1 Jul 2011

Helicopter Money

A great deal can be learned about the government’s response to this crisis, as well as the mistaken policies that necessitated it, by analysing a speech delivered by Ben Bernanke on 21 November 2002. At that time, Bernanke was a Governor of the Federal Reserve. The speech, to the National Economists Club, was titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here”. In light of subsequent events, Bernanke’s comments expose his misunderstanding of the state of the US economy, and, in particular, the forces driving it. This is important because the policies he advocated in that speech are the ones that have been employed in this crisis. Those policies were conceived as a solution to an economic situation Bernanke did not understand. Consequently, they will not cure the imbalances that caused the New Depression. In the short run, their effect will be palliative at best. Over the long run, unless combined with new policies to restructure the US economy, they will only exacerbate past mistakes and permanently undermine American prosperity.
Bernanke gave this speech soon after the collapse of the NASDAQ bubble, when deflation threatened the US for the first time since the 1930s. His ideas about how to prevent deflation are important if we are to understand his ideas about curing it. He began by stating, “I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small …” He went on: “A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape.”
At the end of 2002, the US banking sector was not healthy, and it was certainly not well regulated. Within five years of those remarks it began to collapse, pulling the global economy down with it. Nor were household balance sheets in “good shape”. American households had never been more indebted. As for corporate balance sheets, who can say what condition they were in, given the long series of accounting scandals involving Enron, WorldCom, Fannie Mae, Freddie Mac, and many others?
The Fed governor went on to discuss the causes of deflation and its relationship to aggregate demand:
“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand—a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending—namely, recession, rising unemployment, and financial stress.”
Next, Bernanke suggested it would be far better to prevent deflation rather than to be forced to cure it once it had taken hold, as it had in Japan:
“The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation.”
According to Bernanke, then, deflation is caused by a collapse in aggregate demand and can be prevented by using monetary and fiscal policy “to support aggregate spending”. But he does not address the question of why aggregate demand would collapse in the first place. Nor does he explain why the economy cannot be righted by market forces but instead must rely on government intervention to hold off deflation.
These questions are too important to overlook. Deflation took hold in the US in the 1930s and in Japan in the 1990s because policymakers in those countries failed to prevent credit bubbles from forming there in the 1920s and the 1980s. Credit bubbles cause aggregate demand for goods and services to expand far beyond the point that can be sustained by the underlying income of society. That is why aggregated demand collapses when the credit bubble pops. Therefore, it must be understood that deflation is the consequence of misguided government policies that allow the formation of credit bubbles. Bad policies were responsible for the NASDAQ bubble. Its collapse produced the deflationary pressures Bernanke was discussing in 2002. Bad policies are also responsible for the deflationary threat now confronting the US following the rise and fall of the housing credit bubble.
Bernanke ended by describing what the Fed could do to cure deflation in the “unlikely” event that prevention did not work and the overnight federal funds rate fell to zero: The following excerpts convey most of his recommendation on the subject.
“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. …
Of, course the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. …
Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association). …
Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasure bond prices and yields at other than the shortest maturities. …
If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly. However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, banks loans, and mortgages) deemed eligible as collateral. …
Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.”
While most of those measures were not required in 2002-03, they have been put into effect since 2008. Their purpose is to prevent a contraction of aggregate demand after a credit bubble has burst. This policy is inherently flawed because it fails to recognise that the bubble (and the aggregate demand it created) could not be kept inflated indefinitely by the private sector because the private sector did not have sufficient income to sustain it. It is no cure to use aggressive fiscal and monetary policy to inflate a new credit bubble to replace the one that just burst. The second bubble will be no more sustainable than the first.
The policies employed to prevent deflation and support aggregate demand after the NASDAQ bubble burst were only a mild version of those laid out in Bernanke’s 2002 speech. Aggressive fiscal and monetary measures were implemented that pumped up aggregate demand by fuelling the US property bubble. That approach worked in the short run: the US experienced no significant deflation at the time. Over the long run, however, those policies made matters very much worse. If private-sector income was insufficient to support the NASDAQ credit bubble in 2001, how could anyone have supposed that it would be sufficient to support the much larger housing credit bubble a few years later?
Yes, as Bernanke pointed out, “Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero”. That is certainly true in the short run, but what is the exit strategy? Given the scale of government intervention required to prevent complete economic collapse during the last three years, at this rate, a continuation of the fiat-money bubble-blowing strategy will soon end in nothing less than total collectivization of society.
The policy response to the New Depression has not cured the causes of the economic breakdown, it has merely nationalised the cost of attempting to perpetuate them. Once the bubble began to collapse, there was no realistic alternative to nationalisation. Nationalisation has kept the patient alive. A radically different policy will be required, however, if the patient is actually to be cured.
Having dropped $2.3 trillion of helicopter money so far, Washington still does not understand any of this. QE 2 ends today. Expect to hear a loud hissing sound as the global credit bubble begins to deflate. The next round of helicopter money is very likely to begin before the end of the year.


The Screaming Fundamentals For Owning Gold And Silver

This report lays out an investment thesis for gold and one for silver.  Various factors lead me to conclude that gold is one investment that you can park for the next ten or twenty years, confident that it will perform well. My timing and logic for both entering and finally exiting gold (and silver) as investments are laid out in the full report. The punch line is this: Gold and silver are not (yet) in bubble territory, and large gains remain, especially if monetary, fiscal, and fundamental supply-and-demand trends remain in play.
In 2001, as the painful end of the long stock bull market finally seeped into my consciousness, I began to grow quite concerned about my traditional stock and bond holdings. Other than a house with 27 years left on a 30 year mortgage, these holdings represented 100% of my investing portfolio. So I dug into the economic data to see what I could discover. What I found shocked me. It's all in the Crash Course in both video and book form, so I won't go into that data here.
By 2002, I had investigated enough about our monetary, economic, and political systems that I decided that holding gold and silver would be a very good idea, poured 50% of my liquid net worth into precious metals, and sat back and watched.
Since then, my appreciation for and understanding of the role of gold as a monetary asset and silver as an indispensable industrial metal have deepened considerably.
Investing in gold and silver is still a good idea. Here's why.
Why own gold and silver?
The reasons to hold gold and silver, and I mean physical gold and silver, are pretty straightforward. So let’s begin with the primary reasons to own gold.

  1. To protect against monetary recklessness
  2. As insulation against fiscal foolishness
  3. As insurance against the possibility of a major calamity in the banking/financial system
  4. For the embedded 'option value' that will pay out if and when gold is remonetized
By ‘monetary recklessness,’ I mean the creation of money out of thin air and the application of more liquidity than the productive economy actually needs. The central banks of the world have been doing this for decades, not just since the onset of the great financial crisis. In gold terms, the supply of above-ground gold is growing at roughly 3% per year, while money supply has been growing at nearly three times that yearly rate since 1980.
Now this is admittedly an unfair view, because the economy has been growing, too, but money and credit growth have handily outpaced even the upwardly distorted GDP measurements by a wide margin.  As the economy stagnates under this too-large debt load while the credit system continues to operate as if perpetual expansion were possible, look for all the resulting extra dollars to show up in prices of goods and services.  
Real interest rates are deeply negative (meaning that the rate of inflation is higher than Treasury bond yields). This is a forced, manipulated outcome courtesy of central banks that are buying bonds with thin-air money. Historically, periods of negative real interest rates are nearly always associated with outsized returns for commodities, especially precious metals. If and when real interest rates turn positive, I will reconsider my holdings in gold and silver, but not until then. That is as close to an absolute requirement as I have in this business.
Monetary policies across the developed world remain as accommodating as they’ve ever been. Even Greenspan's 1% blow-out special in 2003 was not as steeply negative in real terms as what Bernanke has recently engineered. But it is the highly aggressive and ‘alternative’ use of the Federal Reserve balance sheet to prop up insolvent banks and to sop up extra Treasury debt that really has me worried. There seems to be no way to end these ever-expanding programs, and they seem to have become a permanent feature of the economic and financial landscape.  In Europe, the equivalent would be the sovereign debt now found on the European Central Bank (ECB) balance sheet.
Federal deficits are seemingly out of control and are now stuck in the -$1.5 trillion range. Massive deficit spending has always been inflationary, and inflation is usually gold/silver friendly. Although not always, mind you, as the correlation is not strong, especially during mild inflation (less than 5%). Note, for example, that gold fell from its high in 1980 all the way to its low in 1998, an 18 year period with plenty of mild inflation along the way. Sooner or later I expect extraordinary budget deficits to translate into extraordinary inflation.
Reason #3, insurance against a major calamity in the banking system, is an important part of my rationale for holding gold. I’m not referring to “paper gold” either, which includes the various tradable vehicles (like the "GLD" ETF) that you can buy like stocks through your broker. I’m talking about physical gold and silver because of their unusual ability to sit outside of the banking/monetary system and act as monetary assets.
Literally everything else financial, including your paper US money, is simultaneously somebody else’s liability, but gold and silver are not. They are simply, boringly, just assets. This is a highly desirable characteristic that is not easily replicated.
Should the banking system suffer a systemic breakdown, to which I ascribe a reasonably high probability of greater than 1-in-4 over the next 5 years, I expect banks to close for some period of time. Whether it's two weeks or six months is unimportant; no matter the length of time, I'd prefer to be holding gold than bank deposits.
During a banking holiday, your money will be frozen and left just sitting there, even as everything priced in money (especially imported items) rocket up in price. By the time your money is again available to you, you may find that a large portion of it has been looted by the effects of a collapsing currency. How do you avoid this? Easy; keep some ‘money’ out of the system to spend during an emergency. I always advocate three months of living expenses in cash, but you owe it to yourself to have gold and silver in your possession as well.
The final reason for holding gold, because it may be remonetized, is actually a very big draw for me. While the probability of this coming to pass may be low, the rewards would be very high.
Here are some numbers:  The total amount of 'official gold,' or that held by central banks around the world, is 30,684 tonnes, or 987 million troy ounces (MOz). In 2008 the total amount of money stock in the world was roughly $60 trillion.
If the world wanted 100% gold backing of all existing money, then the implied price for an ounce of gold is ($60T/987MOz) = $60,790 per troy ounce.
Clearly that's a silly number (or is it?), but even a 10% partial backing of money yields $6,000 per ounce. The point here is not to bandy about outlandish numbers, but merely to point out that unless a great deal of the world's money stock is destroyed somehow, or a lot more official gold is bought from the market and placed into official hands, backing even a fraction of the world's money supply by gold will result in a far higher number than today's ~$1,500/Oz.
The Difference Between Silver and Gold
Often people ask me if I hold goldandsilver as if it were one word. I do own both, but for almost entirely different reasons. Gold, to me, is a monetary substance. It has money-like qualities and it has been used as money by diverse cultures throughout history. I expect that to continue.
There is a chance, growing by the week, that gold will be remonetized on the international stage due to a failure of the current all-fiat regime. If or when the fiat regime fails, there will have to be some form of replacement, and the only one that we know works for sure is a gold standard. Therefore, a renewed gold standard has the best chance of being the ‘new’ system selected during the next bout of difficulties.
Silver is an industrial metal with a host of enviable and irreplaceable attributes. It is the most conductive metal known, and therefore it is widely used in the electronics industry. It is used to plate critical bearings in jet engines and as an antimicrobial additive to everything from wall paints to clothing fibers. In nearly all of these uses, plus a thousand others, it is used in such vanishingly small quantities that it is hardly worth recovering at the end of the product life cycle -- and often isn’t.
Because of this dispersion effect, above-ground silver is actually at something of a historical low point. When silver was used primarily for monetary and ornamentation purposes, the amount of above-ground, refined silver grew with every passing year. After industrial uses cropped up, that trend reversed, and today there are perhaps 1 billion ounces above ground, when in 1980 there were roughly 4 billion ounces.
Because of this consumption dynamic,  it's entirely possible that over the next twenty years not one single net new ounce of above ground silver will be added to inventories, while in contrast, a few billion ounces of gold will be added.
I hold gold as a monetary metal. I own silver because of its residual monetary qualities, but more importantly because I believe it will continue to be in demand for industrial uses for a very long time, and it will become a scarce and rare item.
If we cast our minds forward ten years and think about a world with oil costing 2x to maybe 8x more than today, we have to ask how many of our currently-operating gold and silver mines, or the base metal mines from which gold and silver are by-products, will still be in operation, and how many will close because their energy costs will have exceeded their marginal economic benefits.
After just 100 years of modern, machine-powered mining, nearly all of the good ores are gone. By the time you are reading stories like this next one, you should be thinking, 'Why are they going to all that trouble unless that's the best option left?'
South African Miners Dig Deeper to Extend Gold Veins' Life Spans
Feb 17, 2011
JOHANNESBURG—With few new gold strikes around the world that can be turned into profitable mines, South Africa's gold miners are planning to dig deeper than ever before to get access to rich veins.
The plans raise questions about how to safely and profitably mine several miles below the surface. Success would mean overcoming problems such as possible rock falls, flooding and ventilation challenges and designing technology to overcome the threats.
Mark Cutifani, chief executive officer of AngloGold Ashanti Ltd., has a picture in his office of himself at one of the deepest points in Africa, roughly 4,000 meters, or 13,200 feet, down in the company's Mponeng mine south of Johannesburg. Mr. Cutifani sees no reason why Mponeng, already the deepest mining complex in the world, shouldn't in time operate an additional 3,000-plus feet deeper.
"The most critical challenges for all of us in South Africa are depths and depletion of reserves," Mr. Cutifani said in an interview.
The above article is just a different version of the story that led to the Deepwater Horizon incident.  By the time exceptional engineering challenges are being pondered to scrape a little deeper, it tells the alert observer everything they need to know about where we are in the depletion cycle.  We are closer to the end than the beginning.
We are at a point in history where we can easily look forward and make the case for declining per-capita production of numerous important elements just on the basis of constantly falling ore purities, and gold and silver fit into that category rather handily. Depletion of reserves is a very real dynamic. It is not one that future generations will have to worry about; it is one with which people alive today will have to come to terms.
The issue of Peak Oil only exacerbates the reserve depletion dynamic by adding steadily rising energy input costs to mix. Should oil get to the point of actual scarcity, where we have to ration by something other than price, then we must ask where operating marginal mines fits into the priority list. Not very high, would be my guess.
Supply and Demand - Gold
Not surprisingly, the high prices for gold and silver have stimulated quite a bit of exploration and new mine production. With over a decade of steadily rising prices, there has been ample time to bring on new production. Which leads to a real surprise: In the case of gold, relatively little incremental mine production has occurred.
The analytical firm Standard Chartered has calculated  a rather subdued 3.6% gold production growth over the next five years:
Most market commentary on gold centres on the direction of US dollar movements or inflation/deflation issues – we go beyond this to examine future mine supply, which we regard as an equally important driver. In our study of 375 global gold mines and projects, we note that after 10 years of a bull market, the gold mining industry has done little to bring on new supply. Our base-case scenario puts gold production growth at only 3.6% CAGR over the next five years.
(Source - Standard Chartered)
Of course, none of this is actually surprising to anyone who understands where we are in the depletion cycle, but it's probably quite a shock to many an economist. The quoted report goes on to calculate that existing projects just coming on-line need an average gold price of $1,400 to justify the capital costs, while greenfield, or brand-new, projects require a gold price of $2,000 an ounce.
This enormous increase in required gold prices to justify the investment is precisely the same dynamic that we are seeing with every other depleting resource: Energy costs run smack-dab into declining ore yields to produce an exponential increase in operating costs. And it's not as simple as the fuel that goes into the Caterpillar D-9s; it's the embodied energy in the steel and all the other energy-intensive mining components all along the entire supply chain.
Just as is the case with oil shales that always seem to need an oil price $10 higher than the current price to break even, the law of receding horizons (where rising input costs constantly place a resource just out of economic reach) will prevent many an interesting, but dilute, ore body from being developed. Given declining net energy, that's forever, as far as I am concerned.
The punch line of the Standard Chartered gold report is that they think $5,000 gold is a realistic target and go on to note the most important shift in gold accumulation of the past 30 years:
The limited new supply comes at a time when central banks have turned from being net sellers to significant net buyers of gold. The result, in our view, will be a gold market in deficit, even assuming flat growth in demand.
With the supply-demand balance so out of kilter, we see the gold price potentially going to US$5,000/oz.
The emergence of central banks being net acquirers of gold is actually a pretty big deal. Over the past few decades, central banks have been actively reducing their gold holdings, preferring paper assets over the 'barbarous relic.' Famously, Canada and Switzerland vastly reduced their official gold holdings during this period, a decision that many citizens of those countries have openly and actively questioned.
The World Gold Council out of the UK is the primary firm that aggregates and reports on gold supply-and-demand statistics. Here's the most recent data on official (i.e., central bank) gold holdings:
Note that the 2009 data is lowered by slightly more than 450 tonnes in this chart to remove the one-time announcement by China that it had secretly acquired 454 tonnes over the prior six years, so this data may differ from other representations you might see. I thought it best to remove that blip from the data. Also, the data for 2011 is for the first four months only, so we might expect 2011 to be a record-setter if the current pace continues.
Overall, world supply and demand are a bit out of alignment right now, with supply increasing by 2% last year and non-official demand increasing by 10%:
The summary of the fundamental analysis is that with mine production seriously lagging, the price increases for gold, and increased central bank and investment demand, we have set the stage for some hefty price increases irrespective of any fiscal or monetary shenanigans.
However, once we put those back into the mix, I forecast a quite volatile but upwardly sloping price for gold over the coming years. Possibly a very steep upward slope at points.
Supply and Demand - Silver
Silver demand is growing by double-digit percentages, being led primarily by industrial uses and investment demand. The Silver Institute does a fine job of tracking and reporting on these matters.
First, demand:
Total fabrication demand grew by 12.8 percent to a 10-year high of 878.8 Moz in 2010; this surge was led by the industrial demand category. Last year, silver’s use in industrial applications grew by 20.7 percent to 487.4 Moz, nearly recovering all the recession-induced losses in 2009, and is now seeing pronounced advances in 2011. Jewelry posted a gain of 5.1 percent, the first substantial rise since 2003, primarily due to strong GDP gains in emerging markets and the industrialized world’s improving economic picture. Photography fell by 6.6 Moz, realizing its smallest loss in nine years, as medical centers deferred conversion to digital systems. Silverware demand fell to 50.3 Moz from 58.2 Moz in 2009, essentially due to lower demand in India.
Now, supply:
Silver Production 2010
Silver mine production rose by 2.5 percent to 735.9 Moz in 2010 aided by new projects in Mexico and Argentina. Gains came from primary silver mines and as a by-product of lead/zinc mining activity, whereas silver volumes produced as a by-product of gold fell 4 percent last year.
Mexico eclipsed Peru as the world’s largest silver producing country in 2010, and Peru is followed by China, Australia and Chile. Global primary silver supply recorded a 5 percent increase to account for 30 percent of total mine production in 2010.
Again, we are comparing double-digit demand increases against low single-digit supply increases.  After a decade of rather dramatic price increases for silver, the alert observer should be asking exactly why this is the case.
In table form, we can clearly see that the silver balance for the world requires both dishoarding from government stockpiles and the recycling of scrap silver. That is, shortfalls from mining have to be made up from above-ground stocks:

There's only so long that such an imbalance can continue before the shortfalls require much higher prices to cool off demand.
One of the precise reasons that I originally invested quite heavily in silver is that I came to the conclusion that the price was far too low, artificially so, and that it would therefore be a great investment. So far, so good.
Given the above fundamentals, I project that prices for the precious metals will be many multiples higher - in today's dollar terms - by the end of the decade.


Frightening COMEX Silver Volume In May Massively Distorts Silver Price

By all accounts the price volatility in silver for the month of May 2011 was shocking. Silver went into a FREE FALL from near $50/oz to $35/oz in a matter of days. Clearly this is a market that is massively dysfunctional and an immediate remedy is needed if the regulators want to preserve what is left of the people's faith in free markets.
The CME recently published their Monthly Metals Update for May in which they disclose the total volumes of futures and options traded for the month.
That report can be found here: http://www.cmegroup.com/trading/metals/files/MoMU.pdf
According to the CME the average daily volume of Silver futures and options in the month of May was 117,196 contracts and 13,786 contracts respectively or 655M ounces of paper silver traded per day. There were 22 trading days in the month which puts the total amount of paper silver traded on the COMEX in May at 14.4 BILLION ounces (14,408,020,000 to be exact).
Wait just a minute! These are NOT legitimate trades in silver but rather SILVER DERIVATIVES that have lost all touch with their underlying physical asset. The market for silver futures and options is supposed to exist to help the silver market function smoothly for price discovery as well as to help participants manage risk. It is not designed to set the price of the underlying commodity which should solely be determined by specific supply and demand characteristics according to commodity law. The Silver Institute estimates the total physical demand in 2010 was 1,056.8M ounces. On a monthly basis that would translate into 88M ounces per month.
Could this be true? Let's look at the supply side which is much more easily verifiable. Actually, the official physical supply numbers for silver over the last 10 years are relatively stable. Here's the estimates on physical silver supply from the World Silver Survey 2011 (net of implied disinvestment and paper silver hedging) .


As you can see the annual supply of physical silver is VERY stable and growing at an average rate of 1.6% which is in line with global population growth. In 2010 there was a decent 7.4% growth in physical supply which should be expected with a rising price but that still only put total physical supply in 2010 at 995.7M ounces or 83M ounces per month.
So here we have the global physical market for silver trading in the 80M-90M ounces per month range and yet the COMEX paper silver market in the month of May traded 14.4 BILLION ounces of paper silver.
That is a ratio of 160-1 paper vs physical ounces of silver trading!
But that outrageous ratio does not reflect the true picture as the COMEX is just one of many paper derivative silver markets which include the LME, the Silver ETF's, silver pooled certificate programs, silver swaps and all other paper silver exchanges and OTC markets. All of these paper derivatives should be measured against the monthly physical supply for silver of 83M oz/mo. Given all these other forms of paper silver derivatives I would estimate that the COMEX only represents one third of the total paper silver transactions.
That is a ratio of 500-1 paper vs physical ounces of silver trading!
No wonder the price of silver fell so dramatically! The PRICE of silver has absolutely NOTHING to do with the underlying physical silver market. The price of silver is massively distorted by computer trading programs trading millions of ounces of paper silver back and forth to each other to STEER the price not discover the price. There is no "free market" for silver anymore.
We are at a very dangerous point in the silver market as 500-1 leverage does NOT unwind in an orderly fashion.
Buy as much of the REAL PHYSICAL SILVER as you can get your hands on.
The "Day of Reckoning" is close at hand!


30 Jun 2011

Mint To Start Selling 2011 American Eagle Silver Coins At 75% Premium To Paper, As Senators Propose Eliminating Capital Gains From Precious Metal Transactions

All those who have been long awaiting the release of the 2011 American Eagle Silver coins by the US Mint can now relax. America's official source of bullion will release the much anticipated 2011 edition tomorrow at noon, with a strict limit of 100 coins per household at the low, low price of...$59.95! Gotta love that physical-paper spread... It is almost as good as the gold-tungsten compression pair trade.
2011 American Eagle Silver Proof Coins Available June 30

WASHINGTON - The United States Mint will open sales for the 2011 American Eagle Silver Proof Coin at noon Eastern Time (ET) on June 30, 2011.  The coins will be priced at $59.95 each.  Orders will be limited to 100 units per household.

The obverse (heads side) of the coin features a rendition of Adolph A. Weinman's Lady Liberty in full stride, with her right hand extended and branches of laurel and oak in her left.  The reverse (tails side), by former United States Mint Chief Engraver John Mercanti, features a heraldic eagle with shield, an olive branch in the right talon and arrows in the left.

The American Eagle Silver Proof Coin contains .999 silver.  The one-ounce coin is struck on specially burnished blanks and carries the "W" mint mark, indicating its production at the United States Mint at West Point.  Each coin is encapsulated in protective plastic and placed in a blue presentation case with a Certificate of Authenticity.

Orders will be accepted at http://www.usmint.gov/catalog/ or at 1-800-USA-MINT (872-6468).  Hearing- and speech-impaired customers with TTY equipment may order at 1-888-321-MINT.  The American Eagle Silver Proof Coin is also available for purchase through the United States Mint's Online Subscription Program.  Customers who enroll in the program can have the American Eagle Silver Proof Coin and other select products automatically billed and shipped as each product becomes available.  Visit http://www.usmint.gov/catalog/ for more information about this convenient shopping method.

The United States Mint, created by Congress in 1792, is the Nation's sole manufacturer of legal tender coinage and is responsible for producing circulating coinage for the Nation to conduct its trade and commerce.  The United States Mint also produces proof, uncirculated and commemorative coins; Congressional Gold Medals; and silver, gold and platinum bullion coins.

Note:  To ensure that all members of the public have fair and equal access to United States Mint products, orders placed prior to the official on-sale date and time of June 30 2011, at noon ET shall not be deemed accepted by the United States Mint and will not be honored.  For more information, please review the United States Mint's Frequently Asked Questions, Answer ID #175.
And in what is probably far more important news, GATA informs us that Utah Senator Mike Lee, has joined two other senators to introduce legislation that would eliminate capital gains from transactions involving gold and silver, "a change that he hopes will encourage a change in the nation’s monetary system." The reason: "This bill is an important step towards a stable and sound currency whose value is protected from the Fed’s printing press."
Utah Sen. Mike Lee joined with fellow Republicans on Tuesday to introduce legislation that would jettison federal capital gains taxes for gold or silver coins.

Lee’s measure would treat gold or silver coins the same as regular U.S. currency in transactions, a change that he hopes will encourage a change in the nation’s monetary system.

Utah was the first state in the nation to make gold or silver coins legal tender for transactions and removed any state capital gains taxes. Twelve other states have made or are considering such a move.

Lee noted that the U.S. dollar has lost about 98 percent of its value since the Federal Reserve was created in 1913.

"This bill is an important step towards a stable and sound currency whose value is protected from the Fed’s printing press," Lee said.

Lee co-sponsored the legislation with Sens. Jim DeMint of South Carolina and Rand Paul of Kentucky.
Good luck with that. And some words of advice to Senator Lee: stay away from rapidly moving objects and swimming pools.


Fed May Buy $300 Billion in Treasuries After QE2

The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion balance sheet to keep interest rates low.
While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system.
The central bank, which injected $2.3 trillion into the financial system after the collapse of Lehman Brothers Holdings Inc. in September 2008, will continue buying Treasuries to keep market rates down as the economy slows. The purchases are supporting demand at bond auctions while President Barack Obama and Republicans in Congress struggle to close the gap between federal spending and income by between $2 trillion and $4 trillion.
“I don’t think the Fed wants to remove accommodation in any way, shape or form,” said Matt Toms, the head of U.S. public fixed-income investments at Atlanta-based ING Investment Management, which oversees more than $500 billion. “It’s quite natural for them to reinvest cash,” he said. “That effectively maintains the accommodative stance.”
Mortgage Debt
A total of $112.1 billion of the Fed’s government bond holdings will mature in the next 12 months, 7 percent of the $1.59 trillion in Treasuries held in its system open market account, known to traders as SOMA. Replacing those securities will require the Fed to buy an average of $9.4 billion of Treasuries a month through June 2012.
The Fed also held $914.4 billion of mortgage-backed debt and $118.4 billion of debentures, the debt of government sponsored enterprises Fannie Mae and Freddie Mac, as of June 22. UBS AG, Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Royal Bank of Canada say $10 billion to $16 billion will mature each month, depending on the pace of prepayments.
In a Bloomberg survey of 58 economists June 14-17, 79 percent said Fed Chairman Ben S. Bernanke will sustain the central bank’s balance sheet at current levels until the fourth quarter, compared with 52 percent in April. The Fed said June 22 its goal is to hold assets at $2.654 trillion.
Treasury 10-year yields fell to the lowest since Dec. 1 today, down from this year’s high of 3.77 percent on Feb. 9. On June 24, the two-year yield came within one basis point of the record low, set November 2010, reaching 0.32 percent.
Frustrated Fed
The yield on the benchmark 10-year note declined to 2.84 percent today, the least since Dec. 1, before settling at 2.86 percent. The 3.125 percent security due in May 2021 traded at 102 1/4 at 7:13 a.m. in New York, Bloomberg Bond Trader prices showed. Two-year yields were at 0.34 percent after reaching 0.32 percent last week, the lowest since Nov. 4.
Bernanke said at a press conference June 22 that progress bringing down the 9.1 percent U.S. unemployment rate was “frustratingly slow.”
Fed officials said the economy will expand 2.7 percent to 2.9 percent this year, down from forecasts ranging from 3.1 percent to 3.3 percent in April. It was the second time this year Fed officials lowered growth estimates. Gross domestic product expanded 3.1 percent last year.
Policy makers said they expect the world’s largest economy to grow 3.3 percent to 3.7 percent in 2012, according to their central tendency forecasts. In April, their predictions ranged from 3.5 percent to 4.2 percent.
Fear Factor
Fed officials predict an average unemployment rate of 8.6 percent to 8.9 percent in the final three months of 2011, compared with 8.4 percent to 8.7 percent projected in April. Their estimate for unemployment at the end of 2012 was in a range of 7.8 percent and 8.2 percent, compared with 7.6 percent to 7.9 percent in April.
While the Fed didn’t start a third round of quantitative easing, as some traders speculated was needed, Treasuries could gain on weakening of the economy or the European sovereign debt crisis.
“What always moves the market is fear and greed, and there’s a huge amount of fear on the economy,” said David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont, which manages $28 billion. “That’s where you want to have Treasuries.”
The conflict between Obama’s administration and Congress over increasing the government’s borrowing limit could lead to higher yields, as Moody’s Investors Service and Standard & Poor’s said they may consider cutting the nation’s AAA credit rating unless progress is made next month.
Debt Ceiling
Vice President Joe Biden’s bi-partisan deficit-reduction group has been meeting since May 5 to reach a compromise that would trim long-term deficits by as much as $4 trillion and clear the way for a vote in Congress to raise the $14.29 trillion debt ceiling. Treasury Secretary Timothy F. Geithner has said the U.S. risks defaulting if the limit isn’t increased by Aug. 2.
The 10-year Treasury note’s yield will reach 4 percent by June 2012, according to the median of 64 forecasters in a Bloomberg News survey. The last time it reached 4 percent was April 2010. Should that happen, investors would lose 5 percent on their investment, Bloomberg data show.
“Up until now, our assumption was that the risk is virtually zero of them ever missing an interest payment,” Steven Hess, Moody’s senior credit officer, said in an interview June 21. “If they actually miss a debt payment, then it’s a fundamental change.”
Record Auction Demand
So far, there’s been no lack of demand for government securities even as public Treasury debt has grown to $9.26 trillion from $4.5 trillion at the start of the financial crisis in August 2007, and $5.75 trillion when Obama took office in January 2009.
Investors have bid a record $3.01 for every dollar of debt sold by the Treasury this year, compared with $2.99 last year and $2.50 in 2009. The average 10-year yield this year of 3.32 percent compares with a 20-year average of 5.17 percent.
The Fed won’t raise its zero to 0.25 percent target rate for overnight loans between banks until the first quarter of next year, according to the weighted average forecast of 71 analysts surveyed by Bloomberg.
“The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected,” Fed policy makers said in a June 22 statement. While the labor market has been “weaker than anticipated,” the impact of higher food and energy prices on consumption is likely to be “temporary,” officials said.
Inflation Expectations
Yields on 10-year Treasury Inflation Protected Securities show bond traders project an average 2.2 percentage point inflation rate during the life of the debt, up from 1.5 percentage points in August 2010, when Bernanke first indicated the central bank might resume debt purchases to fight deflation. QE2 also succeeded in driving investors into riskier assets. The Standard & Poor’s 500 Index has gained 22 percent during the period.
The Fed began its first round of quantitative easing in November 2008 after the collapse of Lehman and the central bank’s $85 billion bailout of insurer American International Group Inc. with a program to buy $500 billion of mortgage securities and $100 billion of agency debentures. In March 2009 it boosted planned purchases to include $300 billion of Treasuries and raised its target for mortgage debt to $1.25 trillion and $200 billion of government agency bonds.
Asset purchases, even at a smaller scale, “still promotes what the Fed was trying to accomplish,” said Tony Crescenzi, a money manager and strategist at Newport Beach, California-based Pacific Investment Management Co., which runs the world’s biggest bond fund. “Even with the stoppage of QE2, the fundamental forces remain intact.”


3 Cracking Videos to watch NOW!

Videos as posted on SilvergoldSilver.. If you havent already, I suggest you bookmark his site.

As posted by him:
"We are either going into a Depression or Hyperinflation. The Dollar will be coming down and things will get tough. The Government is inflating the stock market along with the banks. The quiet before the storm. I feel it in my bones that we are on the brink of something big and bad. Get your S*#t together. The end of QE2, pushing the Debt Ceiling , Greece, Spain, Japan....all coming to a head. This scenario may begin this week considering the most recent report that the Greek military is threatening a military coup if parliment imposes more austerity measures. So its either default of revolution resulting in default. The Global Ponzi scheme is about to tumble like the house of cards it is. I wish i had more time to prepare. AND what makes matters worse is that available food will be an issue soon because of floods and droughts. There is no contingency plan for the average citizen. You are expendable. And if you're a patriot that is deemed an extremist, you are disposable. Watch Europe, for they will probably fall first, maybe.
This excites me as I have been waiting my whole life for this world we live in to change. The older I have gotten the more I understand that total and complete collapse is the only way the criminal sociopath 'managing' our world can be stopped.

Store food, guns/bullets and some form of real money. Make friends with your neighbor and build a community so you may protect each other.That was always my question.... how WILL these people act that haven't prepared for anything and then find themselves without money, food or water? I remember the LA riots and that wasn't over something personal. I can't imagine how the people will truly act when they have something very real staring them in the face and it is then personal to their SURVIVAL and their kids. The worst of humanity will take over until the NWO takes full control & that's when the bigger problems begin
When you support your local retailer, You are supporting your local economy. Before you decide to pump your money into corporate giants, Please consider that your local corner mom & pop stores are working hard to make ends meet. They are your neighbors and would like to feed their family as well.. So Instead of contributing to corporate executives Hawaiian Vacations, Shop at your local retail stores. support Your Neighborhood, Your Town and Your Economy."

Economic crisis in Greece could reach United States, IMF warns

The economic crisis in Greece could reach the United States through money market funds, especially if the contagion spreads to European banks, officials from the International Monetary Fund said Wednesday.
"Money market mutual funds are exposed here and the United States is in a relatively stronger position than Europe," said fund's No. 2 official, John Lipsky, at a news conference.
Some financial intermediaries depend on money markets for funding in the United States, but the Federal Reserve provides a "readily available" alternative source of financing, Lipsky added.
The bigger risk of Greek contagion comes from European banks, said Gian Maria Milesi-Ferretti, an IMF economist.
"The channel of transmission through money market mutual funds would be operative, more dangerous in case the difficulties ... spill over to banks in core Europe because core European banks have significant dollar activity," he said.
Separately Wednesday, the IMF said failure by U.S. lawmakers to agree soon on a deal to raise the government's borrowing limit could deliver a "severe shock" to a still fragile recovery and global markets.
In an annual review of U.S. economic conditions, the IMF said the key challenge the country faces is finding a way to stabilize its debts by mid-decade without derailing growth, which is likely to remain modest for some time.
"And of course, the federal debt ceiling should be raised expeditiously to avoid a severe shock to the economy and world financial markets," the IMF said in a statement.
The U.S. Treasury already has hit the existing $14.3 trillion legal limit on the nation's debt and has warned the debt ceiling needs to be raised by August 2 to avoid a default on the nation's obligations.
The IMF said a failure to raise the ceiling in time could lead to a downgrade in the United States' coveted AAA debt rating and send interest rates soaring. "These risks would also have significant global repercussions, given the central role of U.S. Treasury bonds in world financial markets," it said.
The Obama administration and Congress are locked in tense negotiations to try to reach a deal on budget cuts that would give lawmakers political cover to raise the debt ceiling.
The IMF said the goal should be to stabilize the nation's debt ratio -- which it said now was unsustainable -- by mid-decade and gradually ratchet it down after that.
"We see early political agreement on a comprehensive medium-term consolidation plan based on realistic macroeconomic assumptions as a cornerstone of a credible and cyclically appropriate fiscal adjustment strategy," the IMF said.
It said the Federal Reserve's policy of keeping interest rates near zero likely will be appropriate for some time in view of modest U.S. growth prospects.
But it added the U.S. central bank must also be ready to "respond decisively" if inflation expectations appear likely to become unhinged.

What Happens When A Country Is Too Big To Fail?

We're about to find out.

Greece, of course, is that country. And it is both too big to fail and bail because of the complex linkages of debt in the Eurozone, fuelled by years of reckless lending (or borrowing…take your pick).

There is too much at stake for the European bureaucrat/banking elite to allow a Greek default at this point. An apparent pre-condition for an emergency release of 12 billion euros – and a subsequent second bailout of 120 billion euros – is the passing of new austerity measures by parliament tonight .

The likelihood is the politicians will vote yes. Many have indicated an initial willingness to reject the austerity vote. But there has been a concerted effort by all vested interests to create an environment of fear of economic collapse should Greece default. Very few politicians have the gumption to stand firm under such pressure.

So the vote will pass. And even if it doesn't, the EU will find a way to provide Greece with the emergency funds it needs, giving time to coerce or bribe those not sold on austerity.

According to Reuters, 'It is conceivable that even without aid, Greece could roll over some 4.4 billion euros of three- and six-month Treasury bills due to mature on July 15 and 22, but it is expected to be unable without aid to redeem 5.9 billion euros of five-year bonds it has falling due on August 20.'

Now, here's why the can-kicking exercise will prolong the pain, add to market uncertainty (after the initial adrenalin rush) and make the problem larger down the track.
The maturing debt is due to be repaid to private investors. The bailout funds are not going to Greece, (not in their entirety, anyway) they are simply repaying private investors who made very bad lending decisions. Greece's debt hasn't shrunk. It simply has new creditors…the funders of the IMF and taxpayers of the Eurozone.

The bureaucrats are under the illusion that asset sales and austerity measures will allow Greece to grow out of its debt problem. They assume these measures will enable Greece to return to the bond market next year and borrow from private investors, rather than the IMF and the Euro bailout fund.

That was the plan with the 2010 bailout but the bond market has become even more hostile towards Greek debt. 10-year yields are currently a prohibitive 16 per cent. So the bureaucrats now think even deeper austerity measures (and another 120 billion bailout) will do the trick by next year.

Look, the Greek economy is about as dysfunctional as you can get for a developed economy. It needs deep reforms on many levels, including pensions, the public sector, tax etc.

But carrying out reform, for the benefit of the European banks, will not work in a country with 16 per cent unemployment and 42 per cent youth unemployment. (That was from March, it's probably higher now). Civil unrest will continue until the lenders share responsibility for making stupid loans.

For every bailout though, the costs of an eventual and inevitable default move onto the public. This is probably the strategy. Kick the can for as long as you can and when the banks have been repaid and offloaded enough debt to the European Central Bank, organise a restructure.

Meanwhile, these actions send out extremely damaging long-term price signals. What I mean is that by failing to punish poor, highly risky lending decisions, bankers/traders/speculators just take on greater risks. Capital continues to be misallocated and greater economic distortions build up over the long run.

So instead of having a nasty but short-lived economic and financial shock, as a result of a default and debt restructure, you'll get prolonged economic malaise, which will in turn lead to more meddling and government 'fixes'.

This is the unsettling reality of trying to manage your wealth in 2011 and beyond…

For a long but comprehensive read on the complexity of the mess that is Europe, check
this article out. It's written by Satyajit Das, the Indian/Aussie credit/derivative market expert who saw the first credit crisis hit well before the pack. This article is a great hindsight look at Das's foresight.

So what does all this mean for global and Aussie markets? Reprieve, for the time being.

29 Jun 2011

Soros: “Financial system remains extremely vulnerable ... We are on the verge of an economic collapse”

Gold is mixed today after last week’s 2.4% fall. The short term trend remains negative but medium and long fundamentals remain supportive as do the very challenging and risky macro, sovereign debt and currency environment. Physical buying remains strong at the $1500 level with premiums for gold bullion bars higher in Singapore and Hong Kong.
The risk of contagion in the Eurozone and indeed a global financial contagion remains real. Peripheral European bond markets are under pressure again today with 10 year bond yields in Ireland rising to over 12.1% and to over 11.65% in Portugal.

Cross Currency Rates
European leaders are preparing for a default by Greece. The German finance minister, Wolfgang Schaeuble, said yesterday that Europe is preparing "for the worst".
George Soros, Chairman of Soros Fund Management and famous for breaking the Bank of England in 1992, has warned that "we are on the verge of an economic collapse which starts, let's say, in Greece but it could easily spread."

Gold in Euros – 1 Year (Daily)

The 80-year-old investor said that the “financial system remains extremely vulnerable."
Soros added that "there are fundamental flaws that need to be corrected."  The core flaw, says Soros, is that the euro is not backed by a political union or joint treasury, so when something goes wrong with a participating country, there is "no provision for correction."
Soros said that it is "probably inevitable" that highly indebted countries will be given a way to quit the euro.
Gold has been the strongest currency in the world in recent years and all major fiat currencies, including the Swiss franc, have fallen against it. Should Greece revert to drachmas, Ireland to punts, Spain to pesetas, Italy to lira and Portugal to escudos, these countries would suffer massive inflation and the price of gold would surge in terms of these local currencies.


The assertion that gold is a bubble may soon be seen as silly as gold increasingly reasserts itself as a safe haven asset and currency.
Gold’s primary advantage is that it protects against currency devaluation – this will be realized again in the coming weeks and months.
The very strong demand for gold seen in Greece in recent days will likely soon be experienced in other peripheral Eurozone countries. It will likely be replicated internationally as concerns mount about currency debasement and currencies in general including the euro, the British pound and the U.S. dollar.
Soros Gold ETF Sale - Well Publicized but Poorly Analyzed 
Soros’ recent sale of his gold ETF holdings made headline news internationally with much commentary claiming that Soros sale of his gold ETF holdings means that gold has “peaked” and the “bubble” may soon burst.
However, what was less reported was the fact that Soros maintained very significant positions in gold mining companies.
It is highly unlikely that Soros Fund Management would maintain significant allocation to gold mining companies if there was a belief that gold was a bubble that was soon to burst.
Indeed, if his hedge fund truly believed that gold was a bubble and significantly overvalued, it would seem sensible of them to have shorted the gold ETF and not have added to gold mining positions.
More plausible is that Soros, given his political activism, may have decided that he did not want continuing publicity regarding his large ETF gold holding. ETF gold holdings like all securities must be declared in SEC filings.
Given Soros view that “we are on the verge of an economic collapse” and his oft repeated deep concerns about the U.S. dollar, it is very possible that he is accumulating gold in allocated accounts away from the spotlight of the media and the public.
London Good Delivery gold bars (400 oz) can be bought in volume at much the same prices as the gold ETF. They can be stored at a cheaper cost but have the added advantage of not having to be declared.
Importantly,  London Good Delivery gold bars are highly liquid and would be more liquid than ETFs in the event of a systemic crash and or currency crisis. This is one of the reasons that increasingly respected hedge fund manager, David Einhorn, has opted for gold bars in allocated accounts in specialist depositories.
Counter party risk is also one of the reasons that the University of Texas Investment Management Co., the second-largest U.S. academic endowment, said April 14 that it has taken delivery of about $1 billion worth of gold bullion bars.

Read more:

European leaders prepare for a Greek default

European leaders have admitted they are preparing for a Greek default as the eurozone debt crisis enters a pivotal week.

European leaders prepare for a Greek default

Greek politicians will vote on a radical €28.4bn (£25.2bn) austerity package in the coming days that they must pass if the country is to receive the vital fifth tranche of a €110bn bail-out agreed last year. The outcome is expected to go down to the wire as the ruling party's slim majority is pushed to the limit by the opposition's refusal to support the deal, a wave of national strikes, and another round of public protests.
Werner Faymann, the Austrian Chancellor, said on Sunday he "can't rule out" a Greek default and Wolfgang Schaeuble, the German finance minister, revealed that Europe is preparing "for the worst".
"We are doing everything we can to prevent a perilous escalation for Europe but must at the same time be prepared for the worst," Mr Schaeuble said. "If things turn out differently than everyone expects that would of course be a major breakdown. But even in 2008, the world was able to take coordinated action agai-nst a global and unpredictable financial market crisis."
If the austerity package is passed, Greece has been promised a second bail-out of up to €120bn. Private sector creditors are being urged to participate on a voluntary basis but evidence is mounting that their involvement will be less than the €30bn officials at the European Union and International Monetary Fund hope.
German banks were reported over the weekend to be pushing for state guarantees in return for voluntarily "rolling over" the debt, but the demands were rejected by Chancellor Angela Merkel as they would increase the German taxpayers' exposure. In Britain, the Treasury said there were "no specific proposals" for the UK private sector to be involved.
President Nicolas Sarkozy indicated that French banks were prepared in principle to take part in the programme, but no details have been agreed.
In a show of support for Europe, though, Chinese premier Wen Jiabao yesterday promised that China would continue to buy European sovereign debt. Noting that it had just agreed to buy Hungarian bonds, he said: "That is China lending a helping hand to Hungary at a time when that country is in difficulty. We will do the same thing for other European countries.
"[Since the sovereign debt crisis,] China has actually increased the purchase of
government bonds of some European countries and we have not cut back on our euro holdings."
Greece's deputy prime minister, Theodoros Pangalos, sought to shore up support, describing talk of Greece quitting the euro as "immense stupidity". However, he warned that although he is optimistic about winning the first round of the austerity vote, he is more wary about securing approval for specific laws to enact fiscal reforms and privatise public companies.
"That's where we may have problems. I don't know whether some of our members of parliament will vote against it. It's possible," he said.
George Soros, the hedge fund manager famous for shorting Sterling in the 1990s, added that it is "probably inevitable" that a country will quit the euro. "There are fundamental flaws that need to be corrected," he said. What Europe's leaders are saying about the bail-out.


Global Banking Is What's Really in Crisis

We are confronting a crisis, all right, but it is not a Greek crisis, unless uncertainty as to the date of that country's de facto default counts as a crisis.

European Pressphoto Agency (Rompuy);Reuters (Barroso)
Agence France-Presse/Getty Images (Trichet)
AGENDAIf the insolvency of that tiny country were the world's only problem, it would be stretching the word "crisis" to apply it to the travails and insolvency of that tiny country.
What we have come to call the Greek crisis is, first, an international banking crisis. Like Lehman Brothers, Greece is definitely not too big to fail. It is too interconnected to fail, too interconnected to the international banking system, too interconnected to the political ambitions of those who have spent decades replacing the system of nation states with a
united Europe.
Mixed messages are coming from Herman Van Rompuy, left, José Manuel Barroso, center, and Jean-Claude Trichet.S
tart with Greek banks, which hold €70 billion ($99.3 billion) of their government's sovereign debt. The Economist estimates that if Greek banks were required to recognize the fact that markets are valuing Greek government debt at about half the value assigned to this paper on their books, shareholders would be wiped out and the banks would have to scramble to raise substantial new capital. Depositors would scramble to get their money out, and the European Central Bank would have to torture its rules to find a way to continue accepting Greek bank IOUs in return for the cash needed to maintain the liquidity of the Greek banking system.
Other financial institutions would also find life more difficult. Many of Germany's under-capitalized banks would be hard hit if they were forced to recognize that their books are in good part works of fiction, with IOUs of Greece and its banks and businesses recorded at values that have no relation to their true worth.
German banks are not alone in their predicament: The rating agencies are already expressing concern about the exposure of three French banks and some 29 Italian banks, and the governor of the Bank of England has called the problems of overly indebted euro-zone countries the "most serious and immediate risk" to the U.K. financial sector. It is also obvious that we have no clear idea of the exposure of U.S. money-market funds to Greece's insolvency, or of insurers—remember AIG, anyone? That's why $51 billion has been pulled out of those funds in recent weeks by nervous investors, why America's banks have become reluctant to lend to their European counterparts, and why the Fed is asking U.S. banks about their exposure, including credit default swaps written on European banks.
Greece's problem has also revealed another crisis—a crisis of governance. The Tower of Babel that is euroland governance is collapsing. Markets have gone from puzzled to incredulous and on to near-panic as Herman Van Rompuy says one thing, José Manuel Barroso another, Jean-Claude Trichet another, Angela Merkel still another. Their failure to sing from the same hymn sheet is damaging—no, destroying—any confidence markets might once have had in the competence of the euro-zone governing class.
On to the next, and related crisis, a crisis of German identity. The current generation of German voters is no longer certain it must pay any price to subsume its nation in a wider Europe lest its nation's economic power stir fears of a rebirth of the "German problem." Germans remember the decades-long price they paid to bring woebegone East Germany closer to the economic standard of the West, and are not sure they want to pay a similar price to bring southern Europe up to German standards of economic performance, if that is even possible. A Germany that wants once again to be a "normal" country is not a nation that will uncomplainingly consent to the perpetual southern shift of its income and wealth, which is the only alternative to default other than devaluation, unavailable to euro-zone countries.
What we are calling the Greek crisis is also a crisis of structural economic dysfunction. Illiquidity and insolvency are merely the symptoms of the deeper problem affecting a broad swathe of the euro-zone. Excessive debt is not the result of profligacy alone. It is also the result of demography and of a lack of economic growth. The ageing of the European population, and the increasing proportion that consists of immigrants not enamored of Western values and free markets, present problems Europe has yet to confront. Nor has it coped with the stifling effect on innovation and growth of the systematic protection of inefficient private- and public-sector institutions. Illiquidity and even insolvency can be cured with money; a lack of international competitiveness in countries unable to devalue requires the stronger medicine of structural reform.
But enough whining. In Philip Roth's wonderful novel "Portnoy's Complaint," a book closer to reality than the ledgers of many banks, a psychiatrist listens to the protagonist's complaints about his life for more than 200 pages, and then remarks, "Shall we begin?"
Let's. If we accept that the politicians have decreed that immediate default is off the table, we can, indeed, must:
• force the banks to recognize that much of what they count as assets aren't, and to recapitalize, even if this slows lending and growth in the short term;
• recognize the need to speak to markets with one voice;
• admit that perpetual dependence on the generosity of Germany is not a sustainable policy;
• remove incentive-numbing high taxes and barriers to innovation in order to generate the growth and tax revenues to support more sensibly constructed welfare states.
There's more, but that would be a start.


28 Jun 2011

Bruno Bandulet interview with James Turk

Dr. Bruno Bandulet (www.bandulet.de) and James Turk of the GoldMoney Foundation talk about about the gold market, the Euro and the European debt crisis. Bruno explains how far the Euro has evolved from being a German-like currency to following French monetary policies and now is being managed like an Italian currency. He talks about how, despite it being a big issue in Germany, no major party has spoken out against it and so germans are devoid of alternatives.
They talk about how a major party in Switzerland has proposed a referendum over the reintroduction of a gold franc, which would circulate parallel to the paper swiss franc and allow the swiss to save in gold.
They discuss competing currencies and how the drive to centralize money had nothing to do with monetary stability or international trade, but rather was about political control. The return to the world’s traditional international money, gold and how this is disliked by politicians because of the discipline it imposes. Bruno explains how central banks still keep their gold as a base on which to build if the fiat money experiment crumbles.
They explain the impending dollar crisis, the dire US fiscal situation and possible solutions that could be made if the political will existed. How 40% of US government spending comes from debt, levels only seen in countries near the tipping point on the road to hyperinflation. They also talk about confiscatory measures taken in many governments in similar straits, rather than curb their spending.
They contemplate the possibility of Greece or Germany leaving the Euro. They talk about the possibility of reestablishing the Deutsche mark and how this was already proposed during the pre-Euro European currency system. The different economies of the Euro-zone and the growing distance between France, Italy, Spain, Portugal… and Germany.
They move on to the current Greek situation coming to a critical point this summer and the impact that this could have on the price of gold as well as the European banking system. They see an impending bank run looming in Greece, but according to Bruno it is still manageable as the Greek economy is not as large as, for example, Spain. They talk about how strong Asian demand has been on pullbacks in gold’s uptrend.
They comment on the very strong fundamentals that are driving the long term uptrend in commodities and specially precious metals, the possible corrections that we may encounter as a normal part of bull markets and the growing divergence between physical and paper markets. They draw parallels with the ‘70s commodity boom and also point out how it could end differently this time.

This interview was recorded on 14 May 2011 in Hamburg, Germany.

27 Jun 2011

Gold Standard to Save the Euro

Professor Robert Mundell urges gold convertibility for the euro, the currency which he fathered, as well as for the dollar. This is a major step forward. Thought leaders are abandoning “old monetarism,” which was vainly fixated on quantity. Even its chief proponent, Milton Friedman, acknowledged old monetarism as unsuccessful in a 2003 interview with the Financial Times.  An emerging “new monetarism” is quickly taking its place — one that focuses on the quality, not quantity, of money.
Empirical data suggest that the gold dollar represents the epitome of quality.  As Forbes’ own Steve Forbes advised the presidential candidates last week, the “debate should be focused on what the best gold system is, not on whether we need to go back on one.”
Mundell recently endorsed the gold standard on Pimm Fox’s Bloomberg Television “Taking Stock.”
Pimm Fox:  You’ve written about the role of gold in the world economy, Professor Mundell.  Do you think that we’re going to see any kind of return to the gold standard?
Mundell:  [T]here could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade central banks.
The great advantage of that was that gold is nobody’s liability and it can’t be printed.  So it has a strength and confidence that people trust.  So If you had not just the United States but the United States and the euro tied together to each other and to gold, gold might be the intermediary and then with the other important currencies like the yen and Chinese yuan and British pound  all tied together as a kind of new SDR that could be one way the world could move forward on a better monetary system.
Mundell is the world’s most distinguished living economist. He is a Nobel Economics Laureate. He was the primary source of the original supply-side manifesto, “The Mundell-Laffer Hypothesis,” which led to the low-tax-rate, strong-dollar policy at the heart of Reaganomics. He has acted as a privy counselor to the Chinese government (which in appreciation has named a university for him).   Mundell’s guidance, of course, is one of the reasons why mainland China has had 30+ years of uninterrupted double-digit economic growth. Mundell’s work also laid the foundation for the common European currency, the euro.
Although Mundell is less of a pop culture celebrity than Paul Krugman, another Nobel winner, the impact of Mundell’s life work is epochal, while Krugman caps his career as a New York Times blogger. I have arguedelsewhere that Mundell’s work has helped create something like $100 trillion of new wealth. The world’s GDP in 1980 was around $11 trillion, reports the World Bank. Today it is around $60 trillion. Mundell had much to do with this.
The added $50 trillion-per-year capitalizes to over $100 trillion in new wealth — even when adjusted for inflation. Lower tax rates, free trade and more stable currencies moved something like 2 billion people out of dollar-a-day penury into prosperity. That achievement arguably makes Mundell the greatest living humanitarian. In becoming the first Nobel-class economist to advocate the gold standard it suggests that his greatest contribution to human flourishing may lie ahead.
Let us now take the next step from the 20th century’s “Mundell-Laffer Hypothesis” to a 21st century “Mundell-Tamny Hypothesis.” Tamny, editor of Forbes‘ Opinions page, proposed in his June 12 column that we:
… define the euro in terms of gold, and make euros redeemable in the yellow metal. If so, the euro’s staying power and eventual rise to preeminence among currencies would almost be assured. Strong money that is stable in value is much demanded as a ticket used to exchange real wealth, and if the euro had a stable definition, it would quickly trump the dollar.
Of course the mythmakers predicting the euro’s demise would argue that a gold-defined euro would lead to certain debt default by Greece and Ireland (to name but two struggling countries), and that both would quickly exit the euro under such a scenario. The thinking here is wildly incorrect. ….
[T]he governments of Greece and Ireland are having trouble with their debts to some degree because economic growth has withered alongside tax receipts. If so, far from a weight on growth, a strong, stable euro would attract the investment that would drive company formation and job creation that would bolster the ability of both governments to remain current on interest payments. For good or bad, economic growth is always the best fix for governments in arrears to creditors.
Many economists are already considering restoring the classical gold standard. From the rising economies known as the BRICS, S.S. Tarapore, former deputy governor of the Reserve Bank of India, has publicly articulated the virtues of the gold standard. Zhou Qiren, dean of Peking University’s National School of Development and a member of the People’s Bank of China Monetary Policy Committee recently, while not minimizing the political challenges of doing so, told a reporter Ye Weiqiang:
If the currency of each major country is bound to gold, financial headaches would of course be reduced.  Taking QE2 as an example, if this were the 1880s, the currencies of the major western countries would be measured in gold.  Unless the U.S.Treasury suddenly gained a large quantity of gold reserves, it would be impossible for (U.S. Federal Reserve Chairman Ben) Bernanke to print US$ 600 billion to purchase long-term debt.  If there is a commitment to a gold standard system, such as the Bretton Woods system in place until 1971, the Fed could not easily ease its monetary policy, because not only could each country with dollar holdings hold them accountable, they could also redeem their dollars for gold to see how much Uncle Sam’s promise is worth.
A gold standard also would eliminate exchange rate wars.  Since all major currencies could be exchanged for gold or other currencies pegged to a currency that follows the gold standard, exchange rates would remain stable without anyone doing anything.  Where would exchange rate disputes come from?  In short, the gold standard would effectively prevent each country’s government from recklessly levying ‘inflation taxes’ domestically and passing troubles to others by manipulating currency exchange internationally.
Of course, this is an excellent monetary system.
This, of course, is but the tip of an iceberg with commentators such as Larry Kudlow pushing gold as the “crown” of an economic growth strategy, with the gold standard’s eminence grise, Lewis E. Lehrman, with whose eponymous institute this writer is professionally associated, emerging as a leading presence in the economic discourse, with American Principles in Action, with which this writer is professionally associated, teaming up with the Iowa Tea Party to raise public, and the presidential candidates’, awareness of the gold standard.  And far more.
Keynes wrote, in The General Theory of EmploymentInterest and Money:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
It is time, and long past time, for the practical men of our era — such as our president and the Republican presidential aspirants — to throw off the shackles of various defunct economists, cease to distill frenzy from some academic scribblers, embrace the Mundell-Tamny hypothesis, and move forward, immediately, to multilateral convertibility of currencies to gold.
The gold standard is the key to human flourishing. If we grasp the opportunity of gold convertibility this still-dawning millennium beckons with the possibility of becoming a new golden age.