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Page II Index
USAGOLD (2/2/2000) On Promulgating the Idea of Sound Money...the Purpose of this Forum
FOA (1/10 -19/2000) An Overview Series
Usul (3/26/2000) On the Expanding Money Supply and the Perils of Easy Money
Fasolt (3/27/00) The Price of Gold: a Tale of Two Hats...Commodity and Currency
ORO (4/19/2000) The Hidden Gold Standard and the U.S. Debt Trap
Aristotle (4/19/2000) On the Distinction of Wealth --Where Gold Serves Better than Currency
John Doe (05/18/00) On Capitalism and the Monetary System
ORO (06/14/00) ORO's Impression and Overview of FOA's Presentation of ANOTHER's Concept for "Free-Market Gold"
(2/2/2000; 19:58:54MDT - Msg ID:24162)
...let me make another point. The purpose of this Forum, believe it or not, is not simply to generate profits for Centennial Precious Metals. It is also to promulgate an idea -- that idea being in its simplest frame of reference -- Sound Money. As we are all learning there is a whole universe of thinking that attends that concept. Centennial will get its share of the gold market whether or not this Forum exists. At the same time, I will not in the least bit underplay how important its been to the current and hopefully future fortunes of this gold firm. Have you ever noticed though how many times I have failed to respond to questions from the Forum that would have been considered an excellent sales opportunity by any investment broker? (Stranger, you know what I'm saying.) Have you ever wondered why I do not run any ads here? Why we only lightly toot our horn from time to time? Have you wondered why I haven't commercialized this site? Don't get me wrong. We have done fairly well over the past few years and God-willing we will do well in the years to come.
This Forum was originally created
as a place where people of a like mind with respect to gold could
have a place to gather and discuss their views, their opinions,
their lives. I consider that and that alone to be of extraordinary
importance and I am proud to be able to provide it. USAGOLD is
a dream realized. Up until places like this existed, people who
felt as we do about the nature of money, economics and politics
were completely shut out from the public discussion. The fact
that FOA and Another were around to help launch the site was a
happy circumstance for me and the rest of us who first gathered
here. At the same time, they were the catalyst. It was their acceptance
of my invitation to post here that made it all possible. It was
even a happier circumstance for me to see the intense level of
thinking, interest and ideas that evolved here as a result of
their presence right up until some of the strong posts from this
afternoon. (I wish I could name names but I am sure I would leave
out a shining star. I don't want to do that.) Do I agree with
everything FOA and Another espouse? No, I do not. Anyone who has
read the posting carefully can see that. But I do revel in the
level of discussion among highly intelligent people that come
here simply because these two teachers have decided to camp here
for awhile. I have this strange notion that the pen is indeed
mightier than the sword and this Forum is my testament to it.
So in this way I am in all of your debt. You have made this more
than I ever thought possible. This place was created for the gold
investor and that's the way it will stay. Thank you, my friends
and fellow goldmeisters. Let us hope that we ALL continue to walk
this road together. And may this Mighty Oaken Table, like the
subject discussed over it, never lose its luster.
20:39:02MDT - Msg ID:22663)
ORO (01/06/00; 15:05:40MDT - Msg ID:22411)
-----------------For years, I could not understand how the dollar could stabilize in 1980. It was a complete mystery to me. Austrian monetary theory, which I studied with the intense interest of youth, alongside Monetarist theory, was giving no clue as to how the dollar could be stable at all once the arbitrage to gold through redeemability was closed to everyone - CBs included.---------------------
It was amazing wasn't it? During that time, anyone that had any grasp of money theory just knew that eventual world wide dollar inflation was coming. Yet, right after the Mexico default crisis, the whole system came back to life. Never before in history had a country dropped it's gold backing, watched it's currency be devalued against gold ($800+) and then returned it to normal use as if nothing had happened.
But something did happen and
it sent the world onto a different trail. Thinkers, world leaders,
common workers, and investors had just spent the previous ten
years learning the true worth of oil! And they learned how it
had two values.
Duality of value is a funny thing.
If you have a gun in hand pointed at me and I have an identical gun pointed at you, their (the guns) worth is the same. Yet, if I am wearing a bullet-proof vest, my identical gun has more worth. Not much, just a little more. Strategic location? You pointed out how in 1933 dollars outside the US were worth their weight in gold. Yet, inside the US they were not. The same dollar had a dual value dependent on location.
Oil, gold, minerals
and ones bank account can all have dual values based on the strategic
location of these items. Another form of duality exists for most
things. Gold has a jewellery value and a monetary value. It's
price is reflected in the degree of total demand generated from
each value. In fact everything we own has our personal wealth
value and a "monetary" worth. After 1980, oil also reflected
this different duality.
Back to the main trail:
In the late 60s and early 70s some US strategic leaders were beginning to understand the "monetary value" of oil. It was becoming clear that local oil reserves, not gold was the real backing behind the robust US economic engine. Like gold today, oil back then was worth a whole lot more than the amount we were paying for it.
The simple fact was that as
long as your economic system got more from (out of) the local
oil it brought than printing ones currency took away, local oil
was worth more as a "monetary backing" than gold. This
was the changing currency climate some could see long ago. Modern
society, as it functioned using digital settlement was restructuring
monetary theory. The only problem was that it wasn't changing
the importance of "human nature" or "strategic
By the early 70s the old gold exchange standard was breaking down, even as the worlds goods production system was just embarking on a new era of efficiency. Using the benefits of hindsight, we can today see that each year into the 70s, 80s and 90s all brought technological gains that were overshadowed by our currency system's flaws. The world was using technology to get more out of the life's blood in a modern economy, oil.
It was recognized that even though the old (gold) money system of the 60s had priced oil favourably for the US, it's (US) oil reserves were running out at that price. We needed a higher price for oil in order to build local reserves. At the very least, we needed higher prices to discover higher cost reserves located in the "Strategic Americas" (both north and south).
The potential (indeed, it was
reality at that time) for the Middle East to continue producing
reasonably priced oil for gold (dollars) stood in the way these
needed higher prices. In order to resolve this, we moved off the
gold standard (1971) and onto the oil standard. Again, in hindsight
it was a masterful play. You see, in duality, oil in the Middle
east was worth more than other oil if it could back the dollar
in world settlement.
Make no mistake, gold was and still is the center of the money universe. Only the way we utilized it was changed (indeed, it's about to be changed again). ORO, the US had already placed it's currency on an oil standard years before (in practical theory anyway). They were expanding the money supply directly in relation with the increased production of goods that modern oil use was providing. Of course they ran away with the process as is always the case. Gunning the debt money supply and justifying it by extrapolating growth at ever increasing rates. Dollar creation overran the ability of the gold exchange standard to balance it. Still, in all fairness, the old system was built on a much slower creation of production efficiencies and couldn't accommodate this modern surge of wealth (and debt). Let's face it, the world has no precedent for the last 30 years of growth. By adhering to the fixed money supply, currencies would have risen in value creating a deflationary effect on the debt created from this growth. Our first experiment with this came as the US decided to keep gold in the money universe but back the currency with oil. Better said: "continue to settle oil in dollars as long as the rate (oil price) creates more value from production than the inflation of the currency takes away".
This is the reason the BIS did not lobby the US to officially devalue the dollar in gold (raise the dollar gold rate from $42 to say $200) and continue the system. Even though many people were hurt from this, the system was failing and had to change. The tactic was not to stop using dollars if the gold was not delivered, but rather for the US to just stop shipping the gold. In reality the dollar is still a receipt for $42 in gold, but the it will never be connected to gold again. Ever!
In the background, the value of the gold backing lost was found in oil. In reality, the value of oil to the world economy was increasing much faster than value of gold lost from dollar default. Even at the higher prices per barrel the need and demand for oil proved to be a far superior "monetary backing" for the dollar than gold. As long as the majority of oil producers agreed to receive dollars for oil, the stage was set for a renewed surge in growth the world over.
Yet, gold was still in the monetary game. Only this time the game was proving to be short lived and unstable. This new "free market" for gold was soon being leveraged in a way the old dollar was. Once again, the supply of gold contracts was exploding as they were responding to the new demands of an expanding world economic system. Only this time it wasn't the dollar that was about to default, it was the "new gold market".
Today, we find
ourselves on the edge of yet another change in the world financial
More later FOA
FOA (1/11/00; 6:23:10MDT - Msg ID:22690)
Working from my FOA (01/10/00; 20:39:02MDT - Msg ID:22663)
" " Our first experiment with this came as the US decided to keep gold in the money universe but back the currency with oil. Better said: "continue to settle oil in dollars as long as the rate (oil price) creates more value from production than the inflation of the currency takes away".--------
Initially this created instability in the financial system. Through out the 70s players ran into gold, trying to regain the monetary security the dollar had lost without it. Soon, everyone realized that no amount of conversion would ever replace all the foreign dollars outstanding. The dollars stayed in circulation even as they were traded for gold. Further, the dollars were still being received by ME oil producers in return for oil. Dollar price inflation was bad, but in no means did we see the "runaway price inflation" that should have come from a reserve currency without gold backing.
In practical theory, oil now backed the dollar as world oil payments were settled in dollars. In return, gold now backed oil from a US guarantee of an open market for the metal. Over time, a portion of oil dollars could be replaced with real gold through actual physical purchases or in participation with evolving world gold banking (paper gold). Even though the dollar gold price had surged, the higher oil prices were allowing a percentage of those dollars to be converted back into gold at the old gold/oil rate. Slowly, the old dollar holdings (prior to 71) were effectively being used to reclaim gold. The expansion of the world dollar money supply was seen as reflecting the more modern importance (value) of oil in the economy. As long as growth in the production of economic goods outstripped dollar price inflation, the dollar could be expanded to match the unrealized value held in oil.
Again, "strategic location" of the worlds major oil reserves was the backbone behind this "duality" in oils value. Gold in fort knox could not back the dollar anymore, because the US had shown that they could just withdraw it from backing. In fact, the entire validity of backing any currency with a fixed gold amount was in question with this new age of "super nation blocks". For it to work again, gold and the reserve currency backed by it would have to reside in different "power blocks" to guarantee delivery. That wasn't going to happen. Indeed, with supply of the worlds major oil reserves being controlled outside the US, the dollar was now backed more effectively by a commodity that could be used to devalue it (through the oil price) should the money supply run wild.
This system balanced, as the value received from oil by the goods producing world outran the loss from price inflation initially created from rising oil prices. ORO, this does not explain everything , by any means. But, it does at least give us a handle on the dollar transition through out the 70s and 80s. Looking back one can see that "money theory" wasn't thrown out the window, only reworked a great deal. It offers a reasonable understanding as to why the dollar continued, even as the US treasury took control of the world financial system.
Today, the situation is changing in a much more dramatic way. I'll later offer a view as to where we are and where we are going.
FOA (1/16/00; 12:52:52MDT - Msg ID:23002)
Moving on from my earlier posts, today we see where we are and where the trail may lead::
FOA (01/10/00; 20:39:02MDT - Msg ID:22663)
FOA (1/11/00; 6:23:10MDT - Msg ID:22690)
We stop and share the view!
In the early 90s the world was not experiencing any visible results from our new Euroland currency creation (Euro). On the surface things continued much the same as before. The EMU (European Monetary Union) was somewhat in order, but most of the world financial analyst completely wrote off any of it's possible effects on the dollar. A view that was accepted because the US and the dollar were becoming ever more dominant in world affairs. Still, an increasing dollar reserve base impacted the economies of foreign nations as the US dollar trade deficit and the debt that represented it expanded without relief.
I'm told that an excellent graph of this is still available on the net at the above link. It shows how dollars have been building up overseas without fail from 1976. Yet, in this visual expression of dollar flows we can see the first fluctuation of a new currency order taking shape. Between 91 and 94 our dollar flows made an abrupt turn for the negative. Some would say that this was just a function of the dollar becoming stronger. We say it represents a new "hands off" policy by foreign decision makers. This turn was in effect allowing the dollar to enter a multy year self destruct mode, during which deficit dollar flows would expand into oblivion. The US would be flooding the world with dollar reserves at the exact beginnings of Euro success.
After over two decades of non-stop foreign dollar inflation, the dollar float had become so large that any transition from dollar settlement into "Other" settlement would permanently remove it from reserve status. This forward looking thinking would eventually be spelled out in the events directly before us today. In these events we will witness and document the "Facts" of a dollar fall from grace.
Unlike past bouts of local US price inflation affecting dollar value perceptions, this transition from dollar reserve use will be felt first in currency exchange rates as the Euro slowly replaces the dollar as the major trade holding. The later impact from this will be a massive "super hyper price inflation" in the local US marketplace. Much the same as seen in the third world country panics in Asia. But prior to this, the largest of all currency exchange rate transitions will try to express itself. That will be the true dollar value exchange rate of gold. A transition so large and all consuming that it will completely wreck the present leverage in the paper contract gold market we today call "the gold market". Long before this new real physical price of gold is realized, the marketplace will stop all function as physical deliveries, at any price come to an end for a time. Eventually, a world physical market will return.
Onward for another view:
The strong US economic success has been spelled out more in our SOL (Standard Of Living) than if expressed in financial accounts. Dollar exchange rates, interest on dollars, stock market values, home values all represent what an American "can buy" if they decide to spend their wealth. Not what they presently have as owned wealth, paid up 100%. This leveraging of dollar affairs has created an "illusion of savings" that in effect allowed a high SOL. In other words, we live high on the hog today because our present equity values and savings don't really exist. Time has transformed the entire dollar system into a giant "futures contract" that only represents the wealth we could obtain in partial "future purchases". Just like the gold market, we mostly trade paper wealth and call it real. Yet, if a large percentage demand for delivery ever happened, the contracts would fail. Yes, our wealth and economy status is really based on us cashing in and buying just a little at a time. if we didn't, the illusion would be exposed. Only our present dollar economy is "super leveraged" not just into the future of US goods production, rather it also completely depends on future foreign fulfilment to produce those real goods. Truly, most of our present sizeable financial wealth is little more than a function of the "acceptance of dollars overseas" by others.
Few locals today consider the view from the other side. They proclaim that the dollar is king because the "others" want to spend it here. It's the very same mentality of a gambler that's winning. He doesn't want to hear that the house is on fire and will accept any other "good news" that prolongs his current "prosperity". In reality, if the above dollar deficit chart was ever forced (from outside pressures, Euro?) into reverse, no amount of real US goods production could be brought using present dollar price rates. In other words, foreigners could never spend their dollars at a rate that matches our SOL values. Indeed, some of the biggest players now know it! It's all an illusion that has spanned 25+ years from the loss of the gold standard and it's about to be tested.
Onward as we look behind and before us:
In the 90s, big oil understood what was driving the acceptance of dollars. And from my earlier posts, we can grasp how their knowledge was gained through the oil embargo effect. Still, as long as international oil could be settled in dollars at prices well below it's economic value return, US debt, dollar reserves and dollar investments looked very good This train would run as long as another system was being built. Keep oil cheap and the dollar deficit flood would continue.
Why would they do this for free? They didn't and neither did Euroland! People "in the know" knew the effects a new reserve currency would have on dollar values. They also knew the future impact on physical gold. As long as the gold market kept gold priced at a discount to the real value of oil, buying some gold with excess oil dollars more than made up for any loss of investment or loss of reserve values. Europe needed this concept to work and they helped maintain the present gold market trend for this purpose. A good way to wait for a dollar retirement, no? If the Euro was not born (a real possibility a few years ago) big oil was more than prepared to include physical gold settlement into it's payment package. Just a minor inclusion of gold would have gunned the market and replaced any lost investment gains from a botched Euro introduction. So, the participation in gold and gold banking made good sense.
Indeed, even now the paper gold market expressed a major "duality" in real value depending on the strategic location of it's contracts. Some leveraged gold banking backed with Euroland guarantees is today far superior after the Euro success. (I think this concept is hard on most people. Still, it will look much different after the train wreck that coming.)
Going further into the duality values from my earlier "overviews"; Oil prices today are on the rise and doing so in total conflict to perceived marketplace function. It's no mistake as to why this dollar price rise is happening now after the Euro was born (we have been discussing this for some time). Just as a high gold price would expose the dollar by presenting it's true past inflation (world dollar money supply growth), a rising oil price exposes the US economy to the super leverage it contains. Especially if one can grasp how that economy was built on oil backing through dollar settlement. Once the threat of a dollar slump is made possible by high oil, expect big oil to run to Euro settlement for international trade. Perhaps run is not a good word? Let's just say a transition will begin that shows the world the trail ahead. This is the period when the Euro will rise very much against the dollar (2.00 or 3.00 Euros per dollar?). As oil becomes cheaper in Euros, their local economy (Euroland) will experience a dramatic positive shift in activity relative to the US and other countries tied to US trade. Does Japan sound like one on the wrong side? (TownCrier, yes, no?)
Because the ECB has no pressing need to keep gold prices in place, gold could initially run in Euros also. Still, eventually Euro gold prices will not be anywhere close to dollar gold prices as international dollar reserves are liquidated. In effect, the disgorging of dollar reserves will show no negative accounting on ECB books as gold prices more than make up for dollar reserve destruction. In fact, once the Euro becomes the world reserve, there will be no reason to hold dollars at all.
Onward, looking only forward:
In fits and starts, oil prices will keep rising based on an expected reserve currency transition, not dollar oil use economics. Any substitution of alternate oil resources in the US will run head long into a local cost inflation roadblock. $200 dollar crude will not be seen as enough to drill for reserves nor switch to other fuels.
The Euro will keep taking market use share from the dollar, especially if major US players continue to trade the Euro down to parity. Eventually (and presently as this is happening now), dollar reserves held outside the US will be forced into shorter and shorter maturities as the "return on" these holdings becomes more important than their "use as trading currency". This will drive dollar rates far above Euro rates, draining liquidity and forcing the Fed to continue "Most" of it's pumping action (what so many thought was Y2K related). Rising dollar rates will be in response to this new currency problem, not the present non-existent local US inflation. Later, the fed will be seen as far behind the inflation combating yield curve. However, these rising rates will fully cap the local stock market. Whether it falls will depend entirely on how fast hyper inflation later accelerates. In this environment, foreign exchange controls will play a major negative roll in pricing stocks.
Gold will, at some time meet it's 2nd bout of paper destruction. The next will be far worse. If the currency crisis becomes in full view, there will be no small physical gold lenders to soften the blow. We shall see.
More and replies later. FOA
FOA (1/19/00; 8:53:32MDT - Msg ID:23197)
Last "overview" for a while
I read your "Golden View" about the Euroland Gold valuations in TownCrier(01/18/00; 20:42:11MDT-MsgID:23158).
Do we see the beginnings of a new official gold market being traded through the BIS system. One could almost see where the gold is moving into the EMCBs and only being traded and valued in Euros. We have promoted this shift for some time and anticipate it to grow as Euro use in the international community expands. Especially as the Swiss sales begin. This lack of CB bullion liquidity will eventually starve the London paper gold system, mostly a dollar settlement system for the maintenance of dollar gold prices. Again, it (Euroland agenda) was a process that was designed some time ago and implemented with the Washington Agreement. Indeed, the WA is not the end of this "changing of the rules".
True, they (BIS) move a lot of gold for CBs and always have. Only, this time (from 1990 to date) they have shifted their agenda in favour of the ECB system. A shift that will strengthen the Euro as it weakens the dollar. This entire evolution of BIS direction and support has taken Washington, Britain and most economic thinkers by surprise. Yet, over the last twenty years it was a very visible and logical move with the Continent coming closer and closer to a new common currency. It's no secret that they (BIS) became ever more apart from political dollar support as this (Euro)new weapon was growing. We can trace this shift's beginnings from the Jamaica Accords (mid 70s)and the first creations of the EEU (European Economic Unit)(early 80s). Later (mid to late 80s) the BIS fully promoted the EMS (European Monetary system) and used it's stability as a selling point around the world. This new architecture is what drew in Arabia to become a member and now sees a new BIS office in Hong Kong (opened in 98??). China will be the next member and a big Euro / gold suporter.
The entire (current) process involves a gradual weakening of the gold market (the paper function of it, not the paper price) to match the Euro expansion (5 years per the WA timeline?). I expected the paper gold marketplace to fail sooner and fall into discount. But the market has yet to fully grasp the impact of these events and still bids contract gold at par. However, we look at the dramatic speed of this change (Euro acceptance) and can see gold coming into severe stress much sooner now. At the rate that Euro financing (and use) is growing, they will be imploding the paper gold market much sooner as they must revalue gold faster.
We watch for the dollar to come
into real stress when the LBMA has it's system tested. This is
where the real currency transition begins to grow! Again, I do
not offer our words as proof, watch for events to confirm. As
Another said, "Time will prove all things"!
Our stance is and always has been that the world will be using paper digital currencies for the rest of our lifetime. I for one, have never heard any official voice his stance that we will move back into a gold standard. Their (Euroland) direction has always been to keep a reserve currency system and strengthen it with a free physical gold market trading in the background. In none of our meetings have we heard where a fear was expressed that the governments will lose control of digital currencies and give it (that control) back to gold. That is simply not going to happen, no matter how severe a down turn the loss of the American dollar system creates. Believe it.
This has been the fundamental
thrust of this news. The dollar system is failing as we move into
another stronger (relative to fiat currencies) money system. I
support, use and promote the new Euro simply because it is and
will create the next trend for the future. Not because it's a
gold currency of extra hard value. This (Euro) future will see
us all using digital currencies, for better or worse. Therefore,
by logical extension if I must use a reserve currency of account,
I move into one that has the best strategic ability to survive
and denominate my assets. In addition, it's creators are restructuring the
gold market to the physical bullion holders advantage. This is
the only reason I "Walk In The Footsteps Of Giants".
They created this bullion path and the world will follow in due
time. Therefore, my position of Euro assets and physical gold.
Mostly (because I am American), I lean to gold for this transition.
One can take the radical position that the world financial system is going to end without the dollar. You can also say that the Euro will fail as this process evolves. One can buy gold for these reasons only and still prosper, whether your grasp of politics leads you this conclusion or not. Our sole reason for writing is a private commission to share official directions and perceptions with the average citizen of the world. Nothing else.
Still, stand alone logic and history promote that the world will lose the present system to paper inflation and move into another as it has done before. With this, gold will bankrupt (through extreme price devaluation, $10,000 - $30,000) the outgoing system as hyper inflation runs through it. In a broader view, all total dollar dependent economies (Canada, Mexico, Japan, etc.) will share this fate.
This view gives you no facts only our perceptions from the builders of the future. We offer only the events as they occur for our proof. Indeed, strong events are ahead on this gold trail we all walk.
Al Fulchino (01/18/00; 20:58:12MDT - Msg ID:23160)
------------And like you, I see what is coming. And I see where FOA's thoughts regarding the euro and oil lead us.--------------
Hello Al, as you have read all of our posts, one can see how oil is the swing power in this currency war. Their commodity has been used to back the outgoing dollar system for some time and in the process keep it alive. Their price in return was a "cheap gold market" and their percent of return will be a new stronger reserve currency and acceptance of physical gold as a real settlement option in international finance. We will all get a feel for this as the oil prices lead the US dollar, and it's world dependent Economy into a slowdown. At the same time, the entire Euro / gold market changes will impact world perceptions about their values.
Solomon Weaver (01/18/00; 21:46:49MDT - Msg ID:23168)
Compliments to FOA
FOA (1/18/00; 6:57:14MDT - Msg ID:23098)
--------More than ever before, collapse will be of our own doing. Perhaps what we need most is a very dramatic shift in our SHARED UNDERSTANDING of what global politics and economics really is. Perhaps, as the cat gets out of the bag, the politicians and power brokers will not get it back in...at least by the same hole it gets out of.----------------------------
Hello Solomon, add the above to my "overview" posts and we can see how the shift will affect Western investors the most. This is the segment that is most (mentally) unprepared for a true "marking to the market" of their paper dollar wealth. Again, they will lose nothing but their perception that their buying power was so great. It never was.
lamprey_65 (01/18/00; 21:47:13MDT - Msg ID:23169)
It's getting very interesting
"The Japanese car manufacturer Toyota has threatened to pull its business out of Britain unless thegovernment signs up to the Euro."---------------------
Lamprey, I can just feel that dollar in my pocket that Michael will owe me. If Britain backs out though, my bet with USAGOLD may break me. (smile)
canamami (01/18/00; 22:10:58MDT - Msg ID:23172)
Lease rates tumble again
--------------When will the Asian CB's (or the ECB as per FOA), or big Saudi money, or anyone, finally go long big time for gold?-----------------
Hello canamami, they already have, didn't
you see it? No, you can't watch the paper contract markets, because
they stopped buying those early last year. Also: Forget the current
lease rate charts. It's so thin it doesn't reflect the real lending.
Most of that has gone off-line. When they do come into the visible
market again, it will be as before, in a big overflow that guns
rates for the next crisis.
Thanks ALL Good Luck! I'll be after more info and will be gone for some time. FOA
8:38:53MDT - Msg ID:27504)
It is easy money, rather than debt, that is the threat- for there is always debt, yet in good times debt is benign; in bad times debt is crippling. In the early stages of an economic expansion, the debts you were then servicing were probably hard-won, and by application of strict tests, you ended up with a debt burden that was well within your means. Now, after a long economic expansion, credit is easier to obtain, but easy money is actually the precursor to crippling debt. Easy money gets easier, and is never easier than in the last scenes of this story of a "goldilocks economy". The face of the fifth horseman will not be seen clearly until the end, which will not be a happy one.
Easy money- low interest rates, and the plentiful supply of easily obtained credit, has been fuel for the growth of a speculative mania that must end in a catastrophic financial meltdown. The fact that easy money rather than savings acted as the prime mover for the financial bubble suggests that the debt burden after the collapse will not allow a rapid recovery.
Recall how Asian economies were devastated in the "Asian meltdown" that started in 1997, as waves of devaluation were forced upon Asia and Latin America while their banks imploded from bad debts and risky lending.
The role of easy money in the Asian meltdown was highlighted by Brett D. Fromson writing on Sunday, November 16, 1997 in the Washington Post:
"The problem this time is that the Asian crash threatens the region's already-weak banking system. As foreign money leaves, Asia finds itself with less -- and therefore more expensive -- capital. That hits Pacific Rim financial institutions especially hard because they've grown dependent on cheap money and easy credit."
It has been easy money and the resultant debt hangover that has contributed to the persistent non-recovery of Japans economy. Japanese reportedly held over one trillion dollars of bad debt, yet the level of personal savings in Japan remained high. People remained reluctant to spend their savings as they saw them as a safety net that must be preserved. Where there are no savings, the effects of a collapse will be more severe and recovery harder to achieve (US savings haven't been as low as present levels since the 1930s).
According to US Representative Ron Paul (speaking on Jan 31, 2000), "Rampant monetary growth has led to historic high asset inflation, massive speculation, overcapacity, malinvestment, excessive debt, a negative savings rate and a current account deficit of huge proportions. These conditions dictate a painful adjustment, something that would have never occurred under a gold standard"
The economic condition of the U.S. is proxy for much of the Western World, especially the UK and Western Europe. If the US economy falls into a second Great Depression, it will have world-wide consequences. Such large consequences are why we talk about "Horsemen of the Apocalypse" and seek to identify them.
The US, UK, and Western Europe have enjoyed the fruits of a "goldilocks economy". If we need money, how easy it is today to obtain loan funds-- why, the banks even send us unsolicited loan offers, pre-approved, in the mail. It sometimes seems as if the banks are desperate to lend us money. Does anyone remember a time when going to the bank for a loan was a difficult thing?
If money is easy to come by, people won't think so carefully about what to do with it.
"Easy come, easy go".
This encourages unwise investments. Businesses start up with easy money availability and their business plans are not scrutinised as they would have been in a tight money environment. There is therefore a tendency towards more risky ventures, and what the Austrian economists call malinvestments. Some of these risky ventures may well be profitable in the short term, as people are willing to consume fuelled by easy money. But when conditions worsen, these risky ventures are the first to collapse and their recent growth has added levels to the house of cards that will prove to be a danger to the formerly sound levels below.
Easy money availability, big money being made in share trading and business start-ups encourages corruption.
Stock market scam stories abound, with regulators fighting "boiler room" operations to peddle shares by using high-pressure sales tactics, misrepresenting the assets and future prospects of companies, and manipulating share prices up so that they can sell before the private investors get wiped out in the subsequent collapse.
In the stock markets, new companies float and day traders rush to buy their shares on the strength of as little as a few paragraphs in an internet chat room, or a recommendation from popular television "analysts". Many of the people pushing easy money into these companies will not have taken the trouble to read through the details of the companies' prospectuses or do other forms of due diligence. I have heard stories of people buying shares in companies merely because their ticker symbol resembled one that one person picked up in error, causing the price to rise, and seeing this, everyone else jumped on the bandwagon, pushing the share price up by sheer momementum only.
Easy money flows to casual investors, and thence into momentum stocks that are dropped as soon as they stop going up. If money was not so easy, there would be a far greater diligence applied to examining the risks. However, low debt ratings, lack of profits and sky-high P/E ratios are now ignored in the rush to place easy money where visions of imaginary future profits dance before speculators' eyes.
Easy money and momentum speculation are what make for gains such as the 380% in three days for JB Oxford stock in February 1999, or the record first-day gain of 600 percent for theglobe.com in November 1998, or the 185 percent first-day gain for auction software and network provider FairMarket on March 17th 2000. By the way, theglobe.com stock closed at $7 on March 24th, a loss of 89% from its first-day closing price of $63.50.
Recently, broad money supply, institutional funds, commercial debt and credit extended by banks have all grown aggressively, and new mortgage debt runs at double the rate of that of a few years ago.
The build-up of debt throughout the economy is illustrated by a total junk bond market that was estimated at half a trillion dollars by David W. Tice in early 1999. According to Tice, "the total junk issuance was $33 billion during 1986, the heyday of the Michael Milken junk bond era".
The flow of easy money is central to the "economic miracle" that is in part, as identified by Alan Greenspan, powered by the "Wealth Effect" of perceived gains in paper assets. US shares have gained about $US10 trillion in value in the last decade.
But money that has been spent can not be recovered from paper assets, because if everyone were to attempt to convert them to cash, their value would instantly collapse. How then will business and household repay their debts? Money that is easy to borrow, may be hard to repay.
At the end of January a reported GDP gain of 5.8% came in higher than expectations of 5.5% gain. The price deflator, which indicates inflation pressure, rose 2%, which was also above the 1.5% expected, and employment costs rose 1.1%, which was above expectations of 0.8%. All indicative of a runaway economy fuelled by easy money and, for the moment, supporting the strength of the dollar.
Alan Greenspan once said: "The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed."
Economic distortions and imbalances are what built up in the 1920s, and in East Asia in the 1990s, in an easy money environment. These imbalances remained latent until an economic downturn was precipitated and then by their weak foundations acted to reinforce a spiral of collapse. The flow of hot money and massive leverage of financial instruments when put into reverse gear is devastating. A great deal of this hot money and financial leverage is now focused on the "goldilocks economies" of Europe and the US.
Even the Fed seems to have succumbed to easy money distortions. Its Federal Open Market Committed recently decided to keep the temporarily expanded list of securities eligible as collateral by the Federal Reserve Bank of New York, that had originally been allowed specifically for the Y2K rollover.
Has speculative stock market mania has grown so extreme, fuelled by easy credit, that the only way to prevent a meltdown of the first magnitude is to pump up the flow of credit backed by ever more questionable collateral?
Financial instruments such as derivatives depend on a carefully constructed model that depends on known historical relationships between currencies and interest rates. In mathematics, derivative functions, being related to the "rate of change" of the underlying functions, change by large amounts if there are too rapid or step changes in the underlying function. This is the Achilles' heel of the derivative model. In the event of any sudden unexpected change (currency devaluation, or recently, the unexpected announcement of US Treasury buy-backs) the model breaks down and there is a rush to close out positions that were based on the old stable model; in the rush, price movements become magnified as traders rush to unwind massive derivative trades. NB: The US commercial banking sector has nearly $30 trillion of interest rate contracts.
Easy money makes it easy for companies to finance through debt. When the Fed, BOE, or ECB raise rates (and they have all been doing just this), it hurts traditional companies as repayments increase. But for the "new economy" companies who have financed themselves through equity and laugh in the face of rate rises, the day of reckoning will come when their customers, who buy their products with debt-financed easy money, suddenly find that repayments are going up and further loans become unaffordable. The customers could sell their stocks to raise funds, but if they all do that then the stocks will crash, and if they have bought stocks on margin or through credit cards or second mortgages, they could find that the proceeds are insufficient to cover their debts. So the "new economy" companies will indeed be hurt by the rate hikes, it's just that many will not realise this until it's too late.
The United States' borrowing of easy international money has turned it from the world's largest creditor into the world's largest debtor nation, with total net international debt of $1.22 trillion at the end of 1997.
In fact, according to Michael Hodges' Grandfather National Debt Report, the U.S. National Debt (defined as the sum of all recognized debt of federal, state & local governments, international, private households, business and domestic financial sectors, including federal debt to trust funds - but excluding the huge contingent liabilities of social security, government pensions and medicare) is now over $25 Trillion, or $93,000 per man, woman and child as of March 1999.
The US trade deficit has been described as "Fueled by brisk consumer demand", which is just a facet of the easy money phenomenon, as consumers spend their easily obtained funds on whatever takes their fancy, which usually means foreign goods. The deficit expanded nearly 14 percent in January to a record high of $28 billion.
There is a worrying parallel between the worsening US trade deficit, and the trade situation of Thailand in 1997, which experienced an 18% devaluation of the baht on July 2 of that year, and was attributed to currency speculator action following a steep fall in Thai export trade in 1996 due to competition from China and Indonesia and a drop in economic growth rate. Few people predicted the ensuing economic collapse and domino effect spreading to other East Asian countries.
Alan Greenspan has cited the trade deficit as being a major imbalance in the U.S. economy. Anyone who has listened to Lawrence Summers and his predecessor Robert Rubin knows that the US economy is predicated on a strong dollar policy.
The value of the dollar against other world currencies must eventually fall as the trade deficit rises. Because of the easy money inspired debt load, the value of paper investments will be decimated. Bond yields will fall as foreign owners sell their treasury notes, and domestic owners find it necessary to sell all forms of paper investment to settle their debts. In fact, hardly any form of investment will escape punishing losses, except for gold, gold mining shares, and contrarian funds. There are nevertheless risks associated with gold shares and contrarian funds, for example, gold miners who have hedged heavily, betting on a falling gold price- Ashanti being a prime example. In the event of a general economic collapse, therefore, the only safe store of wealth is physical gold (or other precious metal). A study of the relative values of gold and the dollar over the long term (100 years) will demonstrate that the value of the dollar has been decimated whereas gold has maintained its value, even after more than a decade of bear market conditions. To be sure, this is gold's forte.
The possibility of a stampede of hot money into precious metal investments and a large increase in real value can clearly not be discounted, as speculators realise that it is the only true safe haven.
If the dollar collapses through record trade deficits, as Americans send more dollars abroad to pay for imports than come in from sales of exports, the free flow of imports will be blamed, resulting in new pressures for erecting trade barriers. In a parallel with the 1920s, trade barriers are already being erected, but this will gather momentum if there is an economic collapse. Erecting harmful trade barriers with countries such as China will not help political relations.
The deficit with China expanded to $6.03 billion in January from $5.61 billion in December. Competition from China and Indonesia was blamed for a steep fall in Thai export trade in 1996 that led to the devaluation of the Thai baht.
The sheer weight of debts are what will make the next market crash so dangerous, therefore justifying "easy money" as the Fifth Horseman. The 1929 Wall Street crash led to the Thirties depression as banks tightened up on credit. It became impossible for people to repay their debts.
In 1997, financing the national debt took nearly 20% of U.S. federal revenue. The US national debt in September 1997 was $5,413 billion. Recently it stood at $5,729 billion. This pile of debt, global easy money for state coffers, will impose a punishing burden on the taxpayer if the economy collapses.
People who have been happy to pump easy money into stocks and risky businesses will, after a financial collapse, be reluctant to do so again. This will hurt good businesses as well as bad. For as Mark Twain once said: "The cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But he won't sit upon a cold stove lid, either".
A perceived solution to this is to maintain the flow of credit by supplying ample liquidity from the centre. This approach was used most recently to swamp any liquidity drain that might have been caused by Y2K jitters. Yet much of this liquidity only strengthened the easy money environment that diverts the flow of funds into the stock markets.
It is not liquidity that must
be strengthened, it is confidence. For if confidence is lost,
people will shy away from the stock markets and rein in their
spending. No matter how much liquidity is provided, and no matter
how low interest rates are brought down, consumers will not consume
if they lack confidence. The Japanese economy of the last few
years has been the perfect laboratory demonstration of this effect,
dubbed "pushing on a string". Spending slows down, profits
evaporate, companies go broke, institutions call in their loans.
Investors then begin to think twice about supporting any new business
ventures. The conditions are set up for a major depression. The solution to this
is not to push on a string with easy credit, but to restore consumer
and investor confidence through promotion of sound investment
practices and analysis. And nothing encourages financial stability
and sound control of credit better than an economy firmly linked
8:58:25MDT - Msg ID:27545)
The Price of Gold: a Tale of Two Hats
Although I'm a relative newcomer to the gold market (about three years), I've done my level best to try and learn how and why things work as they do in this foggy, smoke-and mirrors, POG world. I've learned quite a bit from the posters on this forum, so feel free and encouraged to correct me where you think I'm wrong.
It appears to me that gold wears two hats: it is simultaneously both a commodity and a currency. It is more visible as a commodity, where it trades on various exchanges like the COMEX and TOCOM, and the price is tracked by goldbugs (like me) 24 hours a day. Over the last 35 days volume on the COMEX has averaged 35,000 contracts/day: ($290 Ave. POG X 100 oz/contract = $29k X 35k contracts = $1 Billion/ day). This $1 B/day is duplicated, in proportion to their sizes, at the other commodity exchanges: TOCOM, Zurich, Sydney, & Hong Kong. I'll guess $3 B/day worldwide. A certain unknown and constantly changing percentage of this is made up of speculators trying to make a profit by "investing" in the gold commodity market, and who have no intention of taking delivery of physical gold. This market is more visible than the other one.
The "other" gold market is, of course, the LBMA. The London Financial Times reports once a month on the average daily volumes of gold traded on the LBMA. These volumes tend to average between 900 and 1,100 m.t./day. Let's take an average of 1,000 m.t./day: 1,000 m.t. X 32,150 oz/m.t. X $290/oz = $9.3 Billion/day. Since this volume of gold represents more in 3 days than the output of all the gold mines in the world for an entire year (2,600 m.t.), obviously the lion's share of trading is speculation in paper gold and derivatives. It appears to me as if gold trades on the LBMA more like a currency than a commodity, (If it walks like a duck, and talks like a duck, well then. . .). Furthermore, this market is almost 100% invisible; we know neither the players nor the individual daily volumes. What we are told is that twice a day a representative from each of five financial institutions (Bank of Nova Scotia, CanadañDeutsche Bank, GermanyñMidland Bank, GBñNM Rothschild, GB--& Republic Nat'l Bank, USA) meets to "fix" the POG.
Presumably, each of these five representatives has a telephone link to his boss bank, and since all buy and sell ordersare routed through these member banks, the balance point between demand and supply can be ascertained and the price "fixed." The enormous dollar volume on the LBMA, when contrasted with less than one third this dollar volume on the other world gold markets combined, seems to give the LBMA the upper hand in determining the POG.
This dollar dominance of the LBMA and its opaqueness suggest that this is where the world's CBs go to trade gold back and forth between themselves. However, they are not really engaged in trading paper gold nearly as much as they are engaged in currency speculation. Gold may be the only currency that is not someone else's debt, but maybe even more important, it is the only currency that is not connected to a country. Thus, the management or manipulation of gold as a currency by the CBs does not directly affect the economic strength or weakness of any country. Of course, if gold mining is a major component of a country's economy, such as South Africa or Ghana, then it has a very important indirect effect on that nation's economy and people. Who can blame the government of Ghana's recent threat to nationalize Ashanti when it was driven to the verge of bankruptcy by the American and British bullion bankers who led them down the disastrous path of hedging years of future gold production at the wrong price? Nor is it a coincidence that the South African gold mining companies have been the most vocal about and the most proactive in readjusting their ultimately damning hedging positions. One can only wonder how many fresh casualties await us, like ASL and CBJ, if the POG surges to $350 or $400.
I have wondered why the gold miners don't "take arms against this sea of troubles"? Why are they content to be passive purveyors of a commodity which is then transformed into a currency as soon as it reaches the marketplace? My answer goes like this: The fundamental principle that drives a mining co. is "Grow or Perish." This growth can be achieved through exploration/discovery and/or acquisition. Unlike the unanimity of purpose that exists in OPEC, a few gold mining companies blessed with fat profit margins and thick wallets are out to acquire their less fortunate rivalsñand at bargain basement prices whenever possible. When the millionaire CEOs of mining companies talk about "maximizing shareholder value," I don't believe them for a minute. The larger and stronger of them would, in the long run, profit more from a sustained, low POG because they would grow relatively stronger, while their rivals would grow weaker and more vulnerable to acquisition. It's simply Capitalism and survival of the fittest.
When Fed Chairman Alan Greenspan testified to the House Banking Committee on July, 30, 1998 that, "Nor can private counterparts restrict supplies of gold, another commodity whose derivatives are often traded over the counter, where banks stand ready to lease gold in increasing quantities should the price rise." he knew whereof he spoke. In late September, 1999, in the wake of the ironically named "Washington Agreement," the POG went ballistic: from $260 to $330 in a few days. On October 21, the CB of Kuwait, in an act of uncommon generosity, announced that it had recently loaned the BOE their entire stockpile of gold: 79 m.t. Not to be left in the shade, Jordan announced a few days later that it had sold an additional 10 m.t. Silly me for believing that the BOE had too much gold just because they were publicly auctioning off 25 m.t. every second month. I do wonder, however, whether Kuwait loaned all its gold to the BOE at someone's request, and if so, whose? About a month later, the US government announced that it was spending a few hundred million dollars to upgrade some airstrips in Kuwait. And the Lockheed co. recently announced that it was selling Kuwait a few dozen F18 fighter planes. You can't say that Uncle Sam doesn't know how to repay a favor. And you certainly can't say that Uncle Al didn't warn us.
I have also wondered why it has been so important and such a priority for the US government to manipulate and manage down the POG to the degree that it has for the last few years. My answer, for what it's worth, is that gold, because it is a high profile currency, is too important to trade as if it was a mere commodity obeying the laws of supply and demand. Historically, the most reliable indicator for the POG has been its inverse relationship to the US dollarñand the US stock marketñso the POG must not be allowed to cast a doubtful shadow on the spectacular rise of the US stock markets, especially the NASDAQ. This ever-rising US stock market, what many have called an ever-inflating bubble, is a manifestation of the absolute necessity for the US to gain and establish world-wide dominance in computer technology: hardware, software, internet, the whole ball of wires. All this dominance takes time, money-- and a sustained rise in the stock market. No other country's technological expertise can be allowed more than a small share in this emerging mega-market, and that in turn is reflected in the diminished value of that country's currency. Gold, since it is also a competing currency, is just another casualty in the unfolding of this process.
The US economy is a colossus the likes of which the world has never known. Any group that tries to do battle with the US Treasury and/or Federal Reserve deserves a David label (as in David vs. Goliath),whether it's GATA, ECB, Bank of Japan, or the US Congress. None of them has found a sling shot equal to the task of convincing the US government to cease and desist where the manipulation of the gold market is concerned. If it is true, as some have written, that a number of US bullion banks are short such an immense amount of gold that they can not extricate themselves from their positions, a sudden surge in the POG might push them toward bankruptcy--and thus threaten the stability of the entire US banking system. The unwinding of a short position involving several thousand m.t. of gold will take a long time. If this is the case, then the US Treasury has little choice but to continue to cap the POG in order to prevent economic chaos on a global scale. Gold, it seems, might be the vulnerable underbelly of the Goliath economy.
Whether the US Treasury is intervening indirectly via the ESF (exchange stabilization fund) or even more indirectly through its bullion bank friends, the effects on the POG are obvious. During the last 42 days, the POG has closed lower on the COMEX 28 times (67%) when compared to the AM fixing price on the LBMA. This percentage (67%) is almost exactly the same for the LBMA PM fixing price compared to the AM fixing price. To a simple-minded type like me, one of two things must currently be taking place:
A. The demand for gold exceeds the supply throughout
the "rest of the world," and the price naturally rises,
but in North America the opposite is true, i.e. we have "too
much" gold reaching the market place, and the price falls
during COMEX trading hours. OR
B. The combination of buying and short covering naturally pushes the price up in "the rest of the world," (including the opening fix on the LBMA, where the volume is nine times the size of the COMEX), but the price is subsequently manipulated down when the COMEX opens because it is comparatively inexpensive (and possible) to achieve this desired effect.
The formula for making a profit in speculating on the POG is pretty clear:
A. Play on the LBMA, where the average size of a trade is $10 million.
B. Short gold at the AM fixing price.
C. Cover your short at the PM fixing price or at the close.
D. You will make a profit on your $10 million trade two days out of three.
E. Congratulate yourself for helping to keep the POG low, so that young lovers can afford nicer wedding rings, goldbugs can buy more Eagles, Maple Leafs, etc, and you can buy your wife the18 karat gold necklace with all those diamonds in it that she saw in Tiffany's window.
F. Feel good inside because you are a loyal American helping to support the US dollar, US Treasury, US Stock Market (except for a few score unfortunate gold mining companies), and the American way of life.
It appears that crony capitalism is alive and well in Washington, D.C. and London City. Except that this secret, arrogant manipulation of the POG by the US Treasury smells more like the NY or London Fish Market than it does an above-the-board commodity exchange.
Another question that I don't have an answer to concerns the US Treasury selling off its gold during the administrations of Ike, JFK, LBJ and the early Nixon years. According to an essay on the "History of CB Gold Reserves since 1845," by Timothy Green, and published by the WGC, by the late 1940s the US owned about three quarters of the world's CB goldñ22 thousand m.t. It appears that the US demanded and received payment in gold from the rest of the world during the late 1930s and WWII. As they now claim to own eight thousand m.t., they were selling approximately 700 m.t. a year for a period of twenty years. Who were they selling to, and why were they divesting themselves of most of America's gold?
On a final note, possibly Fed Chairman Greenspan may once again prove to be clairvoyant. In an article he wrote for the WSJ in 1981, titled "Can the US Return to the Gold Standard?," he said:
"The run-up to $875 per ounce in early 1980 was surely an aberration, reflecting certain circumstances in the Middle East which are unlikely to be repeated in the near future."
Well, it is now almost twenty
years later, and once again the price of oil has risen sharply,
another harbinger of inflation. Maybe, whoever it was that caused
the dramatic bull run in gold in 1979 and early 1980 is quietly
flexing his considerable economic muscles and getting ready to
once again have a kick at the sleeping DOG, er, POG.
0:05:39MDT - Msg ID:29003)
Stirring the pot
Oldgold, thanks for stirring our little pot of soup. Some stuff has gottent stuck at the bottom.
Rather that try to put Trail Guide's point across for him, which he does very well himself, I will just point out this:
1. There has been a gold standard in effect through the 80s. The US overdrew its gold and the system collapsed.
2. There has been a dual physical gold and paper gold standard since 1989 or so. The US and UK overdrew this by 1997.
3. The Asian collapse, though it would have happened eventually anyway, was a planned event that saved our sorry @$$es for three years.
4. The bulk of the dollar support mechanism (remember that we did not have a current account surplus in three decades) was a series of debt traps for various emerging nations that were indebted by tricks and by force. These debtors needed dollars to pay off interest on dollar loans so that they could buy life's basics on the global markets.
5. The idea of a debt derived money offering stability in economic function and in prices is an absurdity on the scale of defying gravity, absolving the world from Newton's law. Without an anchor in a commodity money, all debt money spirals out of control and into worthlessness. No conceivable system can make it otherwise. Gold is to finance and money as the speed of light is to Einstein's law of relativity. Gold answers the question "relative to what?".
In short: for a monetary system to work, someone, somewhere, must be able to exchange the currency for gold AT A FIXED RATE. We call this parity.
6. The global dollar debt system is collapsing. Soon, only the US and a few "friends" will be left owing dollars and owning the "bag" - our debt.
7. The system could not work if it was well known even among the top bankers, because their attempts to get into gold for defense against this would have killed the system. Even now, when it is apparent, bankers refuse to believe that their product is as toxic as RJR's and Columbia's main export combined (and they work in remarkably simillar ways).
Finally, say thanks for the low gold and silver prices you are getting and pray that it can continue. Next thanksgiving tell your familly to give thanks to the Germans, Japanese, Koreans, Chinese, Indians, Italians and others who feed and clothe us half the time (actually 56% in 1998, 60% in 1999).
Some details and discussion follow:
We have fought a war and have lost it. The war that was fought was for financial hegemony through the issue of the reserve currency for the world. In essence making the US serve the role of banker to the world. The war was lost in 1968 and defeat conceded in 1971 and again in 1973. With much support from a world scared of a complete freeze-up of commerce, the dollar was resuscitated just in the nick of time and a new gold convertibility standard was put together by the same bankers that pushed for and got the Fed and then Bretton Woods. JP Morgan said "gold is the only money". He said so well into the Fed's life when gold was no longer circulating in great volumes.
Fiat debt money is incapable of maintaining value without a fix to a real item - notably the precious metals, and the most prominent of them, gold. The dollar is two different things at the same time. Within the US is only a product of debt, the IOUs of all us credit card using and mortgage and car loan paying people that the bank sells to the producers of the houses, goods, autos we buy with "credit". Outside the US, the dollar is much the same, until it meets the BIS for transnational settlements of imbalances. There, the central banks trade gold for dollars at an unknown exchange rate much greater than that in the markets. (This is a premium that is payed for the right to buy gold rather than the gold itself - this way it is kept off the books). The private markets provide the non-US private bankers an opportunity to hedge their dollar assets and those of their clients. The US banks and their UK allies produce the paper gold needed for settlements of dollars into gold debt.
The fact that someone - somewhere - can settle over $100 billion dollars in unbalance "imbalance of payments" every year with gold, is what makes the dollar's value relatively stable.
The US and UK bankers had completely overstepped their bounds in the process and issued way more paper gold than there could ever be redeemed (the BIS and OCC statistics just deal with derivative contracts, these are just mirrors of a much larger gold banking system which underlies trade and at which gold settles the dollar through the SDR). So long as the gold credits were believed to be redeemable, the system was credible.
When it lost credibility, in 1996 - 1997, the imperative became the classic wildcat bank strategy of moving the gold in the back door when the inspector comes to look at your reserves, and transfering it to the next bank just as the inspector is on his way there. The whole dynamic is now the satisfaction of gold demand by whatever means necessary so as to maintain credibility of the paper and thus prevent a "bank run". The Washington Agreement was the statement by the EU that they will not put in jeopardy any more of their gold, that their part in the dollar support system is over. Since that date, the US has been exporting some 800 tons of gold (annual rate) officially, and an unknown ammount "below custom's radar".
In the meantime, the bankers in the EU and the UK have been redeeming their gold liabilities to their clients with American gold liabilities. When actual gold ran out and gold yet to be mined (or found or explored for) was used for settlement, some time in the late 80s, this part of the dollar support system was born. The part US banks played was (at first) small, US market share in gold banking was some 20% in 1995. By 1997, it passed 35%, by mid 99- over 42%, now it probably passed the 50% mark according to OCC numbers (BIS numbers for the end of 99 will only come out in June).
This process reflects the change of responsibility for managing the dollar from the losers of WWII to the "winner". The Fed is responsible for the viability of the liabilities of US banks. These liabilities are what we call dollars if banks can't supply dollars they owe, the Fed supplies them through the treasury and directly. The gold liabilities of US banks are quickly growing so that they will soon hold all of the dollar side of the global dollar-gold settlement system. When the transfer of gold liability from the UK to the US is complete, there will no longer be any reason for Europe and the Oil nations, nor China to assist in controling the gold ecxhange rate. At that point, the gold obligations will be terminated and gold contracts and accounts drawn on US banks will be settled in dollars only.
The time for that is not here
yet. I would venture a guess at the time frame of the end of this
year. At current rates, the transfer should be finished by then.
The terms for the end of the game were set, in part, in the early 80s. Since then, there had been a tremendous effort by the US government to stop use of American resources by American and foreign consumers. Major finds of gas, and particularly, oil were capped and not allowed to go into production. Forest lands were set aside from loggers. Gold mines were induced not to explore nor produce gold within the US. Why? So that when the end does come, the US will have cash traded commodities to sell - so that when the US can't buy on dollar credit anymore, it will have something to trade while the country is reindustrialized.
The US tried to play the technology card by assisting US tech companies in gaining investments, that was done by making them appear more attractive to investors through SEC and IRS accounting rules regarding ESOPs and merger accounting that lower the cash costs of top talent and make losses seem like earnings. But the "social adjustment" oriented school system produces mostly good salespeople and hamburger flippers. India has more programmers than Silicon Valley, and Taiwan and Singapore produce more chips. The best computer and software design is done in Ireland and the Norse countries, and wireless technology is mostly a Finnish, British and German industry. The only way to eliminate the disadvatage in education is to import as many tech pros as we can before they stop wanting to come here. If 10 million 30-35 year old techies can be imported over the next 5-10 years, the US may have a chance to survive as the major economy.
The bank debt reports published by the BIS and the IMF tell the story in all of its gorey statistical details. The dollar debt outside the US is collapsing as it is turned from emerging market and transnational corporate debt into American debt. The US imports produce a flood of dollars that pay off the liabilities of Emerging nation's corporations, governments and banks. It is the need by these to repay dollar loans that has produced demand for dollars abroad. Now that they no longer borrow in quantity and have been reducing their debt, these countries are slowly reducing the international value of the dollar and adding themselves to the long list of dollar creditors. The only dollar debtors left are the UK, some HIPCs, and the greatest debtor ever, the US.
The story is simple. The debt trap set for the emerging markets by 3% dollar interest rates in the early nineties, was sprung in 1997 by a joint effort of the Fed, the IMF and the BIS. The IMF demanded self destructive policies from the countries it was supposed to help, the BIS raised their bank's reserve requirements (actually it was their net asset ratios - a.k.a. ccapital adequacy - but few understand what that is and reserves are a close enough descriptor), and the Fed raised interest rates by all of 1/4% and the whole Asian economic system collapsed.
This generated the requisite dollar demand, stopped Asian gold demand, produced an Asian gold supply, and allowed EU and US banks to buy out many Asian corporation's assets that they were barred from owning before. Hyena and Vulture LP had their day. We were spared disaster for another three years.
2:57:30MDT - Msg ID:29008)
Gold Ownership--its all about achieving a proper understanding of Wealth Hierarchy
oldgold, I've got to hand it to you--you sure managed to trigger a day's worth of posts on the forum that strike this reader as among its best ever. Thanks for sharing your somewhat abrasive personal assessments of the merits of Gold investments as a challenge to many here to come to terms with their own thoughts on the subject. It looks to me like many liked what they found when they looked inward...and not surprisingly, they were, to a man, ALL physical Gold owners (in addition to whatever other wide and varied facets of social and investment endeavors they may have.)
From your latest post on European CBs and Gold, you said:
"I still finds the idea that the European CBs will ever do anything significant to help gold and hurt the dollar fanciful to say the least. Not only do they continue to trash gold in a major way (albeit now within certain limits) but they continue to accumulate US dollars at a rapid pace."
Isn't more accurate that it is your assessment that might be what is fanciful? If not, what is your supporting evidence to the above claims? If I may, please let me offer two bits of readily obtainable information as a counter to your claims.
Standing against your first claim that European Central Banks won't "ever do anything significant to help gold" and that "they continue to trash gold in a major way," I offer this very public and very significant historical act--the Washington Agreement, now barely half a year old:
Mr. Wim Duisenberg, President of the European Central Bank, announced the joint Statement on Gold: "In the interest of clarifying their intentions with respect to their gold holdings, the [fifteen European] institutions make the following statement:
1. Gold will remain an important element of global monetary reserves." ...etc...
Standing against your second
claim that European Central Banks won't ever do anything significant
to "hurt the dollar" and that "they continue to
accumulate US dollars at a rapid pace," I offer a simple
acknowledgement of the successful launch of the euro currency
to counter the first half. Against the second half of this claim
I offer these two news briefs on the latest release of the ECB's
weekly balance sheet:
--ECB total gold assets unchanged at 115.677 bln euros Apr 14
["My, Granny, what large Gold you have," said little Red Riding Hood.]
--ECB: Net FX assets dn 1 bln euros to 264 bln on Apr 14
["My Granny, what a large drop in foreign exchange reserves you have. Where is the accumulation of dollars at a rapid pace?" asked little Red Riding Hood.]
But, oldgold, you reached your thought-stimulating best when you offered these remarks at the end of the day:
"The comment by one poster today that people should be here only to find out how the world works and not to get rich quick again shows a kind of arrogance and disdain for the financial interests of gold investors that has long been a problem at this site. I for one am not here to get rich quick but to help ascertain when the gold bear might turn into a gold bull. If this site cannot help people in this regard it will be on its way out."
First, I'm sure you can appreciate why those of us with abosolute, pinpoint, foreknowledge could never possibly be permitted to share such information about the bear/bull transformation date and time of day on a public forum. <ear-to-ear grin> Here's a hint though--you already missed the turn. (It was cleverly hiding behind BoE sales.)
Regarding the issue of either figuring out how the world works or getting rich, I would suggest that the latter naturally follows the former. It can't be any other way short of heavy reliance on blind luck.
We are Gold owners, accumulators, and advocates because we have in fact discovered the ways of the world. It's all about understanding the Wealth Hierarchy.
Simply put, the world works like this: We all have needs to sustain our life, and we therefore all must endeavor from cradle to grave in the satisfaction of life's requirements. Wealth, you see, is anything that can be utilized in meeting our needs to sustain our lives.
Wisdom and experience show that some wealth assets are more reliable and universal. Some are so reliable, and so universal we actually give very little thought to counting them amoung our assets. Take oxygen. Most of us as we walk down the street give this nary a thought. We are oxygen rich! If you don't believe me, just think of what you'd say upon hearing of a scuba diver who ran out of air while exploring some underwater cave. "Poor bastard." At least, that's what I'd surely say.
So, unless we anticipate scuba diving, very few of us take any effort to mindfully or aggressively gather for later use the real wealth of oxygen. And to any primative, or to a resurrected ancient who had no concept of scuba diving, we would surely look like the perfect fool bottling air in preparation for the event.
To keep this short, let me come to the point. We have basic material needs of food, clothing, and shelter. Access to energy could be also be included in the list. To have more than you need for satisfying the immediate demands for survival is to be wealthy. To come up short in the ability to satisfy any one vital need quickly reveals you to be another "poor bastard" in the eyes of the impartial gravediggers.
Fotunately, from the earliest times of our ancestors we have discovered that we don't all need to be meticulous wealth planners like the modern scuba diver, Mt. Everest climbers, or astronauts taking a ride to the moon. We can generally blunder our way through day to day and year to year in the comfortable fact of life that, through the open market--through the ability to trade with others--we can generally obtain what we materially need in one facet in exchange for some of our own wealth in another facet. Food for clothing seems like a pretty reasonable medieval exchange, doesn't it?
We all know the inefficiencies of barter, don't we? As civilization and trade evolved from the dawn of man to the 20th century, Gold revealed itself to be the single most reliable, universal agent that could be traded in various quantities for anything anywhere on Earth. Maybe most remarkable in this is that Gold is not itself something that is needed or consumed in satisfaction of our basic material needs for survival. But due to it being perfectly and uniquely suited for this universal role in trade for any other person's available wealth as necessary to meet our own specific needs, Gold has become such a near proxy for the real wealth we require for life that many of us have permitted ourselves the casual inclusion of Gold into our otherwise strict definition of wealth.
Those in the financial industry have come to call this universal wealth asset (Gold) by the name "money," but that unnecessarily confuses the issue. In their efforts to facilitate various objectives in modern life, those in the financial industry endeavored to master the alchemist's craft--to methodically create "money" from such substances as worthless base metals or from paper. Even the village idiot can clearly see that "the bankers and others" didn't succeed in creating Gold. But the village idiots were never so sure that these nickel coins and paper notes weren't in fact successfully turned into this other thing that the experts called "money." As for me, I'm comfortable calling these lesser creations by the name "currency," and further, I recognize that they can and do serve a useful purpose in modern society. With this distinction I am not so easily baffled as the village idiots into thinking that these currencies created in the image of "real money" can actually attain the superior wealth function of the asset they sought to imitate--that being Gold. And you shouldn't be fooled either.
Every currency made in imitation of Gold goes hand in hand with the financial architecture that supports it right into the trashbin of failed efforts, and are logged into the collective wisdom of those who vow not to be fooled again. Based on the "conception, care, and feeding" of the various currencies and their supporting architectures, the lifespan--or timeline--of predictable rise and fall milestones may vary in length from one currency to another. They may serve a purpose while they last, but they all suffer the same eventual demise at the hands of inflation. Remember, these currencies are man's artificial attempt, time and time again, to imitate Gold for use in modern commerce. They are built for speed--built to be borrowed specifically, and spent rapidly! They are not suitable for saving. For that you must turn to the master--the near-wealth proxy upon which all currencies must bow down in inferior imitation.
So you see, learning how the world works is all about each man coming to the understanding about the real wealth we all require to best ensure our survival. Knowing that Gold is the master proxy for our life's day-to-day and year-to-year shifting requirements for food, clothing, shelter, and energy, it simply makes more sense to gather in Gold for later use than to gather in clothes (that we may outgrow,) food (that may spoil,) houses which are more than our needs, or energy (that we can't store.) You see, time bears witness to this undeniable fact: Gold can be called wealth because it is an enduring wealth proxy in exchange for our life's needs. Currency, on the other hand, serves a specific modern economic purpose--to be borrowed and inflated in placation of man's immediate desires. It is not wealth, it fails as a proxy for the Gold it tries to immitate. Do not confuse the two.
Understanding how the world works is easy as soon as you understand the Wealth Hierarchy. Like this: Earn money/currency, buy what you need, save Gold, enjoy what life has to offer.
Real wealth. Get you some. ---Aristotle
John Doe (05/18/00; 17:51:10MT - usagold.com msg#: 30797)
In reply to Journeyman (05/18/00; 14:08:46MT - usagold.com msg#: 30787-9)
Conclusion: The only connection between free markets and
"capitalism" is that "capitalists" ingenuously claim they
like free markets, while at the same time taking every
opportunity to destroy them, or to encourage governments to do it
Or, a little less harshly, a capitalist is someone who wants to
buy from a free market, but sell into a restricted (protected)
market, where he/she is protected from competition.
"Or, a little less harshly, a capitalist is someone who wants to buy from a free market, but sell into a restricted (protected) market, where he/she is protected from competition."
I like this, as it reminds one of the vertically integrated monopolies of Old, which apparently have never left us. They've just learned to better work the system they've always controlled to yield more palatable "perceptions" among the general populace. Both verticality and monopolism have been downsized, virtualized, and decentralized. They still remain, de facto, but not in hard copy form that one can easily point to and demand redress and reform.
Monopolism is, was, and always will be the heart of the matter. What are Fascism and Communism but the utter, bald-faced, Totalitarian monopoly of political and economic thought? Freedom and Monopolism are, were, and always will be diametrically opposed. Any monoculture is stifling, inherently counter-productive, and doomed to destruction. Yet, the current moneyed interests and power-hungry never cease to see or admit this situation. Rather than designing and implementing equitable, sustainable systems, they instead endlessly pursue various forms of monopolism in wave after wave of failure and destruction, all in the name of temporary (or lineal?) advantage.
A global government will not work any better than a global religion would, and a global currency will not succeed any better than chopping down every other type of plant in the jungle for the sake of a single one. A healthy, dynamic, evolving system requires a continuously varying multiplicity of inputs. Nature tells us as much and, in my opinion, nature has it exactly right. Good government needs a two-way flow of corrective feedback and new ideas and the free means to inspect, select, and apply the corrective feedback and new ideas. Likewise, a healthy economic and monetary system requires multiple viable choices among freely operating investment vehicles, stores of wealth, and transmissions of value. What passes for Capitalism these days actively and forcefully subverts both the proper functioning of a rational, viable governance and a long-term, sustainable, equitable economic and monetary system.
Enjoyed your dissertation on Capitalism, you are now promoted to Master. :o)
(06/14/00; 12:09:27MT - usagold.com msg#: 32319)
FOA, ANOTHER - A summary analysis of their view and its consequences
The following summarizes my take on the view FOA presents, within the context of my monetary and economic understanding.
First a little note.
I am well aware that one can not go to a government and banking system and "sell it" the concept of unilateraly disarming in their war against the productive individuals that make those things available that governments and bankers want to control/take a piece of/steal. Of course, banks will not like to lose their monopoly on creating the exchange money. Government, the partner in the scheme, would not want to have banking lose its usefulness because of the desire to have unlimited credit - that is to have the option, when they feel like it, to tax away a large chunk of an economy's production by inflation. Also banking serves to have the government as the only economic actor with no nominal possibility of failure - the highest credit rating possible, rather than government's traditionally low credit rating under the REAL free gold banking system.
The aspect of having gold contracts by the banks unenforced would sell the banks on the deal any day, as it would for the Arab Oil interests
So, now to the secondary note
on this subject.
The program ANOTHER presents gives the governments (EU, US, Oil, Japan, China, Tigers, Anglos, Latin America) an opportunity to save the nominal currency systems they feel they can control and use in order to control the economy. Quite frankly, the detachment of gold from the currencies would eliminate the benefit of having them. Any attempt to inflate would destroy the currency values. Any attempt to restrict credit will cascade into a Japanese style disaster while still destroying currency values (unlike Japan, the US does not have any chance at achieving currency stability because it does not have the excess exports by which to maintain the international value of the currency). The debt currency, as says ANOTHER, is a "negative value asset". Without a tie to gold, which is a positive asset value, its nature will show.
Like the indexed pesos, or reals, or rupiahs, or shekels in many accounts around the globe, the indexed interest rates and index adjusted wages and prices will move to undo the advantages that banking and government derive from inflating in the nominal world. That advantage is provided by the gold tie-in of the currency; the inflation of gold through paper gold substitutes, allows debt money currencies to be accepted so that the currency can be inflated relative to the paper gold outstanding, while the paper gold inflates relative to gold assets.
That ANOTHER has managed to sell governments (and I assume this extends to banks as well) the same lie they sell the public is quite an achievement. Now to the summary:
1. Gold IS THE MONEY: The core of the financial system is gold. The profits of trade are placed in rarities and gold.
Like all profit motive operations (the only motive) the 100% of the enterprise exists because of the expected 15%-20% gross margin, the gross margin is only important because it provides the profit which can be invested or stored. Investments earn a return, gold is what is returned and not reinvested. Traditionally, a 3% net profit is all that is necessary, thus 97% of trade can be done without gold, but the only justification for the 97% is the 3% that will be put into gold.
2. The philosophy ANOTHER sold is that debt money exchange media are useful for the conduct of business, but the 3% that goes into gold must not be manipulated by government or by banking.
This separates the motive of business from its conduct. Thus business will cease to have purpose if conducted in disconnected currency that can not be exchanged to gold at a predictable exchange rate (which one expects to fix in a futures contract etc. - all gold debt securities). This also separates the risk from the return.
3. Reserve structure: central banks will have the option of issuing cash to buy gold.
Gold holdings will not be accessible to the currency holder, he will have to trade in parallel by purchasing gold (rather than converting) at an unknown future rate. Since the gold is the purpose of the business activity, the only way to convert into gold at a known rate is to do so BEFORE business is conducted - by borrowing to buy the gold before the enterprise is started. Thus we have central banks needing to take in gold in order to issue non-debt currency that can prevent the dismal fate of Japan. Inflation of currency - Euro in particular - would require purchase of gold or of debt securities. Guess what the central bank would do when the debt system needs cash pushed in. They will purchase gold - good for us gold holders - very good for oil based gold accumulators.
3. History of the modern gold-currency connection post 1971: The dollar debt bubble of the past 50 years broke the gold tie midway in 1971. After that, gold was separate from the dollar till 1979-1980. At some point at that time, the connection was reestablished for the purpose of stopping the conversion of dollars into gold that the Arab oil required. Why? because oil was priced by them at the unrealistically high historical gold contract price of 20 barrels per ounce - appropriate for the paper inflated gold price of the time, instead of the appropriate rarity ratio that would price oil at 100-200 barrels per ounce. In short, they were trying to get more gold than existed, could be mined, or more than can be provided by anything but for imagination. The source of the problem was the historical leverage of dollars relative to gold when the expectations were built in Arab Oil's perception.
The world at large was trying to fill the conversion requirements of Arab oil into gold after the world had converted so much of its energy consuming plant into using oil, and after years of excess extraction of oil without consideration of its depletion. The world was locked into using oil, but had locked oil exploration out of profitability by inflating currency in relationship to nominal oil and oil product production. Oil was what everything worked on, and there was more of everything but the only oil of which more was available was from Arabia, and the "sacred trust" of the dollar-gold conversion window was violated - Arab Oil wanted payment as in the contract, and raised dollar prices as high as they dared in order to obtain it. Only when sufficient oil supplies were found did the oil price fall. In 1986, the US was nearly free of OPEC supply.
During the Arab chase after gold, every cow pasture was explored for gold. In 1980 it was possible to provide more gold than before as annual production grew at a 5% rate during this period of 1980-1986. Possibly, a large supply of gold, rumored to have been made available during this time, was under US control and was disbursed off market during this time, largely to the Oil interests. It is noteworthy that the substantial Oil revenue accumulated up to that time disappeared during this period despite a hefty (though falling) dollar revenue.
1986 marked a change in the US so far as oil and banking/monetary issues were concerned: The US had grown new money at a globally unprecedented rate over an unheard of period. The dollar was back to its situation in 1971. Germany (Bundesbank) was unwilling to support the dollar (by lowering rates) at the expansionary conditions at which the US operated its banking system. In response, the tax preference for debt was reduced substantially, as was the tax loophole system that caused investments in cash positive operations with high depreciation. This reform dropped the rate of debt expansion like a rock but created a deflationary danger. The Asian and South American crises were over and US had to inflate if it were not to suffer the same consequences. The resumption of growth in these nations caused a new draw on oil supplies and OPEC had to be tapped. But they would not trade for dollars after having had gold delivered for years, much to their satisfaction, even though dollar balances declined.
The deal following the near collapse of 1987 was structured to allow the Arab oil interests to convert petrodollars to gold at an artificial gold price by trading oil futures and gold futures backed by mine obligations and central banks promising to step into the breach if necessary. If the gold did not arrive, neither would the oil.
The US inflated at the minimal rate that allowed survival of banking while not killing the dollar. The NET dollar supply into the global markets was absorbed as long as the contracted gold parity was maintained, and the deal's ceiling was not reached. Seems that this deal dates to 1987, probably negotiated after the Plaza Accords. It also seems to have been renewed in 1992, with the UK on the US side. EU dropped support for the sterling and collapsed out of the ERM and brought the UK into recession and gave the EU members a chance to revel at one of the creators of the IMF turn into a major suplicant.
The renewed deal I suspect started in 1992 was put together to allow time for two items: do the EMU, and get Britain back in the fold. The old unofficial parity values were still set, but the future gold requirement had to be contracted out of reluctant gold miners, and even then quantities were insufficient to provide the necessary gold. Gold had to be displaced from the central banks or from the public. Not only were current holdings to be displaced, but the complete diversion of gold investment out of the physical markets had to be achieved through the provision of the right interest rates and gold price behavior.
Henderson's 1997 Fed study was intended to provide price targets and interest rate policy guidance needed to achieve this. Judging by the cutoff dates for new information going into the simulations, the running model had a preliminary version as early as 1996, and possibly the informal work was done in 1995 or before, running on spreadsheets with best guess estimates. The "welfare" calculations are a joke. It is the price curve and interest rate requirements that the work was intended to produce. Also, the work was intended to provide an estimate of the availability of gold in the future in case the deal could be renewed again in 1997, and in order to provide the downslope numbers for the benefit of the large group of private investors who needed to convert at the best possible prices while unloading investments. The gap between the intended start of the EMU and the actual schedule was bridged by the action of the past few years since 1997.
4. Euro-Oil and the ultimatum.
In 1997, Oil representatives revealed their intention of having the gold market and bullion banking destroyed by the institution of an open pricing of oil in gold in full public view. The choice was simple: either the EU trades gold without the possibility of gold banking and gold debt having the potential to dilute gold purchasing power, or the EU along with the US will have to pay in cash gold bullion for each oil delivery. The reserve structure of the Euro must also force the ECB to partake in a runup in gold prices and align the ECBs interests with a high gold price.
Was there an alternative? "Take the oil and the gold?" No one would let anyone else take the oil fields by force, and no agreement can be had where a consortium of states would do so. The presence of US troops after Iraqi-Kuwaiti war was resolved has nothing to do with Sadam's ambitions and everything to do with Saudi (and Kuwaiti) desire to eliminate Sadam's oil supplies from the markets without US occupation. Another problem is the destructibility of oil fields which rely on natural pressure to push up the oil. The seal that keeps the pressure high is relatively easy to destroy (you only need to crack it), though it takes quite a bit of technology (which is available from Russia, Taiwan, Israel, China, India, Pakistan and others at a price that is affordable to the Oil nations). If this is done, the oil extraction becomes substantially more expensive. The threat of destroying the oil fields is enough to prevent most nearly sane Western politicos from even trying.
5. Legal status of gold,
PMs and gold banking/debt.
Legal tender status
Pressure is rising to allow use of gold to pay debt, returning its status as legal tender. Gold and other PMs are the only financial assets to benefit greatly in hyperinflation. While all avoid currency and financial assets like the plague during the steep price rises, they do chase PMs. The result is that the only financial assets available to repay debt without extremely aggressive central bank currency printing are the PMs.
Thus there is pressure to return "real cash" into the bank system. However, if you can pay debts with a PM, why should you hold any non-PM assets but for what is needed for payment for day to day expenses? The use of PMs for legal tender would cause the bulk of the demand for currency for the purpose of debt repayment to be transferred to these monetary metals.
A legal tender concession for gold on the part of the ECB/EU is dangerous for the Euro. However, it is more dangerous for the dollar because the debtors would prefer to hold PMs to holding dollars for reserves (used for debt and trade settlement) if they could use them for debt payment somewhere. As a result, they would tend to replace dollar debt with Euro debt, as they are doing now just much more rapidly.
The dollar debt to Euro debt transition is occurring right now, though not for the same reasons. This was causing a monetary expansion in the Euro while destroying both dollars and dollar debt until recently. The dollar spike that resulted from this and from the exacerbating factors of the recent interest rate hikes by the Fed. The resulting dollar stream from the current accounts deficit is expanding by leaps and bounds. It could soon reach a point where even the Japanese can't afford to sop up the excess dollars that overflow the debt payment demand.
A note on hyperinflation:
Hyperinflation in debt money systems is a result of a previous overexpansion debt collapsing. It is, paradoxically, a deflationary phenomenon. In a hyperinflationary currency collapse, the cause for the price rises is the injection of funds by the central bank. The reason such apparently foolish action is taken is the danger of a deflationary collapse of banking due to loan defaults. In the attempt to keep the banking system afloat, the central bank can inject enormous amounts of currency to replace currency that could "evaporate" with the accounts held at weaker banks. Once the price rise process begins, people hold less and less in currency and currency accounts relative to their incomes and expenditures. The reason for this is the tendency to avoid holding a significant portion of their assets in a devaluing medium. As a result, they are unprepared for income loss and for the rise in price of basic necessities for business and personal purposes. This causes deterioration in credit performance and eliminates bank assets.
The process is self-reinforcing as the speed of price rises causes lesser purchasing power to be held in currency and associated assets. Less currency results in a cash shortage and therefore will result in defaults. Defaults destroy bank assets and the banks must sell assets to obtain cash with which to settle. The defaulted loans are no longer a source of demand for currency, and so the value of the currency erodes further. The low cash levels cause a reduction in actual sales as inflation progresses. The central bank tries to replace lost funds from the banking system so as to maintain the ability of depositors to spend.
The agreement regarding the gold banking system comes down to one thing: it will not survive. The Oil based gold holders will have none of it. They are unwilling to allow any gold debt in the future. They are not willing to suffer from the expansion of gold debt with or without cartel conditions i.e. with free gold banking (the "ideal" state economically) or with central banks and government pushing further inflation of fiduciary gold to dilute the POG.
The point at which the banks default on gold liabilities is when all gold available to the banks has been displaced by fiduciary substitutes, and the supply from accumulated reserves has stopped because none dare sell anymore and all gold "investors" who care about price rather than wealth insurance, have converted their gold into paper. The gold bankers know that they are going to fail and will have to default. However, by accepting the deal with Oil on ceasing further gold banking and perhaps allowing gold its legal tender status, they may have an outlet from their predicament in having the rules changed so that their delivery requirement on gold obligations is lifted. They can be "saved" from delivery of gold and will need only to deliver currency, perhaps at a level that does not reflect the physical price. This deal, at least for EU banks, is a saving grace; for the US banks, not joining would mean that they will be sued for the next two decades until all claims are settled. Since the bulk of gold contracts have dollars on one side, joining the deal would mean that there is likely to be a dollar pump if the official markets (that serve as reference for POG contracts) continue to operate. The recent joining of Credit Suisse into the LBMA fixing five could be a sign of this market possibly maintaining life as a physical gold trading arena, if that is so, then the US banks would not be let off the hook easily since the potential for a gold-dollar pump would remain.
6. Ill will and the cost to the world of the dollar's reserve currency status: The US has enjoyed over 55 years of currency hegemony as a result of imposing Bretton Woods on the decimated economies at the end of WWII. It was the only economy that was intact at the time. Militarily there was no possibility of resistance to it. The US demanded the right to print money in return for goods and purchases of foreign assets. In order to make it seem "kosher" the agreement allowed gold redeemability to stay in place with a gentlemen's agreement as to the nations of Europe not exchanging their dollars for gold.
Furthermore, it was thought that the nations of Europe and Japan would fall into debt traps as they are forced to import US capital equipment paid for by loans. US corporations and the military spent so heavily abroad that there was not that high a need for US dollar borrowing, and Europe was soon flooded with dollars.
Without the danger of gold redemptions and with no competition from European, Japanese (or any other) consumers, the US saw a tremendous growth in consumer-oriented imports of foods, rare woods, rubber and porcelain at negligible prices that barely made a blip on the import numbers.
By 1960 the US had created enough of a dollar float so that the Europeans, confident of their security after the death of Stalin, started redeeming dollars for gold despite a nominal trade balance that was slightly favorable for the US. The dollar supply was in excess of demand for debt repayment. By the late 60s the gold markets of Europe were short of gold and a pool was put together to supply gold to the markets from central banks. The dollar supply, however, would not go away and continued growing because of the expansionary Fed policy accommodating massive government borrowing in order to finance an artificial war in Vietnam and an attempt by Pres. Johnson to institutionalize and make permanent the poverty of millions of Americans, complete with prizes for people who do not work, and social workers who make certain that the recipient of welfare aid is well motivated not to seek independence or employment.
Soon after this, the US ran out of new oil and its domestic production fell just in time for baby boomers to enter the workforce, enabling them to buy cars and houses while the WWII generation started for retirement with Social Security benefits exploding. The government was then spending at its record pace relative to business and private spending. The oil situation was dire because the falling production came just after the conversion of so much power generation and chemical feedstocks from coal to oil, and the expansion of polymer product manufacturing from oil. It was necessary to import as much as possible to satisfy the new demand pressures, but the dollar glut was pressing gold reserves as the gold redemptions were emptying treasury's vaults at an incredibly quick pace while Americans were enjoying their best economic times ever, with a currency overvalued by 220% on a PPP basis. The official nominal trade balance was doing fine, but the trade balance was understating the volume of imports because of the distortion by the currency exchange rates. The volume trade imbalance was as double the level of exports. THIS WAS THE ESSENCE OF BRETTON WOODS, the reward for America winning the war was to have an overwhelming stream of imports coming in as the overvalued dollar teetered for years after it was obviously insolvent.
In 1971, the world was stuck with dollar assets in a sufficient quantity to redeem all the gold the US ever possessed ten times over. The reality of the US being broke since the early 60s was driven home when Nixon suspended gold convertibility. OPEC attempted to regain the gold price of their oil through dollar pricing under the assumption that the US could revert back to gold conversion (though I don't understand by what economic process this could have been achieved. It was an irrational expectation).
The US needed higher relative oil prices so that domestic or near domestic supplies could refill the oil supply gap. Rather than that being a motive for dollar inflation and the closure of the gold window, as Aristotle, ANOTHER and FOA contend, I believe the US was insolvent in the first place, the events were the classic events surrounding a "bank run", and inflation was necessary to undo the deflationary pressures from an overextended debt system. [Editor's note: At archive posts 6/16/2000 - usagold.com msg#: 32473 & 32475 Aristotle refreshes ORO's memory on this point, demonstrating that they all have been in agreement with the "bank run" scenario and the consequences with oil.] The higher relative oil prices were just the results of this policy, though a much desired result from a strategic viewpoint.
The explosion of dollar supply before and after the dollar default and the attempts to cash that supply for gold on the open markets led the gold markets to explode in price. Nominal imports grew tremendously as new oil demand was met with imports and import prices rose. However, import volumes were not increased in proportion as the dollar declined and exports recovered. Since 1980 we have seen a repeat of the pattern of the 50s and 60s but at a greater pace, greater order of magnitude, and greater proportion to the non-import economy. The currency distortion today is equal to that of 1970 at 220%. The imports which we trade for paper chits have grown to over 50% and peaked at near 60% of our goods sales volumes (not dollar values).
The people freed up from the manufacture of our consumer goods are now occupied in retailing and distributing these imports and in other services. Most important is the fact that some of these people were freed to conduct technical research, study finance, and invent and many technical people came to the US and will remain here if conditions do not turn sour too quickly. The technology edge of the US will help us survive the retrenchment of the dollar since the products of these technologies would not have to be produced outside the US as the dollar distortion would not work against US based manufacture any longer. Furthermore, some of the people freed from manufacturing by imports had moved to construction work, where relative wages have fallen from far above average to substantially below.
The US has not conducted itself fairly in the eyes of many in the indebted countries. Europe and Japan have also suffered from the need to support the dollar as much of the Japanese surplus had to be accumulated in potentially worthless US paper. Many indebted peoples see the US and its banking arms (World Bank, IMF) as enemies because of the financial, environmental, political and economic damage done to them by projects that were supposed to help but instead destroyed the core of the economy and by US political pressures that had brought unpopular socialist and militarist leaders so as to assure the flow of cheap bananas or shoes or to invite Anglo and Euro bankers to print up overvalued money with which they bought whole economic sectors and created monopolies that hiked prices shortly after they were assembled.
In the aftermath of the latest debt entrapment and financial disaster in the Emerging Economies, the US/Anglo and EU banks and corporations are in a hyena-like rush to take over and consolidate industries.
Would these countries not come to try to unseat the dollar at the first opportunity where US retaliation is not possible? Would Europe not try to secure independence from the dollar trading, debt and settlement system? The Oil potentates who traded oil for promises of gold but ended up holding a paper stuffed bag, wouldn't they do all they could to avoid the possibility of their having to go through that again?
7. "The giant's footsteps"
The value of gold as the core of the monetary system is not a function of its tag to oil, it is oil's pricing which is tagged to gold, as most of the Arab's share of the oil price is profit and must be converted into PMs in order to survive the ages. Like all major private wealth holders that are not forced to keep accounts in currency (as all public corporations are), Gates, Buffet and the partners of Warburg, Goldman, etc. are getting their wealth insurance at the discounted price while they unload their investments by going public or selling out to public firms. Aside from Rothschild, is there another familly bank not sold out or gone public? There should be no surprise that silence is maintained on the issue, as everyone must run along the path "in the footsteps of giants" before rush hour begins. The golden tail wags the dog.
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