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THE
ROCKET SCHOOL OF ECONOMICS


The Wizard of Oz
by Professor von Braun

February 28th, 2000

"Never in the history of our nation have so many owed so much to so few."

Words spoken by Winston Churchill after the worst of the German aerial onslaught during the battle for Britain was over.

Today it could be said that "never in the history of Central Banking have so many owed so much (other than paper) to so few." The few of course refers in this case to the Central Bankers who have loaned/leased large amounts of physical gold to bullion bankers who in turn have off loaded these loans to any body (the many) they could. An act of great foresight one might have thought. After all, who needs gold? It's heavy, expensive to store, does not earn interest, and in this electronic age, obviously, like grandmother's china, has become redundant, of interest to perhaps a few collectors of antiques, relics and curiosities.

What better idea than to lease the gold, earn interest, keep the gold on the balance sheets, and have it returned, since we have only leased it. Perfect. What a wonderful, wonderful idea.

How this activity actually passes an audit, a serious audit I might add, different to the current variety of new age audits carried out on many U.S. public companies, is a mystery to me. Unless of course audits of gold reserves are not carried out.

The question "where is the gold now?" seems not to have been asked. A bit like a US bank making unsecured loans to anybody that walks through the door. No credit check, no security, no income test, just make the loan, package it and sell it to an institution that has a higher credit rating and is too big to fail. OK. Problem solved? No, merely a problem passed to someone else. A case of hide the peanut under a better looking shell. Or pass the responsibility. Somebody will bail us out appears to have become the motto of the day.

Central Banks rely in part on the prudent lending practices of their respective banking industry leaders to protect the perception of value in whatever form of printed currency they use. The widespread use of debt always leads to a collapse of some sort as loans are made on assets that are dubious to begin with. More dubious loans are needed to cover this up and so on until the fallacy is seen for what it is and the game ends. Book entries don't work in the end.

But in turn Central Banks have guidelines that they follow and expect others to do so as well. The sound banking criteria they call it. The Bank for International Settlements (BIS) is regarded as the Central Bankers' bank. It too has "lending criteria" that it uses to measure a country's credit worthiness and its reports are supposed to be taken seriously. Concerns about such things as derivatives raised by BIS over the last few years, certainly since the "Asian crisis" of 1997, appear to have been ignored.

The fact that publicly the BIS have not raised concerns about the gold leasing concept is puzzling. What goes on behind closed doors is another matter. But one would have thought that the BIS should have twigged to what's going on by now. Monitoring irregularities in the banking system is what it is supposed to do best. Including assets in ones reserves that one no longer physically owns should be considered at the very least "unsound" and at the very worst, fraudulent.

Recent comments by Sir Aldot.Com [Alan Greenspan], the apparent head monk and chief wizard of the Fraternity for Central Bankers, that he does not actually know what money is and consequently can't measure the money supply are disturbing to say the least. Maybe he does not know what money is, but there are a large number of people who are relying on it for some reason or other. To be told that you are holding the apparent equivalent of worthless pieces of paper in your retirement account by no less a person than the issuer of these pieces of paper should set off an alarm bell somewhere.

One either accepts these statements at face value and acts accordingly, or one joins the Sir Aldot Com fan club, either willingly or by default, via the process of simply sitting still.

The debasement of currency is a bit like the beginnings of winter and the effect it has on the autumn crops left in the ground. It is going to happen. No currency has ever survived intact. Debasement is inherent, an action that will eventually happen. When it begins its time to buy the alternative and wait until the debasing period ends. Why do Central Banks continue to hold large gold reserves? They know that when the current cycle of the latest paper currency format ends that is their fall back position, the one you need to start the game again.

"Similarly, growing credibility of the European Central Bank should provide an anchor to stabilize inflation expectations and in turn inflation itself" - this is a quote from the highlights of a speech delivered by the Chairman of the BIS at its annual general meeting, June, 1998. What this statement tells you is that the BIS believes that credibility is an issue when it comes to Central Banks. Certainly some Central Banks have little credibility and this is reflected in their currencies and the value attached to them. Thailand and Indonesia come to mind. It also tells you, given the performance of the Euro since its introduction, even the BIS gets it wrong on occasion.

"By definition, all prices are indeed the 'ratio of exchange of a good for money'. And what we seek is what that is." And further, "our problem is not that we do not believe in sound money. We do. We very much believe that, if you have a debased currency, that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. We have had trouble ferreting out proxies for that for a number of years." (Do you mean since the US went off the gold standard?). These are select excerpts from Sir Aldot Com's response to a question from Congressman Paul.

Now we all know that everything said by Sir Aldot Com is always out of context and should never be taken to mean anything at all other than, "no that is not what I meant". But I would be concerned about the phrase "our problem". Who exactly are the parties to "our" problem. Whose problem is he referring to? How all encompassing is this statement? What exactly is "our problem"?

As a holder of assets denominated in US dollars is this your problem?

Credibility is, like beauty, in the eye of the beholder. An ongoing belief in a financial system that has a "problem" -- one admitted by no less than the wizard himself, the same wizard who can't recognize a bubble, should be looked at very carefully. Transferring ones paper assets to something more tangible and reliable than a promise to pay may be a very prudent move.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

Return to the The Gilded Opinion Index Page

The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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