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Problematic Banking Systems!
by Professor von Braun

March 28th, 2009

To maintain a fiat monetary system ALL demands written within and upon that system need to be approved either by a regulator who reports to the central bank, or by the central bank itself. In the case of the current financial crisis many were asleep at the wheel.
What has appeared to have happened is that a combination of the 'shadow' banking system and the writers of derivative contracts, the most prominent being AIG, have written contracts that were unregulated and therefore outside of the banking system itself. Where were the regulators? These contracts were payable in units, in this case US $'s,  the issue of which was and is under the control of the banking system's central bank.
One way of describing this bizarre situation is that the central bank's role of expanding credit via its member banks was usurped by the shadow banking system. Debt (read obligations) was created by non-member unregulated entities, and credit was expanded by those who had no business expanding credit. That is the role of the Federal Reserve and its members.
When the eventual contraction occurs, all those who are involved in credit expansion take a hit and we begin a round of market inspired credit contraction to restore the balance. What the Fed and the Treasury are now having to deal with is this contraction of credit, which, given the size of the expansion, will continue for a few years as over-inflated assets are written down.
The issue now will be that of outstanding obligations, contracts entered into by anybody involving either the repayment of debt or the insurance of the debt itself. Trying to reinflate the value of the underlying assets, regardless of what they are will not work. The liabilities attached to them far exceed the Federal Reserves ability to pretend to fund them. Using taxpayers money, which is future income already spoken for about 5 times over, won't work either.
I am not to sure at this point as to whether the Fed or the Treasury fully understand the situation they are having to deal with. So far I have not seen too much by way of intelligent comments about what the problem they are trying to fix actually is.
Its not so much that the value of the assets has dropped, rather it's the fact that they were over-inflated in the first place and that over-inflation, in particular, was of non-productive items. It's the credit expansion game that has ended, a game in and of itself inherently flawed, but when usurped by unregulated players it has the apparent effect of expanding the monetary base without the knowledge of those whose business it is to know about these things. It is almost as if a your neighbor plugged a hose into your water supply and forgot to tell you and one day you wake up and find the well dry.  The Fed has been reduced to using recycled bath water as it scrambles to fix the liquidity problem.
The real issue here is the fiat monetary system itself. The purpose of a gold standard is to effect settlement and the closing of the gold window in 1971 placed the very necessary activity of settlement into the deferred stage. Since that time no transactions have been officially settled. These unsettled transactions remain on other Central Banks balance sheets as reserves, which they are not. They are liabilities of the United States.
Within the banking industry old debt has been replaced by new debt as assets were inflated and larger mortgages simply reissued. The much touted home ownership programs by politicians, in particular the Democrats, is a fraud. Perhaps it would have been better named the 'keep the fiat monetary game going program', as the banking system needed more and more mortgages to continue to feed itself. Now the bankers' worst nightmare has arrived. How do they re-inflate non-productive assets when there are no buyers left! Who can be the new chief re-inflator?
Talk about a strong dollar or a weaker dollar is really quite pointless. The dollar became the world's reserve currency because it was backed by gold. President Nixon ended that in 1971, and now all it is backed by is a perception, one based upon the supposed strength of the US economy and the US treasury tax take that allows interest to be paid on its debt. Well the economy is heading south and so is the tax take, but now they need to increase the debt?
We now have the Federal Reserve buying US Treasuries on the pretext of providing liquidity to the banking system so they, the bankers, can now make 'new' loans. But 'new' loans to whom and on what security? In addition where is the cashflow going to come from to service the debt when the economy, which itself is a farce, is, along with credit, contracting.
Nothing will be resolved until the players within the Central Banking game realize what they have been doing, which is deferring settlement ad infinitum via the activity of inflating the price of non-productive assets and they are erroneously calling that an economy. It's not an economy, its an ecomedy with absolutely no sound economic basis in fact. You can not settle a debt with a debt.
All the current talk about the need of new regulations is balderdash, the regulations were in place and the regulators unregulated them, with of course some help, by way of campaign contributions, from the shadow banking system. The issue is that of settlement and at some stage settlement between countries will have to be made. That will require a return to gold. Special Drawing Rights (SDR's) have about as much value as the dollar, for they too are another perception. Hallo China!

The Prof can be contacted by email at

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

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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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