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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary.
Gold, Bankers, the Trade
Deficit and Unsettled Transactions
by Professor von Braun
September 6th, 2006
Part 1.
Let's start with the
principle of breathing, which, as we all know, is that for each
new breath to be taken, the old has to be expelled. It is impossible
to hold ones breath for any lengthy period of time, eventually
that 'held' breath will expel itself and a new breath will be
automatically breathed in. Fortunately there is no charge for
the air.
The working principle of banking is that a) the bank has a paid
up capital to begin with and begins to accept deposits from customers,
b) customers deposits are then lent out at higher interest rates,
c) it is from the difference between what the deposit earns as
interest and what the loan earns as interest that the bank makes
its income.
Under a fractional banking system the bank can lend out the same
deposits several times over, providing that it can find a willing
borrower with recognizable security and the ability to repay the
loan. Those that police the banking system are always looking
at a bank's loan portfolio to see that these requirements are
met, that the bank's loans are sound, that the security is there
and the repayments are up to date.
The depositor also has an interest in the bank's soundness as
he or she would at some stage like his/her money back.
No fiat banking system has ever lasted for any period of time,
this we know, and the current banking system that the world is
using is, in a sense, another experiment with a fiat system, albeit
an unplanned one.
Banking is a means of settling transactions, a convenient way
of doing business, of settling an exchange of goods and services
between two parties. The world is like one giant swap meet in
some ways, were people swap their products for other products
or services that help create products or repair them. Trade is
not something banking invented. Trade, the exchange of products,
led to banking -- a convenient method to facilitate the settlement
of transactions when a settlement was required, when the exchange
of substances did not balance, when a higher value item 'a' was
swapped for a lesser value item 'b' plus some of item 'c'.
Now item 'c' has to be a neutral component, something that is
acceptable to all. Historically the component that fulfilled this
role has been gold and/or silver. Without a mutually acceptable
neutral component free trade cannot readily take place.
Unfortunately it has been the practice of various nations over
the centuries to either resort to war when they do not have the
ability to trade or to settle any potential transaction, or, alternatively,
to debase the item that has up to that time been mutually acceptable
as settlement. Eventually the activity of debasement either leads
to rebellion, revolution or war.
After these events have taken place the new power possessing being
usually re-introduces a substance that is mutually acceptable
to all parties as an alternative settlement for transactions,
i.e. item 'c.' In fact a key ingredient in well documented past
periods of peace and prosperity has been the quality and widespread
acceptance of item 'c.'
In 1944 the banking world created the idea that the US dollar
would be item 'c' -- that other countries' central banks could
hold these US dollars instead of gold and that they could present
them to the US banking system and redeem them for gold, thereby
maintaining the noble idea that the dollar was as good as gold.
The idea of course was that all countries could have access to
a mutually acceptable item 'c,' thereby having the ability to
settle transactions between themselves with a mutually acceptable
component.
How much easier it would be not to have to ship gold they were
told and so it came to be.
This 'new' system worked quite well following the end of WW2 through
to the late 1950's when an emerging Europe, having rebuilt itself
from the previous debacle as a result of trade, began to accrue
a surplus of these dollars and, per the 1944 agreement, began
to request gold (then priced at $35 per ounce) for these dollars.
This began a substantial decline in the US's gold reserves which
continued until August 1971 when then President Nixon closed the
gold window.
The effect of this was that the connection between gold and the
dollar as an official item 'c' was severed. What stability there
was in the settlement of transactions along with the ability to
actually settle any further transactions 'officially' was gone.
Put another way the genie was now out of the bottle.
The great inflation game had begun, quietly, with little in the
way of objections from within the banking system itself.
Oil remained priced in $'s as did gold, as did all other commodities,
but prices started to rise and rise and rise. By mid 1974 oil
was at $10.00 per barrel, silver was at $6.00 per ounce and gold
was nudging $125 per ounce. And that was just the beginning.
The process of settling transactions had taken on a different
form as countries, central bankers and people conducting business
came to grips with the new official non-redeemable international
monetary system, which in and of itself is a very non-democratic
institution, one that was never discussed, voted on or approved
by any entity other than the US itself.
In short the US dollar could be used as a swap instrument providing
that the rest of the world went along as it had no official redeemable
value, but 'officially' it could be used to pay for goods and
services throughout the world, but at a price, as the market set
the idea of what it was perceived to be worth by utilizing item
'c' -- unofficially of course as the benchmark it always had been.
By 1980 oil, gold and silver
prices had peaked and a stability of sorts seemed to have begun.
An acceptance of the situation seemed to have occurred amongst
bankers worldwide, certainly by the ones that counted the most,
the Europeans, the UK and Japan and they all agreed to hold dollars
as reserves, acting as if they were still the same 'convertible
into gold at $35 dollars per ounce' pre-August 1971 dollars and
continue to treat these dollar 'reserves' in the same fashion
through to this very day. The problem they have is that their
'reserves' are US originated IOU's deposited in the US banking
system.
Meanwhile the US under Reagan in the early 80's began spending
money they merely created -- with the Roosevelt-originated idea
of deficit spending gaining momentum with a gusto, and soon the
US economy was booming.
But few understood what the boom was all about and how it was
occurring. The unrecognized problem was that few were paying any
attention to the fact that the US banks were the recipients of
the accumulation of its currency by the other central banks who
had became the accumulator by default. As trade deficits with
the US became the norm the rest of the world seemed happy to continue
doing business.
In the late 1990's China had joined the party and today it is
the third largest holder of T-bills, following Japan, which follows
the collective Caribbean islands -- the offshore tax haven banking
industry.
Currently there is about $1.6 trillion held by US bankers within
the US on behalf of the other countries central bankers. These
amounts are referred to as reserves and it is estimated that 66%
of all central banks reserves are denominated in US $'s which
means that they are deposited in the US banking system. Now that
is rather cute as the cost of doing actual business with Uncle
Sam is, to be polite, a tad one-sided. To begin with, the most
essential commodities, the ones required for productivity expansion,
are priced in US $'s, so the other CB's obviously need to have
access to US $'s to fund their own countries' development. But
these dollars, the ones referred to as reserves, are deposited
within the US banking system itself and it is from these accounts
that payment is made.
However the
notes used as payment are debt instruments and are themselves
not officially redeemable, which suggests that any accumulation
of them is a risky business. They are not a neutral item, on the
contrary they are anything but neutral, being dependant on the
rest of the world's inflationary banking system to agree to hold
IOU's and not hold neutral
items.
The US banking system treats a customer's deposits as a liability
and their loans are treated as assets and we know that the 'liabilities'
can be lent out over and over again.
The other Central Banks treat their US deposits as reserves, but
these reserves are lent out again by the US banking system many
times over. The effect of the fiat monetary system is to postpone
the settlement of any transaction for as long as possible, for
that is all it can do. You can not pay off a debt with the creation
of more debt, which is what the US has been doing since August
15, 1971 and you can not call a debt instrument a reserve, although
that is what the other Central Banks have been doing. They have
become depositors within the US banking system, not so much by
choice but as a requirement of the banking system itself, the
one agreed to in 1944 and drastically curtailed with no discussion
or agreement in 1971.
The inherent price of playing this game is inflation, as in particular
rising commodity prices. However commodities and the trade and
consumption of them is what provided the fiat monetary system
with the platform to begin with. It's not so much that the price
of the commodity -- any commodity -- goes up, rather it's the
decoupling of the settlement unit from its origins (being commodity
backed) that destroys its neutrality as a settler of transactions.
Basically no outstanding trade obligations have been settled since
August 15, 1971 and the much touted wealth accumulation we hear
about today is not other than a collection of compounded book
entries that are really quite meaningless and of very dubious
value. What the Chinese need to understand is that they are accepting
payment for goods produced in a currency that is not a reserve,
merely a swap item, which in and of itself creates inflation which
appears as rising prices, which in turn shows up in the price
of the very commodities China (along with India and other developing
countries, as well as the western world) needs to keep the US
dominated fiat monetary system going. Remember that in 1971 oil
was $3.60 a barrel, gold was officially at $35 and silver was
at about $1.60.
In addition the US banking system now has the problem of putting
these trade deficit generated deposits to use by way of loans
to customers within the US itself -- consumers they call them,
who themselves are now largely at a maximum when it comes to their
ability to borrow and service their debt. The banking system is
running (or has already run) out of things to securitize which
has been happening gradually over the last 6 or 7 years with bankers
and some select clients now betting between themselves with derivatives
contracts, using their clients' deposits to do it with. They are
creating ever more and more dubious securities of notional items.
The paper gold market is an example of this, where it is estimated
that for every ounce of physical traded at a minimum 100 ounces
of paper gold contracts are written.
What we are seeing by way of the early fall out from the bursting
housing bubble is merely the tip of the debt iceberg. The housing
bubble was an attempt to get money to the consumer so they could
keep on spending, maintaining the idea that all is well by virtue
of consumption figures. This is, in a sense, part of an ongoing
effort to avoid the settlement of any trade transactions conducted
since the world's reserve currency lost its reserve-ability.
Meanwhile the commodity-rich countries, most of whom don't particularly
care for the US, also have to deal with the issue of what to do
with their US $ denominated deposits which are also deposited
within the US banking system.
Currently I believe that now is about the time we see the emphasis
on the back-to-the-basics game when it comes to gold, commodities,
bankers and unsettled transactions. If you as an investor,
being a holder of US $ denominated 'stuff,' do not currently hold
commodities, then you are going to be one among many in a very
large pool, one that is tainted with redeemability issues that
have been postponed and postponed and postponed again and again,
for the last 35 years.
The net result is the numbers increase -- as in from billions
to trillions -- in terms of debt, debt that can never be settled,
as there is no official mechanism in place to do it with. The
only thing left to do is to come up with ever more exotic debt
instruments, some of which must work their way through to the
consumer so they can continue to consume. Needless to say this
will be difficult to do as the consumer is over consumed already,
suffers under the weight of personal debt, has no savings and
is about to become un-creditworthy.
Put another way, it's time for the US banking system to breath
out and resume functioning in a fashion that reflects what a banking
system should be -- a means to settle transactions via a neutral
item, one that is acceptable to all parties involved.
Finally a quote from Thomas Jefferson:
"If the American people ever allow private banks to control
the issuance of their currencies, first by inflation then by deflation,
the banks and corporations that will grow up around them will
deprive the people of all their prosperity until their children
will wake up homeless on the continent their fathers conquered."
That quote is an example of a warning that should have been followed
up on and is quite remarkable for its content, which reflects
what we are looking at today. The people are about as deprived
of their prosperity as they ever have been since the time that
quote was given.
The Prof can be contacted by email at profvonb2@aol.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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