“IF FIVE hundred millions of paper had been of such advantage, five hundred millions additional would be of still greater advantage.” So Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds, described the “quantitative easing” tactics of the French regent and his economic adviser, John Law, at the time of the Mississippi bubble in the early 18th century. The Mississippi scheme was a precursor of modern attempts to reflate the economy with unorthodox monetary policies. It is hard not to be struck by parallels with recent events.
Law was a brilliant mathematician who used his understanding of probability to help his gambling habit. Escaping from his native Scotland after killing a rival in a duel, he made friends with the Duke of Orleans, the regent of the young king Louis XV.
The finances of the French government were in a terrible mess. Louis XIV had spent much of his long reign fighting expensive wars. Tax collection was in the hands of various agents, who were more concerned with enriching themselves than the state. Not only was the monarchy struggling to pay the interest on its debt, there was also a credit crunch in the form of a shortage of the gold and silver coins needed to fund economic activity.
Law’s insight was that economic activity could be boosted by the use of paper money that was not backed by gold and silver. He was well ahead of his time.
Establishing confidence in a new monetary system was the trickiest part. Law had the benefit of working for an absolute monarchy which could decree that taxes should be paid in the form of notes issued by his new bank, Banque Générale. He also believed, having observed the success of the Dutch in exploiting the spice trade in the East Indies, that France could use paper money to develop its colonial possessions. Hence the Mississippi scheme, under which Law created the Compagnie d’Occident to exploit trade opportunities in what is now the United States. The money raised from these share issues was used to repay the government’s debts; on occasion, Law’s bank lent investors the money to buy shares.
Turn this into modern economic jargon and Law could be described as creating a stimulus package for French economic activity. But rather than rescuing sunset industries such as carmaking, Law was an early venture capitalist, financing the dynamic potential of the Mississippi delta.
The problem was that the delta was a mosquito-infested swamp. According to Niall Ferguson, a historian, 80% of the early colonists died from starvation or disease. Even though the company had monopolies over things like tobacco, it had little chance of generating enough income to fund the dividends Law had promised.
So a vicious circle was created, in which a growing money supply was needed to bolster the share price of the Mississippi company and a rising share price was needed to maintain confidence in the system of paper money. You can see parallels with recent times, in which money was lent on the back of rising asset prices, and higher prices gave banks the confidence to lend more money.
When the scheme faltered Law resorted to a number of rescue packages, many of which have their echoes 300 years later. One was for the bank to guarantee to buy shares in the Mississippi company at a set price (think of the various government asset-purchase schemes today). Then the company took over the bank (a rescue along the lines of Fannie Mae and Freddie Mac). Finally there were restrictions on the amount of gold and silver that could be owned (something America tried in the 1930s).
All these rules failed and the scheme collapsed. Law was exiled and died in poverty. The French state’s finances stayed weak, helping trigger the 1789 revolution. The idea of a “fiat” currency was perceived to be the essence of recklessness for another two centuries and the link between money and gold was not fully abandoned until the 1970s, when the Bretton Woods system expired.
Of course, the parallels with today are not exact. Law’s system took just four years to collapse; today’s fiat money regime has been running for nearly 40 years. The growth in money supply has been less excessive this time. Technological change and the entry of China into the world economy have generated growth rates beyond the dreams of 18th-century man. But one lesson from Law’s sorry tale endures: attempts to maintain asset prices above their fundamental value are eventually doomed to failure.
http://www.economist.com/businessfinance/displayStory.cfm?story_id=14215012
Showing posts with label private money. Show all posts
Showing posts with label private money. Show all posts
24 August 2009
why money is collapsing and why central banks need adult supervision
Hat Tip Taichi
Introduction: Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Brown developed an interest in the developing world and its problems while living abroad for eleven years in Kenya, Honduras, Guatemala and Nicaragua. She returned to practicing law when she was asked to join the legal team of a popular Tijuana healer with an innovative cancer therapy, who was targeted by the chemotherapy industry in the 1990s. That experience produced her book Forbidden Medicine, which traces the suppression of natural health treatments to the same corrupting influences that have captured the money system. Brown's eleven books include the bestselling Nature's Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000 copies.
Daily Bell: Nice to meet you.
Brown: My pleasure!
Daily Bell: Nice to meet you.
Brown: My pleasure!
Daily Bell: Can you tell us your book's thesis in a nutshell?
Brown: Our money is an illusion. Except for coins, which compose only one ten-thousandth of the money supply, all of our money today consists of debt to private banks. Banks always take back more money in principal and interest than they put into the money supply as principal, making the system basically a pyramid scheme. After 300 years, this scheme has spread around the world and has now reached its mathematical limits. The whole world has been captured in the debt trap of a private international banking monopoly.
Daily Bell: These are clearheaded deductions about economics. How did you get interested?
Brown: In my earlier books, which were on health and the politics of health, I saw the pharmaceutical industry as the force to be reckoned with and exposed. I was on the legal team of a Tijuana cancer therapist named Jimmy Keller, who showed Ed Griffin's documentary "World Without Cancer" to all his patients. I read Griffin's book of the same name and realized that the banking, drug and oil cartels were basically the same entities, and that their power came from the power to create money that they had usurped from the people themselves. This was such a mind-boggling insight that I felt I had to write about it.
Daily Bell: How did you make the jump from nutrition to finance?
Brown: My first book was on nutrition but my later books focused on the politics of health and what is wrong with our health care system. I feel we have been misled about drugs and healing, and I wanted to expose that and set it right. After reading "World Without Cancer," I read Ed Griffin's book "The Creature from Jekyll Island," which I thought was great right up to the end; but I felt his solution would not work. I then read other books on the subject and got my grounding in it. I actually got interested in writing on economics and the Federal Reserve in the seventies, but that was before the Internet, and I wasn't able to follow my hunches to the end. When that remarkable tool became available, the missing puzzle pieces fell into place and I could see the larger picture and had to write about it.
Daily Bell: Tell us some more about your background, where you grew up and when you traveled.
Brown: I was born in California, grew up in the Detroit and Denver suburbs, graduated from UC Berkeley in English and then from UCLA Law School. I met my husband Cliff in law school, and we worked as attorneys in L.A. for 10 years (11 for him), until he burned out on Beverly Hills law and decided to join the U.S. Agency for International Development. He always wanted to go abroad, and it gave me a chance to write and have more time with the kids (we have two). From 1989 to 2000, we lived in Kenya, Honduras, Guatemala and Nicaragua. Then I got divorced and returned to the States, where I discovered this most interesting of writing subjects. I'm still good friends with my ex; I just ran out of topics overseas! There was more to it than that, of course, but I do feel I had to come back to the States to find this topic du jour. My daughter now works for a U.N. N.G.O. and my son is a graduate student in economics in Michigan.
Daily Bell: What's been the reaction to your book?
Brown: Remarkably good. I get flooded with email, which is great. With my other books, I didn't have much contact with readers and felt like a ghostwriter. With this one, I feel like a lightning rod, attracting ideas from everywhere. I credit it to the Internet, an amazing historical development that has changed the game worldwide.
Daily Bell: Are you familiar with Austrian finance? What do you think of it?
Brown: I am, and I enjoyed reading Murray Rothbard; but I don't think the Quantity Theory of Money is correct. Prices do not benignly adjust to a contraction in the money supply; this has been shown historically. When the money supply contracts, workers get laid off, businesses shut down, and the economy goes into a recession or a depression. It's a fallacy to think you can control prices by controlling the money supply - or even that you can control the money supply ("you" meaning, of course, the central bank). In the 1970s and 1980s, when Milton Friedman's monetarism was popular, attempts were made to regulate prices by regulating the money supply, and they didn't work. Some major recessions resulted, and Third World countries got locked hopelessly in debt from a radical increase in interest rates, but the money supply couldn't be controlled.
The Federal Reserve doesn't create money; banks do. The Federal Reserve just responds by providing the reserves they need after the fact if they come up short. And adding money to the system doesn't raise prices - not if workers and materials are available to make goods. If you add money to the system, the money will go looking for goods, and merchants will respond by making more. Supply and demand will go up together and prices will remain stable. An increase in interest rates is more likely to raise prices. Merchants raise their prices to cover their costs, and interest is a major cost.
Daily Bell: Are you a free-market economist or something else?
Brown: I believe in free markets, but I don't believe we have them today. Virtually every market now is manipulated and controlled. We lost our free markets when we gave away the power to create money to a private banking elite. They got their power through sleight of hand, and it can be reversed only by reversing the sleight of hand. Ironically, to get back our free markets, we need some government intervention. The economy has been captured by thieves, and we need some rules and regulations to put the genie back in the bottle.
Daily Bell: What's wrong with a gold or silver monetary system?
Brown: To answer that question properly will take more than a few sentences, but I'll try to be succinct. There are three ways a precious metal system could be set up: (1) a "gold-backed" fiat currency, of the sort we had until 1933 domestically and until 1971 internationally; (2) 100% gold coins, as Ed Griffin recommends; or (3) gold, silver and anything else trading freely with dollars, as recommended by Ron Paul.
The first alternative failed historically and doesn't work mathematically. Nixon had to take the dollar off the gold standard internationally after DeGaulle traded in his dollars for gold and the British then tried to trade in theirs, and the U.S. was about to run out of gold. In a "fractional reserve" system, only a fraction of the gold necessary to cash in all the dollars "backed" by gold is actually held in the banks' vaults. When people figure that out, you get runs on the banks and the banks have to close their doors. Roosevelt was faced with the same problem. People had panicked and were trading in their dollars for gold at the banks. The dollar was then 40% backed by gold, so whenever anyone cashed in $2 in paper money, $3 in loans had to be called in. The result was a radical collapse in the money supply.
Option #2, an all-gold currency, won't work for a number of reasons, but I'll just mention one: where are you going to get the gold? To be fair, the government would have to swap all the dollars in the money supply for gold. Assume a $13 trillion money supply (M3) and that there is $4 trillion worth of gold in the world (per the last report I saw). Even if you could acquire every penny's worth of gold, you'd have to revalue the gold so that it was worth $3000/ounce. Goldbugs say that's doable, but here's my question: how are you going to get the gold? What are you going to buy it with? Your paper dollars are going to be worthless. What Indian woman wearing that gold around her neck is going to be foolish enough to trade it for your paper dollars?
Ed Griffin would just divide the outstanding money supply by the gold in Fort Knox, but we don't know if there's any gold left in Fort Knox, and even assuming there is, the dollar value per ounce is going to be so far from anything resembling the real market value of gold that tying the dollar to gold will lose all meaning. If you want a fixed money supply, why not just have Congress order up X number of dollars, forbid any more to be issued, and make it illegal for banks to create credit on their books? Let them lend what they have and no more. Even that won't work though; you'll quickly degenerate into recession or depression, because there won't be enough money for innovation, development and the like. The ability to create and extend credit is a good thing and is necessary to a thriving economy. It's just a question of who gets to create it, private banks (which then proceed to charge interest on it that they siphon off the top as profits) or public banks, drawing on the "full faith and credit of the United States" because they are the United States and can return the profits to the United States, maintaining a mathematically sound system?
The third idea - allowing people to trade in any currency they want - doesn't solve anything and just creates new problems. What's the exchange rate going to be between these various domestic currencies, and who is going to set it? Are you going to allow shortselling between currencies, derivative bets, etc.? If you have silver and gold coins trading together, what happens if gold goes up in value relative to silver? Will you have to change the face value of the coins? They could be left unstamped, but then you won't really have coins; you'll just have round gold bars. Then why not just keep your gold bars and sell them for paper dollars as needed? If the paper dollars lose value, as goldbugs are sure they will, the gold bars will fetch more dollars when sold, so value will have been preserved just as it would have been if the gold were actually turned into gold coins.
Daily Bell: You are somewhat cynical about government, yet your solutions feature government involvement. Can government really be trusted to do the right thing?
Brown: I have faith in the sort of government "of the people, by the people, for the people" described by Abraham Lincoln; but we don't have that now. What we have is government controlled by a few giant corporations, and they got their power by acquiring the power to create the national money supply. "Allow me to issue and control a nation's currency," Amschel Mayer Rothschild allegedly said in the 18th century, "and I care not who makes its laws." That statement may be apocryphal, but that is how they did it, and that is the power we have to get back if we want a just and trustworthy government that represents people rather than wealthy corporations.
Daily Bell: Do you believe in a business cycle - and that central banks aggravate it by printing too much money?
Brown: We had obvious business cycles in the 19th century when we were on the gold standard. Banks would issue banknotes that were many multiples of the gold they held in their vaults, until the paper money supply so far outstripped its backing that people realized the banks could not make good on all their gold-backed notes and there would be runs on the banks. "Fiat money" was not the problem though. The whole system was a ruse. The gold backing allowed private bankers to create paper money on a printing press and lend it at interest, pretending it represented gold the bankers did not really have in their vaults. Privately-issued paper money that is only partially backed by precious metals is a form of counterfeiting whether the sums are prudently managed or not.
Daily Bell: Was central banking over-printing of money the proximate cause of the economic crisis?
Brown: No. Alan Greenspan did lower interest rates to ridiculously low levels in 2001, precipitating the housing bubble that precipitated the current crisis; and he gave his blessing to derivatives, which allowed banks to move loans off their books, package them up, and sell them to investors, making room on their books for more loans and fanning the housing bubble. But it wasn't the central bank that over-printed money. It was the commercial banks, and of course they don't actually "print" it. They just create it as accounting entries on their books. The "crisis" came when there was a sudden shift in accounting rules, from "mark to fantasy" to "mark to market". The idea was to rein in the over exuberance\ of the banks; but the banks were just doing what they had to do to keep the Ponzi scheme going: create ever more loans. The real cause of the crisis was the Ponzi scheme itself: it just ran out of its food source.
Daily Bell: What are the best investments to make throughout the business cycle, and do they change over time?
Brown: They change over time, and because markets are so heavily manipulated, you can't really know what they are unless you're an insider. The rest of us just have to pay very close attention and ride the roller coaster. A case in point was a year ago, when gold was about to break through $1000, oil was hovering near $150/barrel, bank stocks were plummeting, and so was the dollar. Suddenly in July, everything miraculously reversed - the dollar and bank stocks shot up, and gold and oil plunged. What happened? The Japanese central bank later admitted in its local paper that the central banks had colluded to manipulate the markets.
Daily Bell: What do you think of the current economic crisis. Are Western countries handling it well?
Brown: Yes and no. The credit system has collapsed and Western central banks are trying to pump it back up with "quantitative easing," which is a better approach than President Hoover took when he tried to tighten the government's belt and "balance the budget" in the early 1930s. But bailing out the banks is the wrong approach. Governments should be using quantitative easing (essentially money-printing) to build infrastructure and pay the government's bills rather than trying to clean up the toxic books of failed banks. The problem is that the central banks are there to serve the banking system, not the people. We need truly national central banks. England and Canada technically own their central banks, but their governments still borrow from private banks. They don't use their central banks as if they owned them. China, Malaysia, and South Korea do; and they're faring quite well these days.
Daily Bell: Do you believe in the bailouts taking place in America?
Brown: No. We've been extorted into them. We've been made to believe the only way we can save our credit system is to spend our hard-earned taxpayer money to save the banks that got us into the mess, but that's not true. We can set up our own public credit system and let the private parasitic cartel fend for itself. They made billions in the free market; let them go down in the free market.
Daily Bell: Can you explain the genesis of the financial crisis?
Brown: Taking the long view, it's the end of a 300 year Ponzi scheme. Virtually all of our money is created by banks as loans; but banks create only the principal, not the interest necessary to pay their loans back. More is always owed back than is created in the first place, and new borrowers must continually be found to take out new loans to create the money to pay this extra interest. After 300 years, the whole world has been locked in debt, and the parasitic pyramid has run out of its food source.
All sorts of scams and schemes were devised to plunder the last dollar out of borrowers - securitization of subprime mortgages to move them off the banks' books and make room for more, derivatives to supposedly eliminate the risk of subprime default and induce investors to buy, etc. But the schemes have been exposed, and the "shadow lenders" - the investors induced to buy these bundles of subprime debt - have gone away and they aren't coming back any time soon.
The shadow lenders made up $10 trillion worth of the mortgage market. Virtually all of our money consists of credit (or debt), and a big chunk of this credit has disappeared. The money supply is collapsing, and that is what has caused the financial crisis. The solution is to put money back into the system; but the banks can't do it, because the Bank for International Settlements has imposed a tourniquet on lending with the Basel Accords.
We need to set up our own public banks, which cannot run short of "the full faith and credit of the United States" because they ARE the United States (or whatever local government is setting them up). In the U.S., we should nationalize the Federal Reserve and let it operate like a real government-owned bank, issuing money and credit on behalf of the public for infrastructure and other government expenditures. States could also set up their own credit mechanisms by setting up their own banks.
Daily Bell: Do you believe that some of your ideas will be taken up officially?
Brown: I keep trying, knocking at any doors I see; but it's a slow-moving machine. The first step is mass education and popular understanding.
Daily Bell: Have you heard from Wall Street about your ideas?
Brown: No.
Daily Bell: Are you at all worried about the reaction to your ideas?
Brown: I try to suggest solutions that are good for everyone. I think the private banking business has actually come to the end of the line. They're scrambling desperately to hold it all together, but there's not much more they can do. The whole multi-trillion dollar derivatives edifice was constructed in an attempt to bring business back that the banks were losing to their competitor non-bank institutions, but it didn't work in the end. I think the bankers might be relieved to pass the baton. Not that they want to lose their existing fortunes, but they might be ready to retire to their favorite islands and let the next generation tackle the problem; or to take jobs exercising their expertise in a new public banking arrangement with the stable backing of the government.
Daily Bell: You do a great deal of public speaking. What do you emphasize most in your talks?
Brown: Solutions, solutions, solutions. This nut can be cracked. We've been looking at the problem wrong. When we step outside the box and look again, it's all quite simple. Truth is simple.
Daily Bell: What are the most important - seminal -- articles of yours that you would encourage everyone to read? Where can they be found?
Brown: My articles can all be found on my website at WebofDebt.com. I try to write one every week or two, and they're quite topical, but the most popular (per the OpEdNews ratings) have been "It's the Derivatives, Stupid!", written in September 2008 after the Lehman/AIG collapse; "Borrowing from Peter to Pay Paul: The Wall Street Ponzi Scheme Called Fractional Reserve Banking" (December 29, 2008); and "Toward a Solution to the Debt Crisis in California" (July 13, 2009). My latest article is "The Public Option in Banking: How We Can Beat Wall Street at Its Own Game" (August 8, 2009), posted on the Huffington Post among other places.
Daily Bell: On behalf of all of our readers we thank you for sharing your views with us - and for your courageous and important work.
Brown: You're welcome. I don't feel courageous; I just write. I live with my 90-year-old mother in a senior village. I need the excitement!
http://www.thedailybell.com/496/Ellen-Brown-Web-of-Debt.html
Introduction: Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Brown developed an interest in the developing world and its problems while living abroad for eleven years in Kenya, Honduras, Guatemala and Nicaragua. She returned to practicing law when she was asked to join the legal team of a popular Tijuana healer with an innovative cancer therapy, who was targeted by the chemotherapy industry in the 1990s. That experience produced her book Forbidden Medicine, which traces the suppression of natural health treatments to the same corrupting influences that have captured the money system. Brown's eleven books include the bestselling Nature's Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000 copies.
Daily Bell: Nice to meet you.
Brown: My pleasure!
Daily Bell: Nice to meet you.
Brown: My pleasure!
Daily Bell: Can you tell us your book's thesis in a nutshell?
Brown: Our money is an illusion. Except for coins, which compose only one ten-thousandth of the money supply, all of our money today consists of debt to private banks. Banks always take back more money in principal and interest than they put into the money supply as principal, making the system basically a pyramid scheme. After 300 years, this scheme has spread around the world and has now reached its mathematical limits. The whole world has been captured in the debt trap of a private international banking monopoly.
Daily Bell: These are clearheaded deductions about economics. How did you get interested?
Brown: In my earlier books, which were on health and the politics of health, I saw the pharmaceutical industry as the force to be reckoned with and exposed. I was on the legal team of a Tijuana cancer therapist named Jimmy Keller, who showed Ed Griffin's documentary "World Without Cancer" to all his patients. I read Griffin's book of the same name and realized that the banking, drug and oil cartels were basically the same entities, and that their power came from the power to create money that they had usurped from the people themselves. This was such a mind-boggling insight that I felt I had to write about it.
Daily Bell: How did you make the jump from nutrition to finance?
Brown: My first book was on nutrition but my later books focused on the politics of health and what is wrong with our health care system. I feel we have been misled about drugs and healing, and I wanted to expose that and set it right. After reading "World Without Cancer," I read Ed Griffin's book "The Creature from Jekyll Island," which I thought was great right up to the end; but I felt his solution would not work. I then read other books on the subject and got my grounding in it. I actually got interested in writing on economics and the Federal Reserve in the seventies, but that was before the Internet, and I wasn't able to follow my hunches to the end. When that remarkable tool became available, the missing puzzle pieces fell into place and I could see the larger picture and had to write about it.
Daily Bell: Tell us some more about your background, where you grew up and when you traveled.
Brown: I was born in California, grew up in the Detroit and Denver suburbs, graduated from UC Berkeley in English and then from UCLA Law School. I met my husband Cliff in law school, and we worked as attorneys in L.A. for 10 years (11 for him), until he burned out on Beverly Hills law and decided to join the U.S. Agency for International Development. He always wanted to go abroad, and it gave me a chance to write and have more time with the kids (we have two). From 1989 to 2000, we lived in Kenya, Honduras, Guatemala and Nicaragua. Then I got divorced and returned to the States, where I discovered this most interesting of writing subjects. I'm still good friends with my ex; I just ran out of topics overseas! There was more to it than that, of course, but I do feel I had to come back to the States to find this topic du jour. My daughter now works for a U.N. N.G.O. and my son is a graduate student in economics in Michigan.
Daily Bell: What's been the reaction to your book?
Brown: Remarkably good. I get flooded with email, which is great. With my other books, I didn't have much contact with readers and felt like a ghostwriter. With this one, I feel like a lightning rod, attracting ideas from everywhere. I credit it to the Internet, an amazing historical development that has changed the game worldwide.
Daily Bell: Are you familiar with Austrian finance? What do you think of it?
Brown: I am, and I enjoyed reading Murray Rothbard; but I don't think the Quantity Theory of Money is correct. Prices do not benignly adjust to a contraction in the money supply; this has been shown historically. When the money supply contracts, workers get laid off, businesses shut down, and the economy goes into a recession or a depression. It's a fallacy to think you can control prices by controlling the money supply - or even that you can control the money supply ("you" meaning, of course, the central bank). In the 1970s and 1980s, when Milton Friedman's monetarism was popular, attempts were made to regulate prices by regulating the money supply, and they didn't work. Some major recessions resulted, and Third World countries got locked hopelessly in debt from a radical increase in interest rates, but the money supply couldn't be controlled.
The Federal Reserve doesn't create money; banks do. The Federal Reserve just responds by providing the reserves they need after the fact if they come up short. And adding money to the system doesn't raise prices - not if workers and materials are available to make goods. If you add money to the system, the money will go looking for goods, and merchants will respond by making more. Supply and demand will go up together and prices will remain stable. An increase in interest rates is more likely to raise prices. Merchants raise their prices to cover their costs, and interest is a major cost.
Daily Bell: Are you a free-market economist or something else?
Brown: I believe in free markets, but I don't believe we have them today. Virtually every market now is manipulated and controlled. We lost our free markets when we gave away the power to create money to a private banking elite. They got their power through sleight of hand, and it can be reversed only by reversing the sleight of hand. Ironically, to get back our free markets, we need some government intervention. The economy has been captured by thieves, and we need some rules and regulations to put the genie back in the bottle.
Daily Bell: What's wrong with a gold or silver monetary system?
Brown: To answer that question properly will take more than a few sentences, but I'll try to be succinct. There are three ways a precious metal system could be set up: (1) a "gold-backed" fiat currency, of the sort we had until 1933 domestically and until 1971 internationally; (2) 100% gold coins, as Ed Griffin recommends; or (3) gold, silver and anything else trading freely with dollars, as recommended by Ron Paul.
The first alternative failed historically and doesn't work mathematically. Nixon had to take the dollar off the gold standard internationally after DeGaulle traded in his dollars for gold and the British then tried to trade in theirs, and the U.S. was about to run out of gold. In a "fractional reserve" system, only a fraction of the gold necessary to cash in all the dollars "backed" by gold is actually held in the banks' vaults. When people figure that out, you get runs on the banks and the banks have to close their doors. Roosevelt was faced with the same problem. People had panicked and were trading in their dollars for gold at the banks. The dollar was then 40% backed by gold, so whenever anyone cashed in $2 in paper money, $3 in loans had to be called in. The result was a radical collapse in the money supply.
Option #2, an all-gold currency, won't work for a number of reasons, but I'll just mention one: where are you going to get the gold? To be fair, the government would have to swap all the dollars in the money supply for gold. Assume a $13 trillion money supply (M3) and that there is $4 trillion worth of gold in the world (per the last report I saw). Even if you could acquire every penny's worth of gold, you'd have to revalue the gold so that it was worth $3000/ounce. Goldbugs say that's doable, but here's my question: how are you going to get the gold? What are you going to buy it with? Your paper dollars are going to be worthless. What Indian woman wearing that gold around her neck is going to be foolish enough to trade it for your paper dollars?
Ed Griffin would just divide the outstanding money supply by the gold in Fort Knox, but we don't know if there's any gold left in Fort Knox, and even assuming there is, the dollar value per ounce is going to be so far from anything resembling the real market value of gold that tying the dollar to gold will lose all meaning. If you want a fixed money supply, why not just have Congress order up X number of dollars, forbid any more to be issued, and make it illegal for banks to create credit on their books? Let them lend what they have and no more. Even that won't work though; you'll quickly degenerate into recession or depression, because there won't be enough money for innovation, development and the like. The ability to create and extend credit is a good thing and is necessary to a thriving economy. It's just a question of who gets to create it, private banks (which then proceed to charge interest on it that they siphon off the top as profits) or public banks, drawing on the "full faith and credit of the United States" because they are the United States and can return the profits to the United States, maintaining a mathematically sound system?
The third idea - allowing people to trade in any currency they want - doesn't solve anything and just creates new problems. What's the exchange rate going to be between these various domestic currencies, and who is going to set it? Are you going to allow shortselling between currencies, derivative bets, etc.? If you have silver and gold coins trading together, what happens if gold goes up in value relative to silver? Will you have to change the face value of the coins? They could be left unstamped, but then you won't really have coins; you'll just have round gold bars. Then why not just keep your gold bars and sell them for paper dollars as needed? If the paper dollars lose value, as goldbugs are sure they will, the gold bars will fetch more dollars when sold, so value will have been preserved just as it would have been if the gold were actually turned into gold coins.
Daily Bell: You are somewhat cynical about government, yet your solutions feature government involvement. Can government really be trusted to do the right thing?
Brown: I have faith in the sort of government "of the people, by the people, for the people" described by Abraham Lincoln; but we don't have that now. What we have is government controlled by a few giant corporations, and they got their power by acquiring the power to create the national money supply. "Allow me to issue and control a nation's currency," Amschel Mayer Rothschild allegedly said in the 18th century, "and I care not who makes its laws." That statement may be apocryphal, but that is how they did it, and that is the power we have to get back if we want a just and trustworthy government that represents people rather than wealthy corporations.
Daily Bell: Do you believe in a business cycle - and that central banks aggravate it by printing too much money?
Brown: We had obvious business cycles in the 19th century when we were on the gold standard. Banks would issue banknotes that were many multiples of the gold they held in their vaults, until the paper money supply so far outstripped its backing that people realized the banks could not make good on all their gold-backed notes and there would be runs on the banks. "Fiat money" was not the problem though. The whole system was a ruse. The gold backing allowed private bankers to create paper money on a printing press and lend it at interest, pretending it represented gold the bankers did not really have in their vaults. Privately-issued paper money that is only partially backed by precious metals is a form of counterfeiting whether the sums are prudently managed or not.
Daily Bell: Was central banking over-printing of money the proximate cause of the economic crisis?
Brown: No. Alan Greenspan did lower interest rates to ridiculously low levels in 2001, precipitating the housing bubble that precipitated the current crisis; and he gave his blessing to derivatives, which allowed banks to move loans off their books, package them up, and sell them to investors, making room on their books for more loans and fanning the housing bubble. But it wasn't the central bank that over-printed money. It was the commercial banks, and of course they don't actually "print" it. They just create it as accounting entries on their books. The "crisis" came when there was a sudden shift in accounting rules, from "mark to fantasy" to "mark to market". The idea was to rein in the over exuberance\ of the banks; but the banks were just doing what they had to do to keep the Ponzi scheme going: create ever more loans. The real cause of the crisis was the Ponzi scheme itself: it just ran out of its food source.
Daily Bell: What are the best investments to make throughout the business cycle, and do they change over time?
Brown: They change over time, and because markets are so heavily manipulated, you can't really know what they are unless you're an insider. The rest of us just have to pay very close attention and ride the roller coaster. A case in point was a year ago, when gold was about to break through $1000, oil was hovering near $150/barrel, bank stocks were plummeting, and so was the dollar. Suddenly in July, everything miraculously reversed - the dollar and bank stocks shot up, and gold and oil plunged. What happened? The Japanese central bank later admitted in its local paper that the central banks had colluded to manipulate the markets.
Daily Bell: What do you think of the current economic crisis. Are Western countries handling it well?
Brown: Yes and no. The credit system has collapsed and Western central banks are trying to pump it back up with "quantitative easing," which is a better approach than President Hoover took when he tried to tighten the government's belt and "balance the budget" in the early 1930s. But bailing out the banks is the wrong approach. Governments should be using quantitative easing (essentially money-printing) to build infrastructure and pay the government's bills rather than trying to clean up the toxic books of failed banks. The problem is that the central banks are there to serve the banking system, not the people. We need truly national central banks. England and Canada technically own their central banks, but their governments still borrow from private banks. They don't use their central banks as if they owned them. China, Malaysia, and South Korea do; and they're faring quite well these days.
Daily Bell: Do you believe in the bailouts taking place in America?
Brown: No. We've been extorted into them. We've been made to believe the only way we can save our credit system is to spend our hard-earned taxpayer money to save the banks that got us into the mess, but that's not true. We can set up our own public credit system and let the private parasitic cartel fend for itself. They made billions in the free market; let them go down in the free market.
Daily Bell: Can you explain the genesis of the financial crisis?
Brown: Taking the long view, it's the end of a 300 year Ponzi scheme. Virtually all of our money is created by banks as loans; but banks create only the principal, not the interest necessary to pay their loans back. More is always owed back than is created in the first place, and new borrowers must continually be found to take out new loans to create the money to pay this extra interest. After 300 years, the whole world has been locked in debt, and the parasitic pyramid has run out of its food source.
All sorts of scams and schemes were devised to plunder the last dollar out of borrowers - securitization of subprime mortgages to move them off the banks' books and make room for more, derivatives to supposedly eliminate the risk of subprime default and induce investors to buy, etc. But the schemes have been exposed, and the "shadow lenders" - the investors induced to buy these bundles of subprime debt - have gone away and they aren't coming back any time soon.
The shadow lenders made up $10 trillion worth of the mortgage market. Virtually all of our money consists of credit (or debt), and a big chunk of this credit has disappeared. The money supply is collapsing, and that is what has caused the financial crisis. The solution is to put money back into the system; but the banks can't do it, because the Bank for International Settlements has imposed a tourniquet on lending with the Basel Accords.
We need to set up our own public banks, which cannot run short of "the full faith and credit of the United States" because they ARE the United States (or whatever local government is setting them up). In the U.S., we should nationalize the Federal Reserve and let it operate like a real government-owned bank, issuing money and credit on behalf of the public for infrastructure and other government expenditures. States could also set up their own credit mechanisms by setting up their own banks.
Daily Bell: Do you believe that some of your ideas will be taken up officially?
Brown: I keep trying, knocking at any doors I see; but it's a slow-moving machine. The first step is mass education and popular understanding.
Daily Bell: Have you heard from Wall Street about your ideas?
Brown: No.
Daily Bell: Are you at all worried about the reaction to your ideas?
Brown: I try to suggest solutions that are good for everyone. I think the private banking business has actually come to the end of the line. They're scrambling desperately to hold it all together, but there's not much more they can do. The whole multi-trillion dollar derivatives edifice was constructed in an attempt to bring business back that the banks were losing to their competitor non-bank institutions, but it didn't work in the end. I think the bankers might be relieved to pass the baton. Not that they want to lose their existing fortunes, but they might be ready to retire to their favorite islands and let the next generation tackle the problem; or to take jobs exercising their expertise in a new public banking arrangement with the stable backing of the government.
Daily Bell: You do a great deal of public speaking. What do you emphasize most in your talks?
Brown: Solutions, solutions, solutions. This nut can be cracked. We've been looking at the problem wrong. When we step outside the box and look again, it's all quite simple. Truth is simple.
Daily Bell: What are the most important - seminal -- articles of yours that you would encourage everyone to read? Where can they be found?
Brown: My articles can all be found on my website at WebofDebt.com. I try to write one every week or two, and they're quite topical, but the most popular (per the OpEdNews ratings) have been "It's the Derivatives, Stupid!", written in September 2008 after the Lehman/AIG collapse; "Borrowing from Peter to Pay Paul: The Wall Street Ponzi Scheme Called Fractional Reserve Banking" (December 29, 2008); and "Toward a Solution to the Debt Crisis in California" (July 13, 2009). My latest article is "The Public Option in Banking: How We Can Beat Wall Street at Its Own Game" (August 8, 2009), posted on the Huffington Post among other places.
Daily Bell: On behalf of all of our readers we thank you for sharing your views with us - and for your courageous and important work.
Brown: You're welcome. I don't feel courageous; I just write. I live with my 90-year-old mother in a senior village. I need the excitement!
http://www.thedailybell.com/496/Ellen-Brown-Web-of-Debt.html
20 January 2009
US dollar deception and hidden credit creation began in 1961
Further analysis of this post. Supkis found the smoking gun..
"This disclosure confirms the conclusions in my article “The Smoking Gun”, http://www.fgmr.com/smokegun.htm> published in December 2000, which used this reporting anomaly described above to illustrate ESF intervention in the gold market.
I should add that my article illustrated ESF intervention ‘for a time’ because shortly after my article was published, the Federal Reserve Bulletin was changed. All ESF references were removed, once again hiding government intervention in the gold market, as explained in my article, “What Is Happening to America's Gold?”.
Published data may be illustrated as follows, bearing in mind that figures would be net, and hence any individual transaction might be offset. For illustration, assume that the Stabilization Fund purchases DM 50 million in the market with dollars currently in the account.
1. Effect on Fund's foreign exchange account: would not appear in Federal Reserve Bank or System data but would be reflected in the quarterly data of the Treasury, with a six to eight-month delay.
2. Fund's dollar account: the item “Other deposits” on our weekly statement would show a decline, and the transaction also would be reflected in the Treasury's quarterly report, but with delay.
3. Reserve accounts: would show an increase in member bank reserves on the Federal Reserve Bank weekly statement.
Essentially, the only real problem related to the foreign exchange position of the Fund would lie in our weekly statement which would show a direct impact on the Fund’s dollar holdings, as reflected in the item “Other Deposits”. In order to minimize immediate analysis of operations over the short-run, it would be desirable to include a wider range of items in these categories. However, operations could under present conditions be masked to some extent by careful supervision of the account and a selective use of “swaps.”
Here are two more important admissions. First, the accounting will be changed to make the Federal Reserve’s balance sheet more opaque, which not only flies in the face of generally accepted accounting practices but also runs roughshod over prudent public policy requirements for close scrutiny of government operations.
Second, and just as importantly, is the mention of swaps. Several GATA supporters, including me, have written about the ways that swaps have been used to intervene in the gold market. Here we learn that swaps were a tool of the Federal Reserve (and presumably the ESF and Treasury) as far back as 1961. Because these entities were not yet intervening then in the foreign exchange market, we can only conclude that up to the writing of this “Confidential” memo, the swaps were being used in the gold market.
III. Conclusion
The approaches discussed above to foreign exchange dealings are suggested possibilities. Whatever the technique used, the United States will run some risk of changes in currency values. To have effective protection of the dollar, such risks--minimized by careful management--would seem a relatively small price to pay. Once a basic choice is made as between operations for the account of the Federal Reserve Banks and operations by the Reserve Bank for the Treasury as fiscal agent, detailed investigation of coordinating techniques and the requirements of secrecy can be made. It may be that fiscal agency operations offer some advantages in the way of speed and simplicity. However, there are distinct benefits to be gained from Federal Reserve operations for its own account. Foreign exchange operations by central banks are considered a normal part of their activities, and there is much to be said for utilizing resources that are not directly limited by a required cash position. April 5, 1961
This Federal Reserve memo discovered in William McChesney Martin’s papers is another important piece of evidence that monetary policy in the United States has run amok. It is one of the formative documents that have put US monetary policy in general and dollar policy in particular on the wrong path. It clearly describes the intent of the Federal Reserve to pursue a dollar policy that was not only hidden from public view, but was contrary to the law at the time which defined the dollar as a weight of gold and required the maintenance of this standard of value. It was also contrary to the US’s international obligations under the Bretton Woods Agreement that required the dollar’s link to gold.
Rather than acknowledging that the dollar by 1961 had become debased, which would lead to a tightening of monetary conditions by raising interest rates (the traditional central bank response to maintain the gold standard) or a devaluation of the dollar to reflect its debased state (the approach taken by Franklin Roosevelt), the aim in 1961 was to pursue a different path. I purposely don’t say it was a ‘new’ path because it wasn’t. It had been tried before countless times by many governments and their central banks, and it has never worked. It is a path to the fiat currency graveyard, and the dollar was put on it by bureaucrats in the Federal Reserve serving their masters, the banks.
Today’s problems with the dollar and countless insolvent banks thus began decades ago. Bankers got what they wanted, a license for the unbridled extension of credit. As a result, we see clearly today what they have wrought. They have nearly collapsed their banks and the dollar as a consequence. So the emergence of this “Confidential” memo from the Federal Reserve is timely, and hopefully today’s policy makers can learn from it."
link
"This disclosure confirms the conclusions in my article “The Smoking Gun”, http://www.fgmr.com/smokegun.htm> published in December 2000, which used this reporting anomaly described above to illustrate ESF intervention in the gold market.
I should add that my article illustrated ESF intervention ‘for a time’ because shortly after my article was published, the Federal Reserve Bulletin was changed. All ESF references were removed, once again hiding government intervention in the gold market, as explained in my article, “What Is Happening to America's Gold?”
Published data may be illustrated as follows, bearing in mind that figures would be net, and hence any individual transaction might be offset. For illustration, assume that the Stabilization Fund purchases DM 50 million in the market with dollars currently in the account.
1. Effect on Fund's foreign exchange account: would not appear in Federal Reserve Bank or System data but would be reflected in the quarterly data of the Treasury, with a six to eight-month delay.
2. Fund's dollar account: the item “Other deposits” on our weekly statement would show a decline, and the transaction also would be reflected in the Treasury's quarterly report, but with delay.
3. Reserve accounts: would show an increase in member bank reserves on the Federal Reserve Bank weekly statement.
Essentially, the only real problem related to the foreign exchange position of the Fund would lie in our weekly statement which would show a direct impact on the Fund’s dollar holdings, as reflected in the item “Other Deposits”. In order to minimize immediate analysis of operations over the short-run, it would be desirable to include a wider range of items in these categories. However, operations could under present conditions be masked to some extent by careful supervision of the account and a selective use of “swaps.”
Here are two more important admissions. First, the accounting will be changed to make the Federal Reserve’s balance sheet more opaque, which not only flies in the face of generally accepted accounting practices but also runs roughshod over prudent public policy requirements for close scrutiny of government operations.
Second, and just as importantly, is the mention of swaps. Several GATA supporters, including me, have written about the ways that swaps have been used to intervene in the gold market. Here we learn that swaps were a tool of the Federal Reserve (and presumably the ESF and Treasury) as far back as 1961. Because these entities were not yet intervening then in the foreign exchange market, we can only conclude that up to the writing of this “Confidential” memo, the swaps were being used in the gold market.
III. Conclusion
The approaches discussed above to foreign exchange dealings are suggested possibilities. Whatever the technique used, the United States will run some risk of changes in currency values. To have effective protection of the dollar, such risks--minimized by careful management--would seem a relatively small price to pay. Once a basic choice is made as between operations for the account of the Federal Reserve Banks and operations by the Reserve Bank for the Treasury as fiscal agent, detailed investigation of coordinating techniques and the requirements of secrecy can be made. It may be that fiscal agency operations offer some advantages in the way of speed and simplicity. However, there are distinct benefits to be gained from Federal Reserve operations for its own account. Foreign exchange operations by central banks are considered a normal part of their activities, and there is much to be said for utilizing resources that are not directly limited by a required cash position. April 5, 1961
This Federal Reserve memo discovered in William McChesney Martin’s papers is another important piece of evidence that monetary policy in the United States has run amok. It is one of the formative documents that have put US monetary policy in general and dollar policy in particular on the wrong path. It clearly describes the intent of the Federal Reserve to pursue a dollar policy that was not only hidden from public view, but was contrary to the law at the time which defined the dollar as a weight of gold and required the maintenance of this standard of value. It was also contrary to the US’s international obligations under the Bretton Woods Agreement that required the dollar’s link to gold.
Rather than acknowledging that the dollar by 1961 had become debased, which would lead to a tightening of monetary conditions by raising interest rates (the traditional central bank response to maintain the gold standard) or a devaluation of the dollar to reflect its debased state (the approach taken by Franklin Roosevelt), the aim in 1961 was to pursue a different path. I purposely don’t say it was a ‘new’ path because it wasn’t. It had been tried before countless times by many governments and their central banks, and it has never worked. It is a path to the fiat currency graveyard, and the dollar was put on it by bureaucrats in the Federal Reserve serving their masters, the banks.
Today’s problems with the dollar and countless insolvent banks thus began decades ago. Bankers got what they wanted, a license for the unbridled extension of credit. As a result, we see clearly today what they have wrought. They have nearly collapsed their banks and the dollar as a consequence. So the emergence of this “Confidential” memo from the Federal Reserve is timely, and hopefully today’s policy makers can learn from it."
link
11 December 2008
The Manipulation of Gold Prices
There is no other leveraged commodity market where short sellers increase their positions, materially, as the price rises, and increase them even more when prices are exploding, except gold and silver. The reason traders don’t normally do that is that it exposes short sellers to unlimited liability and risk. Yet, in both March and July 2008, and on countless occasions over the past 21 years, vast numbers of new gold and silver short positions were temporarily opened up, with the position holders seemingly unconcerned about the fact that precious metals had just risen exponentially, and that there was a very real potential they would bankrupt themselves with unlimited upside potential. Normal traders would not expose themselves to such unlimited risks.
I conclude, therefore, that over the last 21 years or so, “fake” precious metals supply in the form of promises of future delivery have habitually been increased when prices increase until increased “supply” managed to overwhelm increased demand, leading to a temporary price collapse. This is compounded by the fact that the futures prices on COMEX tend to dictate the “official” report price for the precious metals elsewhere.
After the market is broken, shell-shocked leveraged long market participants have always been thrown out of their positions by margin calls, and/or have been happy to sell contracts back to the short sellers at much lower prices. This process has always allowed short sellers to cover short positions at a profit. If for some reason naked shorts needed to deliver, they could always count on various European central banks (and some say the Fed basement repository) to backstop them, releasing tons of physical gold into the market. It seemed that there were always another 34 tons or so of gold dumped at strategic times to bring down fast rising prices. Meanwhile, huge physical market demand in Asia and severe shortages buffered the downside. Because of the physical demand, prices steadily increased but, perhaps, at a much slower pace than would have been the case in the absence of market manipulation.
Rarely was there ever a serious short-squeeze. Rarely, that is, until Friday of last week when the deliveries demanded by non-leveraged long buyers reached record levels. In spite of an avalanche of complaints from gold and silver investors, the CFTC (Commodity Futures Trading Commission) has never bothered to audit even one vault to see if the short sellers really have the alleged gold and silver they claim to have. There is a legal requirement that, in every futures contract that promises to deliver a physical commodity, the short seller must be 90% covered by either a stockpile of the commodity or appropriate forward contracts with primary producers (such as miners). Inaction by CFTC, in the face of obvious market manipulation, implies a historical government endorsed price management.
Things, however, are changing fast. As previously stated, the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest. Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts.
The U.S. economy is in shambles. Both commercial and investment banks are insolvent. European central banks no longer want to sell gold. China wants to buy 360 tons of it as soon as humanly possible, and as soon as it can be done without sending the price into the stratosphere. A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold. There has been a vast expansion of Fed credit, which has risen from $932 billion to $2.25 trillion in the last two and a half months. The Fed has bought nearly all toxic bank assets that were supposed to be purchased pursuant by the $700 billion Congressional bank bailout.
Official bailout funds have been used to buy equity interests in the various banks instead. By avoiding the use of monitored Congressional funds, the Fed has embarked on a secretive campaign to buy toxic assets. They have refused to give any accounting of their activities, even though they are using taxpayer money to do this. The Fed has refused, for example, to comply with a “freedom of information act” request from Bloomberg News. That refusal is now the subject of a major lawsuit.
The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.
First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.
A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.
At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.
This was combined with what is probably a tacit agreement by which the banks were given the money and led to redeposit most newly printed cash back into the Fed, in a category known as “Reserve balances with Federal Reserve Banks”. This category has ballooned from $8 billion in September to $578 billion on November 28th.
On October 9, 2008, the Federal Reserve began paying interest on deposits at Federal Reserve Banks. The overnight rate happens to have dropped way below the “official” federal funds rate. Meanwhile, rates paid by the Fed on required deposits are only .1% less than the federal funds rate, and on voluntary deposits only .35% less than the federal funds rate. Accordingly, U.S. banks can engage in a dollar based one-nation carry trade, which further sequesters the newly printed dollars.
Banks are borrowing from the Fed, then taking the same money, redepositing it, and earning a spread on the interest rate differential. Banks can also deposit newly printed dollars into a category known as “Deposits with Federal Reserve Banks, other than reserve balances.” This category also earns interest in a similar way, and has risen from $12 billion to $554 billion in the same time period. The funds will eventually be used for direct lending from the Fed to open market borrowers, at huge levels of risk that even the free-wheeling cowboys who run things at America’s private banks are not willing to accept.
That being said, most money center banks in America are certainly NOT risk averse, even now. People who are bailed out of foolish decisions never become risk averse. They are, however, very insolvent, and, aside from the non-recourse provisions of Fed repurchase agreements, they would prefer, for bad publicity reasons, not to default on their obligations to the Fed. Aside from the newly printed dollars given to them by the Fed and the recent transfer of all risk to the taxpayers, they have no liquidity of their own with which to make new loans. That is why they aren’t making any. The Fed will eventually make the loans itself and take all the risk, while using the private banking system as merely a means for delivery.
Right now, however, the Fed wants to sequester the new dollars, until the U.S. Treasury has finished the major part of its funding activities. That will allow the Treasury to borrow money at very low rates. The Fed intends to feed money into the system, but at the minimum rate needed to prevent the DOW index from staying under 8,000 for any significant period of time. Right now, most measures are designed simply to stop U.S. banking laws from automatically requiring the closure of most big banks.
The extent of manipulations engaged in by this Federal Reserve is mind numbing. The total number of sequestered dollars has now reached well in excess of $1.2 trillion dollars. That means that Fed credit, so far, has been effectively increased only by about 10%, over the last 2.5 months, rather than 150% that appears on the surface of the Fed balance sheet. The rest is temporarily sequestered.
Back in July, the U.S. Treasury, through the ESF (Exchange Stabilization Fund), sold billions of euros and, I believe, established a dollar sequestering “derivative” by paying interest, perhaps in Euros, to foreign money center banks. This was designed to keep dollars out of circulation, overseas. It was the beginning of the dollar bull back on July 15th.
I had thought, at the time, with good reason, that the U.S. would run out of foreign exchange and would be forced to close down the operation within a few months. I underestimated Ben Bernanke.
Instead, the Fed managed to establish currency swap lines with various foreign nations, under the guise of supplying them with dollars. This need for dollars arose partly as a result of the actions of the Fed, in sequestering Eurodollars in July, and partly as a result of the multiple credit default events which triggered over $2.5 trillion worth of selling in the stock and commodities markets, as 50 to 1 leveraged players were forced to cover about $50 billion worth of credit default insurance obligations.
In truth, the Fed needs the foreign currency more than the foreign central banks need dollars. The Fed is using its new foreign currency resources, in part, to control the value of the dollar, and to ensure that U.S. bailout bonds are sold for the highest possible prices at the lowest possible long term costs. Anyone who buys long term Treasury bills is going to lose a fortune of money in the long term.
The Fed has also taken a number of steps beyond those already discussed to restrict aspects of the normal money supply which most strongly affect exchange rates. For example, they only allowed “currency in circulation” to rise by $33 billion in aggregate, while at the same time increasing foreign reverse repurchase agreements to reduce foreign availability of dollars by $30 billion, and reducing the “other liabilities” category dollar availability by another $7 billion. Since it is likely that “other liabilities” involve foreign held dollars, this resulted in a net deficit of $4 billion on foreign exchange markets, as compared to September, 2008.
All these actions, taken together, have supported the dollar overseas, and led to a breakdown of the commodities markets. The adverse effect of a paradoxically rising dollar has been especially severe in dollar dependent commodity producing nations, such as Ukraine.
The net effect is that the U.S. dollar, in spite of terrible fundamentals, is now King of the Currencies once again, at least temporarily. The rising value of the dollar happens also to support naked short sellers of gold and silver, on COMEX, and these are old friends of the Federal Reserve. Supply and demand ultimately determine the price of gold but, in the shorter term, it is inversely tethered to the dollar. When the dollar is artificially high, gold prices will often plunge artificially low.
But, in short, the Fed currently has gained complete control over the value of the dollar. It can now adjust and micromange the dollar on a day-to-day basis. All it needs to do is open and close the “dollar spigot.” When they want the dollar to rise, the Fed can reduce the number of sequestered dollars. When they want it to fall, they simply ease up, releasing dollars into the financial markets. There is only one problem. Real investors are fleeing the stock market, and stock indexes are becoming more and more dependent upon government cash in order to avoid collapse.
People are liquidating holdings in mutual funds, and redeeming against hedge funds at a fantastic rate. This has created heavy downward pressure on stock prices. If the DOW falls below 8,000 for any significant amount of time, most big American insurance companies will be forced to recognize huge losses on their portfolios, and will become insolvent. Insolvent insurers, like insolvent banks, must be closed by their regulators as a matter of law. Obviously, mass insurer bankruptcies would be yet another major destabilizing slap in the face to an increasingly unstable economy.
The Fed now has only two ways to stop this. One is by brute force. It can buy securities directly, through its primary dealers, thereby supporting and pumping up stock prices. It has done a lot of that in the past few weeks, but this method is highly inefficient and costly. It is better to catalyze upward market movement rather than force it. Catalysis of markets involves opening up the money spigot a bit, allowing some of the sequestered funds to bleed back into the system. This allows the stock market to rise or stabilize naturally, as the equivalent of inflation is created mostly in the stock market without substantial bleed through. At the same time, however, opening the money spigot reduces the value of the dollar and causes gold prices to rise. Rising gold price adversely affects COMEX short sellers who are, as previously stated, old friends of the Federal Reserve.
Gold buying enthusiasm, everywhere but at the COMEX, is at record levels, whereas stock market investing appetite is low. For this reason, when the Fed tried to constrict the money supply on Monday, it caused more damage to the stock market than to the price of gold. Gold declined by over 5%, but the S&P 500 collapsed by over 9%. The next day, the Fed eased up on the money supply spigot, allowing the dollar to fall and the stock market to reflate. If the Fed repeats this performance over and over again, stock investor psychology will be seriously harmed. Withdrawals from mutual and hedge funds will accelerate. The stock market will sink at an uncontrollable rate, and the world will surge onward toward Great Depression II, much worse than the first. At some point, there will be nothing the Fed can do about it, no matter what manipulations it attempts. Hopefully Ben Bernanke is aware of the dangerous nature of the game he is playing.
The Federal Reserve must now make a tough choice. In the past, Federal Reserve Chairmen may have felt it necessary to support regular attacks on gold prices to dissuade conservative people from putting a majority of their capital into gold. Now, however, the world economy needs much higher gold prices in order to devalue paper money, not against other currencies in a "beggar thy neighbor" policy, but against itself. This can jump start the system. If the Fed continued to support gold price suppression, that would collapse the stock market far deeper than they can afford, most insurers will end up bankrupt, and there will be no hope of avoiding Great Depression II.
I think Ben Bernanke is aware of this. Gold shorts will be abandoned, to avoid financial catastrophe. In commenting, I take a practical view, accepting what appears to be so, without passing judgment on the acts and omissions of the last 21 years.
Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.
It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about half of the current increase in Fed credit is eventually neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of gold standard. In the nearer term, gold will rise to about $2,000 per ounce, as the Fed abandons a hopeless campaign to support COMEX short sellers, in favor of saving the other, more productive, functions of the various banks and insurers.
Revaluation of gold, and a return to the gold standard, is the only way that hyperinflation can be avoided while large numbers of paper currency units are released into the economy. This is because most of the rise in prices can be filtered into gold. As the asset value of gold rises, it will soak up excess dollars, euros, pounds, etc., while the appearance of an increased number of currency units will stimulate investor psychology, and lending and economic output will increase, all over the world. Ben Bernanke and the other members of the FOMC Committee must know this, because it is basic economics.
Many venerable names in banking agree, although none have gone so far as to take their thoughts to the natural conclusion. Both JP Morgan Chase's and Citibank’s analysts, for example, are predicting a huge rise in the price of gold. That is interesting because GATA has come up with fairly compelling evidence that JP Morgan Chase (JPM) and HSBC (HBC) may have been big COMEX naked short sellers in the past.
Goldman Sachs (GS) is also a huge bullion bank, which allegedly is heavily involved in downward gold price manipulation. However, this month, both HSBC and GS took lots of deliveries of gold from COMEX. Given the size and bureaucracy at such firms, it is certainly possible for the majority of traders to be entirely honest, while others, at the same firm, may be totally corrupt.
More important, however, than dwelling on the accuracy of conspiracy theories is the fact that huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a “future” than as a spot exchange.
Smart traders at big firms may be buying on COMEX to sell into the spot market, for a profit. This pricing condition is known as “backwardation”. Backwardation is always the first sign that a huge price rise is about to happen. In the absence of backwardation, there is no rational explanation as to why HSBC, Bank of Nova Scotia (BNS), Goldman Sachs, and others are forcing COMEX to make large deliveries.
The fact that this backwardation is hidden from the public eye is not surprising. In spite of the ostensible existence of a so-called “London fix”, 96% of all OTC transactions are secret and unreported. The transactions happen solely between two parties, and are done opaquely, in complete darkness. The current London fix may well be just as fake as the bank interest rate reports that comprised LIBOR proved to be, just a few months ago.
It won’t matter much if you purchase gold at $750, $800, $850, $900 per ounce, or even much higher. All of these prices will be looking extraordinarily cheap in a few months. The price of our pretty yellow metal is about to explode, and it is probably going to soar, eventually, to levels that not even most gold bugs imagine. COMEX gold shorts will be playing the price a bit longer, in an attempt to shake out some remaining independent leveraged longs. Once that is finished, however, and it will be finished soon, the price will start to rise very quickly.
Disclosure: The author holds physical gold and is long positions in GLD and gold futures.
I conclude, therefore, that over the last 21 years or so, “fake” precious metals supply in the form of promises of future delivery have habitually been increased when prices increase until increased “supply” managed to overwhelm increased demand, leading to a temporary price collapse. This is compounded by the fact that the futures prices on COMEX tend to dictate the “official” report price for the precious metals elsewhere.
After the market is broken, shell-shocked leveraged long market participants have always been thrown out of their positions by margin calls, and/or have been happy to sell contracts back to the short sellers at much lower prices. This process has always allowed short sellers to cover short positions at a profit. If for some reason naked shorts needed to deliver, they could always count on various European central banks (and some say the Fed basement repository) to backstop them, releasing tons of physical gold into the market. It seemed that there were always another 34 tons or so of gold dumped at strategic times to bring down fast rising prices. Meanwhile, huge physical market demand in Asia and severe shortages buffered the downside. Because of the physical demand, prices steadily increased but, perhaps, at a much slower pace than would have been the case in the absence of market manipulation.
Rarely was there ever a serious short-squeeze. Rarely, that is, until Friday of last week when the deliveries demanded by non-leveraged long buyers reached record levels. In spite of an avalanche of complaints from gold and silver investors, the CFTC (Commodity Futures Trading Commission) has never bothered to audit even one vault to see if the short sellers really have the alleged gold and silver they claim to have. There is a legal requirement that, in every futures contract that promises to deliver a physical commodity, the short seller must be 90% covered by either a stockpile of the commodity or appropriate forward contracts with primary producers (such as miners). Inaction by CFTC, in the face of obvious market manipulation, implies a historical government endorsed price management.
Things, however, are changing fast. As previously stated, the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest. Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts.
The U.S. economy is in shambles. Both commercial and investment banks are insolvent. European central banks no longer want to sell gold. China wants to buy 360 tons of it as soon as humanly possible, and as soon as it can be done without sending the price into the stratosphere. A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold. There has been a vast expansion of Fed credit, which has risen from $932 billion to $2.25 trillion in the last two and a half months. The Fed has bought nearly all toxic bank assets that were supposed to be purchased pursuant by the $700 billion Congressional bank bailout.
Official bailout funds have been used to buy equity interests in the various banks instead. By avoiding the use of monitored Congressional funds, the Fed has embarked on a secretive campaign to buy toxic assets. They have refused to give any accounting of their activities, even though they are using taxpayer money to do this. The Fed has refused, for example, to comply with a “freedom of information act” request from Bloomberg News. That refusal is now the subject of a major lawsuit.
The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.
First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.
A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.
At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.
This was combined with what is probably a tacit agreement by which the banks were given the money and led to redeposit most newly printed cash back into the Fed, in a category known as “Reserve balances with Federal Reserve Banks”. This category has ballooned from $8 billion in September to $578 billion on November 28th.
On October 9, 2008, the Federal Reserve began paying interest on deposits at Federal Reserve Banks. The overnight rate happens to have dropped way below the “official” federal funds rate. Meanwhile, rates paid by the Fed on required deposits are only .1% less than the federal funds rate, and on voluntary deposits only .35% less than the federal funds rate. Accordingly, U.S. banks can engage in a dollar based one-nation carry trade, which further sequesters the newly printed dollars.
Banks are borrowing from the Fed, then taking the same money, redepositing it, and earning a spread on the interest rate differential. Banks can also deposit newly printed dollars into a category known as “Deposits with Federal Reserve Banks, other than reserve balances.” This category also earns interest in a similar way, and has risen from $12 billion to $554 billion in the same time period. The funds will eventually be used for direct lending from the Fed to open market borrowers, at huge levels of risk that even the free-wheeling cowboys who run things at America’s private banks are not willing to accept.
That being said, most money center banks in America are certainly NOT risk averse, even now. People who are bailed out of foolish decisions never become risk averse. They are, however, very insolvent, and, aside from the non-recourse provisions of Fed repurchase agreements, they would prefer, for bad publicity reasons, not to default on their obligations to the Fed. Aside from the newly printed dollars given to them by the Fed and the recent transfer of all risk to the taxpayers, they have no liquidity of their own with which to make new loans. That is why they aren’t making any. The Fed will eventually make the loans itself and take all the risk, while using the private banking system as merely a means for delivery.
Right now, however, the Fed wants to sequester the new dollars, until the U.S. Treasury has finished the major part of its funding activities. That will allow the Treasury to borrow money at very low rates. The Fed intends to feed money into the system, but at the minimum rate needed to prevent the DOW index from staying under 8,000 for any significant period of time. Right now, most measures are designed simply to stop U.S. banking laws from automatically requiring the closure of most big banks.
The extent of manipulations engaged in by this Federal Reserve is mind numbing. The total number of sequestered dollars has now reached well in excess of $1.2 trillion dollars. That means that Fed credit, so far, has been effectively increased only by about 10%, over the last 2.5 months, rather than 150% that appears on the surface of the Fed balance sheet. The rest is temporarily sequestered.
Back in July, the U.S. Treasury, through the ESF (Exchange Stabilization Fund), sold billions of euros and, I believe, established a dollar sequestering “derivative” by paying interest, perhaps in Euros, to foreign money center banks. This was designed to keep dollars out of circulation, overseas. It was the beginning of the dollar bull back on July 15th.
I had thought, at the time, with good reason, that the U.S. would run out of foreign exchange and would be forced to close down the operation within a few months. I underestimated Ben Bernanke.
Instead, the Fed managed to establish currency swap lines with various foreign nations, under the guise of supplying them with dollars. This need for dollars arose partly as a result of the actions of the Fed, in sequestering Eurodollars in July, and partly as a result of the multiple credit default events which triggered over $2.5 trillion worth of selling in the stock and commodities markets, as 50 to 1 leveraged players were forced to cover about $50 billion worth of credit default insurance obligations.
In truth, the Fed needs the foreign currency more than the foreign central banks need dollars. The Fed is using its new foreign currency resources, in part, to control the value of the dollar, and to ensure that U.S. bailout bonds are sold for the highest possible prices at the lowest possible long term costs. Anyone who buys long term Treasury bills is going to lose a fortune of money in the long term.
The Fed has also taken a number of steps beyond those already discussed to restrict aspects of the normal money supply which most strongly affect exchange rates. For example, they only allowed “currency in circulation” to rise by $33 billion in aggregate, while at the same time increasing foreign reverse repurchase agreements to reduce foreign availability of dollars by $30 billion, and reducing the “other liabilities” category dollar availability by another $7 billion. Since it is likely that “other liabilities” involve foreign held dollars, this resulted in a net deficit of $4 billion on foreign exchange markets, as compared to September, 2008.
All these actions, taken together, have supported the dollar overseas, and led to a breakdown of the commodities markets. The adverse effect of a paradoxically rising dollar has been especially severe in dollar dependent commodity producing nations, such as Ukraine.
The net effect is that the U.S. dollar, in spite of terrible fundamentals, is now King of the Currencies once again, at least temporarily. The rising value of the dollar happens also to support naked short sellers of gold and silver, on COMEX, and these are old friends of the Federal Reserve. Supply and demand ultimately determine the price of gold but, in the shorter term, it is inversely tethered to the dollar. When the dollar is artificially high, gold prices will often plunge artificially low.
But, in short, the Fed currently has gained complete control over the value of the dollar. It can now adjust and micromange the dollar on a day-to-day basis. All it needs to do is open and close the “dollar spigot.” When they want the dollar to rise, the Fed can reduce the number of sequestered dollars. When they want it to fall, they simply ease up, releasing dollars into the financial markets. There is only one problem. Real investors are fleeing the stock market, and stock indexes are becoming more and more dependent upon government cash in order to avoid collapse.
People are liquidating holdings in mutual funds, and redeeming against hedge funds at a fantastic rate. This has created heavy downward pressure on stock prices. If the DOW falls below 8,000 for any significant amount of time, most big American insurance companies will be forced to recognize huge losses on their portfolios, and will become insolvent. Insolvent insurers, like insolvent banks, must be closed by their regulators as a matter of law. Obviously, mass insurer bankruptcies would be yet another major destabilizing slap in the face to an increasingly unstable economy.
The Fed now has only two ways to stop this. One is by brute force. It can buy securities directly, through its primary dealers, thereby supporting and pumping up stock prices. It has done a lot of that in the past few weeks, but this method is highly inefficient and costly. It is better to catalyze upward market movement rather than force it. Catalysis of markets involves opening up the money spigot a bit, allowing some of the sequestered funds to bleed back into the system. This allows the stock market to rise or stabilize naturally, as the equivalent of inflation is created mostly in the stock market without substantial bleed through. At the same time, however, opening the money spigot reduces the value of the dollar and causes gold prices to rise. Rising gold price adversely affects COMEX short sellers who are, as previously stated, old friends of the Federal Reserve.
Gold buying enthusiasm, everywhere but at the COMEX, is at record levels, whereas stock market investing appetite is low. For this reason, when the Fed tried to constrict the money supply on Monday, it caused more damage to the stock market than to the price of gold. Gold declined by over 5%, but the S&P 500 collapsed by over 9%. The next day, the Fed eased up on the money supply spigot, allowing the dollar to fall and the stock market to reflate. If the Fed repeats this performance over and over again, stock investor psychology will be seriously harmed. Withdrawals from mutual and hedge funds will accelerate. The stock market will sink at an uncontrollable rate, and the world will surge onward toward Great Depression II, much worse than the first. At some point, there will be nothing the Fed can do about it, no matter what manipulations it attempts. Hopefully Ben Bernanke is aware of the dangerous nature of the game he is playing.
The Federal Reserve must now make a tough choice. In the past, Federal Reserve Chairmen may have felt it necessary to support regular attacks on gold prices to dissuade conservative people from putting a majority of their capital into gold. Now, however, the world economy needs much higher gold prices in order to devalue paper money, not against other currencies in a "beggar thy neighbor" policy, but against itself. This can jump start the system. If the Fed continued to support gold price suppression, that would collapse the stock market far deeper than they can afford, most insurers will end up bankrupt, and there will be no hope of avoiding Great Depression II.
I think Ben Bernanke is aware of this. Gold shorts will be abandoned, to avoid financial catastrophe. In commenting, I take a practical view, accepting what appears to be so, without passing judgment on the acts and omissions of the last 21 years.
Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.
It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about half of the current increase in Fed credit is eventually neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of gold standard. In the nearer term, gold will rise to about $2,000 per ounce, as the Fed abandons a hopeless campaign to support COMEX short sellers, in favor of saving the other, more productive, functions of the various banks and insurers.
Revaluation of gold, and a return to the gold standard, is the only way that hyperinflation can be avoided while large numbers of paper currency units are released into the economy. This is because most of the rise in prices can be filtered into gold. As the asset value of gold rises, it will soak up excess dollars, euros, pounds, etc., while the appearance of an increased number of currency units will stimulate investor psychology, and lending and economic output will increase, all over the world. Ben Bernanke and the other members of the FOMC Committee must know this, because it is basic economics.
Many venerable names in banking agree, although none have gone so far as to take their thoughts to the natural conclusion. Both JP Morgan Chase's and Citibank’s analysts, for example, are predicting a huge rise in the price of gold. That is interesting because GATA has come up with fairly compelling evidence that JP Morgan Chase (JPM) and HSBC (HBC) may have been big COMEX naked short sellers in the past.
Goldman Sachs (GS) is also a huge bullion bank, which allegedly is heavily involved in downward gold price manipulation. However, this month, both HSBC and GS took lots of deliveries of gold from COMEX. Given the size and bureaucracy at such firms, it is certainly possible for the majority of traders to be entirely honest, while others, at the same firm, may be totally corrupt.
More important, however, than dwelling on the accuracy of conspiracy theories is the fact that huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a “future” than as a spot exchange.
Smart traders at big firms may be buying on COMEX to sell into the spot market, for a profit. This pricing condition is known as “backwardation”. Backwardation is always the first sign that a huge price rise is about to happen. In the absence of backwardation, there is no rational explanation as to why HSBC, Bank of Nova Scotia (BNS), Goldman Sachs, and others are forcing COMEX to make large deliveries.
The fact that this backwardation is hidden from the public eye is not surprising. In spite of the ostensible existence of a so-called “London fix”, 96% of all OTC transactions are secret and unreported. The transactions happen solely between two parties, and are done opaquely, in complete darkness. The current London fix may well be just as fake as the bank interest rate reports that comprised LIBOR proved to be, just a few months ago.
It won’t matter much if you purchase gold at $750, $800, $850, $900 per ounce, or even much higher. All of these prices will be looking extraordinarily cheap in a few months. The price of our pretty yellow metal is about to explode, and it is probably going to soar, eventually, to levels that not even most gold bugs imagine. COMEX gold shorts will be playing the price a bit longer, in an attempt to shake out some remaining independent leveraged longs. Once that is finished, however, and it will be finished soon, the price will start to rise very quickly.
Disclosure: The author holds physical gold and is long positions in GLD and gold futures.
7 November 2008
What will happen and why
Next year, in the summer, strange things will start to happen.
Some confusion will appear in the way benchmark interest rates are quoted and disputes will openly surface between respected sources as to what is being referred to as the key indicator rate; this will be framed as more a 'lease rate' of bank capital under regulated management, and not the interest rate on interbank money borrowed. And that is because someone will know that this capital is meant to drop in value, in other words be discounted.
As said recently by Mannfmm this is an epic bear market.
The market will neither stabilise nor appear to stabilise, experiencing continued large swings in both ways - but the overall trend will be markedly down. No stable move up can occur until reported earnings underpin P/E's for more than one quarter BEYOND at least one and more likely two or three quarters after the December quarter. That is only an obvious thing, not an insider's knowledge.
The UK interest rate action is tied to a desire not to drag the money flows from extremely low US interest deposits towards a higher UK deposit environment.
The principle motivation of central banks is not the health of the stockmarket, but the preservation of the currency.
And this is where things are getting interesting.
The currency system has been destabilised by the financial assets ratio to Money Supply via the equitisation of a previously 'not financialised' asset - real estate. The bubble value of real estate is so large that it is in fact incalculably large and bears no resemblance to the amount of money issued. THIS and the reason for it - the lack of bank reserves to debt through errosion of these bank rules - has produced the so-called credit crisis which has been 'solved' by GIVING private banks capital from the public government's Treasury... There is a hidden meaning to this mechanism; it ADDS to the numerical currency issuance, and moves towards the incalculable size of the financial asset figure. If, as is expected by central banks, the underlying real estate retreats substantially in value - say by about 40% - the amount of money on issue reaches more reasonably towards the financial assets number and therein, a complete freeze in financial circulations is avoided.
And some stage in that process it is FULLY EXPECTED that the government securities donated to banks will be heavily discounted AND THIS IS THE ONLY PROCESS WHEREBY THE MARKET CAN DERIVE MARKET CREDIT SOURCES TO ONCE AGAIN PRODUCE THE BENCHMARK INDICATOR RATE THAT LEADS MARKET LENDING AND ANOTHER PHASE OF GROWTH.
The injection by say, the Saudi Government, of huge direct cash and capital, IS NOT GROWTH - it is either theft, or bribery or extortion or at best misdirection and seduction and diversion of somebody else's growth. But it is in no way 'economic growth' of the US or the UK economy.
Buying bank equity is not in itself a means of supplying new circulating credit lines to the general market - it only becomes that if the new equity is discounted to the next holder. Circulation can only occur when there is an expectation of a low risk profit in the creation of a credit - otherwise, the holder of the capital will simply not lend (interbank freeze). There is no expectation of a low risk profit when interest rates are too low combined with the clear knowledge that assets are in a bubble condition. Even when assets are no longer in an obvious bubble position, the low interest provides inadequate reward and money still does not circulate in ways that permit government to draw tax and re-finance the substance of its currency.
There is no reason for 'banks' to lend to companies. Exxon can lend to companies via circulated transferable private credit notes and maintain the entire US economy on a growth path single-handed if it wished and if companies represented a rational economic risk - but since they mostly don't, the idea of 'lending to companies' is a political pursuit by government seeking to maintain the monopoly on credit-based dollarisation.
Hyperstagflation - a fact of modern life already in existence, and a word either coined by Mannfm or Bulldog or Ras - cannot be obviously seen because of the gap between Joe the Plumber's lifestyle and Suzanne Klatten's lifestyle.
With interest rates at zero, Joe the Plumber can as little afford the real estate that Suzanne Klatten resides in as
he could have when he thought property always went up and when GE Money lent him money he never intended to pay back other than by borrowing more on his never-ending equity rises.
If you can sell products to Suzanne Klatten, you will most certainly comprehend that her companies' increased revenues in China even today are not a reason to cut your prices to her because Fox told you there was a 'severe credit crisis...'
If you can sell products to Fox, you will not be confused by the massive increase in media spend for the Presidential election - what are they referring to when they say 'recession?' Certainly not political advertising budgets that's for sure!
Thus the epic bear market must go on for Joe the Plumber.
For only the Treasury may print actual money and it is unwilling at this point to let the market determine the price thereof - until of course it falls from its throne as the official financial mediator of, what is it - the ideals and principles of Democracy, and Liberty... ...and Hope.
The Pope just now referred to Peace, and the Grand Mufti of Bosnia said Peace and Justice...
They are all correct, because Joe the Plumber lives on illusion and cannot handle Truth, Substance and Delivery.
Today, Truth, Substance and Delivery comes through a slim handheld Samsung device.
A plastic credit card is in all events, a most passe piece of style. Hope is debt to the now, and Delivery is money freehold and substance now. You are cheating yourself if you trade money for hope.
You can discount Hope today for some delivered cash, but you will not discount Delivery today for Hope.
Suzanne Klatten wants delivery today. Joe the Plumber is drunk and can afford to wait until tomorrow.
Voltaire said that Democracy propagates the idiocy of the masses.
Money can be used by idiots, but it is seldom saved by them and never stored anywhere near them.
Only a lunatic believes money is cheap to borrow. If it is cheap to borrow, it is not really money and cannot produce delivery of anything valuable. Lunatics and idiots however, believe things to be valuable, that are not, and that is what makes cleverer people money.
It is not possible to create a permanently low interest rate environment without risking someone come along and push you off the hill using substance he purchased cheaply whether you have installed clever regulations and laws to prevent it or not! Clever people are more inventive than that. The dispute among serious economists today is about whether deflation runs right across all asset classes and whether or not there is any single thing at all that holds permanent trade value at non price deflationary numbers.
It does not. Run across all asset classes.
Moreover, if you knew today what will go up fifty times in the next two years, you will have something to value and to manage as capital, rather than hope about.
I wonder whether you all think the USA is going to invest in Germany or Israel, or China - or somewhere else given the new President? What do you think? I think somewhere else.
And yes, there most certainly is an Illuminati Elite. It casts its plans well into the future, and it is patient and organised and powerful. It thrives on poverty and crime rate. Wherever you see poverty and crime rate, read profit. Of course I remember someone rubbishing me about this before... ...before you elected an African.
The day you see Samsung promote a digital device as thin as a credit card, know that the defining moment has arrived. There is no money, like new money. All Treasurers have Judas as a patron. Jesus, on the other hand, was a teknoi. Which is not a carpenter by the way.
Calvin J. Bear
Some confusion will appear in the way benchmark interest rates are quoted and disputes will openly surface between respected sources as to what is being referred to as the key indicator rate; this will be framed as more a 'lease rate' of bank capital under regulated management, and not the interest rate on interbank money borrowed. And that is because someone will know that this capital is meant to drop in value, in other words be discounted.
As said recently by Mannfmm this is an epic bear market.
The market will neither stabilise nor appear to stabilise, experiencing continued large swings in both ways - but the overall trend will be markedly down. No stable move up can occur until reported earnings underpin P/E's for more than one quarter BEYOND at least one and more likely two or three quarters after the December quarter. That is only an obvious thing, not an insider's knowledge.
The UK interest rate action is tied to a desire not to drag the money flows from extremely low US interest deposits towards a higher UK deposit environment.
The principle motivation of central banks is not the health of the stockmarket, but the preservation of the currency.
And this is where things are getting interesting.
The currency system has been destabilised by the financial assets ratio to Money Supply via the equitisation of a previously 'not financialised' asset - real estate. The bubble value of real estate is so large that it is in fact incalculably large and bears no resemblance to the amount of money issued. THIS and the reason for it - the lack of bank reserves to debt through errosion of these bank rules - has produced the so-called credit crisis which has been 'solved' by GIVING private banks capital from the public government's Treasury... There is a hidden meaning to this mechanism; it ADDS to the numerical currency issuance, and moves towards the incalculable size of the financial asset figure. If, as is expected by central banks, the underlying real estate retreats substantially in value - say by about 40% - the amount of money on issue reaches more reasonably towards the financial assets number and therein, a complete freeze in financial circulations is avoided.
And some stage in that process it is FULLY EXPECTED that the government securities donated to banks will be heavily discounted AND THIS IS THE ONLY PROCESS WHEREBY THE MARKET CAN DERIVE MARKET CREDIT SOURCES TO ONCE AGAIN PRODUCE THE BENCHMARK INDICATOR RATE THAT LEADS MARKET LENDING AND ANOTHER PHASE OF GROWTH.
The injection by say, the Saudi Government, of huge direct cash and capital, IS NOT GROWTH - it is either theft, or bribery or extortion or at best misdirection and seduction and diversion of somebody else's growth. But it is in no way 'economic growth' of the US or the UK economy.
Buying bank equity is not in itself a means of supplying new circulating credit lines to the general market - it only becomes that if the new equity is discounted to the next holder. Circulation can only occur when there is an expectation of a low risk profit in the creation of a credit - otherwise, the holder of the capital will simply not lend (interbank freeze). There is no expectation of a low risk profit when interest rates are too low combined with the clear knowledge that assets are in a bubble condition. Even when assets are no longer in an obvious bubble position, the low interest provides inadequate reward and money still does not circulate in ways that permit government to draw tax and re-finance the substance of its currency.
There is no reason for 'banks' to lend to companies. Exxon can lend to companies via circulated transferable private credit notes and maintain the entire US economy on a growth path single-handed if it wished and if companies represented a rational economic risk - but since they mostly don't, the idea of 'lending to companies' is a political pursuit by government seeking to maintain the monopoly on credit-based dollarisation.
Hyperstagflation - a fact of modern life already in existence, and a word either coined by Mannfm or Bulldog or Ras - cannot be obviously seen because of the gap between Joe the Plumber's lifestyle and Suzanne Klatten's lifestyle.
With interest rates at zero, Joe the Plumber can as little afford the real estate that Suzanne Klatten resides in as
he could have when he thought property always went up and when GE Money lent him money he never intended to pay back other than by borrowing more on his never-ending equity rises.
If you can sell products to Suzanne Klatten, you will most certainly comprehend that her companies' increased revenues in China even today are not a reason to cut your prices to her because Fox told you there was a 'severe credit crisis...'
If you can sell products to Fox, you will not be confused by the massive increase in media spend for the Presidential election - what are they referring to when they say 'recession?' Certainly not political advertising budgets that's for sure!
Thus the epic bear market must go on for Joe the Plumber.
For only the Treasury may print actual money and it is unwilling at this point to let the market determine the price thereof - until of course it falls from its throne as the official financial mediator of, what is it - the ideals and principles of Democracy, and Liberty... ...and Hope.
The Pope just now referred to Peace, and the Grand Mufti of Bosnia said Peace and Justice...
They are all correct, because Joe the Plumber lives on illusion and cannot handle Truth, Substance and Delivery.
Today, Truth, Substance and Delivery comes through a slim handheld Samsung device.
A plastic credit card is in all events, a most passe piece of style. Hope is debt to the now, and Delivery is money freehold and substance now. You are cheating yourself if you trade money for hope.
You can discount Hope today for some delivered cash, but you will not discount Delivery today for Hope.
Suzanne Klatten wants delivery today. Joe the Plumber is drunk and can afford to wait until tomorrow.
Voltaire said that Democracy propagates the idiocy of the masses.
Money can be used by idiots, but it is seldom saved by them and never stored anywhere near them.
Only a lunatic believes money is cheap to borrow. If it is cheap to borrow, it is not really money and cannot produce delivery of anything valuable. Lunatics and idiots however, believe things to be valuable, that are not, and that is what makes cleverer people money.
It is not possible to create a permanently low interest rate environment without risking someone come along and push you off the hill using substance he purchased cheaply whether you have installed clever regulations and laws to prevent it or not! Clever people are more inventive than that. The dispute among serious economists today is about whether deflation runs right across all asset classes and whether or not there is any single thing at all that holds permanent trade value at non price deflationary numbers.
It does not. Run across all asset classes.
Moreover, if you knew today what will go up fifty times in the next two years, you will have something to value and to manage as capital, rather than hope about.
I wonder whether you all think the USA is going to invest in Germany or Israel, or China - or somewhere else given the new President? What do you think? I think somewhere else.
And yes, there most certainly is an Illuminati Elite. It casts its plans well into the future, and it is patient and organised and powerful. It thrives on poverty and crime rate. Wherever you see poverty and crime rate, read profit. Of course I remember someone rubbishing me about this before... ...before you elected an African.
The day you see Samsung promote a digital device as thin as a credit card, know that the defining moment has arrived. There is no money, like new money. All Treasurers have Judas as a patron. Jesus, on the other hand, was a teknoi. Which is not a carpenter by the way.
Calvin J. Bear
16 October 2008
Greenspan’s Close Encounter of the Third Kind
As he slowly regained consciousness, Alan Greenspan sensed a presence. “Who are you where am I, what’s happening to me” he almost shouted, his voice rising in panic. A strange voice, clearly synthetic, answered. “Don’t worry EZ Al, I’m not your Maker and you are still alive. I’ve been sent from my world to your planet to study your economic and financial system. The Earth has been on our ‘To Do List’ for a very long time; but my boss moved it up in priority… their system is melting down, you need to get over there now, he ordered me. So here I am and I’ve merely telekinetically transported you to my spaceship to ask a few questions.”
Relieved that he was still alive, and being reassured that the ET was not going to hurt him, EZ Al felt fear recede from his body. ‘Ah, just another dumb reporter. I should be able to handle this, no problem’ thought Greenspan. “And what if I don’t want to answer any question”, he said. No sooner had he said that, he felt a strange new sensation … like he was drowning. “Am I being ‘waterboarded’?” he wondered as he felt a sheer sense of fear and panic wash over him. “Okay, okay. I will talk.” He blurted. Immediately, the drowning sensation disappeared.
ET: I am glad you have seen the light Dr. Greenspan. May I call you EZ Al for short? You can call me ET.
EZ Al: I’d rather not, but given that I have no choice in the matter, go ahead.
ET: Explain to me how you manage economic activity on Earth. And please try to be clear and concise. I don’t have time for your usual long-winded, pseudo-sophisticated gibberish.
EZ Al: Economies on Earth are managed via two kinds of policies – Monetary and Fiscal. The former is decided by the Central Banks while governments are responsible for the latter. Some Central Banks have a degree of ‘independence’ from governments but as a practical matter they must ultimately bow to political pressure … after all they are chartered by the State. Monetary policy is executed by, essentially, changing the short-term interest rate, i.e., the price/cost of money. When goods and services price inflation is high and rising, we raise the interest rate to discourage borrowing. Conversely, when economic growth is flagging, we lower the cost of borrowing in order to encourage credit growth – which gets the economy humming again.
ET: That sounds simple enough. Tell me EZ Al, do Central Banks have other responsibilities?
EZ Al: Yes, they do. We in the U.S., for example, have two other responsibilities: (1) To regulate the banking system to ensure long-term safety and soundness, and (2) To be the ‘lender of last resort’.
ET: And have you fulfilled these responsibilities?
EZ Al: Well we fulfill the second every time there is a crisis. And we have these crises with some regularity. Examples during my tenure as Chairman include the Stock market crash of 1987 and the LTCM/Russian bond default of 1998. However, when it comes to regulation, we believe in ‘free enterprise capitalism as the best path to prosperity’. Specifically, we believe in ‘efficient markets’ … that free markets are perfect and the way to get there is through de-regulation. So while we pay lip service to regulation to keep the socialists in our country off our backs, we work very hard to de-regulate markets and fight new regulation proposals.
ET: So under your tenure, did you make progress towards your goal of ‘totally free markets’?
EZ Al: Yes we accomplished a lot. We undid all the Depression Era regulations like Glass-Steagall, we succeeded in creating a huge ‘shadow banking system’ which circumvented the old regulated banks and, most importantly, set-up a global process of packaging loans and their derivatives along with capital markets that enable investors to buy and trade these ‘bundles of risk’ with perfect freedom.
ET: Hmmm … wonder why your perfectly free capital markets are having such a massive coronary right now. Tell me EZ Al, as you manipulate interest rates to promote or restrict the flow of credit into the economy, what happens to the level of Debt in the system; and do you have any guidelines as to how much Debt the economy can safely handle?
EZ Al: Well, I can tell you what has actually happened in the US over the last quarter century. Non-Financial Sector debt has increased from about $ 5 T to $ 32 T and Financial Sector debt ahs gone from $ 0.8 T to $ 16 T. And if you want to know how this relates to GDP, the total Debt to GDP ratio has gone from 150 % to 350 %. As far as any guidelines on ‘safe and sound debt levels’ are concerned, we don’t have any. As I told you, we believe in the free market. If debt levels become more than the system can handle, free markets will take care of them. It Schumpeter’s ‘creative destruction’ in action – reckless lenders will go out of business and prudent lenders will take their place.
ET: Hmmm … wonder if the fact that the Debt/GDP ratio has surpassed the point that it hit early in your last Great Depression is significant. Tell me EZ Al, do you think that there are any ‘natural limits’ to this debt load … that there comes a point when, to use a nuclear metaphor, it reaches ‘critical mass’ – causing a ‘core meltdown’?
EZ Al: Well, if there is such a natural limit, we on Earth are unaware of it. Macro-Economic Science has no such concept. Yes there have always been jeremiahs, doomsayers, chicken littles – take your choice of labels – who have been warning that the sky is falling. But what can you do about people who cry wolf – and always there is no wolf and the sky is still intact above? You ignore them.
ET: And as you manipulated the price of money, what happens to the price of assets – stocks, bonds, real estate?
EZ Al: I consider it one of my greatest accomplishments that, during my tenure as Chairman, the growth in the value of assets far exceeded the growth of goods and services prices as well as incomes. Especially during boom times, which, not surprisingly, some Cassandras called bubbles, American Wealth galloped ahead impressively. And today, in spite of falling housing values, on the whole, Americans are richer than at any time in our history.
ET: Do you think asset value booms, or bubbles as your critics call them, could lead to problems for the economy down the road? And, if so, should you not prevent, or at least, ‘lean against’ their growth?
EZ Al: Yes, sometimes booms lead to busts. But (a) you cannot identify them until later (b) even if you could, you can’t do anything to stop them (c) and if you did, you could damage the economy. So its best to ignore them and if their fall-out tanks the economy, you could always ‘mop up’ the mess and revive the economy via liquidity and EZ credit.
ET: So you don’t view asset value booms as an inflation problem?
EZ Al: No, of course not. Our whole job is to increase wealth. That’s what asset price inflation represents. Why would we want to contain it? On the contrary, we want to encourage it.
This time when the ET spoke, EZ Al sensed a distinct change in the ET’s tone of voice. No more did he sound Socratic, even friendly. There was no mistaking the withering contempt in his speech. It made the hair on Greenspan’s body stand on end.
ET: EZ Al, you and your ilk are complete fools. You don’t even have the common sense off a not-too-bright ten year old child. And yet you strut about with great pride in your ‘Economic Science’. If you represent human intelligence, I fear for the survival of your race. Let me explain this in very simple terms because you are obviously not too bright.
Debt levels are central to the safely and soundness of a financial system. Left unchecked, they grow to a point when the debt service burden starts squeezing disposable income, which in turn curtails spending and what you call economic growth. If the ‘squeeze’ becomes a ‘shock’, as in rate resets of your Adjustable Rate Mortgages, the consumer defaults. If enough defaults occur, lenders get scared, pull in their horns and curtail credit. This sets off a chain reaction … lower spending, leading to lower business profit, leading to lay-offs. Now you have consumers experiencing painful shocks to both incomes and obligations … leading to more debt defaults … which repeats the cycle in a downward spiral.
So what do you do to avoid this vicious cycle? Don’t be so arrogant. Respect the accumulated wisdom of your race. Re-learn ‘An ounce of prevention is worth a pound of cure’ or ‘A stitch in time saves nine’. Apply this learning to debt. PREVENT Credit Bubbles. Safety, Soundness and Sustainability require Limiting Debt Growth. Any real banker knows that he cannot lend beyond the borrower’s capacity to repay – in good and bad times. And you have to prevent asset bubbles … because they enable rampant debt growth. And when the bubble bursts and asset prices fall, people find that they are, in your idiom, ‘upside down’ … which leads to their defaulting in droves.
EZ Al felt a chill go up his spine. No one had ever spoken to him in this tone before. And yet, he was intrigued. The scholar in him came out.
EZ Al: Sounds like you think we are complete idiots in economic matters. So how do you manage money in your world?
Economics in One Lesson
The ET’s tone of voice changed. It sounded friendlier … as if he was smiling. There was some hope for humanity after all. At least this specimen before him had a learning attitude. He proceeded to teach …
ET: Al, it all starts with really understanding what money is and how it should be treated or handled. Obviously, money serves two purposes (a) a store of value, and (b) a medium for exchange. It serves both these roles admirably as long as you treat or handle it with respect. Think of money as a person … if you abuse it, it will desert you. If you treat it with respect, it will always be your faithful companion.
Now you might accuse me of waxing philosophical. Maybe you are thinking all this sounds great but what does it really mean? You know what it means to treat a person with respect. But what does it mean to treat money with respect? Let me explain. There are four major ways of abusing money:
Spending more than you earn
Spending money in unhealthy (for the individual as well as society) ways
Borrowing/lending money for consumption rather than investment that improves societal productivity
Gambling/speculation … particularly with Other Peoples’ Money (OPM)
By these criteria, you will no doubt recognize, your society has been disrespecting and abusing money on a grand scale. All of your economic ‘players’ – consumers, businesses, and government have been spending far more than they earn …making up the difference with borrowing – hence the mammoth increases in debt. By the way, you should be ashamed of your appalling ethics. You claim to be the moral beacon for the whole world and yet you don’t hesitate to stick the tab for your gargantuan current consumption on to future generations of Americans. And yes, McMansions and SUVs are consumption and not investment – for they increase the ‘operating cost’ of households and are thus a drain on productivity. Why is it that your measures of economic growth make no allowance for qualitative differences – whether the money is being used to make bombs or feed the poor and hungry, to build yachts and private airplanes or medicines for the sick, to produce $5000 bottles of wine and $100 cigars for the ‘Masters of the Universe’ on Wall Street or to educate your children? And while I am at it, let me point out that all this mad waste, which you worship at the altar of GDP growth, is depleting your planet’s non-renewable resources while putting its fragile environment – and by implication your race, at risk.
Yes, all this constitutes disrespect of money. Of course, one of the worst abuses is what you do in your precious Capital Markets. While you justify their existence on the grounds that they facilitate the flow of capital from investors to entrepreneurs, let’s be honest about what they really are … a license to gamble, most often with Other Peoples’ Money (OPM).
However, let me point out the worst abuses of money on your planet. Real money or capital is a society’s savings. They are what is left over from income after deducting all expenditures. As such, they represent a voluntary restraint on current consumption in order to provide for an uncertain future. Savings are the true measure of character … the ability to postpone immediate gratification. These savings constitute the capital a society has to invest in production methods that increase efficiency and productivity. Over the last quarter century you have discouraged savings and encouraged borrowing and speculation. This you have done by driving down the returns savers can earn on safe bank deposits. So, to beat inflation they have to put their money into risky ‘investments’ – stocks, bonds, and real estate. And by reducing borrowing costs and encouraging asset bubbles, you have provided people huge incentives to gamble – often with other peoples’ money. Everywhere you turn on your planet, advertisers are trying to get you to buy stuff … even if they need to ‘help’ you buy it with no down, 0% ‘financing’. Your entire monetary policy is morally reprehensible and constitutes a profound abuse of money.
So there you have it – you have violated every principle of sound money consistently, and over a long period of time. Is it any wonder that money is now returning the favor by walking out on you?
EZ Al listened with rapt attention as ET unfolded this strange doctrine of sound, healthy money. Finally he said
EZ Al: ET, what you are saying is so diametrically opposed to what we do here on earth, it leaves me totally dumbfounded. Let me try a different tack. What would you do to solve the current problems? As you know, our financial system is totally frozen … as Bill Gross of PIMCO put it, it resembles a constipated owl. How would you treat this owl? Suppositories? Laxatives? Or do we need an enema?
ET: Well Al, that’s the beauty of basing economic policy on eternal principles or values. That is the Value of Values. If you applied the Money Values that I have just outlined, not only is the solution clear and simple; most importantly, it is also fair and just … for in solving one problem you do not want to create a bigger mess down the road. Keep in mind the Hippocratic injunction – First, do no harm. Money Values provide you with a Moral Economic Compass to guide your policies … vs. the scatter-brained, ad-hoc approach you take. Here is what I would do.
Find out whether these frozen assets represent real money (somebody’s savings) or phony money, i.e., borrowings.
If it is the former, and it is ‘frozen’ in the system for some reason, step in and provide liquidity to ‘unfreeze’ it.
If, however, some entity is in distress because they cannot borrow any more money, you must tell them the truth … they were wrong to arrange their affairs to be so dependent upon ‘other people’s money’ and must suffer the consequences of taking undue risk. In good times these entities gambled and won spectacularly; it is only fitting that they experience the downside of leverage so that in the future they are discouraged from abusing money in this way.
In your society, unfortunately, the proportion of money abusers is large … consumers who live beyond their means – often borrowing on credit cards or against their homes or automobiles to squander on frivolous pursuits, businesses that expand beyond sustainable levels fueled by borrowed funds and, above all, investment banks and hedge/private equity funds who make jaw-dropping sums of money gambling with other peoples’ money. I am tempted to call your entire society ‘Opium (OPM – Other Peoples’ Money) Enterprises’ not withstanding your hubristic self-image of rugged self-reliance.
EZ Al: But ET, you don’t understand the problem. You see, our financial system is frozen … it is not extending credit – at least not in the copious quantities we need to drive economic growth. And the reason it cannot extend credit is because losses on previous lending are depleting the capital in the system. And believe it or not, we still have some rules on capital adequacy. The only way banks can start lending again is if they got new capital. And since private investors will not put in capital because they are afraid of losing it, the taxpayer is our only option.
ET: There you go again. You just don’t get it. You want the banks to lend more money. Have you stopped to ask yourself if that’s desirable? As I have demonstrated, the whole mess was created because you turned the economy into ‘Opium Enterprises’. Tell me EZ Al, does it make any sense to increase lending to consumers or businesses in the face of the deepening recession? Anybody who wants to increase leverage under these circumstances is either stupid or a fraud (because they have no intention to repay the debt). Either way, no responsible bank should lend to them.
You earthly economists are so blinded with Keynesian Fundamentalism, you can’t even think straight. You are like the physician who, examining the 300-lb patient who has been rushed to the emergency room due to a massive coronary brought about by years of over eating (of EZ credit) and no exercise (of self-restraint), prescribes more of the same regimen. Realize EZ Al, that EZ credit is like a drug … years of abuse has made your nation obese … literally as well as figuratively! So now you are fat, dumb, and unhappy. If you restore your country to respecting Money … in other words, recognizing the Value of Money Values, you can once again become lean, smart, and happy.
EZ Al: ET your medicine is a bitter pill – it will cause a nasty recession… may be even a depression.
ET: Well EZ Al, if you keep going on the current self-destructive path, it will merely postpone, while most likely exacerbating, the ultimate outcome. Wisdom is discernment … knowing right from wrong. And courage is the fortitude to follow the right path regardless of short-term consequences. I suggest it is time for your nation to display both.
So there you have it. If you deal with the crisis in this way you would be respecting money and avoiding violent injustice to those who acted responsibly and did nothing to contribute to the problem. You would also be ensuring both retributive and distributive justice for those who played major roles in creating this crisis.
Well, it was nice meeting you EZ Al – and please give my regards and best wishes to your fellow passengers on spaceship Earth. Got to run. Ciao!
And then, with that strange sensation at the base of his spine again, Greenspan blacked out.
* * * * *
Slowly regaining consciousness in his back yard, he realized the sun was high in the sky. “I must have dozed off,” he thought. And then he remembered very clearly the entire encounter with ET. “That could not have really happened – it must have been a nightmare”, he said to himself. “Thank God its over.”
America’s nightmare was only beginning.
Relieved that he was still alive, and being reassured that the ET was not going to hurt him, EZ Al felt fear recede from his body. ‘Ah, just another dumb reporter. I should be able to handle this, no problem’ thought Greenspan. “And what if I don’t want to answer any question”, he said. No sooner had he said that, he felt a strange new sensation … like he was drowning. “Am I being ‘waterboarded’?” he wondered as he felt a sheer sense of fear and panic wash over him. “Okay, okay. I will talk.” He blurted. Immediately, the drowning sensation disappeared.
ET: I am glad you have seen the light Dr. Greenspan. May I call you EZ Al for short? You can call me ET.
EZ Al: I’d rather not, but given that I have no choice in the matter, go ahead.
ET: Explain to me how you manage economic activity on Earth. And please try to be clear and concise. I don’t have time for your usual long-winded, pseudo-sophisticated gibberish.
EZ Al: Economies on Earth are managed via two kinds of policies – Monetary and Fiscal. The former is decided by the Central Banks while governments are responsible for the latter. Some Central Banks have a degree of ‘independence’ from governments but as a practical matter they must ultimately bow to political pressure … after all they are chartered by the State. Monetary policy is executed by, essentially, changing the short-term interest rate, i.e., the price/cost of money. When goods and services price inflation is high and rising, we raise the interest rate to discourage borrowing. Conversely, when economic growth is flagging, we lower the cost of borrowing in order to encourage credit growth – which gets the economy humming again.
ET: That sounds simple enough. Tell me EZ Al, do Central Banks have other responsibilities?
EZ Al: Yes, they do. We in the U.S., for example, have two other responsibilities: (1) To regulate the banking system to ensure long-term safety and soundness, and (2) To be the ‘lender of last resort’.
ET: And have you fulfilled these responsibilities?
EZ Al: Well we fulfill the second every time there is a crisis. And we have these crises with some regularity. Examples during my tenure as Chairman include the Stock market crash of 1987 and the LTCM/Russian bond default of 1998. However, when it comes to regulation, we believe in ‘free enterprise capitalism as the best path to prosperity’. Specifically, we believe in ‘efficient markets’ … that free markets are perfect and the way to get there is through de-regulation. So while we pay lip service to regulation to keep the socialists in our country off our backs, we work very hard to de-regulate markets and fight new regulation proposals.
ET: So under your tenure, did you make progress towards your goal of ‘totally free markets’?
EZ Al: Yes we accomplished a lot. We undid all the Depression Era regulations like Glass-Steagall, we succeeded in creating a huge ‘shadow banking system’ which circumvented the old regulated banks and, most importantly, set-up a global process of packaging loans and their derivatives along with capital markets that enable investors to buy and trade these ‘bundles of risk’ with perfect freedom.
ET: Hmmm … wonder why your perfectly free capital markets are having such a massive coronary right now. Tell me EZ Al, as you manipulate interest rates to promote or restrict the flow of credit into the economy, what happens to the level of Debt in the system; and do you have any guidelines as to how much Debt the economy can safely handle?
EZ Al: Well, I can tell you what has actually happened in the US over the last quarter century. Non-Financial Sector debt has increased from about $ 5 T to $ 32 T and Financial Sector debt ahs gone from $ 0.8 T to $ 16 T. And if you want to know how this relates to GDP, the total Debt to GDP ratio has gone from 150 % to 350 %. As far as any guidelines on ‘safe and sound debt levels’ are concerned, we don’t have any. As I told you, we believe in the free market. If debt levels become more than the system can handle, free markets will take care of them. It Schumpeter’s ‘creative destruction’ in action – reckless lenders will go out of business and prudent lenders will take their place.
ET: Hmmm … wonder if the fact that the Debt/GDP ratio has surpassed the point that it hit early in your last Great Depression is significant. Tell me EZ Al, do you think that there are any ‘natural limits’ to this debt load … that there comes a point when, to use a nuclear metaphor, it reaches ‘critical mass’ – causing a ‘core meltdown’?
EZ Al: Well, if there is such a natural limit, we on Earth are unaware of it. Macro-Economic Science has no such concept. Yes there have always been jeremiahs, doomsayers, chicken littles – take your choice of labels – who have been warning that the sky is falling. But what can you do about people who cry wolf – and always there is no wolf and the sky is still intact above? You ignore them.
ET: And as you manipulated the price of money, what happens to the price of assets – stocks, bonds, real estate?
EZ Al: I consider it one of my greatest accomplishments that, during my tenure as Chairman, the growth in the value of assets far exceeded the growth of goods and services prices as well as incomes. Especially during boom times, which, not surprisingly, some Cassandras called bubbles, American Wealth galloped ahead impressively. And today, in spite of falling housing values, on the whole, Americans are richer than at any time in our history.
ET: Do you think asset value booms, or bubbles as your critics call them, could lead to problems for the economy down the road? And, if so, should you not prevent, or at least, ‘lean against’ their growth?
EZ Al: Yes, sometimes booms lead to busts. But (a) you cannot identify them until later (b) even if you could, you can’t do anything to stop them (c) and if you did, you could damage the economy. So its best to ignore them and if their fall-out tanks the economy, you could always ‘mop up’ the mess and revive the economy via liquidity and EZ credit.
ET: So you don’t view asset value booms as an inflation problem?
EZ Al: No, of course not. Our whole job is to increase wealth. That’s what asset price inflation represents. Why would we want to contain it? On the contrary, we want to encourage it.
This time when the ET spoke, EZ Al sensed a distinct change in the ET’s tone of voice. No more did he sound Socratic, even friendly. There was no mistaking the withering contempt in his speech. It made the hair on Greenspan’s body stand on end.
ET: EZ Al, you and your ilk are complete fools. You don’t even have the common sense off a not-too-bright ten year old child. And yet you strut about with great pride in your ‘Economic Science’. If you represent human intelligence, I fear for the survival of your race. Let me explain this in very simple terms because you are obviously not too bright.
Debt levels are central to the safely and soundness of a financial system. Left unchecked, they grow to a point when the debt service burden starts squeezing disposable income, which in turn curtails spending and what you call economic growth. If the ‘squeeze’ becomes a ‘shock’, as in rate resets of your Adjustable Rate Mortgages, the consumer defaults. If enough defaults occur, lenders get scared, pull in their horns and curtail credit. This sets off a chain reaction … lower spending, leading to lower business profit, leading to lay-offs. Now you have consumers experiencing painful shocks to both incomes and obligations … leading to more debt defaults … which repeats the cycle in a downward spiral.
So what do you do to avoid this vicious cycle? Don’t be so arrogant. Respect the accumulated wisdom of your race. Re-learn ‘An ounce of prevention is worth a pound of cure’ or ‘A stitch in time saves nine’. Apply this learning to debt. PREVENT Credit Bubbles. Safety, Soundness and Sustainability require Limiting Debt Growth. Any real banker knows that he cannot lend beyond the borrower’s capacity to repay – in good and bad times. And you have to prevent asset bubbles … because they enable rampant debt growth. And when the bubble bursts and asset prices fall, people find that they are, in your idiom, ‘upside down’ … which leads to their defaulting in droves.
EZ Al felt a chill go up his spine. No one had ever spoken to him in this tone before. And yet, he was intrigued. The scholar in him came out.
EZ Al: Sounds like you think we are complete idiots in economic matters. So how do you manage money in your world?
Economics in One Lesson
The ET’s tone of voice changed. It sounded friendlier … as if he was smiling. There was some hope for humanity after all. At least this specimen before him had a learning attitude. He proceeded to teach …
ET: Al, it all starts with really understanding what money is and how it should be treated or handled. Obviously, money serves two purposes (a) a store of value, and (b) a medium for exchange. It serves both these roles admirably as long as you treat or handle it with respect. Think of money as a person … if you abuse it, it will desert you. If you treat it with respect, it will always be your faithful companion.
Now you might accuse me of waxing philosophical. Maybe you are thinking all this sounds great but what does it really mean? You know what it means to treat a person with respect. But what does it mean to treat money with respect? Let me explain. There are four major ways of abusing money:
Spending more than you earn
Spending money in unhealthy (for the individual as well as society) ways
Borrowing/lending money for consumption rather than investment that improves societal productivity
Gambling/speculation … particularly with Other Peoples’ Money (OPM)
By these criteria, you will no doubt recognize, your society has been disrespecting and abusing money on a grand scale. All of your economic ‘players’ – consumers, businesses, and government have been spending far more than they earn …making up the difference with borrowing – hence the mammoth increases in debt. By the way, you should be ashamed of your appalling ethics. You claim to be the moral beacon for the whole world and yet you don’t hesitate to stick the tab for your gargantuan current consumption on to future generations of Americans. And yes, McMansions and SUVs are consumption and not investment – for they increase the ‘operating cost’ of households and are thus a drain on productivity. Why is it that your measures of economic growth make no allowance for qualitative differences – whether the money is being used to make bombs or feed the poor and hungry, to build yachts and private airplanes or medicines for the sick, to produce $5000 bottles of wine and $100 cigars for the ‘Masters of the Universe’ on Wall Street or to educate your children? And while I am at it, let me point out that all this mad waste, which you worship at the altar of GDP growth, is depleting your planet’s non-renewable resources while putting its fragile environment – and by implication your race, at risk.
Yes, all this constitutes disrespect of money. Of course, one of the worst abuses is what you do in your precious Capital Markets. While you justify their existence on the grounds that they facilitate the flow of capital from investors to entrepreneurs, let’s be honest about what they really are … a license to gamble, most often with Other Peoples’ Money (OPM).
However, let me point out the worst abuses of money on your planet. Real money or capital is a society’s savings. They are what is left over from income after deducting all expenditures. As such, they represent a voluntary restraint on current consumption in order to provide for an uncertain future. Savings are the true measure of character … the ability to postpone immediate gratification. These savings constitute the capital a society has to invest in production methods that increase efficiency and productivity. Over the last quarter century you have discouraged savings and encouraged borrowing and speculation. This you have done by driving down the returns savers can earn on safe bank deposits. So, to beat inflation they have to put their money into risky ‘investments’ – stocks, bonds, and real estate. And by reducing borrowing costs and encouraging asset bubbles, you have provided people huge incentives to gamble – often with other peoples’ money. Everywhere you turn on your planet, advertisers are trying to get you to buy stuff … even if they need to ‘help’ you buy it with no down, 0% ‘financing’. Your entire monetary policy is morally reprehensible and constitutes a profound abuse of money.
So there you have it – you have violated every principle of sound money consistently, and over a long period of time. Is it any wonder that money is now returning the favor by walking out on you?
EZ Al listened with rapt attention as ET unfolded this strange doctrine of sound, healthy money. Finally he said
EZ Al: ET, what you are saying is so diametrically opposed to what we do here on earth, it leaves me totally dumbfounded. Let me try a different tack. What would you do to solve the current problems? As you know, our financial system is totally frozen … as Bill Gross of PIMCO put it, it resembles a constipated owl. How would you treat this owl? Suppositories? Laxatives? Or do we need an enema?
ET: Well Al, that’s the beauty of basing economic policy on eternal principles or values. That is the Value of Values. If you applied the Money Values that I have just outlined, not only is the solution clear and simple; most importantly, it is also fair and just … for in solving one problem you do not want to create a bigger mess down the road. Keep in mind the Hippocratic injunction – First, do no harm. Money Values provide you with a Moral Economic Compass to guide your policies … vs. the scatter-brained, ad-hoc approach you take. Here is what I would do.
Find out whether these frozen assets represent real money (somebody’s savings) or phony money, i.e., borrowings.
If it is the former, and it is ‘frozen’ in the system for some reason, step in and provide liquidity to ‘unfreeze’ it.
If, however, some entity is in distress because they cannot borrow any more money, you must tell them the truth … they were wrong to arrange their affairs to be so dependent upon ‘other people’s money’ and must suffer the consequences of taking undue risk. In good times these entities gambled and won spectacularly; it is only fitting that they experience the downside of leverage so that in the future they are discouraged from abusing money in this way.
In your society, unfortunately, the proportion of money abusers is large … consumers who live beyond their means – often borrowing on credit cards or against their homes or automobiles to squander on frivolous pursuits, businesses that expand beyond sustainable levels fueled by borrowed funds and, above all, investment banks and hedge/private equity funds who make jaw-dropping sums of money gambling with other peoples’ money. I am tempted to call your entire society ‘Opium (OPM – Other Peoples’ Money) Enterprises’ not withstanding your hubristic self-image of rugged self-reliance.
EZ Al: But ET, you don’t understand the problem. You see, our financial system is frozen … it is not extending credit – at least not in the copious quantities we need to drive economic growth. And the reason it cannot extend credit is because losses on previous lending are depleting the capital in the system. And believe it or not, we still have some rules on capital adequacy. The only way banks can start lending again is if they got new capital. And since private investors will not put in capital because they are afraid of losing it, the taxpayer is our only option.
ET: There you go again. You just don’t get it. You want the banks to lend more money. Have you stopped to ask yourself if that’s desirable? As I have demonstrated, the whole mess was created because you turned the economy into ‘Opium Enterprises’. Tell me EZ Al, does it make any sense to increase lending to consumers or businesses in the face of the deepening recession? Anybody who wants to increase leverage under these circumstances is either stupid or a fraud (because they have no intention to repay the debt). Either way, no responsible bank should lend to them.
You earthly economists are so blinded with Keynesian Fundamentalism, you can’t even think straight. You are like the physician who, examining the 300-lb patient who has been rushed to the emergency room due to a massive coronary brought about by years of over eating (of EZ credit) and no exercise (of self-restraint), prescribes more of the same regimen. Realize EZ Al, that EZ credit is like a drug … years of abuse has made your nation obese … literally as well as figuratively! So now you are fat, dumb, and unhappy. If you restore your country to respecting Money … in other words, recognizing the Value of Money Values, you can once again become lean, smart, and happy.
EZ Al: ET your medicine is a bitter pill – it will cause a nasty recession… may be even a depression.
ET: Well EZ Al, if you keep going on the current self-destructive path, it will merely postpone, while most likely exacerbating, the ultimate outcome. Wisdom is discernment … knowing right from wrong. And courage is the fortitude to follow the right path regardless of short-term consequences. I suggest it is time for your nation to display both.
So there you have it. If you deal with the crisis in this way you would be respecting money and avoiding violent injustice to those who acted responsibly and did nothing to contribute to the problem. You would also be ensuring both retributive and distributive justice for those who played major roles in creating this crisis.
Well, it was nice meeting you EZ Al – and please give my regards and best wishes to your fellow passengers on spaceship Earth. Got to run. Ciao!
And then, with that strange sensation at the base of his spine again, Greenspan blacked out.
* * * * *
Slowly regaining consciousness in his back yard, he realized the sun was high in the sky. “I must have dozed off,” he thought. And then he remembered very clearly the entire encounter with ET. “That could not have really happened – it must have been a nightmare”, he said to himself. “Thank God its over.”
America’s nightmare was only beginning.
14 October 2008
A Flood of Money ~ it can't work
Monday, October 13, 2008, 8:27 am, by cmartenson
Well, the G7 met and decided that what we needed was, unsurprisingly, a flood of money. An unlimited wall of new money to replace the money that mysteriously evaporated into the mist of the credit crisis.
I say "unsurprisingly," because this has all been tried before.
When John Law's infamous credit experiment started to unravel in 1720, the French authorities first resorted to decreeing that their failing paper promises were worth more than gold and silver, and then, upon the almost immediate failure of that edict, to printing as much as necessary to buy out the failing equity and debt issuances upon which the entire bubble was formed.
The whole thing collapsed in rather short order, and the angry, destitute crowds took matters into their own hands shortly thereafter.
Here's how I summarize the news from this weekend:
Ireland guarantees all bank deposits ($563 billion dollars of exposure)
France increases bank deposit insurance (exposure unknown)
Danish government guarantees all bank deposits ($6.5 billion dollars of exposure)
UAE guarantees all bank deposits ($13 billion dollars of exposure)
Germany guarantees all bank deposits ($549 billion dollars of exposure)
Portugal guarantees bank deposits ($28 billion dollars of exposure)
Australia guarantees all bank deposits (exposure unknown)
Spain increases deposit guarantees (exposure unknown)
UK increases bank deposits (exposure unknown)
New Zealand guarantees all bank deposits (exposure unknown)
EU guarantees interbank lending in unlimited amounts
EU raises bank insurance limits by 100% (but still only $68,000 per account)
UK plans to take majority stake in RBS and big holdings in Lloyds, TSB, HBOS, and Barclays ($60 billion dollars)
And I almost certainly missed a few things, because it was a firehose of information.
And the US? $1.5 - $2 trillion total cost for the next year.
So far I have not yet read ONE article that asks the most obvious question of them all, "Where will all this money come from?"
That's it. That's the $64,000,000,000,000 question.
"Where will all this money come from?"
It's a pretty obvious question.
So how come nobody is asking it?
Because the answer is the same as it was during the French South Sea Bubble in 1720 - it will be printed up by central banks.
Which raises the uncomfortable follow-up question, "So why is it that we are expecting a different or better outcome this time?"
It is a serious question, and it deserves a serious answer. But it's hard to get an answer to a question that practically nobody is asking....
Well, the G7 met and decided that what we needed was, unsurprisingly, a flood of money. An unlimited wall of new money to replace the money that mysteriously evaporated into the mist of the credit crisis.
I say "unsurprisingly," because this has all been tried before.
When John Law's infamous credit experiment started to unravel in 1720, the French authorities first resorted to decreeing that their failing paper promises were worth more than gold and silver, and then, upon the almost immediate failure of that edict, to printing as much as necessary to buy out the failing equity and debt issuances upon which the entire bubble was formed.
The whole thing collapsed in rather short order, and the angry, destitute crowds took matters into their own hands shortly thereafter.
Here's how I summarize the news from this weekend:
Ireland guarantees all bank deposits ($563 billion dollars of exposure)
France increases bank deposit insurance (exposure unknown)
Danish government guarantees all bank deposits ($6.5 billion dollars of exposure)
UAE guarantees all bank deposits ($13 billion dollars of exposure)
Germany guarantees all bank deposits ($549 billion dollars of exposure)
Portugal guarantees bank deposits ($28 billion dollars of exposure)
Australia guarantees all bank deposits (exposure unknown)
Spain increases deposit guarantees (exposure unknown)
UK increases bank deposits (exposure unknown)
New Zealand guarantees all bank deposits (exposure unknown)
EU guarantees interbank lending in unlimited amounts
EU raises bank insurance limits by 100% (but still only $68,000 per account)
UK plans to take majority stake in RBS and big holdings in Lloyds, TSB, HBOS, and Barclays ($60 billion dollars)
And I almost certainly missed a few things, because it was a firehose of information.
And the US? $1.5 - $2 trillion total cost for the next year.
So far I have not yet read ONE article that asks the most obvious question of them all, "Where will all this money come from?"
That's it. That's the $64,000,000,000,000 question.
"Where will all this money come from?"
It's a pretty obvious question.
So how come nobody is asking it?
Because the answer is the same as it was during the French South Sea Bubble in 1720 - it will be printed up by central banks.
Which raises the uncomfortable follow-up question, "So why is it that we are expecting a different or better outcome this time?"
It is a serious question, and it deserves a serious answer. But it's hard to get an answer to a question that practically nobody is asking....
13 October 2008
Can you have your house and spend it too?
ECONOMIC DIS-EQUILIBRIUM
Can you have your house and spend it too?
"What remedy is there if we have too little Money?" asked Sir William Petty (the author of Political Arithmetick, designer of an ill-fated high-speed sailing catamaran, and cofounder of the Royal Society) in his brief Quantulumcunque Concerning Money in 1682. His answer, amplified by the founding of the Bank of England in 1694, resonates to this day: "We must erect a Bank, which well computed; doth almost double the Effect of our coined Money: And we have in England Materials for a Bank which shall furnish Stock enough to drive the Trade of the whole Commercial World."
And in the beginning, there were tally sticks. This collection of 13th-century Exchequer "stocks" is stored at the National Archives in London.
Courtesy National Archives, UK
Petty showed that wealth is a function not only of how much money is accumulated, but of the velocity with which the money is moved around. This led to the realization that money, like information but unlike material objects, can be made to exist in more than one place at a single time.
An early embodiment of this principle, preceding the Bank of England by more than five hundred years, were Exchequer tallies—notched wooden sticks issued as receipts for money deposited with the Exchequer for the use of the king. "As a financial instrument and evidence it was at once adaptable, light in weight and small in size, easy to understand and practically incapable of fraud," explained historian Hilary Jenkinson in 1911. "By the middle of the twelfth century, there was a well-organized and well-understood system of tally cutting at the Exchequer... and the conventions remained unaltered and in continuous use from that time down to the nineteenth century."
A precise description was given by Alfred Smee, resident surgeon to the Bank of England and the son of the accountant general (as well as the inventor of electroplating, electrical facsimile transmission, digital image compression, an artificial muscle, and other prescient ideas): "Curiously enough, I have ascertained that no gentleman in the Bank of England recollects the mode of reading them," Smee reported in 1850. "The tally-sticks were made of hazel, willow, or alder wood, differing in length according to the sum required to be expressed upon them," Smee explained.
The tally sticks were notched to show the amount and inscribed on both sides with the name of the person paying the money along with the date; the stick was then split down the middle so that each side retained a copy of the inscription, and one half of every notch. One part (known as the "stock," thus the origin of this term) remained at the Exchequer and the other part was given to the person depositing their money with the king. As Smee puts it: "Rude and simple as was this very ancient method of keeping accounts, it appears to have been completely effectual in preventing both fraud and forgery for a space of seven hundred years. No two sticks could be found so exactly similar, as to admit of being identically matched with each other, when split in the coarse manner of cutting tallies; and certainly no alteration of the particulars expressed by the notches and inscription could remain undiscovered when the two parts were again brought together."
Exchequer tallies were ordered replaced in 1782 by an "indented cheque receipt," but the Act of Parliament thereby abolishing "several useless, expensive and unnecessary offices" was to take effect only on the death of the incumbent who, being "vigorous," continued to cut tallies until 1826. "After the further statute of 4 and 5 William IV the destruction of the official collection of old tallies was ordered," noted Hilary Jenkinson. "The imprudent zeal with which this order was carried out caused the fire which destroyed the Houses of Parliament in 1834."
The notches were of various sizes and shapes corresponding to the tallied amount: a 1.5-inch notch for £1000, a 1-inch notch for £100, a half-inch notch for £20, with smaller notches indicating pounds, shillings, and pence, down to a halfpenny, indicated by a pierced dot. The code was similar to the notches still used to identify the emulsion speed of photographic film in the dark. And the self-authentication achieved by distributing the information across two halves of a unique piece of wood is analogous to the way large numbers, split into two prime factors, are used to authenticate digital financial instruments today.
So far so good. The breakthrough was in money being duplicated: the King gathered real gold and silver into the treasury through the Exchequer, with the tally given in return attesting to the credit of the holder who could enter into trade, manufacturing, or other ventures, eventually producing real wealth with nothing more than a notched wooden stick. So what's the problem? Aren't we just passing around digital versions of the tallies we've been using for almost one thousand years? Aren't mortgages, whether prime or sub-prime, just a modern version of paying for houses with fraud-resistant sticks?
The roots of the current financial meltdown can be found in John von Neumann's "Model of General Economic Equilibrium," first developed in 1932. Von Neumann elucidated the behavior of an expanding autocatalytic economy where "goods are produced not only from 'natural factors of production,' but... from each other..." and proved the coexistence of equilibrium and expansion via the saddle-point topology of convex sets. Some of his assumptions—such as that "the natural factors of production, including labour, can be expanded in unlimited quantities" and that "all income in excess of necessities of life will be reinvested"—appeared unrealistic to others at the time, less so now that Moore's Law, and the zero-cost replication of information, is driving the economy of today. Other assumptions, such as an invariant financial clock cycle, are conservative under the conditions now in play.
Von Neumann, who made seminal contributions to digital computing, left a number of distinct monuments to his abbreviated career: among them his "Theory of Games and Economic Behavior" (with Oskar Morgenstern) and his "Theory of Self-Reproducing Automata" (with Arthur Burks). Synthesis between these two regimes is now advancing so quickly that no unified theory of the economics of self-reproducing systems has been able to keep up. Periodic instability should come as no surprise. We may be on the surface of a balloon. Or in the saddle of a dynamic equilibrium—we hope.
The unlimited replication of information is generally a public good (however strongly music publishers, software developers, and other pockets of resistance disagree). The problem starts, as the current crisis demonstrates, when unregulated replication is applied to money itself. Highly complex computer-generated financial instruments (known as derivatives) are being produced, not from natural factors of production or other goods, but purely from other financial instruments. When the Exchequer splits the tally stick in two, the King keeps the gold and silver, and you keep one half of the stick. Derivatives are the equivalent of splitting off (and selling) further copies of the same stick—or the "clipping" and debasing of coinage that led Isaac Newton to spend the later part of his life reforming the financial system as Master of the Mint.
The result is a game of musical chairs that follows von Neumann's model of an expanding economic equilibrium—until the music stops, or we bring in Isaac Newton, whichever comes first.
Can you have your house and spend it too?
"What remedy is there if we have too little Money?" asked Sir William Petty (the author of Political Arithmetick, designer of an ill-fated high-speed sailing catamaran, and cofounder of the Royal Society) in his brief Quantulumcunque Concerning Money in 1682. His answer, amplified by the founding of the Bank of England in 1694, resonates to this day: "We must erect a Bank, which well computed; doth almost double the Effect of our coined Money: And we have in England Materials for a Bank which shall furnish Stock enough to drive the Trade of the whole Commercial World."
And in the beginning, there were tally sticks. This collection of 13th-century Exchequer "stocks" is stored at the National Archives in London.
Courtesy National Archives, UK
Petty showed that wealth is a function not only of how much money is accumulated, but of the velocity with which the money is moved around. This led to the realization that money, like information but unlike material objects, can be made to exist in more than one place at a single time.
An early embodiment of this principle, preceding the Bank of England by more than five hundred years, were Exchequer tallies—notched wooden sticks issued as receipts for money deposited with the Exchequer for the use of the king. "As a financial instrument and evidence it was at once adaptable, light in weight and small in size, easy to understand and practically incapable of fraud," explained historian Hilary Jenkinson in 1911. "By the middle of the twelfth century, there was a well-organized and well-understood system of tally cutting at the Exchequer... and the conventions remained unaltered and in continuous use from that time down to the nineteenth century."
A precise description was given by Alfred Smee, resident surgeon to the Bank of England and the son of the accountant general (as well as the inventor of electroplating, electrical facsimile transmission, digital image compression, an artificial muscle, and other prescient ideas): "Curiously enough, I have ascertained that no gentleman in the Bank of England recollects the mode of reading them," Smee reported in 1850. "The tally-sticks were made of hazel, willow, or alder wood, differing in length according to the sum required to be expressed upon them," Smee explained.
The tally sticks were notched to show the amount and inscribed on both sides with the name of the person paying the money along with the date; the stick was then split down the middle so that each side retained a copy of the inscription, and one half of every notch. One part (known as the "stock," thus the origin of this term) remained at the Exchequer and the other part was given to the person depositing their money with the king. As Smee puts it: "Rude and simple as was this very ancient method of keeping accounts, it appears to have been completely effectual in preventing both fraud and forgery for a space of seven hundred years. No two sticks could be found so exactly similar, as to admit of being identically matched with each other, when split in the coarse manner of cutting tallies; and certainly no alteration of the particulars expressed by the notches and inscription could remain undiscovered when the two parts were again brought together."
Exchequer tallies were ordered replaced in 1782 by an "indented cheque receipt," but the Act of Parliament thereby abolishing "several useless, expensive and unnecessary offices" was to take effect only on the death of the incumbent who, being "vigorous," continued to cut tallies until 1826. "After the further statute of 4 and 5 William IV the destruction of the official collection of old tallies was ordered," noted Hilary Jenkinson. "The imprudent zeal with which this order was carried out caused the fire which destroyed the Houses of Parliament in 1834."
The notches were of various sizes and shapes corresponding to the tallied amount: a 1.5-inch notch for £1000, a 1-inch notch for £100, a half-inch notch for £20, with smaller notches indicating pounds, shillings, and pence, down to a halfpenny, indicated by a pierced dot. The code was similar to the notches still used to identify the emulsion speed of photographic film in the dark. And the self-authentication achieved by distributing the information across two halves of a unique piece of wood is analogous to the way large numbers, split into two prime factors, are used to authenticate digital financial instruments today.
So far so good. The breakthrough was in money being duplicated: the King gathered real gold and silver into the treasury through the Exchequer, with the tally given in return attesting to the credit of the holder who could enter into trade, manufacturing, or other ventures, eventually producing real wealth with nothing more than a notched wooden stick. So what's the problem? Aren't we just passing around digital versions of the tallies we've been using for almost one thousand years? Aren't mortgages, whether prime or sub-prime, just a modern version of paying for houses with fraud-resistant sticks?
The roots of the current financial meltdown can be found in John von Neumann's "Model of General Economic Equilibrium," first developed in 1932. Von Neumann elucidated the behavior of an expanding autocatalytic economy where "goods are produced not only from 'natural factors of production,' but... from each other..." and proved the coexistence of equilibrium and expansion via the saddle-point topology of convex sets. Some of his assumptions—such as that "the natural factors of production, including labour, can be expanded in unlimited quantities" and that "all income in excess of necessities of life will be reinvested"—appeared unrealistic to others at the time, less so now that Moore's Law, and the zero-cost replication of information, is driving the economy of today. Other assumptions, such as an invariant financial clock cycle, are conservative under the conditions now in play.
Von Neumann, who made seminal contributions to digital computing, left a number of distinct monuments to his abbreviated career: among them his "Theory of Games and Economic Behavior" (with Oskar Morgenstern) and his "Theory of Self-Reproducing Automata" (with Arthur Burks). Synthesis between these two regimes is now advancing so quickly that no unified theory of the economics of self-reproducing systems has been able to keep up. Periodic instability should come as no surprise. We may be on the surface of a balloon. Or in the saddle of a dynamic equilibrium—we hope.
The unlimited replication of information is generally a public good (however strongly music publishers, software developers, and other pockets of resistance disagree). The problem starts, as the current crisis demonstrates, when unregulated replication is applied to money itself. Highly complex computer-generated financial instruments (known as derivatives) are being produced, not from natural factors of production or other goods, but purely from other financial instruments. When the Exchequer splits the tally stick in two, the King keeps the gold and silver, and you keep one half of the stick. Derivatives are the equivalent of splitting off (and selling) further copies of the same stick—or the "clipping" and debasing of coinage that led Isaac Newton to spend the later part of his life reforming the financial system as Master of the Mint.
The result is a game of musical chairs that follows von Neumann's model of an expanding economic equilibrium—until the music stops, or we bring in Isaac Newton, whichever comes first.
13 August 2008
Can they print like China?
Last week, Congress passed a housing bill that gave the Treasury Department a blank check to inject billions of U.S. taxpayer dollars into mortgage giants Fannie Mae and Freddie Mac, snatching them from insolvency. To accommodate this blank check, Congress obligingly raised its debt ceiling by $800 billion. Ouch! That’s nearly a trillion dollars. Why was it necessary to incur this potentially crippling public debt to bail out two completely private, for-profit behemoths, which have run themselves into bankruptcy with their own risky investment schemes? Policymakers said it was essential to maintain the country’s creditworthiness with foreign lenders, which today hold about one-fifth of Fannie and Freddie securities. According to a July 21 report by Heather Timmons in The New York Times:
One out of 10 American mortgages is, in effect, in the hands of institutions and governments outside the United States.1
Ten percent of American mortgages are now owned by foreigners? Doesn’t that defeat the whole purpose of Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Mortgage Corporation)? They were supposedly set up to fund “the American dream” – home ownership by Americans. Today, American homes are owned by anonymous pools of private investors, many of whom are foreign governments and foreign central banks. How did we manage to give away the farm? And why are we bowing to the interests of foreign investors to the point of driving our own government into bankruptcy? The federal debt is already nearly ten trillion dollars, more than the government can ever possibly repay with taxes.
According to analysts, the bailout of the two mortgage giants is necessary “because America’s relations with a host of countries are intricately tied to Fannie and Freddie,” and because we need to assure “Americans’ future ability to gain access to credit. If foreign companies and governments abandon United States investments, home, auto and credit card loans will be much more difficult to come by.”2
The same sort of argument was once made by U.S. banks to get Third World countries to pay up on their foreign loans. The U.S., it seems, has finally achieved Third World debtor-nation status. For the last half century, the push for “free trade” has been all about preserving profitable opportunities for investment, finding ways to “make money” without actually making anything, exploiting the work of others by buying up corporations around the world and drawing profits off the top. But now the tables have turned. We have gone from being the world’s largest creditor to the world’s largest debtor. We spent our dollars abroad and now they are coming back to shop for our own real estate and corporate assets. Timmons observes:
Asian institutions and investors hold some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376 billion and Japan $228 billion as of June 2007 . . . . Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.
Sovereign wealth funds (investment funds of sovereign nations and their central banks) are now busily buying up U.S. assets, in what Bill Bonner has called “the biggest transfer of wealth in history.” Writing in The Daily Reckoning on July 11, he observed:
[T]he balance sheet of the U.S. Fed shows $2.3 trillion of US treasury debt held in custody for foreign central banks. The harder the Fed fights the [economic] correction . . . the more money and credit it puts out. This monetary inflation causes prices for oil and imports to rise . . . and more money goes into foreign reserves and Sovereign Wealth Funds in the East, to be used to buy more assets in the West. Thanks to America’s mad monetary policy, these private assets are being taken into public ownership. Some of America’s most important properties are being nationalized . . . but by other nations.3
The ultimate irony is that these other nations may be buying our federal bonds and mortgage-backed securities with money they simply created on a printing press. John Succo is a hedge fund manager who writes on the Internet as “Mr. Practical.” He estimates that as much as 90 percent of foreign money used to buy U.S. securities comes from foreign central banks, which print their own local currencies, buy U.S. dollars with them, and then use the dollars to buy U.S. securities.4 These nations are doing what Congress itself has declined to do: exercising the sovereign right of governments to print their own money.
Unlike the U.S. Federal Reserve, which is wholly owned by a consortium of private banks, the People’s Bank of China (PBoC) is actually owned by the Chinese government. When Chinese merchants, awash with U.S. dollars, cash them in for local currency to pay their workers, the PBoC obliges by swapping dollars for government-issued renminbi. The workers get paid in local currency, and the PBoC gets the dollars for the cost of printing the renminbi. The PBoC then uses the dollars to buy either U.S. interest-bearing bonds or Fannie and Freddie securities, which have conveniently opened up U.S. real estate to foreign investment. In effect, American citizens are paying a foreign government to turn U.S. debt into money, using currency the foreign government issued by fiat (Latin for “let it be” or “so be it” – money simply ordered into existence by the sovereign).
Why doesn’t the U.S. government just issue its own fiat money? That solution may seem radical now, but it could start to look better if Congress has to do what President Roosevelt did in 1933 – declare national bankruptcy and call for a plan of reorganization. There is simply not enough money in the public till to bail out Bear Stearns, IndyMac, and now the private mortgage giants Fannie Mae and Freddie Mac, as well as pay $500 billion annually to service a gargantuan federal debt, and still have enough money left over to repair our failing infrastructure, develop sustainable energy systems, and generally provide for the Common Wealth. The cookie jar is empty, and it is empty because private profiteers have been helping themselves to the cookies.
If the Federal Reserve were made a truly “federal” agency, Federal Reserve Notes (dollar bills) could simply be issued by the U.S. government, instead of being borrowed from a private banking system that creates them with accounting entries and charges interest for the privilege. (See E. Brown, “Putting the ‘Federal’ Back in the Federal Reserve,” www.webofdebt.com/articles, July 26, 2008.) Rather than scrambling to find foreign investors to roll over a $10 trillion debt, Congress could just pay off the debt as the bonds came due, using the same sort of money that foreign central banks used to purchase the bonds in the first place – government-issued national currency. Congress would just be giving them their fiat money back.
As for Fannie and Freddie, they are too big to fail; but they aren’t too big to be nationalized. If we the people are paying the bills, we should get the stock. Fannie Mae began in the 1930s as a truly federal agency, funded by a wholly government-owned bank. The Reconstruction Finance Corporation (RFC) advanced its own federal credit, which was used to fund not only the New Deal but the rapid industrialization that led to victory in World War II.5 The result was to make America the world leader in industry and productivity for most of the rest of the century. It may be time to try that experiment again. The RFC had some flaws, but they could be worked out. That is another subject, to be covered in another article. The bottom line here is that the deed to the farm needs to remain on these shores, and so does the sovereign power to issue money and credit. The existing system of banking and credit creation is teetering on the brink of a collapse brought about by its own internal contradictions and corruption. The system has long since failed in its primary mission of channeling this country’s resources towards investment in a sustainable future. As it stumbles from crisis to crisis, we have neither the time nor the resources to give it yet another chance to do the job. The time has come to clear the boards and begin a new game with new rules.
One out of 10 American mortgages is, in effect, in the hands of institutions and governments outside the United States.1
Ten percent of American mortgages are now owned by foreigners? Doesn’t that defeat the whole purpose of Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Mortgage Corporation)? They were supposedly set up to fund “the American dream” – home ownership by Americans. Today, American homes are owned by anonymous pools of private investors, many of whom are foreign governments and foreign central banks. How did we manage to give away the farm? And why are we bowing to the interests of foreign investors to the point of driving our own government into bankruptcy? The federal debt is already nearly ten trillion dollars, more than the government can ever possibly repay with taxes.
According to analysts, the bailout of the two mortgage giants is necessary “because America’s relations with a host of countries are intricately tied to Fannie and Freddie,” and because we need to assure “Americans’ future ability to gain access to credit. If foreign companies and governments abandon United States investments, home, auto and credit card loans will be much more difficult to come by.”2
The same sort of argument was once made by U.S. banks to get Third World countries to pay up on their foreign loans. The U.S., it seems, has finally achieved Third World debtor-nation status. For the last half century, the push for “free trade” has been all about preserving profitable opportunities for investment, finding ways to “make money” without actually making anything, exploiting the work of others by buying up corporations around the world and drawing profits off the top. But now the tables have turned. We have gone from being the world’s largest creditor to the world’s largest debtor. We spent our dollars abroad and now they are coming back to shop for our own real estate and corporate assets. Timmons observes:
Asian institutions and investors hold some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376 billion and Japan $228 billion as of June 2007 . . . . Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.
Sovereign wealth funds (investment funds of sovereign nations and their central banks) are now busily buying up U.S. assets, in what Bill Bonner has called “the biggest transfer of wealth in history.” Writing in The Daily Reckoning on July 11, he observed:
[T]he balance sheet of the U.S. Fed shows $2.3 trillion of US treasury debt held in custody for foreign central banks. The harder the Fed fights the [economic] correction . . . the more money and credit it puts out. This monetary inflation causes prices for oil and imports to rise . . . and more money goes into foreign reserves and Sovereign Wealth Funds in the East, to be used to buy more assets in the West. Thanks to America’s mad monetary policy, these private assets are being taken into public ownership. Some of America’s most important properties are being nationalized . . . but by other nations.3
The ultimate irony is that these other nations may be buying our federal bonds and mortgage-backed securities with money they simply created on a printing press. John Succo is a hedge fund manager who writes on the Internet as “Mr. Practical.” He estimates that as much as 90 percent of foreign money used to buy U.S. securities comes from foreign central banks, which print their own local currencies, buy U.S. dollars with them, and then use the dollars to buy U.S. securities.4 These nations are doing what Congress itself has declined to do: exercising the sovereign right of governments to print their own money.
Unlike the U.S. Federal Reserve, which is wholly owned by a consortium of private banks, the People’s Bank of China (PBoC) is actually owned by the Chinese government. When Chinese merchants, awash with U.S. dollars, cash them in for local currency to pay their workers, the PBoC obliges by swapping dollars for government-issued renminbi. The workers get paid in local currency, and the PBoC gets the dollars for the cost of printing the renminbi. The PBoC then uses the dollars to buy either U.S. interest-bearing bonds or Fannie and Freddie securities, which have conveniently opened up U.S. real estate to foreign investment. In effect, American citizens are paying a foreign government to turn U.S. debt into money, using currency the foreign government issued by fiat (Latin for “let it be” or “so be it” – money simply ordered into existence by the sovereign).
Why doesn’t the U.S. government just issue its own fiat money? That solution may seem radical now, but it could start to look better if Congress has to do what President Roosevelt did in 1933 – declare national bankruptcy and call for a plan of reorganization. There is simply not enough money in the public till to bail out Bear Stearns, IndyMac, and now the private mortgage giants Fannie Mae and Freddie Mac, as well as pay $500 billion annually to service a gargantuan federal debt, and still have enough money left over to repair our failing infrastructure, develop sustainable energy systems, and generally provide for the Common Wealth. The cookie jar is empty, and it is empty because private profiteers have been helping themselves to the cookies.
If the Federal Reserve were made a truly “federal” agency, Federal Reserve Notes (dollar bills) could simply be issued by the U.S. government, instead of being borrowed from a private banking system that creates them with accounting entries and charges interest for the privilege. (See E. Brown, “Putting the ‘Federal’ Back in the Federal Reserve,” www.webofdebt.com/articles, July 26, 2008.) Rather than scrambling to find foreign investors to roll over a $10 trillion debt, Congress could just pay off the debt as the bonds came due, using the same sort of money that foreign central banks used to purchase the bonds in the first place – government-issued national currency. Congress would just be giving them their fiat money back.
As for Fannie and Freddie, they are too big to fail; but they aren’t too big to be nationalized. If we the people are paying the bills, we should get the stock. Fannie Mae began in the 1930s as a truly federal agency, funded by a wholly government-owned bank. The Reconstruction Finance Corporation (RFC) advanced its own federal credit, which was used to fund not only the New Deal but the rapid industrialization that led to victory in World War II.5 The result was to make America the world leader in industry and productivity for most of the rest of the century. It may be time to try that experiment again. The RFC had some flaws, but they could be worked out. That is another subject, to be covered in another article. The bottom line here is that the deed to the farm needs to remain on these shores, and so does the sovereign power to issue money and credit. The existing system of banking and credit creation is teetering on the brink of a collapse brought about by its own internal contradictions and corruption. The system has long since failed in its primary mission of channeling this country’s resources towards investment in a sustainable future. As it stumbles from crisis to crisis, we have neither the time nor the resources to give it yet another chance to do the job. The time has come to clear the boards and begin a new game with new rules.
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