, creating an outlet for
the upper echelon of U.S. bankers and politicians to stack the deck, and ultimately foster the aforementioned "strong dollar policy" ruse.
The exact details of the IMF's gold accounting policies, for both its own (supposed) reserves and those of member countries, have not surprisingly been
murky. However, it is crystal clear that such rules have allowed Central Bank reserves to be double-counted, creating an illusion of supply not much
different than NASDAQ stock trading volume, which counts two transactions for each share traded, one for the buyer and one for the seller. Not to mention,
despite numerous admissions of Central Bank gold sales over the years, most of the major gold holders (notably, the U.S.), never report declines in their
gold holdings.
In fact, a May 2006 paper titled "Treatment of Gold Swaps and Gold Deposits (Loans)" was presented to an IMF reserve accounting committee, admitting that
IMF member Center Banks "overstate reserve assets because both the funds received from the gold swap and the gold are included in reserve assets."
However, under the pressure of inquiries by Blanchard & Company (a New Orleans coin dealer that sued J.P. Morgan and Barrick Gold in 2003 for market
manipulation), the IMF reported in January 2007 that it was reviewing possible accounting changes for recording gold loans after the Reserves Assets
Technical Expert Group (RESTEG) recommended at the Nineteenth Meeting of the IMF Committee on Balance of Payments Statistics (
http://www.imf.org/external/pubs/ft/bop/2006/06-28.pdf) that unallocated gold accounts held with bullion banks should be excluded from reserve assets. In
other words, they were verifying that gold reserves that have been leased out were still being considered official gold reserves, and recommending that
such accounting procedures should be changed.
In fact, in response to questions posed by Chris Powell, Secretary/Treasurer of GATA in November 2008, an IMF official stated the following:
"Members include their reserve position in the IMF in their international reserves."
This, of course, also validates Blanchard's and GATA's accusations (among others) that anything you read about Central Bank gold holdings is suspect, much
less accounting for the IMF's own gold reserves, which, moreover, is held hostage by the U.S.'s 17% IMF "veto power".
Of course, since those recommendations were made in mid-2007, not a single peep has been heard about the matter - apparently, it's simply a matter of case
closed. The inference, of course, is you shouldn't believe a single thing you read or hear about IMF gold holdings.
More Unknown, Unchecked, Unaudited Data about the IMF
Amidst all the hype about potential IMF gold sales, one needs to realize a few things beforehand.
For one, the aforementioned cloudiness of IMF gold accounting rules makes it uncertain as to exactly how much gold the IMF actually has, especially as
there has NEVER been an audit of such reserves since the gold was supposedly transferred to it in the 1970s (not uncoincidentally, shortly after the gold
standard was abandoned in 1971). And what a shock, the U.S.'s own reserves have not been audited for more than 50 years either.
Secondly, according to IMF rules, only the 403 tonnes of gold described above is even eligible for public sale, not the 2,814 tonnes that is dictated to be held per the established percentage quotas of its member nations.
Not to mention that official IMF gold policy states as such:
"Gold is an undervalued asset, and provides a fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall
financial position. Gold holdings provide the IMF with operational maneuverability, both as regards the use of its resources and through adding credibility to its precautionary balances. In these respects, the benefits of the IMF's gold holdings are passed on to the membership at large, to both creditors and debtors. The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies. The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market."
This statement makes all the sense in the world, reflective of the likely belief of the majority. Despite the U.S.'s 17% veto power, the other 184 IMF
member nations hold 83% of the vote, and the odds are that very few are in favor of selling gold, particularly many of the poorer ones, some of which rely
on mining and have little interest in already depressed gold prices being knocked any lower.
Additionally, another stated IMF gold policy is to "act in a manner dictated by its members, which include all the signatories to the Washington Agreement
(aka the Central Bank Gold Agreement, or CBGA), and to "abide by the 'spirit' of that agreement."
Let's see, under the CBGA, which permits member nations (essentially all the world's major gold holders) to collectively sell 500 tonnes per year, only 357 tonnes were sold in the fiscal year ended September 2008, and just 150-200 tonnes are projected to be sold in the fiscal year ending September 2009. Given that IMF member nations own essentially the entire world's Central Bank Gold Reserves, it strains reality to believe that the "will" of this group is to sell a significant amount of IMF gold in order to obtain more U.S. DOLLARS.
IMF Gold Sales - Five Years of Rumors
For the past seven years, essentially since the gold bull market started to accelerate upward, U.S. government officials have constantly pulled out all
kinds of rumors, threats, and innuendo to knock gold prices down whenever momentum started to move in its favor.
Back in 2002-2004, when Bush's fear propaganda tactics reined, the #1 rumor when gold started to rise was "bin Laden Captured", "bin Laden nearly
captured", "top bin Laden aide captured", or even "top bin Laden aide nearly captured."
These rumors magically circulated only during COMEX trading hours on days when gold prices were sharply rising. And no matter how unsubstantiated, or, more importantly, how little such an event should actually impact the price of gold, it always knocked the price down and thus quashed the threat of runaway gold prices. But the bin Laden rumors eventually wore out their welcome, as a) it never happened (or even came close), and b) at some point, the public lost its fixation on bin Laden, probably around the time that the housing bubble started expanding.
Thus, starting around 2005, bin Laden rumors started to be replaced by "IMF gold sales" rumors. Again, magically these rumors surfaced in the market nearly every time gold price momentum threatened to accelerate (always during COMEX trading hours), and each and every time it has resulted in a temporary bashing of the gold price.
In fact, a fellow GATA contributor last month did a search engine inquiry on "IMF Gold Sales" and came up with more than 2,200 hits, indicating just how
much chatter has been made about this topic, despite the fact that a) it has never happened and b) would likely have an extremely limited impact on gold
prices even if it did.
In February 2008, the United States Treasury announced that it will seek authority from Congress for a limited sale of IMF gold (in other words, the
saleable 403 tonnes). However, since then nothing has occurred on that front, and given that gold prices continue to rise globally under the most
hyperinflationary monetary and fiscal policies of all time, not to mention that Central Bank gold sales have dramatically declined (with some Central Banks actually buying), it is hard to see how any sane legislative body would agree to sell gold in this environment. Not to mention, no IMF vote was ever taken on the topic.
The U.S. and U.K. - The "Gold Axis of Evil"
And remember, the two countries most in favor of keeping the gold price down are the U.S. and its "bitch", the U.K..
The U.S. dollar, though listing badly, is still the world's reserve currency, and if it loses that status its population will unquestionably endure a
horrific, lasting inflationary depression.
Conversely, the U.K. has hitched itself firmly to the U.S. in all shapes and forms, believing that by doing so it can "piggy back" on its fortunes. Tony
Blair's lap dog approach to Bush's insane obsession with Iraq was a perfect example of this, as well as Gordon Brown's publicly announced sale of nearly
all of Britain's gold at the market bottom in 1999 (at roughly $250/oz.) to aid the U.S.'s efforts in maintaining its newly established "strong dollar
policy". Yes, Gordon Brown was the Exchequer of Britain at the time, a fancy way of saying Treasury Secretary (Paulson, Geithner, etc.), and as a result of that suicidal, nation-destroying action, he has just been promoted to the post of Prime Minister!
And now, goldless Britain, that of the collapsing Pound and the freefalling housing market and banking system, played host to the historic G20 meeting. As
icing on the cake, Gordon Brown, arguably the most incompetent and disgraced financial figure in the U.K.'s proud history, promptly put it atop his agenda
to advise the IMF to sell its gold.
You simply cannot make this stuff up!
Not only that, but it was Brown's team of morons that initiated the immediate gold selloff (which, once again, occurred just as gold was about to
accelerate upwards) by creating yet another false rumor about the nature of such sales.
Brown shamefully had one of his financial lackeys, Treasury minister Stephen Timms, insinuate that the potential gold sales would be in addition to the 403 currently saleable tonnes (per the aforementioned IMF charter). Here's Timms' bold-faced lie.err, quote, from April 2nd:
"What's referred to here is in addition to what has been noted previously."
By the way, I know this is a non-sequitur, but I am currently listening to the "Big 80s" channel on Sirius Satellite Radio, and while I write this the song "Lies, Lies, Lies" by the Thompson Twins is playing. LOL.
What's this? Not a day later, on the afternoon of April 3rd, after gold had already been knocked down $40 in less than 24 hours, Timms' lie was already
refuted by the IMF itself:
"The gold sales apply only to those amounts already agreed and announced previously by the IMF," IMF spokesman William Murray told Reuters.
But by then, as usual, the damage had already been done, exclusively of course in the NY CRIMEX (sorry, COMEX) futures market, with all the sell stops
having already been run and the gold stocks already hammered.
The Same Old Sorry Story
Alright, hopefully I've given some good commentary before I sum up the silliness of fretting about IMF gold sales, much less in the context of the
hyperinflationary government policies being executed worldwide. Heck, the only major "accomplishment" of the G-20 was the resolution to print an additional
$1 trillion out of thin air!
And here's the gist of it:
The IMF theoretically has 3,217 tonnes of gold, which at current prices is valued at $92 billion, a drop in the bucket compared to Chinese foreign exchange reserves of $2,000 billion (not to mention the $1,000 billion of newly printed money noted in the last paragraph). Oh yeah, only 1% of Chinese reserves are currently backed by gold, which publicly stated two months ago that it would like to raise this percentage closer to 10%. For those mathematically challenged, 10% of $2 trillion is $200 billion, or more than twice the amount of the IMF's entire gold holdings (assuming they even own that much, which I highly doubt).
However, just 403 tonnes of the IMF gold is even saleable, which at current prices is valued at a measly $11.7 billion.
What, you say? All those rumors and innuendo, and all of those gold smashes, including the surreally insane one that occurred Thursday and Friday, is just
about the potential to sell $11.7 billion of gold? That's it?
Yep, that's it.
But then you need to throw into the equation the fact that no IMF gold sales were approved, or even voted on. Heck, it wasn't even the IMF's idea to sell
gold, but that of the "G-20", which of course was led by Heckle and Jeckle, in other words the U.S. and U.K..
Not to mention that 85% of the IMF member nations would need to approve such a sale, many of which are either gold producers, net gold buyers, or nations
whose populace would "storm the Bastille" if, in this environment, their government officials agreed to sell gold in exchange for paper U.S. dollars.
Personally, I don't even believe the U.S. Congress would approve such a sale (for the aforementioned reasons), and even if they do that would only account
for 17% of the 85% vote required for the motion to pass in the IMF.
Also, don't forget that after the U.S.'s (likely fictional) 8,134 tonne gold reserve at Fort Knox, the number two Central Bank holder is Germany with 3,428 tonnes (don't believe they have that either), whom vehemently stated last year that it will no longer sell any gold.
Off topic, by the way, the new #6 holder of gold reserves in the world is the U.S. gold ETF GLD, with something like 1,300 tonnes. Frankly, I am more
inclined to believe the U.S. government holds 8,134 tonnes of unencumbered (not leased out) gold than that GLD holds 1,300 unencumbered tonnes. That is how little credibility I give to GLD and its custodians, gold/silver Cartel leaders J.P. Morgan and HSBC.
Finally, even if somehow Congress approves the IMF gold sale, and miraculously the IMF body receives the 85%+ approval required to sell the measly $11.7
billion of gold into a market with annual demand closer to $90 billion (at current prices), how long will it take for this process to occur? Frankly, I'd
be surprised if Congress ever votes on this issue, let alone in the near-term. Not to mention how long would it take for the other 184 IMF members to
debate this hypersensitive issue?
And, oh yeah, any sales would be undertaken, by IMF policy, within the spirit of the Central Bank Gold Agreement, which establishes quotes for annual sales by its members.
Thus, to sum up, how on earth are IMF Gold Sales an issue at all?
Even if the extraordinary amount of political process required to reach the point of actual sales occurs, it will likely take a very, very long time and,
more importantly, be of an infinitesimal amount of gold, $11.7 billion.
Which ironically is the same amount Goldman Sachs paid out in bonuses this year, within weeks of receiving $10 billion of TARP money from their old CEO,
Hank Paulson!
SOURCE: http://www.midasletter.com/commentary/090406-1_Ongoing-IMF-gold-myths-unvravelled.php
Since the invention of agriculture and the city state the real game has been keeping elites mindfull of their duties; addressing the issues of those who do the work and containing the manipulation and misuse of the magical power of abstraction enabled by numbers and writing. The computer network and the spreadsheet and their descendants have enabled vast new abstractions and hubris in the offical money sector but those same technologies are also disintermediating all of the old relationships between institutions and flows. We move to a new order.
Gold and silver are real money and the price locus of the realities of energy and geology as well as money, power and politics.
The study of gold is the study of civilisations. Kevin NK
By Andy Hoffman MidasLetter.com Monday, April 6th, 2009
The past week marked an acme in the U.S. government's Orwellian tactics of fooling the "proletariat" into believing the G-20 meeting was, in Obama's words,
"the turning point in our pursuit of global economic recovery."
How any can believe that a meeting of the very same people that caused this mess, of which the only material conclusion was to print another $1 trillion,
was a success is another story. But I digress.
Birth of the Ruse
Such market manipulation, not just in gold but all financial markets, were officially endorsed in the U.S. when the "The President's Working Group on
Capital Markets" (aka the PPT) was established in 1987 as a response to the stock market crash. However, the 'spirit' of these tactics turned to the 'dark
side of the force' in 2001, essentially at the time of 9/11.
In other words, what was once a defensive, overt policy created to enable action in the face of near-term issues, at that point morphed into a 24/7 covert
action targeting the long-term manipulation of public perception.
And it's no surprise that under this ruse a monstrous housing bubble was born, as well as the birth of the financial engineering (such as OTC derivatives)
that has directly caused the economic calamity we are facing today. With the "gold alarm bell" turned off by its illegal suppression, the capping of
interest rates, the support of stock markets (via the PPT), and unending bailouts of insolvent entities, the resulting financial imbalances have pushed the
U.S. into an economic abyss that it will likely never re-emerge from. Around that 2001 time frame, a number of forces converged to mark the peak of U.S.
global hegemony, including: the top of the dollar index, the accelerated loss of the U.S.'s manufacturing base, particularly to China the top of the stock
market the bottom of the commodities market the bottom in inflation, both "officially" (via the massaged CPI) and practically the bottom of the gold price
the beginning of Bush's "war on terror", yielding the subsequent acceleration of worldwide anti-American sentiment
It was also around that time that the U.S. "Strong Dollar Policy" started to rear its ugly head from the obscurity which it came from.
Any of these quotes ring a bell?
January 2009: In his confirmation hearing with the Senate Finance Committee, Treasury Secretary Nominee Tim Geithner said that a "strong dollar is in
America's National Interest."
January 2009: "A strong dollar is clearly in our nation's interest," U.S. Treasury Secretary Henry Paulson repeated last Thursday at a White House briefing
on the economic stimulus package.
October 2007: U.S. Treasury Secretary Henry Paulson said on Friday that he believes a strong dollar is in our nation's interest".
January 2005: US Treasury Secretary John Snow said on Friday that the US government remains committed to the so- called "strong dollar" policy.
December 2004: President Bush said Wednesday "The policy of my government is a strong dollar policy."
February 2001: Treasury Secretary Paul H. O'Neill insisted today that the Bush administration is committed to maintaining a strong dollar policy.
September 1999 (for historical context): In his speech yesterday and in a separate interview, Treasury Secretary Summers repeated word for word former
Treasury Secretary Rubin's mantra that a strong dollar is in the interests of the United States.
Notwithstanding, the U.S. dollar index has fallen by roughly 35% during this period due to the seven aforementioned factors, not to mention government
monetary and fiscal policies that easily challenge the most inflationary of recorded history (which are becoming more maniacal with each passing day).
As GATA, or the Gold Anti-Trust Action Committee, has detailed for a decade now, the "Strong Dollar Policy" is nothing more than a ruse aimed at
maintaining confidence in an "emperor with no clothes", in other words the dollar. The linchpin of this "policy", of course, is to artificially suppress
the price of gold, principally with paper positions in the futures and OTC derivatives markets, based on Larry Summers' interpretation of "Gibson's
Paradox" a 1930s Keynesian doctrine essentially stating that inflation expectations move inversely to the gold price.
Summers, the U.S. Treasury Secretary in 1999-2001 and currently Obama's chief economic advisor, is, together with ex-Treasury Secretary Robert Rubin, the
father of the gold suppression scheme. This "policy" thrived under Federal Reserve Chairman Alan Greenspan, who overtly stated in 1998 that "central banks
stand ready to lease gold in increasing quantities should the price rise". And of course, current Treasury Secretary Geithner was head of the New York
Federal Reserve during this time, while current Fed Reserve Chaiman Bernanke (remember him?) was Greenspan's protégé.
Anyhow, regarding the "Strong Dollar Policy", clearly the actions of the past three administrations speak a lot more loudly than those hollow words. Which
brings me to the topic of this article, the ongoing "threat" of IMF gold sales?
The IMF and its Gold Holdings
For backdrop, the IMF, or International Monetary Fund, describes itself as "an organization of 185 countries, working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". This catch-all description essentially enables it to be a behind the scenes clearinghouse of whatever illicit policies its masters are interested in
undertaking, and make no mistake its most powerful members have historically dictated what official IMF policy will be.
The U.S., of course, has a dominant 17% of the IMF's voting power, with no other country holding more than 6%. So it's no surprise that this "international organization" is typically held hostage by the wants of American politicians and bankers, particularly when one realizes that major IMF policy decisions(including proposals to sell gold) require an 85% majority vote to pass. In other words, the U.S. can veto any proposal by its 185-member body.
This reminds me of Robocop's classified "Directive 4", which would not enable him to arrest an officer of the Company that created him!
Anyhow, the IMF theoretically holds 3,217 tonnes of gold (103.4 million ounces), 88% of which (2,814 tonnes) was supposedly acquired more than 30 years
ago, upon the IMF's creation, by pledges from its initial members. The remaining 12%, or 403 tonnes (13.0 million ounces), was supposedly acquired in "off-market gold transactions" in 1999-2000 to repay credit extended by the IMF.
It should be no surprise that the IMF is also charged with creating the 'official rules' of Central Bank gold reserve accounting, creating an outlet for
the upper echelon of U.S. bankers and politicians to stack the deck, and ultimately foster the aforementioned "strong dollar policy" ruse.
The exact details of the IMF's gold accounting policies, for both its own (supposed) reserves and those of member countries, have not surprisingly been
murky. However, it is crystal clear that such rules have allowed Central Bank reserves to be double-counted, creating an illusion of supply not much
different than NASDAQ stock trading volume, which counts two transactions for each share traded, one for the buyer and one for the seller. Not to mention,
despite numerous admissions of Central Bank gold sales over the years, most of the major gold holders (notably, the U.S.), never report declines in their
gold holdings.
In fact, a May 2006 paper titled "Treatment of Gold Swaps and Gold Deposits (Loans)" was presented to an IMF reserve accounting committee, admitting that
IMF member Center Banks "overstate reserve assets because both the funds received from the gold swap and the gold are included in reserve assets."
However, under the pressure of inquiries by Blanchard & Company (a New Orleans coin dealer that sued J.P. Morgan and Barrick Gold in 2003 for market
manipulation), the IMF reported in January 2007 that it was reviewing possible accounting changes for recording gold loans after the Reserves Assets
Technical Expert Group (RESTEG) recommended at the Nineteenth Meeting of the IMF Committee on Balance of Payments Statistics (
http://www.imf.org/external/pubs/ft/bop/2006/06-28.pdf) that unallocated gold accounts held with bullion banks should be excluded from reserve assets. In
other words, they were verifying that gold reserves that have been leased out were still being considered official gold reserves, and recommending that
such accounting procedures should be changed.
In fact, in response to questions posed by Chris Powell, Secretary/Treasurer of GATA in November 2008, an IMF official stated the following:
"Members include their reserve position in the IMF in their international reserves."
This, of course, also validates Blanchard's and GATA's accusations (among others) that anything you read about Central Bank gold holdings is suspect, much
less accounting for the IMF's own gold reserves, which, moreover, is held hostage by the U.S.'s 17% IMF "veto power".
Of course, since those recommendations were made in mid-2007, not a single peep has been heard about the matter - apparently, it's simply a matter of case
closed. The inference, of course, is you shouldn't believe a single thing you read or hear about IMF gold holdings.
More Unknown, Unchecked, Unaudited Data about the IMF
Amidst all the hype about potential IMF gold sales, one needs to realize a few things beforehand.
For one, the aforementioned cloudiness of IMF gold accounting rules makes it uncertain as to exactly how much gold the IMF actually has, especially as
there has NEVER been an audit of such reserves since the gold was supposedly transferred to it in the 1970s (not uncoincidentally, shortly after the gold
standard was abandoned in 1971). And what a shock, the U.S.'s own reserves have not been audited for more than 50 years either.
Secondly, according to IMF rules, only the 403 tonnes of gold described above is even eligible for public sale, not the 2,814 tonnes that is dictated to be held per the established percentage quotas of its member nations.
Not to mention that official IMF gold policy states as such:
"Gold is an undervalued asset, and provides a fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall
financial position. Gold holdings provide the IMF with operational maneuverability, both as regards the use of its resources and through adding credibility to its precautionary balances. In these respects, the benefits of the IMF's gold holdings are passed on to the membership at large, to both creditors and debtors. The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies. The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market."
This statement makes all the sense in the world, reflective of the likely belief of the majority. Despite the U.S.'s 17% veto power, the other 184 IMF
member nations hold 83% of the vote, and the odds are that very few are in favor of selling gold, particularly many of the poorer ones, some of which rely
on mining and have little interest in already depressed gold prices being knocked any lower.
Additionally, another stated IMF gold policy is to "act in a manner dictated by its members, which include all the signatories to the Washington Agreement
(aka the Central Bank Gold Agreement, or CBGA), and to "abide by the 'spirit' of that agreement."
Let's see, under the CBGA, which permits member nations (essentially all the world's major gold holders) to collectively sell 500 tonnes per year, only 357 tonnes were sold in the fiscal year ended September 2008, and just 150-200 tonnes are projected to be sold in the fiscal year ending September 2009. Given that IMF member nations own essentially the entire world's Central Bank Gold Reserves, it strains reality to believe that the "will" of this group is to sell a significant amount of IMF gold in order to obtain more U.S. DOLLARS.
IMF Gold Sales - Five Years of Rumors
For the past seven years, essentially since the gold bull market started to accelerate upward, U.S. government officials have constantly pulled out all
kinds of rumors, threats, and innuendo to knock gold prices down whenever momentum started to move in its favor.
Back in 2002-2004, when Bush's fear propaganda tactics reined, the #1 rumor when gold started to rise was "bin Laden Captured", "bin Laden nearly
captured", "top bin Laden aide captured", or even "top bin Laden aide nearly captured."
These rumors magically circulated only during COMEX trading hours on days when gold prices were sharply rising. And no matter how unsubstantiated, or, more importantly, how little such an event should actually impact the price of gold, it always knocked the price down and thus quashed the threat of runaway gold prices. But the bin Laden rumors eventually wore out their welcome, as a) it never happened (or even came close), and b) at some point, the public lost its fixation on bin Laden, probably around the time that the housing bubble started expanding.
Thus, starting around 2005, bin Laden rumors started to be replaced by "IMF gold sales" rumors. Again, magically these rumors surfaced in the market nearly every time gold price momentum threatened to accelerate (always during COMEX trading hours), and each and every time it has resulted in a temporary bashing of the gold price.
In fact, a fellow GATA contributor last month did a search engine inquiry on "IMF Gold Sales" and came up with more than 2,200 hits, indicating just how
much chatter has been made about this topic, despite the fact that a) it has never happened and b) would likely have an extremely limited impact on gold
prices even if it did.
In February 2008, the United States Treasury announced that it will seek authority from Congress for a limited sale of IMF gold (in other words, the
saleable 403 tonnes). However, since then nothing has occurred on that front, and given that gold prices continue to rise globally under the most
hyperinflationary monetary and fiscal policies of all time, not to mention that Central Bank gold sales have dramatically declined (with some Central Banks actually buying), it is hard to see how any sane legislative body would agree to sell gold in this environment. Not to mention, no IMF vote was ever taken on the topic.
The U.S. and U.K. - The "Gold Axis of Evil"
And remember, the two countries most in favor of keeping the gold price down are the U.S. and its "bitch", the U.K..
The U.S. dollar, though listing badly, is still the world's reserve currency, and if it loses that status its population will unquestionably endure a
horrific, lasting inflationary depression.
Conversely, the U.K. has hitched itself firmly to the U.S. in all shapes and forms, believing that by doing so it can "piggy back" on its fortunes. Tony
Blair's lap dog approach to Bush's insane obsession with Iraq was a perfect example of this, as well as Gordon Brown's publicly announced sale of nearly
all of Britain's gold at the market bottom in 1999 (at roughly $250/oz.) to aid the U.S.'s efforts in maintaining its newly established "strong dollar
policy". Yes, Gordon Brown was the Exchequer of Britain at the time, a fancy way of saying Treasury Secretary (Paulson, Geithner, etc.), and as a result of that suicidal, nation-destroying action, he has just been promoted to the post of Prime Minister!
And now, goldless Britain, that of the collapsing Pound and the freefalling housing market and banking system, played host to the historic G20 meeting. As
icing on the cake, Gordon Brown, arguably the most incompetent and disgraced financial figure in the U.K.'s proud history, promptly put it atop his agenda
to advise the IMF to sell its gold.
You simply cannot make this stuff up!
Not only that, but it was Brown's team of morons that initiated the immediate gold selloff (which, once again, occurred just as gold was about to
accelerate upwards) by creating yet another false rumor about the nature of such sales.
Brown shamefully had one of his financial lackeys, Treasury minister Stephen Timms, insinuate that the potential gold sales would be in addition to the 403 currently saleable tonnes (per the aforementioned IMF charter). Here's Timms' bold-faced lie.err, quote, from April 2nd:
"What's referred to here is in addition to what has been noted previously."
By the way, I know this is a non-sequitur, but I am currently listening to the "Big 80s" channel on Sirius Satellite Radio, and while I write this the song "Lies, Lies, Lies" by the Thompson Twins is playing. LOL.
What's this? Not a day later, on the afternoon of April 3rd, after gold had already been knocked down $40 in less than 24 hours, Timms' lie was already
refuted by the IMF itself:
"The gold sales apply only to those amounts already agreed and announced previously by the IMF," IMF spokesman William Murray told Reuters.
But by then, as usual, the damage had already been done, exclusively of course in the NY CRIMEX (sorry, COMEX) futures market, with all the sell stops
having already been run and the gold stocks already hammered.
The Same Old Sorry Story
Alright, hopefully I've given some good commentary before I sum up the silliness of fretting about IMF gold sales, much less in the context of the
hyperinflationary government policies being executed worldwide. Heck, the only major "accomplishment" of the G-20 was the resolution to print an additional
$1 trillion out of thin air!
And here's the gist of it:
The IMF theoretically has 3,217 tonnes of gold, which at current prices is valued at $92 billion, a drop in the bucket compared to Chinese foreign exchange reserves of $2,000 billion (not to mention the $1,000 billion of newly printed money noted in the last paragraph). Oh yeah, only 1% of Chinese reserves are currently backed by gold, which publicly stated two months ago that it would like to raise this percentage closer to 10%. For those mathematically challenged, 10% of $2 trillion is $200 billion, or more than twice the amount of the IMF's entire gold holdings (assuming they even own that much, which I highly doubt).
However, just 403 tonnes of the IMF gold is even saleable, which at current prices is valued at a measly $11.7 billion.
What, you say? All those rumors and innuendo, and all of those gold smashes, including the surreally insane one that occurred Thursday and Friday, is just
about the potential to sell $11.7 billion of gold? That's it?
Yep, that's it.
But then you need to throw into the equation the fact that no IMF gold sales were approved, or even voted on. Heck, it wasn't even the IMF's idea to sell
gold, but that of the "G-20", which of course was led by Heckle and Jeckle, in other words the U.S. and U.K..
Not to mention that 85% of the IMF member nations would need to approve such a sale, many of which are either gold producers, net gold buyers, or nations
whose populace would "storm the Bastille" if, in this environment, their government officials agreed to sell gold in exchange for paper U.S. dollars.
Personally, I don't even believe the U.S. Congress would approve such a sale (for the aforementioned reasons), and even if they do that would only account
for 17% of the 85% vote required for the motion to pass in the IMF.
Also, don't forget that after the U.S.'s (likely fictional) 8,134 tonne gold reserve at Fort Knox, the number two Central Bank holder is Germany with 3,428 tonnes (don't believe they have that either), whom vehemently stated last year that it will no longer sell any gold.
Off topic, by the way, the new #6 holder of gold reserves in the world is the U.S. gold ETF GLD, with something like 1,300 tonnes. Frankly, I am more
inclined to believe the U.S. government holds 8,134 tonnes of unencumbered (not leased out) gold than that GLD holds 1,300 unencumbered tonnes. That is how little credibility I give to GLD and its custodians, gold/silver Cartel leaders J.P. Morgan and HSBC.
Finally, even if somehow Congress approves the IMF gold sale, and miraculously the IMF body receives the 85%+ approval required to sell the measly $11.7
billion of gold into a market with annual demand closer to $90 billion (at current prices), how long will it take for this process to occur? Frankly, I'd
be surprised if Congress ever votes on this issue, let alone in the near-term. Not to mention how long would it take for the other 184 IMF members to
debate this hypersensitive issue?
And, oh yeah, any sales would be undertaken, by IMF policy, within the spirit of the Central Bank Gold Agreement, which establishes quotes for annual sales by its members.
Thus, to sum up, how on earth are IMF Gold Sales an issue at all?
Even if the extraordinary amount of political process required to reach the point of actual sales occurs, it will likely take a very, very long time and,
more importantly, be of an infinitesimal amount of gold, $11.7 billion.
Which ironically is the same amount Goldman Sachs paid out in bonuses this year, within weeks of receiving $10 billion of TARP money from their old CEO,
Hank Paulson!
SOURCE: http://www.midasletter.com/commentary/090406-1_Ongoing-IMF-gold-myths-unvravelled.php
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