Guest Post: A Comeback For Gold-Backed Money?

Tyler Durden's picture

Submitted by Andrey Dashkov of Casey Research

A Comeback for Gold-Backed Money?

Several legislative initiatives caught our attention recently. All of
them are related to the monetary role of gold and range from proposals
to return to the gold standard, to minting gold and silver as an alternative currency, to having all state transactions carried out in gold and silver coins, to permitting citizens to run their own mints.

Do
these proposals signal a significant attitude change among politicians
and mainstream economic institutions toward gold? No. They are largely
regarded as fringe ideas and dismissed out of hand. The third link above
is written in a condescending tone that implies everyone knows that the
gold standard is bad for an economy and it caused the Great Depression.
Still, it’s quite telling that opinions that gold can be incorporated
into a modern economy are becoming numerous, and actually making it onto
the legislative agenda in various jurisdictions.

Last November,
clearing house ICE Europe began accepting gold bullion as initial margin
for crude oil and natural gas futures. This year, JPMorgan Chase
announced that it would accept physical gold as collateral for a number of transactions. According to the Wall Street Journal,
stock exchanges in New York, Chicago and Europe recently agreed to
accept gold as collateral for certain trades, too. The World Gold
Council is gaining traction in its push to have the Basel Committee on
Banking Supervision accept the precious metals as a Tier-1 asset for
banks, along with government bonds and currencies. Private and public
institutions alike are clearly rethinking their attitude toward gold.

Perhaps most telling of all, the world’s central banks were net buyers of gold in 2010and
in 2009, after being net sellers for the previous 20 years. As World
Bank President Robert Zoellick said last November, gold has become the
"yellow elephant in the room" that needs to be acknowledged by
policymakers of major economies.

No one can predict exactly how this will all shake out, but Doug Casey has long said that a return to a gold standard,
or some modern equivalent, is almost inevitable. That’s because, for
the reasons Aristotle outlined 2,000 years ago (it’s durable, divisible,
consistent, convenient, and has intrinsic value), gold is hands-down
the world’s best money.

Now, Gresham’s Law tells
us that bad money drives out good, but that’s only true when legal
tender laws hold sway (incentivizing people to hoard what’s perceived to
be “good” money and spend the “bad” money as fast as they can). When
people give up on the local legal tender, Gresham’s Law goes into
reverse, and good money chases out bad. The dollarization of third-world
economies is an example of this, the dollar being perceived as being
good when compared to many shakier currencies.

So, what happens if
fiat currencies as a class start to be perceived as bad money? Gresham,
and history, tells us that they’ll eventually be abandoned, unless made
good (put back on some acceptable standard of value, like gold).

The
key point here is that it can’t happen just a little bit, just as you
can’t get a little bit pregnant. Once it starts, the good money will
drive out the bad, and in today’s wired global economy, the phenomenon
will be worldwide, fast and devastatingly thorough.

The investment implications, broadly, are obvious; you want to own gold for safety and speculate on gold stocks for profit. The details on how best to do this are the current raison d’être of our metals publications.

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snakebrain's picture

A local antique dealer in Ireland told me yesterday that a few of his accounts lately have been settled in scrap gold, something he could never have done before...

CH1's picture

I continue to believe that digital gold (and silver, and...) currencies could be a significant part of the answer.

www.dgcmagazine.com

DoChenRollingBearing's picture

I do not think that a gold standard is workable or likely.

I do think that gold will become much more visible and talked about in the entire investment community.  And soon.

I'm with FOFOA on gold.  Just let it go, be untied to currencies.  Let it be what it used to be:

The best wealth preserver in town.

fofoa.blogspot.com

zaknick's picture

Another is complemented by professor Fekete

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Position Paper professorfekete #2, January 17, 2011,
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position paper professorfekete #6, Sept. 9, 2010.
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position papers of professosrfekete #4, July 25, 2010.
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position papers of professorfekete #3, July 4, 2010.
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position papers by professorfekete #2, June 27, 2010.
Krugman's Opium War On China

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Architecture for a New World Financial System

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What you always wanted to know about Gold*

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The New Austrian School of Economics

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position papers of professorfekete #1, May 5, 2010.
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Hedging Non-Gold Investments with Gold

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Front-Running the Fed in the Treasury Market

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The Obama administration is looking at the wrong ratio

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and its implications for the international monetary system

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The Significance of the Gold Standard

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A Critique of the Quantity Theory of Money

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The Marginal Productivity of Debt

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The Gold Standard Institute

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That Accursed Propensity to Save

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Iron Law of the Burden of Debt

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The Anti-Gold Gospel According To Smith

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The Double Whammy of Geopolitical Global Gold Games

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The Crash Of The Bank Of United States

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The Anti-Gold Gospel According To Kaletsky

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Fiat Currency: Destroyer of Capital

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The Shadow Pyramid

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The Saga Of The Naked Boogieman

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Peak Gold! Part Five

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Exploding the Myth of Silver Shortage

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Peak Gold! Part Four

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Peak Gold! Part Three

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Peak Gold! Part Two

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Peak Gold! Part One

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When Atlas Shrugged Part One

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Ultracrepidarian Musings

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Revisionist View Of The Great Depression Part Two

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Whither Gold?

Debtman And Robbin's picture

You are right. It would not be workable.

A rigid gold standard would probably destroy the world.

FOFOA and Fekete know this, although they have quite a different approach.

BTW, since you understand the Euro as explained by FOFOA, you might like Fekete's theory about digital hyperinflation and (physical) paper deflation. A Federal Reserve Note belongs to the Fed - forever. You are only allowed to use it. A Euro Bill is yours as soon as you hold it in your hand. Therefore this can't happen to the Dollar in the same manner. It would not make sense.

http://2.bp.blogspot.com/_cvdgPlEKW9k/TSZ-Ie085cI/AAAAAAAABmA/ZqKxn6-KtY...

Assets:Gold

Liabilities: Banknotes

So what is backed by what? ;-)

And what does that tell us about all the Euro bashers?

 

 

Yen Cross's picture

I apologize for interrupting your thread, Debtman And Robbin. That is RICH. creative for sure!

hamurobby's picture

everyone knows that the gold standard is bad for an economy and it caused the Great Depression.

 

The reason it will not work, just as back then, is because the fed res cannot infinitely expand credit until an economy crashes and burns. Sound money cannot exist with a national bank.

ivars's picture

For silver, afer peaking at 45 USD in April 2011, quite reasonable prices between 25-32 in 2011-April 2012. After that, silver starts to go up. Either supply problem, or Obamas USD devaluation plan in action ( or threat of devaluation plan), or both supply and USD devaluation threat. Looking at stock market prediction I do not think devaluation will be real, but attempts to devaluate the USD to do something as second recession will hit in Q1 2012 may lead to silver price spike . Or, rumours the FED is going to be totally changed/liquidated under the government which will win 2012 elections. That would lead to scooping of silver and gold. That explains a spike during election time. And afterwards high level as e.g. gold standard is reintroduced at different higher level .

http://saposjoint.net/Forum/download/file.php?id=2673

If I very approximately apply the same thinking to gold, it will peak at the same time, April 2011, at around 1600-1700 USD, and , if there is a talk about gold standard in 2013, the level to set it will be around 3000-3500 USD/ounce. But most likely that is not going to work, as there will be substabtive resistance no only from USA and Europe bankers, but all holders of USD and treasuries.

fredquimby's picture

there will be substabtive resistance no only from USA and Europe bankers,

But the Euro LOVES gold! ECB gold reserves were valued on 31st October 2010 140 BILLION Euros more than previous MtoM.... and the Dec 31st MtoM increased them by another 33 BILLION Euros....

 

Non Passaran's picture

1) And how much have their debts increased in the same period? Probably by several times that much.

2) If they love gold, how come individuals have to pay all kinds of crappy taxes to buy this - supposedly "free" - gold?  I call BS on that one.  It's "fakegold" - countries may want to use gold to ensure their own survival, but citizens aren't allowed to do the same for themselves (unless they want to give up 20% or more in form of BS taxes).

Let's see if the EU will allow (and encourage!) private ownership of gold without idiotic taxes. Until then, I say that theory (freegold) is worthless.

jimijon's picture

Hey I minted my first silver coin and am waiting for just one ZH'r to step up and sponsor an official ZH coin. I can do copper, silver or gold.

Write me if interested

http://www.mundogold.com

cheers

watchingdogma's picture

Your web site makes it difficult to see your work.  With everyone's time in so much demand, a poorly designed web site is a significant barrier to attracting clients.

mt paul's picture

clicked twice

still could not

find price..

Unbeliever's picture

- Why do you have "Fifty" on the coin?

- Why do you have no good high-res pics of the coins?

tellsometruth's picture

we shall see...there is more than enough evidence a momentum is building, and at least to warrant a true discussion on the topic which I welcome.

Scottj88's picture

There will be gold, but there will be other things as well.  Silver seems likely (if not certain) to be a monetary metal, but holds resistance for its demand in the technological world.  Investing in silver is the best investment in technology you can make... think chinese solar panals....

The banking cartel will not allow this... they have been up to this ponzi scheme for so long, and gold is their arch nemesis.  They own the physical, but sell the paper... what a fucking joke. 

For those interested in learning the most in depth history of the western banking families, I offer you this documentary that even the most light-deprived internet wanders trouble to find.  The author did a fantastic job.

http://thehardrightedge.com/uroko/

Non Passaran's picture

1) I don't want to click on your link because it sounds like it could be some conspiracy claptrap.

2) You can't spell, which doesn't help your credibility.

 

Scottj88's picture

Luckily it is not my work, I am just sharing it.

Suit yourself.

Zero Govt's picture

I don't believe paper money has to be 'backed' by Gold or Silver from my research, the only thing we do need is a competitive 'free' market in money. That provides for competition to improve each money system, provides competition to keep each money system honest and provides competition so that if one money system fails (as some will) we as consumers have competitors (ie. options/power) to fall back on in that event.

Only a free competitive market in anything provides the best for business and consumers all round. Monopolies of anything always provide ALL the problems and the biggest systemic failures.

So we need a competitive free market in money. If competing systems include Gold or Silver backed money that's absolutely fine. Let them compete.

But what we must not do is go back to one monopoly money system. We MUST have competition and a free competitive market in money with zero State involvement (ie. no licensing or regulation etc)  

CH1's picture

Yes: FREE MARKET MONEY, where each provider must convince you that his currency is good, or you choose another.

Eternal Student's picture

So, can you give one single instance where a "free" market, devoid of State interference, didn't lead to monopolies? I'd really be interested in hearing your best shot here, because from what I've seen, they've always lead to monopolies.

CH1's picture

Umm... the free market, devoid of state interference, has pretty much NEVER led to monopolies.

In the absence of state force, monopolies form only in isolated places where there is no available competition. (Some people are simply pigs. Ah well.) That has ZERO to do with a free market... distance just excludes market players there. Bad luck.

The evidence to the contrary is minimal (near zero) and consists of fiscal Ghost Stories. "The Big, Bad Rich Monster set up a store, and...."

A monopoly does not stand in the face of competition. The entrepreneurs pick it apart. Only state force preserves a monopoly.

I've waited for years to find actual evidence of free market monopolies, and I'm still waiting.

Eternal Student's picture

Ok, so what are your best examples? They are clearly lacking, and all you're posting is conjecture at this point.

BigJim's picture

No, your thesis that free markets lead to monopolies is unsupported conjecture.

Please give us some examples of monopolies that were not the result of government intervention.

Eternal Student's picture

Take your pick of any of the monopolies broken up by the US government of around 100 years ago.  Or even IBM 30 years ago, though the economic climate of a century ago was far less restrictive than of the latter 20th century.

CH1's picture

IBM was a monopoly? Sorry, I was there 30 years ago and did business with quite a few other computer and biz machine companies. FAIL.

Next?

Eternal Student's picture

Ok. Now you've established for certain that you have absolutely no idea whatsoever of what you're talking about. For someone who claims to have been there 30 years ago, you should very well know that IBM had legal action against them by the US government for being a monopoly. And that they were operating under a Consent Decree for decades. The suit was brought up in the 1950's, for Pete's sake. And it was still an issue about 5 years ago, when IBM used their monopoly status against the only real competition they had left in Mainframes, against a small company named PSI.

The Consent Decree was certainly a part of PSI's legal defense at the time.

Which, of course, is a superb example of how companies who succeed at becoming a monopoly in a "free market", abuse their position to squash competition.

Thank you for helping to prove my point.

 

Zero Govt's picture

Eternal Student

yes food is still largely free competitive market but the biggest free markets are black market (knock-off clothes, grass, cocaine etc). 40% of Italian GDP is black market.

Any true free market will develop some dominant players for a brief period in time but smaller competitiors always out-think or out-flank these larger 'established' players and get taken apart (see how forests evolve).

Your 'fix' of monopolists if you analyse it are actually monopolists who stay propped up by the State protection racket using legislation to pervert the free market, mainly add costs to stop small business naturally competing and taking out the dinosaurs.

As example the car market where small competitiors cannot enter without being forced to add  dozens of safety devices (airbags, crumple zones etc) and enviro garbage (catalystic convertors etc) which all prevent innovation and add costs (barriers to entry). 

I read a statistic the other day 1 in 3 businesses now need a Govt license to operate (exist) from 1 in 30 a few decades ago.

All the worst examples of monopolies you can imagine I guarantee are monopolies propped up by the State 

CH1's picture

ZG: Thx. :)

Have a link on "how forests evolve"?

Eternal Student's picture

Sorry, I have to disagree about food still largely being a free market. Agribusiness is anything but, and has been extremely effective at forcing out the small producer. The question of State interference is probably valid, but that wasn't your statement here.

As far as the Black Market goes, using one of your own examples of cocaine distribution, the history and growth of the Drug Lords is a superb example to the contrary of your thesis. Unregulated, they attempt to eliminate their competition completely in the most ruthless manner possible.

So I'd say the evidence is clearly lacking still.

Zero Govt's picture

Eternal

yes agree many aspects of the Agri biz have some giants, in farming and the supply industry such as fertilisers that have driven out smaller farmers. But there are still many smaller operators, mainly specialists such as wine growers and suppliers through to farmers markets outside of the carve-up that is the major food retailers.

Regards 'Drugs Lords' there's too much international competition and product competition too. As a consumer you'd have seen a constant churn in this free market of players and products with nobody being able to dominate the industry as in the legal, and more dangerous to your health, drugs industry where major players like Pfizer etc have huge protection rackets known as Health Depts and Drug Approval Regulators. The contrast between legla drugs and illegal is clear evidence and in how they perform too.

Nobody is more ruthless at defending their turf than these legal dinosaurs who use the State apparatus to destroy competition. Please note Al Capone hurt nobody, he just ran moonshine to happy consumers. No drug gangs shoot consumers, they may shoot the occasional competitor in a turf war but not their customers unlike legal drugs businesses that force their dangerous drugs down consumers throats year after year. 

 

Zero Govt's picture

CH1  -  just pop down to your local forest and see how big (established) trees dominate for a while but eventually die and are replaced by younger competitors. Capitalism is the same life cycle as anything in nature of birth, teen, establish, mature and die. Markets have the exact same 'churn' of players...  why would capitalism be any different to nature, it is afterall a human system and we are first and foremost, animals

Eternal Student's picture

My local forest consists of Redwoods. These are the biggest trees around, and the trees alone last for hundreds of years. The forests last for thousands.

 

CH1's picture

Dude, you have a doctrine that you're fighting to uphold. You're not going to find the truth (of whatever) that way.

If you are interested, a good deal of the truth can be found here:

http://www.amazon.com/Myth-Robber-Barons-Business-America/dp/0963020315/...

Zero Govt's picture

Fulsom did a very good job re-writing the history of the myth of the 'Robber' Barons by differentiating between real US industrialists who built the wealth of America and the fake moguls who were propped up by the US Govt to their wealth.

This is the recurring history of capitalism in a nutshell. The difference between wealth creators who deliver innovation and productivity and wealth consumers (parasites) who consume this wealth via the No.1 parasite system in history, and biggest wealth destroyer, Government. Competition versus monopolist  

Eternal Student's picture

You miss the point. Namely, even using the silly example that you have, ecosystems do indeed evolve large giants which shut out competition. It's a little hard to grow, when your big competitor is shutting out the sunlight. And they last for an extremely long period of time, without outside intervention. Such as is done by the State.

 

Zero Govt's picture

Every plant (and animal) in the forest has a different life cycle. Some like the Redwood lives 100's of years. Others live a few years. The same 'churn rate' is present in markets. Take music, you get 1 hit wonders and you get bands like The Rolling Stones that stretch for decades. Forests do indeed last thousands of years, music will too probably whereas VHS videos lasted barely 20 years before a new technology usurped its place.

Point being life cycles in capitalism work according to natural (Darwins) laws of evolution. And the parasites (big monopoly corporates) in society know this and try to cheat their demise and cheat the free market by monopolising their industry using the greatest monopoly weapon, Government.

Government is the root of 90% of all evil in our markets. It is the ratchet monopolists use using societies wealth via taxation to keep their monopolies going and 'cheat' death by abusing the State apparatus (law, legislation, regulation, subsidies, bailouts etc etc)  

Eternal Student's picture

The Ag business is more than what you're portraying. The big outfits are getting bigger, and the small outfits either sign up or go out of business. Wheat, poultry and milk are excellent examples. Together, big Ag is a superb example of Monopoly Capitalism at its worst, contrary to your thesis.  Where there are exceptions, I'd say it's because they haven't been as targeted.  Yet. However, I still see the same principles starting to apply. That includes the wine industry. Sure, there are specialists. But those cater to a limited market.  The exception if you will. Not the norm. The fact remains that it's hard or impossible to compete against economies of scale.

As far as the Drug Lords' go, I'm sorry, but you just have absolutely no idea of what you are talking about. To suggest that Al Capone "hurt nobody" is absolutely outrageous and insulting to the victims of his violence.  The bloody gang warfare of Chicago is well documented. I suggest you start by looking up the St. Valentine's day massacre, before leaping to outrageous and insulting conclusions.

BigJim's picture

I think you're both missing the point about the illegal drug business.

The profits that drive the criminality derive entirely from the governments' prohibition laws. If these were removed, the prices would drop to a fraction of their current levels. We wouldn't see drug dealers shooting each other in turf wars for the same reason we don't see doughnut sellers offing each other - because when practically anyone can produce, buy, and sell the stuff, it's impossible to control the market.

As for monopolies in general - yes, smaller companies have trouble competing with larger companies in mature industries. So what? The larger companies can only survive if they maintain lower prices, which benefits the consumer. Remember, though it's easy for companies to reduce competitors (by buying them out) it's virtually impossible for them to eliminate competition.

Eternal Student's picture

Your point about prohibition is valid. However that would bring in regulation. The original discussion was about an example of the Black Market, being claimed as the biggest free market.

CH1's picture

"Regulation" is not a free market thing - it is a state force thing.

Again, point fails.

Eternal Student's picture

Yes, which is why I corrected the poster; the original discussion was about free markets and the lack of state force.

Zero Govt's picture

BigJim

Correct and a good example of where the usual State/monopoly 'shut out' of competitors is usurped is the European airline business. The national flag carriers defended against new entrant Virgin by the usual restriction of airport slots, even airport desks and baggage carriers etc.

But Ryanair avoided the whole lot by going to smaller airports who wanted their business instead of the major Eurozone airports that wanted to defend their monopoly carriers. Ryanair is now the largest airline in Europe and has been constantly hassled by national and European regulators but, thankfully, have succeeded by changing the game.

Competition, you simply can't beat it for progress and improving everyones lot

ItsEvolutionBaby's picture

There are good and bad monopolies.

Good monopolies are created by the free market (and remain good as long as the consumer desires) and bad monopolies are created by government through regulation and cronyism (and last forever until the false protections are dismantled). 

I don't know why you are afraid of monopolies. If a company delivers a product to the consumer at a price no one else can match with a high quality then i'm all for monopolies. The problem comes when they get into collusion with the government and they sell shit products and don't let anyone compete with them through exclusionary legislative instruments.

Eternal Student's picture

The problem also comes in when they use their size to stifle competition. This is often seen in "dumping", and is generally recognized as being harmful to the consumer. Sure, it might be helpful to the consumer in the short term; but not the long term.  Unfortunately, by the time the government can intervene, it's too late for the small company.

Monopolies exert great power to stay that way. In an unregulated market (which was what this topic is about), there is nothing to stop them from stifling competition.

Zero Govt's picture

Eternal Student

You write, "In an unregulated market ..there is nothing to stop them (monopolies) from stifling competition."

Yes there is. Profitability. There is only so many times a monopoly can afford to 'dump' products cheaply onto the market. And there's only so many times a monopolist can afford to keep buying up (from their stored previous profits) smaller competitors.A big dinosaur eventually becomes too tired (unprofitable) defending its turf from 1,000 smaller cuts by smaller faster businesses.  

This is precisely why monopolists use the State apparatus. They need the prop, the money of taxpayers, to constantly bailout their businesses and to do their dirty work using regulations to pervert the competitive market.

Without the money (subsidy) of taxpayers and power (law, regulation etc) of the State all monopolies die due to the competitive market. The free market does not allow monopolies to live forever. In fact as soon as one appears new entrants are keen as mustard to attack it.

Huge monopolies such as the US and European energy companies (Exxon, BP, Total etc) would be long gone by now from smaller explorers and retailers. The fact they've been around decades and we've had no new entrants to supply our petrol etc is proof of the effective 'shut-out' by corrupt Govts to stop the constant churn of new entrants to the energy market