Archive for September 2009
The Price of Gold: the Paradox is Revealed
Price of gold: the paradox is revealed
– Excerpt GEAB N°34 (April 16, 2009) –
For months we have witnessing a worldwide paradoxical phenomenon which the press has widely reported. Because of the crisis investors fled most categories of assets (real estate, stock market, currencies, comodities) and many of them have invested a portion of their portfolios in gold, even causing shortages of coins or bars in many markets. Yet, and this is the paradox, the price of gold is not taking off its average price of 900 USD / ounce.
As a first step, in the second half of 2008, the commonly accepted explanation was that margin calls due to massive losses in other asset classes had required significant sales of gold by their holders, offsetting growing demand and this was probably the case. But since early 2009, the paradox remains and this explanation is no longer be sufficient to explain the status of the price of the yellow metal.
LEAP/E2020, therefore, tried to understand the “why” of this paradox and draw conclusions for GEAB subscribers. Let’s keep in mind that the analysis of gold market is particularly complex because it blends several phenomena that obfuscate its actual operation:
1. It is simultaneously a highly speculative market where information of all sorts is circulated to serve any particular market trend and a market for an industrial raw material (namely the jewellery trade)
2. It is a market driven by investors particularly convinced, sometimes ideologically, of the ‘uniqueness’ of gold as the only legitimate basis of an economy and a healthy currency
3. It is a market under the close supervision of central banks and states which, in times of crisis, regard it, on the one hand, as a potential danger to fiat money and, on the other hand, as an asset of « last resort » which can be subject to seizure when the crisis becomes uncontrollable (1)
4. Finally, it is a market that deals with a metal identified as wealth for at least five millennia, known to make people go crazy!
So, to try to understand what is happening currently in this market, caution is required. However, in the many shadowy areas of the international gold market, a darker area than others seems to provide an explanation of the current gold price and from which at the same time, useful recommendations can be drawn for GEAB subscribers. It is the difference between the two types of market for the yellow metal:
1. The physical market, which requires real transactions of yellow metal. It sells and buys real coins and bars that one must then stored oneself (in a bank safe, in one’s garden or under one’s mattress (2))
2. The paper-gold market. It buys and sells certificates that guarantee the possession of a quantity of gold (coins or bullion), which the seller agrees to provide the buyer physically if required.
The practical aspect of the paper gold market is obvious. It avoids the complex problems of transport and storage for buyers of large quantities of gold and facilitates all transactions, increasing liquidity in the gold world market. However, it requires absolute trust in two types of operators in the heart of this market:
. Sellers
. Regulators
The first have to be above any suspicion and respect the rules that require them, in general, to possess physical gold equivalent to 90% of the certificates that they negotiate. The latter must be even more legitimate because they must ensure that all sellers of paper gold comply with the regulations.
However, the performance of global financial institutions and regulators of the major international financial centers over the past two years does not inspire great optimism. The first acted (and still act) as top-level crooks and the latter as the accomplices of the former, especially on Wall Street and the City … which, coincidentally, are the international centers of the gold market (3).
LEAP/E2020 believes that because of the current struggle for survival of major financial institutions and of the crisis in the international monetary system, it would be very naive to assume that the regulators of the gold market play fair, in so far as this would be, first, to the detriment of the Dollar, the British Pound and most fiat money and, second, to the detriment of the balance sheets of major financial institutions, already seriously weakened. We therefore believe that the paper gold market no longer operates by the regulations and that many operators in this market do not respect the requirement to hold 90% physical gold as collateral. It is impossible to know precisely at what collateral they hold but it is likely to be very low, at least at a level that would pose a serious problem if tomorrow more than half the buyers demanded conversion of their certificates into physical gold (4).
For the record, the United States acted, to all intents and purposes in the same manner when a manipulation when, in 1971, President Nixon suddenly announced that the dollar was no longer convertible into gold. Before 1971 the Dollar was equivalent to a certificate on gold and the United States a seller of paper gold which forgot to comlply the constraints of coverage of its certificates, and eventually had to acknowledge that it could no longer honor its contracts (5).
Evolution 2004-2009 of gold sales by the central banks of France (red), Switzerland (blue), The Netherlands (green) and the rest of the world (orange) – Source : World Gold Council / VM Group, 02/2009
Of course, the gold market is also affected by the supply of precious metal. These sources are mainly mining (which is basically stable), central banks’ sales or sales by international institutions like the IMF (6). By massive sales (public or discrete) states can easily alter the gold price (7). Currently, the level of central banks’ gold sales has hardly changed. For many European states, which, because of the Euro, can no longer rely on the direct income of gold sales because they only receive the interest (the capital is in the hands of central banks), the relevance of sales is now marginal. The monetary storm coming by the end of summer 2009 may encourage governments to exchange their foreign currency reserves, particularly U.S. dollars, for gold. As far as the United States is concerned, its gold reserves, even valued at the current market price (about 300 billion USD (8)), represent only a small fraction of the exorbitant amount committed by the US under the current crisis (and there is great uncertainty about the exact amount of current U.S. gold reserves (9)). However this LEAP/E2020 analysis and recommendations does not pass judgment on an evolution of gold price, but on the safety of the investment. That in the end the buyer of gold has physical gold in the hand instead of a piece of worthless paper.
In conclusion, our team recommends that its subscribers who do not want to speculate (and therefore face the risk of losing their entire investment (10)) must stop investing in paper gold and should limit themselves to physical transactions (11). It This may be difficult in some cases, but as we get closer to the breakdown of the international monetary system in the summer of 2009, we believe that there is now a major risk that owners of paper gold will end up losing all their investment when sellers recognize that they cannot honour their contracts because they are unable to supply the physical gold they contracted to.
———
Notes:
(1) Many countries had policies prohibiting private possession of gold and / or setting up forced sales to the State at ridiculous prices. The United States and Germany have experienced such situations in the twentieth century. The United States also maintained a ban on private possession of gold from 1934 to 1974. That is why, for the last two years LEAP/E2020, has regularly reminded its subscribers that one must be wary of the gold market and closely monitor the attitude of public authorities in this area. Although currently it is useful to diversify up to 30% of one’s assets into precious metals (gold, silver, platinum).
(2) The last option is safer but more uncomfortable.
(3) Sources: TraderTech; Quid
(4) Avery Goodman has published two interesting articles on the subject referring to two cases invoking the possibility that the New York Stock COMEX is already out of stocks of gold for certain product categories and that the European Central Bank has intervened discreetly to avoid a problem of coverage in the same market. Sources : SeekingAlpha, 03/27/2009 ; SeekingAlpha, 04/02/2009
(5) The United Kingdom did the same in 1931 because of the economic crisis.
(6) The latter announced a sale of 400 tons of gold last year as part of its reorganization. The recent statements of the G20 summit in London on IMF gold sales are not clear at all. Are they the planned 400 tons or additional quantities? A mystery, and, anyway, it is the general assembly of the IMF which will decide. Source : Reuters, 04/02/2009
(7) For an inventory of world gold reserves: Wikipedia.
(8) Source: Watoday, 03/09/2009
(9) In recent years, frequent changes of the wording in the classification of the various components of the gold reserves of the United States have generated a series of questions about the exact quantity of the country’s gold reserves. Their use by the ESF (Exchange Stabilization Fund, whose interventions on the foreign exchange market in the summer of 2008, which LEAP/E2020 has already described, is suspected to have greatly reduced the country’s gold reserves contrary to official statistics. Source: MarketOracle, 01/31/2007
(10) We take this opportunity to remind subscribers that our analysis and recommendations are never intended for speculation purposes. Anyone who uses them for such purposes takes the risk any speculator should assume: losing his entire bet.
(11) And convert their current certificates, if any, into physical gold immediately.
Lundi 31 Août 2009
In the same category:
Traffic-Info LEAP/E2020 – Over one million single visitors in 6 months on leap2020.eu – 20/07/2009
GEAB N° 36 is available! Global systemic crisis in summer 2009: The cumulative impact of three « rogue waves » – 17/06/2009
LEAP/E2020 and Paris-Sorbonne university announce world premiere in the field of education in political anticipation and strategy – 09/06/2009
Open letter / London G20 Summit: Last chance before global geopolitical dislocation – 24/03/2009
GEAB Archives Offer (1) – Six archive issues of your choice for 50 euros – 22/01/2007
GEAB N°36 (Summer 2009 special edition) – Contents
– Published June 17, 2009 –
Global systemic crisis in summer 2009: The cumulative impact of three « rogue waves »
Because the origins of the crisis remain unaddressed, LEAP/E2020 estimates that the summer 2009 will be marked by the converging of three very destructive « rogue waves », illustrating the aggravation of the crisis and entailing major upheaval by September/October 2009… (page 2)
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The three « rogue waves » of summer 2009
The wave of massive unemployment: Three different dates of impact depending on the country: in America, Europe, Asia, the Middle East and Africa
Summer 2009 will be remembered as a tipping point as regards the impact of unemployment on the course of events of the global systemic crisis. Indeed, it will be the time when, instead of a consequence of the crisis, unemployment worldwide will turn into a factor aggravating it. Of course, this process will unwind neither at the same pace everywhere, nor with similar consequences… (page 7)
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The breaking wave of serial failures: companies, banks, housing, states, counties, towns
Apart from these very high profile events, the number of failures of large, medium and small companies and financial institutions is rapidly and steadily growing. The speed should increase even more after summer 2009. Meanwhile, in the United States, United Kingdom and Spain in particular, a second wave of real estate foreclosures is gestating as well as a wave of state, county and town debt defaults during summer 2009. Financial media’s “green shoots” are only hiding the “dead leaves” of the real economy… (page 15)
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The wave of the terminal crisis of US Treasuries, Dollars and Pounds, and the return of inflation
This first BRIC Summit (which it is not difficult to imagine how difficult it was to organize), is the first sign of dislocation of the current international system. The US probably did everything it could to prevent it from taking place; moreover they were refused the status of observers inside it, indicating clearly that what was to be discussed had nothing to do with diplomacy. The main topic was not a military and strategic issue, but a monetary and financial one: what to do with the hundreds of billions of US dollars (in the form of US Treasuries in particular) accumulated by these four countries in the past few years?… (page 22)
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Strategic recommendations to successfully navigate one deadly summer 2009
. Currencies / Gold
. Real estate
. Corporate shares / bonds
. Treasuries (page 27)
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The GlobalEurometre – Results & Analyses
The Europeans are still very pessimistic about US outlook; a large majority (81 percent) estimate that the United States will not be able to borrow the amounts of money needed to finance its deficits in 2009… (page 29)
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Excerpt from LEAP/E2020 GEAB N°34 – April 16, 2009
[Even though this article was first posted more than 5 months ago, its general thrust still holds true, even taking into account the recent move of gold past the $1,000 barrier.]
FOR MONTHS WE HAVE BEEN WITNESSING a worldwide paradoxical phenomenon which the press has widely reported. Because of the crisis investors fled most categories of assets (real estate, stock market, currencies, comodities) and many of them have invested a portion of their portfolios in gold, even causing shortages of coins or bars in many markets. Yet, and this is the paradox, the price of gold is not taking off from its average price of $900 per ounce.
As a first step, in the second half of 2008, the commonly accepted explanation was that margin calls due to massive losses in other asset classes had required significant sales of gold by their holders, offsetting growing demand and this was probably the case. But since early 2009, the paradox remains and this explanation is no longer be sufficient to explain the status of the price of the yellow metal.
LEAP/E2020, therefore, tried to understand the “why” of this paradox and draw conclusions for GEAB subscribers. Let’s keep in mind that the analysis of gold market is particularly complex because it blends several phenomena that obfuscate its actual operation:
Trade Wars and Protectionism are not Free Trade
Trade Wars and Protectionism are not Free Trade
Posted by Ron Paul (09-21-2009, 02:21 PM) filed under Foreign Policy
Two weeks ago, both the administration and the Fed announced with straight faces that the recession was over and the signs of economic recovery were clear. Then last week, the president made a stunning decision that signals the administration’s determination to repeat the mistakes of the Great Depression. Much like the Smoot-Hawley Tariffs that set off a global trade war and effectively doomed us to ten more years of economic misery, Obama’s decision to enact steep tariffs on Chinese imported tires could spark a trade war with the single most important trading partner we have. Not only does China manufacture a whole host of products that end up on American store shelves, they are also still buying our Treasury debt.
One has to wonder why this course of action is being undertaken if the administration really believes its own statements about economic recovery. Why are they still trying to fix something they have supposedly already fixed? The most troubling thing is the rhetoric about free trade given to justify this. The administration claims it is merely enforcing trade policies and that this is necessary for free trade. This sort of double speak demonstrates a gross misunderstanding of free trade, economics and world history. Yet these are the same people the country trusts to solve our problems. This sort of thing should remove all doubt about the credibility of the decision makers in Washington.
The truth is this will hurt American consumers by driving up prices of tires and cars. This will also complicate matters for our already crippled manufacturing and agricultural industries, if and when China retaliates against US made products. Whatever jobs might be saved in the tire and steel industries here as a result of this protectionist measure will likely be lost in other American industries. It is even doubtful that those jobs will be saved, as cheap tires can be obtained from other places like Mexico instead. It is difficult to see any real winners among all the losers where trade wars are concerned. If Unions think this is beneficial to them, they are being penny-wise and pound foolish.
Free trade with all and entangling alliances with none has always been the best policy in dealing with other countries on the world stage. This is the policy of friendship, freedom and non-interventionism and yet people wrongly attack this philosophy as isolationist. Nothing could be further from the truth. Isolationism is putting up protectionist trade barriers, starting trade wars imposing provocative sanctions and one day finding out we have no one left to buy our products. Isolationism is arming both sides of a conflict, only to discover that you’ve made two enemies instead of keeping two friends. Isolationism is trying to police the world but creating more resentment than gratitude. Isolationism is not understanding economics, or other cultures, but clumsily intervening anyway and creating major disasters out of minor problems.
The government should not be in the business of giving out favors to special interests or picking winners and losers in the market, yet this has been most of what has consumed politicians’ attention in Washington. It has reached a fevered pitch lately and it needs to end if we are ever to regain a functional and prosperous economy.
by Ron Paul
Originally posted on Sept 21, 2009
TWO WEEKS AGO, BOTH THE ADMINISTRATION and the Fed announced with straight faces that the recession was over and the signs of economic recovery were clear. Then last week, the president made a stunning decision that signals the administration’s determination to repeat the mistakes of the Great Depression.
Much like the Smoot-Hawley Tariffs that set off a global trade war and effectively doomed us to ten more years of economic misery, Obama’s decision to enact steep tariffs on Chinese imported tires could spark a trade war with the single most important trading partner we have. Not only does China manufacture a whole host of products that end up on American store shelves, they are also still buying our Treasury debt.
One has to wonder why this course of action is being undertaken if the administration really believes its own statements about economic recovery. Why are they still trying to fix something they have supposedly already fixed? The most troubling thing is the rhetoric about free trade given to justify this. The administration claims it is merely enforcing trade policies and that this is necessary for free trade. This sort of double speak demonstrates a gross misunderstanding of free trade, economics and world history. Yet these are the same people the country trusts to solve our problems. This sort of thing should remove all doubt about the credibility of the decision makers in Washington.
Gold is now underwritten by China
GOLD IS NOW UNDERWRITTEN BY CHINA
There is really only one government in the world that understands the virtues of gold – China. Not only is the country buying all the gold that they can without pushing the price up but they are also encouraging the Chinese people via the media to buy gold and silver.
Power corrupts
Let us first look at the US and ex Fed Chairman Greenspan to demonstrate how sound individuals become totally corrupt and dishonest once they become politicians. (Yes, the chairman of the Fed is political position which permits no integrity).
In 1966 Greenspan wrote an essay – “Gold and Economic Freedom”- in which he spells out the importance of gold. Here is a quote from the essay:
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
Then 21 years later Greenspan started his 19 year reign as chairman of the Fed. During that period he was instrumental in creating or exacerbating one financial crisis after the other. First the stockmarket and Nasdaq bubble, then the housing bubble, the credit bubble, the derivatives bubble and finally the banking and financial system bubble. Greenspan fuelled one bubble after the next by printing more money and lowering interest rates each time there was pressure in the economy.
Every time there was a hearing in front of congressmen or senators Greenspan spoke his gobbledygook that no one understood. But they all (except for Ron Paul) licked his boots and loved him since his money printing and unsound monetary policies created a false prosperity which all their voters believed was real.
Now, 43 years after his essay praising the virtues of gold, Greenspan just said in a speech that “Gold is the ultimate currency”. But during his 19 years as chairman of the Fed he acted like printed paper was the ultimate currency. This is why you can never, ever trust a politician. Political power totally corrupts human beings and whatever integrity, honesty or soundness they had before totally disappears as soon as they take on the political mantle. Bernanke who was once an honest academic is continuing in exactly the same tracks and is doing all he can to make the financial crisis bigger by printing trillions of dollars.
China understands gold
China has recently announced that they have increased their gold reserves by 76% to 1054 tons. But that is just the beginning. China is likely to be a major buyer of gold for the foreseeable future. Chinese government officials who normally keep a low profile have recently become more vociferous about the total mismanagement of the US economy and the US dollar. China is now openly criticising US monetary policy. The former vice-chairman of the Standing Committee, Mr Cheng Siwei, that China is dismayed by the Fed’s credit easing (as reported by Ambrose Evans-Pritchard in the Telegraph). Mr Cheng said: “If they keep printing money to buy bonds it will lead to inflation and after a year or two the dollar will fall hard”. He went on to say: ” We will diversify incremental reserves into Euros, Yen and other currencies. Gold is definitively an alternative but when we buy the price goes up. We have to do it carefully so as not to stimulate markets”.
So China buys other currencies, they use their reserves to buy real assets, especially in the ground, in Africa, South America and other continents and they buy gold. The Chinese government understands what is happening in the world and they have a long term plan to apply their reserves to areas which have real value and which will benefit their economy for years to come. Of course, they have the advantage of not having to worry about short term pressures such as being re-elected.
China is promoting gold and silver on state television. They are urging their people to buy gold and especially silver which they consider very cheap currently (we agree). They are also buying gold with their reserves and they are getting out of the dollar as quickly as they can.
The message can’t be more clear. China with its $2 trillion of reserves and with a population of 1.3 billion are major buyers of gold and silver. The effect of this is that the gold price is underwritten for some time to come.
Stockmarket in real money
Most world stockmarkets have been on a slippery slope against real money for the last 10 years. The chart below shows the Dow Jones against gold since the peak of this ratio in 1999. Since then the Dow has lost almost 80% against gold. Other world markets have had similar percentage falls against gold. We project that the Dow/Gold ratio will fall to 0.5 – 1 which entails another 90 – 95% fall of the Dow against gold.
Asia versus the USA
China is a major buyer of gold as we have just outlined. So is India where the tradition to buy gold makes the country the biggest jewellery buyer in the world by a big margin. In 2008 India bought circa 700 tons of gold or 25% of total supplies.
China and India together have a population of almost 2.5 billion people who buy gold and put their savings in gold and jewellery. In addition the Chinese government is a major buyer of gold. Against that, there are 300 million Americans and most of them don’t understand gold or the value of it. Add to that the US government which hasn’t got a clue about real money. Instead they believe that all their financial problems, all their deficits and all their bubbles can be solved by pressing a button and creating a few more $ trillions of paper that they call money.
So who should we back, the 2.5 billion responsible and thrifty Chinese and Indians or the irresponsible US government? Not a very difficult choice!
“Paper money eventually returns to its intrinsic value – ZERO”
Voltaire 1729
Egon von Greyerz
by Egon von Greyerz
Originally posted 16 September 2009
THERE IS REALLY ONLY ONE government in the world that understands the virtues of gold – China. Not only is the country buying all the gold that they can without pushing the price up but they are also encouraging the Chinese people via the media to buy gold and silver.
Let us first look at the US and ex Fed Chairman Greenspan to demonstrate how sound individuals become totally corrupt and dishonest once they become politicians. (Yes, the chairman of the Fed is a political position which permits no integrity).
In 1966 Greenspan wrote an essay – “Gold and Economic Freedom”- in which he spells out the importance of gold. Here is a quote from the essay:
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
Then 21 years later Greenspan started his 19 year reign as chairman of the Fed. During that period he was instrumental in creating or exacerbating one financial crisis after the other. First the stockmarket and Nasdaq bubble, then the housing bubble, the credit bubble, the derivatives bubble and finally the banking and financial system bubble. Greenspan fuelled one bubble after the next by printing more money and lowering interest rates each time there was pressure in the economy.
Two possibilities Bulls have yet to discount
Two Possibilities Bulls Have Yet to Discount
BY RICK ACKERMAN ON SEPTEMBER 14, 2009 3:35 AM GMT · 0 COMMENTS
We’ve always believed that the stock market’s ups and downs are driven not by anything so mundane as news events or the economy, but by the same mysterious cyclical forces that govern the physical universe. Nevertheless, two rapidly evolving news stories threaten to abruptly reverse Wall Street’s heedless bear rally, which recently entered its seventh month.
The first story concerns the impending collapse of the Obama presidency. Although he ran a very impressive campaign, Mr. Obama appears hell-bent on committing political suicide. The President is clearly obsessed with radically revamping the country’s health care system. But his relentless efforts to do so have turned many voters against him,
including some who supported his election bid. Most recently, a Republican congressman drew heat by calling Mr. Obama a liar during a health care address to the nation. However, it bears mentioning that there are some in his own party, most notably U.S. Sen. Dianne Feinstein, who have said the same thing, more or less, but more tactfully – i.e., that Mr. Obama’s numbers are not to be believed or trusted.
Russia No Ally
The other developing story is the looming showdown with Iran, which last week said it will not be persuaded to give up a uranium enrichment program that’s making the rest of the world extremely nervous. Mr. Obama had stated during the campaign that the U.S. and its allies would not stand by idly as Iran developed nuclear weapons. However, it is now clear that Russia, an absolutely crucial ally in any sanctions that might have been used against Iran, will not lift a finger if the mullahs continue to churn out weapons-grade uranium. Last week, Russia’s foreign minister asserted that Iran’s nuclear program posed no threat to the rest of the world, echoing thoughts believed only by America’s enemies or those so completely blinded by their hatred of Israel that they perceive Ahmadinejad and the mullahs as the good guys.
Concerning Mr. Obama political future, if failure seemed merely imaginable a few months ago, it looks likely now. He has staked his political credibility on a health care plan that looks nearly certain to go down in flames. Even worse, he keeps trying to ram this legislative sausage down the throats of tens of millions of Americans who have grown increasingly skeptical with each new public relations push. If successful politics means knowing when to hold ‘em and when to fold ‘em, Mr. Obama has pushed all his chips into the pot with nothing but a low pair. When his health care sausage turns putrid, he’ll have no political capital left to push through the most ambitious and costly political agenda in the nation’s history.
A Rudderless U.S.
At best, the U.S. would then be without a rudder; at worst, in a rapidly deteriorating economy, there could be political and social chaos. Even then we could probably find a way to limp to the next election. But the situation involving Iran will not long abide Mr. Obama’s stall tactics. The only credible threat the President can use against Iran in the meantime is the assumed willingness of Israel to launch a pre-emptive strike. There was a time not long ago when no one would have thought Israel capable of attacking Iran without direct help from the U.S. Now the U.S. is saying it may not be able to hold Israel back.
This seems like more than a mere shift in rhetoric. In any event, if there is a blow-up with Iran, or if Obama is about to become a lame-duck president in the midst of severe economic decline, it bodes ill for Wall Street. We doubt that many investors are ready for the change, which could come without warning.
by Rick Ackerman
Posted originally Sept 14, 2009
WE’VE ALWAYS BELIEVED THAT THE stock market’s ups and downs are driven not by anything so mundane as news events or the economy, but by the same mysterious cyclical forces that govern the physical universe. Nevertheless, two rapidly evolving news stories threaten to abruptly reverse Wall Street’s heedless bear rally, which recently entered its seventh month.
The first story concerns the impending collapse of the Obama presidency. Although he ran a very impressive campaign, Mr. Obama appears hell-bent on committing political suicide. The President is clearly obsessed with radically revamping the country’s health care system. But his relentless efforts to do so have turned many voters against him, including some who supported his election bid.
Most recently, a Republican congressman drew heat by calling Mr. Obama a liar during a health care address to the nation. However, it bears mentioning that there are some in his own party, most notably U.S. Sen. Dianne Feinstein, who have said the same thing, more or less, but more tactfully – i.e., that Mr. Obama’s numbers are not to be believed or trusted.
Russia No Ally
The other developing story is the looming showdown with Iran, which last week said it will not be persuaded to give up a uranium enrichment program that’s making the rest of the world extremely nervous.
Greenback Gases, Gold and the Coming Shift
Greenback Gases, Gold and the Coming Shift
Bankers in charge of our economies makes as much sense as candy makers being in charge of our diets
At the end of a good movie, oftentimes apparently unrelated events are woven together and it becomes clear how and why things happened. If, today, it feels as if we are at the end of an era, it is because we are; and, just like the movies, only at the end do certain events and the reasons for them become clear.
The removal of gold from the global monetary system was not by accident. It allowed governments to do what they could not otherwise do. Gold cannot be printed. Paper money can. Therein lays the cause and consequence of what is happening today.
BEFORE THE WELFARE STATE WAS THE WARFARE STATE
The introduction of paper money allowed war to be conducted on credit with credit-based paper money. In return for allowing bankers to issue England’s money in the form of paper script, bankers allowed King William, England’s king, to wage war on credit, giving England an advantage over other nations which England parlayed into world dominion.
Good ideas spread and the idea of waging war on credit also spread. Prior to World War I, both France and Germany went off the gold standard in order to go to war backed by limitless amounts of paper money, instead of being constrained by limited amounts of gold.
The resultant carnage would not have been as extreme had France and Germany been forced to pay good money, instead of bad, for their arms. But even after WWI and WWII, in the wake of the greatest suffering humanity ever endured, the desire to wage war on credit continued.
When WWII ended, the US emerged as a world power. Unlike Europe and Asia on whose continents the conflict was waged, the US emerged relatively unscathed and realizing it was now the world’s only superpower, the US decided to insure its new found status by maintaining and enlarging its already formidable military machine.
It did so by spending all the gold it had accumulated; up to that time, the largest amount of gold ever owned by any nation in history. In 25 years, from 1946 to 1971, the US overspent its entire gold reserves of 21,775 tons in the pursuit of world dominion.
During those 25 years, the US had a positive balance of trade with the rest of the world so its gold reserves should have substantially increased, not disappeared. Prior to 1971, gold was used by nations to settle trade imbalances but the US imbalance was not caused by trade, it was caused by the costs of maintaining a worldwide military presence and the overseas expansion of US corporations.
GOLD—THE LAST STRAW
The complete removal of gold from the world monetary system finally occurred in 1971 when the US refused to pay other nations in gold what it then owed. The US refused to do so because the US no longer had enough gold to redeem the vast amount of US dollars it had printed and spent (the US did keep what gold it had).
To this day, what was set in motion in 1971 has yet to be fully grasped and understood. Lack of understanding, however, will not prevent its consequences and the US and, indeed, the world, are now about to experience what was then set in motion, an economic meltdown of epic proportions.
When the US removed gold from the world’s monetary system, it removed the one critical element upon which the entire world economy was based. Because the removal had been gradual, the essential role gold performed had been forgotten—but forgetting gold’s role did not mean it had none as many believed, e.g. Keynes, Friedman, Krugman, Volcker, Bernanke, etc.
A description of the critical role of gold and the gold standard was written by Professor Antal Fekete in his essay The Gold Standard Strikes Back……With A 36-Year Lag
…Gold has the same role to play in the monetary system as the fly-wheel regulator does in an engine, the brake does in a train, and circuit-breakers do in an electrical network. Gold is the regulator of the quantity of debt in the economy that can be safely created and carried. It is also safeguarding quality by rejecting toxic debt before it can start metastasis. Debt-based currency utterly lacks safeguards limiting quantity and vouching for quality of debt. Debt-based currency is an invitation to disaster, that of the toppling of the Tower of Babel. Its effects are far from being instantaneous. There is a threshold and there is a critical mass involved. We have long since crossed that threshold and passed that critical mass. By no rational calculus can the outstanding debt be expected to be repaid without inflationary or deflationary adventures, even if further increase were stopped dead in its track. The discussion of the present financial crisis by academia and media avoids all reference to this fact. Under the gold standard a fast-breeder of debt was unthinkable, and debt was retired in an orderly manner.
Using Professor Fekete’s metaphors, with the regulator of debt now disabled, the brakes discarded, and the circuit breakers removed, it is now understandable, as the last and final act of our financial drama plays out, why we now find ourselves buried beneath unbearable and unpayable quantities of toxic debt.
Removing gold from the international monetary system in 1971 allowed the US to then begin issuing US dollars in increasingly excessive amounts as the US was no longer constrained by gold to maintain any semblance of fiscal restraint.
While consequences may be delayed they cannot be avoided. It’s been 38 years since the US removed gold from the international monetary system. As a consequence, the system is now beginning to collapse. Someday, it will collapse completely.
FEAR-BASED OPTIMISM
Increasingly, the sound-bites of politicians, economists and the media are becoming more positive, indicating that an economic recovery is underway. It is not. If it were, governments would be able to slow or stop the spending they are desperately hoping will rescue their respective economies. None are so doing.
But despite trillions of dollars, the global economy is still contracting. Signs of improvement are due only to the massive amounts of government aid being spent in the hopes of reviving private demand, demand irrevocably crippled by now unpayable levels of debt.
GREENBACK GASES AND THE MELTDOWN
OF THE WORLD FINANCIAL SYSTEM
As China in particular has now observed, the US is increasingly exhibiting signs of monetary incontinence. The US has been unable to control its spending for decades, it is clearly incapable of balancing its budget, and fiscal restraint in the US has gone the way of the Constitution and the Geneva Accords.
China is especially distressed at the apparent inability of the US to control itself. China is holding the vast majority of US debt and, as a self-declared socialist state, finds itself in the incongruous position of having underwritten US wars in Iraq and in Afghanistan along with tax cuts George Bush dispensed to the wealthy.
China and the world has, in effect, been held hostage by the US as a result of the US dollar still being the world reserve currency even after the US defaulted on its gold obligations in 1971.
The world’s acceptance of a fiat currency as a world reserve currency has now destabilized the global economy beyond its ability to recover. For decades, the US has been able to buy goods and services and to repay its extensive borrowings with increasingly worthless paper script. Those days are numbered.
The increasingly fragile house of cards constructed of credit and paper money is now in its final stages of collapse. The global economy is lurching from one bubble to another and we are approaching the end of bankers’ and governments’ ability to pass off their paper money as a store of value. Gold is a store of value. Paper money is not.
GOLD’S ASCENT
In the last two weeks, gold moved strongly upwards. It did so as the US dollar fell. Perhaps the two events are linked, perhaps not. But over the last decade, the price of gold has quadrupled in terms of US dollars, rising as the US dollar has fallen.
No longer having to play the part of the monkey dancing to the tune of government organ grinders, Alan Greenspan recently remarked on gold’s sudden ascent:
Sept. 9 (Bloomberg) — Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.
The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said.
A recent study showed why Greenspan and other economists did not predict the greatest economic collapse in recent history. As befits the profession, the reason for economists’ poor judgment was money.
To succeed in the field of economics, it is virtually necessary that economists support the policies of the Fed. The following is from “How The Federal Reserve Bought The Economics Profession”, http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html :
One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.
The Fed failed to see the housing bubble as it happened, insisting that the rise in housing prices was normal. In 2004, after “flipping” had become a term cops and janitors were using to describe the way to get rich in real estate, then-Federal Reserve Chairman Alan Greenspan said that “a national severe price distortion [is] most unlikely.” A year later, current Chairman Ben Bernanke said that the boom “largely reflect strong economic fundamentals.”
The Fed also failed to sufficiently regulate major financial institutions, with Greenspan — and the dominant economists — believing that the banks would regulate themselves in their own self-interest.
It is clear the lure of money is as seductive to economists as it is to those they study. Money, while a very powerful incentive, rarely improves the quality of truth. It is erroneous to believe, however, that all economists who agree with the Fed’s role and mission have been bought. Others may be sincerely mistaken in their beliefs.
One of the primary reasons I attend Professor Fekete’s seminars is the opportunity to hear academically rigorous discourse untainted by the all-too-common orthodoxy that passes today for economics. As I have previously written, the study of modern economics is like the study of religion in a time of idolatry.
It is the Fed and its stranglehold on economic debate that has confined discussion within the bounds that do not threaten the Fed or its interests. This is tantamount to discussing religion during the Middle Ages without discussing the power and ambition of the Church. Such discussions leave much to be desired.
November 2-5, Professor Fekete will be speaking in Australia on “The World Financial Crisis and the Vanishing Gold Basis”. For those wishing to know more about the professor, the wikipedia reference, http://en.wikipedia.org/wiki/Antal_E._Fekete, is invaluable. I also discuss Professor Fekete on my YouTube channel, http://www.youtube.com/user/SchoonWorks. For information about the up-coming event in Australia, see http://www.professorfekete.com/gsul.asp . I, and others, will be speaking as well.
THE LAST WALTZ
The current economic crisis is now moving quickly towards resolution. How and when it will end is as uncertain as that it will. Systemic death is never easy and the banker’s paper money, like the fatal virus it is, is now everywhere. Its end will not be easy.
Severe climate change, food shortages, and the possibility of a pandemic are taking their place beside the ever-present possibility of military conflict. The collapse of the financial system will not be the only crisis that confronts humanity in the near future.
We are moving from one era into the next. Change is never easy and significant change is significantly more difficult. The bankers’ credit was responsible for much of what happened in the last three hundred years. It is impossible to imagine what life will be like in its absence.
Only one thing is certain—it will be better.
Buy gold, buy silver, have faith.
by Darryl Robert Schoon
Posted originally 14 September 2009
BANKERS IN CHARGE OF OUR ECONOMIES makes as much sense as candy makers being in charge of our diets. At the end of a good movie, oftentimes apparently unrelated events are woven together and it becomes clear how and why things happened. If, today, it feels as if we are at the end of an era, it is because we are; and, just like the movies, only at the end do certain events and the reasons for them become clear.
The removal of gold from the global monetary system was not by accident. It allowed governments to do what they could not otherwise do. Gold cannot be printed. Paper money can. Therein lays the cause and consequence of what is happening today.
Before the welfare state was the warfare state
The introduction of paper money allowed war to be conducted on credit with credit-based paper money. In return for allowing bankers to issue England’s money in the form of paper script, bankers allowed King William, England’s king, to wage war on credit, giving England an advantage over other nations which England parlayed into world dominion.
Good ideas spread and the idea of waging war on credit also spread. Prior to World War I, both France and Germany went off the gold standard in order to go to war backed by limitless amounts of paper money, instead of being constrained by limited amounts of gold.
Gold Bug’s Dream?
GOLD BUG’S DREAM?
China’s immense, and growing, impact on the global gold market
There seems little doubt that China’s economic strength can lead to it dominating gold price movement for the foreseeable future.
Author: Lawrence Williams
Posted: Friday , 11 Sep 2009
LONDON –
There is little doubt that China nowadays has the financial muscle to effectively control the global gold price. The mere sniff of a report that it is taking gold into its official reserves to counteract dollar decline is sufficient to, at the least, stabilise the gold price – and there seems to be little doubt that it is so doing, but at the moment in a manner that is not designed to de-stabilise the dollar or, on the other hand, not to contribute to a quantum leap in the yellow metal’s valuation – yet.
But – should China wish to de-stabilise the dollar by announcing big gold purchases into its reserves to replace a good proportion of its trillions of dollars, there is also little doubt that it could do so. It is an economic weapon which perhaps has more power than a nuclear one if it wished to bring America, and the West, to its collective economic knees through currency war. But again that is not seen as an option – or at least not until the country’s domestic market is big enough to soak up all the manufactured goods China can still sell to the West.
Thus China is still very dependent on export markets, so revaluation of the renminbi is not seen as helpful and dollar decline has to be worrying. So the country has to move cautiously to retain some kind of global economic equilibrium.
But noticeably, China is already exerting its financial dominance. It has said its mostly state-owned financial organisations will have the right to default on some of the more dubious commodity and financial related derivative trades that they may have entered into. This has only raised a muted response from those financial institutions which could be affected because it is China’s financial muscle which is beginning to call the tune in world financial circles – not the mighty U.S.A. any longer. But it could lead to more grief in western financial circles and the already stressed banking system.
Its state-owned enterprises are on a massive buying spree of western assets, both as an investment and, in the case of the mining sector, to tie down future strategic resource supplies. In perhaps a conscious effort to allay suspicions of Chinese motives in many countries, much of this is via significant minority stakes in western companies tied to long term supply deals.
But back to gold. We reported here that a top Chinese official virtually admitted China was buying gold, but in a way which was designed to maintain at least a reasonable degree of stability in the markets and not rock the gold boat. If this is true, and there is little reason why it should not be so then this will effectively mean there is little or no serious downside risk in buying gold. But China can also control the upside, as it may not wish to precipitate a big dollar collapse which would be the likely outcome of a big gold price rise.
We reported also, in an article which virtually went viral on the internet and has been picked up by many other commentators (China pushes silver and gold investment to the masses), that Chinese state organisations are selling, like soap powder, the advice to buy gold and silver to the general populace – which already has a gold purchasing psyche. As a result China is likely to surpass India as the world’s biggest precious metals purchaser this year or next. It also lends support to the country’s domestic gold mining industry – China is currently the world’s largest gold producer and is a country where output is continuing to rise. Chinese domestic gold purchases rose 14% year on year in the first half of the year to 446.6 tonnes and industry analysts expect double digit growth to continue in the curent half year, even with gold at over $1,000.
This too provides a massive underpinning of the gold price at, at least, around current levels. It is apparent that buying has been coming in every time gold dips and the suspicion is that this is by the Chinese, but it is well enough hidden that it is difficult, if not impossible, to clearly define the source.
At the moment gold seems to be holding up well close to the $1,000 level despite the huge degree of profit taking which comes in at psychological levels like this. The suspicion is that China may wish to see $1,000 gold, or thereabouts, as a new floor, but there is unlikely to be any official recognition of this and we will have to wait and see whether the supposed Chinese underpinning of the market is reality – or yet another gold bug’s dream.
China’s immense, and growing, impact on the global gold market
by Lawrence Williams
Originally posted Friday 11 Sep 2009
THERE IS LITTLE DOUBT THAT CHINA nowadays has the financial muscle to effectively control the global gold price. The mere sniff of a report that it is taking gold into its official reserves to counteract dollar decline is sufficient to, at the least, stabilise the gold price – and there seems to be little doubt that it is so doing, but at the moment in a manner that is not designed to de-stabilise the dollar or, on the other hand, not to contribute to a quantum leap in the yellow metal’s valuation – yet.
Should China wish to de-stabilise the dollar by announcing big gold purchases into its reserves to replace a good proportion of its trillions of dollars, there is also little doubt that it could do so. It is an economic weapon which perhaps has more power than a nuclear one if it wished to bring America, and the West, to its collective economic knees through currency war. But again that is not seen as an option – or at least not until the country’s domestic market is big enough to soak up all the manufactured goods China can still sell to the West.
Thus China is still very dependent on export markets, so revaluation of the renminbi is not seen as helpful and dollar decline has to be worrying. So the country has to move cautiously to retain some kind of global economic equilibrium.
Money Talks, Gold Shouts
Money Talks, Gold Shouts
By John Browne
Sep 10 2009 2:39PM
In the second quarter of 2008, when it became clear that bankrupted financial institutions would be bailed out by the federal government, gold did a funny thing. In the wake of a financial crisis of that magnitude, one normally would have expected asset prices, including gold, to plummet. Most observers expected the metal to dip from the $800 level down to $600, or below. Instead, gold held up well during the teeth of the crisis, and has recently increased to just over $1,000.
The biggest change in the gold market has been the unwillingness of certain governments to sell their gold. Some powerful states, such as China, are beginning to hoard gold and to become net sellers of U.S. Treasury securities. In addition, private investors are buying so many gold coins that fabrication plants are months behind on physical deliveries. In short, individuals, institutions and governments are losing faith in paper currencies, particularly the U.S. dollar. Despite the opportunity cost associated with trading interest-bearing government securities for pay-to-store bullion, they are buying gold.
Throughout much of recorded history, gold has proved to be the ultimate form of money. Due to its inherent scarcity, it has been the bane of governments who wished to spend more that they had or could borrow. Certain governments even diluted the gold content of their coins in order to dupe buyers.
The United States entered into federation with a sole reliance on gold as its legal tender. It was not until the Civil War that the U.S. government issues its first paper currency. However, this was not fiat money. All currency issued was backed by gold, and later by silver. But over the years, the backing was withdrawn as government looked to expand the money supply. By 1933, every $20 note was backed by only one ounce of gold at the Federal Reserve. That year, the Fed refused President Roosevelt’s request to further dilute the gold backing of dollars. In response, Roosevelt confiscated gold from all Americans. The Fed acquiesced and printed more paper dollars.
Not content, Roosevelt devalued the U.S. dollar by 75 percent against gold the next year, unleashing a great inflation. Every American who had surrendered gold in 1933 lost 75 percent. Those who owned no gold proclaimed Roosevelt a hero.
In 1971, President Nixon broke the U.S. dollar’s last link to gold, prompting the second great inflationary wave. Inflation became so bad that gold rose from $35 to $850 an ounce by 1981.
In more recent history, President Bush II and former Fed Chairman Alan Greenspan elevated the process monetary debasement into an art form, creating the largest asset boom in history and sowing the seeds of collapse in the financial system. They left the U.S. dollar so debased that the 1980 gold price of $850 is equivalent to $2,200 in today’s shattered currency!
It follows that, at $1,000 an ounce, gold stands at less than half its historic peak. In a recession, when cash is scarce and price levels are falling, it is amazing that gold stands as high as it does. One can only guess where the price will go when the trillions of dollars of electronic government bailout dollars start vigorously circulating.
If we were to return to a gold standard today, each ounce of gold held at the Fed would have to back a breathtaking $39,000 dollar bills. It is a far (1,950 times) cry from the $20 for each ounce of gold of just seventy-six years ago! Is it any wonder that the euro, the currency of the nascent European Union, stands just a shade below its all time high of $1.45?
These signs of chronic monetary decay have not been lost on individual investors or governments holding U.S. dollar surpluses. The key player in this respect is China, the largest holder of U.S. Treasuries – and now the world’s largest gold producer.
Recently, my friend Ambrose Evans-Pritchard reported in the London Telegraph on his interview with Mr. Cheng Siwei, Vice Chairman of China’s Communist Party’s Standing Committee. According to Evans-Pritchard, Mr. Siwei said, “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not [to] stimulate the market.”
This single statement should send shivers down the necks of all who believe in the paper currencies of debtor countries. Similarly, it should warm the heart of all those who already own gold. China has indeed resisted upsetting the international gold market with massive purchases. Quietly, she has merely ‘diverted’ part of her own production into her treasury vaults!
Also, China has sought to protect its citizens from the debasement of paper currencies by lifting restrictions on its citizens’ ownership of precious metals. They can be expected to be large buyers of gold and silver (‘poor man’s gold,’ at only $15 an ounce).
In order to protect themselves from the ravages of governments who believe in massive deficit-financed entitlements, Western citizens should think carefully about whether to trust paper currency over real money. Its an easy decision to reach.
by John Browne
Originally posted Sep 10 2009
http://www.europac.net
IN THE SECOND QUARTER OF 2008, when it became clear that bankrupted financial institutions would be bailed out by the federal government, gold did a funny thing. In the wake of a financial crisis of that magnitude, one normally would have expected asset prices, including gold, to plummet. Most observers expected the metal to dip from the $800 level down to $600, or below. Instead, gold held up well during the teeth of the crisis, and has recently increased to just over $1,000.
The biggest change in the gold market has been the unwillingness of certain governments to sell their gold. Some powerful states, such as China, are beginning to hoard gold and to become net sellers of U.S. Treasury securities. In addition, private investors are buying so many gold coins that fabrication plants are months behind on physical deliveries. In short, individuals, institutions and governments are losing faith in paper currencies, particularly the U.S. dollar. Despite the opportunity cost associated with trading interest-bearing government securities for pay-to-store bullion, they are buying gold.
The Federal Reserve is Immoral
The Federal Reserve is Immoral
Posted 13 Aug 2009
During the first few days of each month comes a task that is increasingly approached with dread around here and, unfortunately, that condition is likely to persist for some time.
Shortly after banks make their month-end update to various short-term savings accounts that we hold, these balances are queried, only to find that, almost without exception, interest credited is less than it was in prior months and far less than it was eight or ten months ago.
Why?
Largely as a result of the Federal Reserve keeping short-term interest rates pegged to zero.
You see, aside from some Certificates of Deposit that were locked up late last year which, today, provide the strangest of feelings during a very strange period in history (i.e., feeling lucky to get about 2.5 percent interest for a one-year CD), it’s nearly impossible to get more than a two percent return these days on any kind of an FDIC-insured account and, more likely than not, you’ll get less than one percent.
Speaking as one who knows from experience, there’s a big difference between one or two percent and five or six percent, what used to be the “minimum” rate of return for a super-safe savings account backed by the government.
More importantly, if this is causing us angst every month, I can only imagine what it’s doing to the budgets of other savers whose finances are far less comfortable than ours.
Put simply, the freakishly low short-term interest rates that the Federal Reserve is jamming down everyone’s throat are immoral and, maybe, just maybe, a lot more people are beginning to see this, along with other practices of our central bank that are just not right.
Maybe, just maybe, something will finally be done about reforming (or, as suggested by Rep. Ron Paul, abolishing) this banking cartel – hopefully before the Fed celebrates its 100-year anniversary in a few years.
Just to be clear on the terminology here, Merriam-Webster offers the following:
immoral
adjective
not moral; broadly : conflicting with generally or traditionally held moral principles
moral
adjective
1a: of or relating to principles of right and wrong in behavior
Setting aside questions about the dark veil of secrecy surrounding who and how much the central bank has been helping with their problem loans, problem assets, and problems staying solvent, there are at least three ways that the organization David Wessel calls “the fourth branch of government” is acting badly these days – by punishing savers, by enriching the banks, and by fleecing the poor.
Of course, none of this is really new – it all just seems a whole lot more relevant today than ever before given the current state of affairs in this country and around the world.
Punish the Savers
As noted above, it used to be that you could always count on getting five or six percent interest in a “no-risk” savings account backed by the FDIC. In fact, going all the way back to 1955 (when the interest rate data at the Fed’s website stops), the average short-term lending rate is right between those two marks – 5.66 percent.
Ever since I was a teenager, I can remember thinking, “If I could somehow amass a million dollars, that would surely generate enough money to live on for the rest of my life”.
Well, welcome to the 21st century, where the asset bubbles keep a-poppin’ and the interest rates keep a-droppin’.
Over most of the last hundred years, aside from the dollar losing more than 90 percent of its purchasing power (versus a loss of zero during the prior ten decades), there hasn’t been too much to complain about in the Fed’s management of money and interest rates but, since asset bubbles and the attendant “mopping up” process have become a way of life, the rate of return on savings has been abysmal.
With the exception of the “baby-steps” rate raising campaign a few years ago, the Fed funds rate has been below two percent since 2002 – after the decade’s first asset bubble met its pin.
Now, if there was a good reason for keeping rates so low, this might all make some sense to senior citizens who have looked disappointingly at their bank statements for years, but given the fact that the low-rates in 2002-2004 led to the housing and credit bubbles forming and then bursting a few years later, and here we are with even lower rates today, all of this should make anyone with half a brain realize that there is something seriously wrong with the system as it currently operates.
In a nation in dire need of internal savings, the fact that savers are being punished as never before is just plain wrong – immoral – and the idea that we live in an era of “low inflation” is just salt rubbed in the wounds of senior citizens who, year after year, watch prices for health care and energy rise by some multiple of the one or two percent they can earn on their savings.
Twenty years from now (perhaps sooner), they’ll look back on today’s monetary policy and say to themselves, “What were they thinking, punishing the savers like that when the U.S. desperately needed savings?”
Enrich the Banks
As if it weren’t bad enough that savers are cheated every time the Federal Reserve lowers interest rates, the worst part is that banks are the beneficiaries.
You see, in addition to buying up many of the bad assets previously held on bank’s books over the last year or so – the result of waves of imprudent bank lending – when the Fed lowers interest rates it helps to make the business of banking much more profitable and, conventional wisdom has it that our financed-based economy will then begin to recover.
And when the banks can borrow at these super-low rates, that means that savers can’t earn much more in interest.
Banks come first and savers are far down on the list.
Why does the system work this way?
Well, most people haven’t got a clue what the Federal Reserve is or what it does (though, understandably, there is growing interest in this topic, ever since the wheels fell off of the global economy last fall), but the crucial bit of information that the now-slightly-more-curious public should learn quickly is that the central bank was not set up to help the people or the government, but, rather, to help the big banks.
In fact, according to G. Edward Griffin, who happened to write a whole book on the subject, the very reason that the Federal Reserve was formed back in 1913 was so that big banks could wrest back control of the banking system from the many small, fledgling, independent banks all around the country that were taking away their business.
Look around you today. You might see lots of little banks failing, but only a few large ones ever go under and none of the country’s biggest banks ever fail.
The Fed was created by the big banks, for the big banks, and its unwritten “mission statement” is to do whatever it takes to ensure the survival and profitability of those big banks, getting the government to step in with public money when necessary for “the greater good”, effectively socializing the losses while keeping the gains in private hands.
That’s why what we have today – a wholly unsustainable system of ever-expanding credit and debt dominated by a handful of “too big to fail” banks – keeps getting propped up.
The masses are led to believe that credit is the “lifeblood of the economy” when, in fact, credit is the lifeblood of a banking system that has, over time, sucked the life out of the economy.
It’s hard to imagine anything that is more immoral than the Federal Reserve’s role in this process, now almost a hundred years in the making.
Fleece the Poor
In arriving at the third and final way that the Federal Reserve is immoral, clearly, that last thought in the previous section was premature.
In fact, there is one very good example of something being done today by the central bank that is even more immoral than a nearly century long wealth transfer from the public sector to the private banking system – the ongoing assistance being provided by the Fed in helping the banking system reach out and find new customers so that every possible dollar can be extracted from them.
You see, the country’s big banks (along with the central bank that serves their interests) would much prefer that poor people all across the country not go to a place like you see to the right and, for a small fee, convert their paycheck into cash and forever live within their means.
Bankers would much rather see the nation’s poor open up checking accounts and then venture further into the world of modern day banking, quickly learning to spend well beyond their means.
Left unsaid in the Fed’s many efforts to reach out to the “unbanked” is that checking accounts are a sort of “gateway drug” for many people – a road to debt serfdom where, in addition to paying interest on money borrowed to buy stuff that they don’t need, these “newly banked” poor will also be fleeced by a bewildering array of fees and charges in a system that is set up to systematically suck as much money out of as many people as possible.
Over the years, the Federal Reserve has made great efforts to attract new customers for banks, in some cases providing cartoon characters to make the whole idea of debt serfdom seem like a friendly sort of condition, much in the same way that Joe Camel once attracted new smokers.
Under the guise of “education” and with “consumer protection” as its goal, the Federal Reserve might seem to be “looking out for the little guy”, but they’re not. They’ve had the power to do this for many years now but, for obvious reasons, have exercised their “power to protect” the consumer only sparingly, allowing millions of subprime borrowers to give the housing bubble one last giant hurrah before it finally burst.
Fortunately, it appears that the Obama administration would like to see the American consumers’ interests watched over by some other group and for good reason. A report earlier in the week in the Financial Times detailed how big banks in the U.S. plan to extract almost $40 billion in overdraft fees from American consumers whose balance sheets haven’t been bolstered by government bailouts.
It seems that, with the collapse of the mortgage finance bubble, big banks are now reverting to a profit model that is driven more by extracting fees from their customers wherever possible and overdraft fees from the cash-strapped are “the mother lode”.
A full 90 percent of overdraft fees come from just 10 percent of all checking accounts and most of this 10 percent have low credit scores and/or are recent entrants to the world of mainstream banking.
Not surprisingly, the highest overdraft fees come from the biggest banks – Citigroup, Bank of America, JP Morgan Chase, Wells Fargo, SunTrust, and Citizens Bank.
For banks, overdraft fees are a low risk, high profit part of their business, not something that is usually mentioned as part of the Fed’s outreach programs. It is a sophisticated, large scale sort of “payday loan” system that many Americans fall prey to and, as long as customers have their payroll checks automatically deposited, the bank will always have first crack at the money and people will continue to spend more than they make because, when you get down to the very basics here, most people aren’t very good at math.
But, banks are.
Maybe Ron Paul is right – the Fed should be abolished.
Then markets could set interest rates, banks would have to fend for themselves, and there would be one less group helping to extract what little money the poor have left.
Tim Iacono
Iacono Research.com
Read all the other articles written by Tim Iacono
by Tim Iacono
Iacono Research.com
Originally posted 13 Aug 2009
DURING THE FIRST FEW DAYS OF EACH MONTH comes a task that is increasingly approached with dread around here and, unfortunately, that condition is likely to persist for some time.
Shortly after banks make their month-end update to various short-term savings accounts that we hold, these balances are queried, only to find that, almost without exception, interest credited is less than it was in prior months and far less than it was eight or ten months ago.
Why? Largely as a result of the Federal Reserve keeping short-term interest rates pegged to zero. You see, aside from some Certificates of Deposit that were locked up late last year which, today, provide the strangest of feelings during a very strange period in history (i.e., feeling lucky to get about 2.5 percent interest for a one-year CD), it’s nearly impossible to get more than a two percent return these days on any kind of an FDIC-insured account and, more likely than not, you’ll get less than one percent.
Speaking as one who knows from experience, there’s a big difference between one or two percent and five or six percent, what used to be the “minimum” rate of return for a super-safe savings account backed by the government. More importantly, if this is causing us angst every month, I can only imagine what it’s doing to the budgets of other savers whose finances are far less comfortable than ours.
Quantum Pranx 