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Swiss Gold Initiative: Good Idea with Unintended Consequences
by Keith Weiner
There is now a very interesting initiative on the Swiss ballot, which will require the Swiss National Bank (SNB) to hold 20 percent of its reserves in gold. The voters will decide on November 30. I won’t predict the vote, but I want to discuss the likely impact of a yes vote.
Much of the analysis of this initiative is about the price of gold. A typical prediction is that it will go up, as SNB buying will exceed supply. However Mike Shedlock notes that, “Nearly all of the gold ever mined is available...” That’s because gold is not consumed. The SNB is small compared to worldwide gold inventories, so it won’t move the price much. Shedlock adds, “It is entirely possible that SNB purchases could significantly alter perceptions…” I agree sentiment is ripe for a change.
The price isn’t very interesting, unless you’re a gold trader. It’s much more important that the referendum brings the first positive monetary change in decades. It reintroduces a link between gold and banking, and imposes a barrier to currency debasement. For this, the Swiss are heroes.
There is a key flaw in our system of floating currencies. Every financial asset is someone’s liability. When a currency moves, it creates winners and losers. Big moves can harm banks with loan portfolios outside their home.
That’s why the SNB currently doesn’t allow the euro to fall below 1.2 francs. To maintain this currency peg, the central bank sells francs and buys euros. There is no limit to this deliberate franc devaluation, which robs Swiss savers, investors, and businesses.
Big exporters, like Swatch and Nestle, may have lobbied for a weaker franc, hoping to make their products more competitive, but that’s a sideshow. The real purpose of franc devaluation is to shield the Swiss banks from euro devaluation. They’re vulnerable, because they do a lot of lending outside the country. They have assets denominated in euros and liabilities denominated in francs. They suffer losses when the euro falls, or the franc rises.
Two examples help illustrate the problem. First, say Jens in Germany borrows a million euros from Credit Suisse. As the euro falls, Jens repays the bank in smaller and smaller euros. On the
franc-denominated books of Credit Suisse, the value of the loan drops like a stone. Jens is happy but Credit Suisse is not.
Second, let’s look at Adriana in Italy who also borrows money, but not in euros. She gets a million francs from UBS. As the euro falls, Adriana experiences it as a rising franc. Her monthly payment goes up and up. UBS is happy, at least initially, because Adrian’s loan is in francs. However Adriana is getting squeezed. When she defaults, then UBS becomes unhappier than Credit Suisse.
Either way, the capital of the Swiss banks is eroding. If the euro falls enough, then the banks could go bust. Only they know where the line is, but it’s likely not too far below the current peg of 1.2 francs.
Depositors won’t feel the currency pain, at first. They are happy to own Swiss francs, especially if the franc is rising. Instead, they should worry about the unintended consequences of breaking the euro peg. Their strong francs will not be good in the case of bank insolvency.
Unfortunately the regime of paper money imposes a bitter dilemma on the Swiss people. They have a choice of slow losses by devaluation, or total losses by bankruptcy. They deserve a better option, a practical roadmap to the gold standard.
It’s great that the Swiss people are striving to move towards gold. I am a passionate advocate of the gold standard, and I want to cheer for my Swiss friends. Yet I must caution them today. I realize they have spent a lot of money and political capital to come so far, but I don’t want to win this battle and lose the war. They need a new initiative, which takes into account the banks’ euro-denominated loans.
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Sorry but there is no easy way out (anymore). Either one stops inflation or corrupts a complete currency.
So the way to go is the way of bankruptcy. It will happen anyway, the sooner the lesser harm. The easier way out was before we accpted credit as collateral for other debts. Just have a a look what the current state really is. The banks do have 90 % more loans then they "have". The central banks are hopelessly undercapitaliced - or how else can the FED have a balance sum of way beyond 4 trillion or a quater of all debts of the US.
Then states which have debt to income ratio of 7:1 (just an example of Germany) the debts are overr 2 trillion and the yearly balance sheet of the state is around 350 bilion. So thid totally indepcted states insure as an example the ECB with a capital of around 34 billions to let the central bank handle a balance sum of over 2 trillion.
So undercapitalized banks to get guarntees of complete indebted states and undercapitalized central banks and the central banks do get backup from the same defaulted states.
So sorry you can forget this argumennt: "They have a choice of slow losses by devaluation, or total losses by bankruptcy. They deserve a better option, a practical roadmap to the gold standard."
They won't get a better option with even more indebted banks, central banks and states. The longer this is prolonged the more hefty the setback will get. And this will be terrible because we do live in highly interdependent relationships. Hardly anyone still can even kill an animal for eating it. Hardly anyone has an own garden from which he/she can live. Hardly anyone can live without currency and heating. We all do need a lot of things, which we can't provide for ourselves.
But now imagine we do not stop somday with the debt expansion. What'll happen in the end? Sorry we've run out of good options at least till before TARP. TARP was the really beginning of the end. You can see how far it has get us. Yoiu remember Paulson 750 billions of the world comes to an halt. Now we've added a few trillions of debt and still we've not gained anything but a little time. Do you feel we really have made anything good with all this new debt? Where the hell is all the "money" gone? It was consumed, and so we're worse off than 6 years or so ago.
As a friend of mine says: "What a load of Hooey!"
Don't the big banks utilize a Trading Desk/Dept. to hedge against unknowns, such as currency fluctuations and other short term market activity?
Don't the banks "secure" loans with some type of collateral?
Gold is used to recapitalize the financial system in the case of a melt down of the paper currency system. (do you think other countries and companies will take more of your newly issued paper, right after you have just burned down your old fiat paper system? Unless you have guns or gold, it won't happen). In today's "paper currency" world, and for this reason, the Swiss banks should be in complete support of this gold reserve initiative.
The Dutch, German, Russian, Chinese, et al central banks must know something is coming down the pike, as they are positioning themselves with physical gold holdings.
This article is propaganda, and I don't buy it. Better luck next time.
Use gold coins.
https://s3.amazonaws.com/khudes/Twitter11.2.14.1.pdf
Just another example of how greed, recklessness and stupidy pays.
Keith, you said: "They need a new initiative, which takes into account the banks’ euro-denominated loans."
Well, There is such an initiative.
They can continue to let the paper Franc devalue with the Euro, and issue an independent hard physical Gold coin Franc, or call it something else.
All the nations of the world have been offered the opportunity to withdraw physical Gold from the Global Debt Facility, TVM-LSM-666 to use to mint gold coin for citizens to use as money.
Follow Karen Hudes on Twitter for details.
"The issue down through the ages that will have to be fought sooner or later, is the people versus the banks". Lord Acton
Maybe Adriana in Italy can't hedge her loan but the banks certainly can hedge theirs.
Serves the banks right for making loans in another currency that they know is mismanaged. Isn't that why many of us here are increasing our allocation to physical gold??
A failed gold referendum is priced in already - thus, if it fails, it's a big yawn that doesn't impact the gold market. If the referendum surprisingly passes, however, then we could see a strong reaction in the gold market.
Fluctuating currencies is what Banks are in business to manage.
That is standard risk management.
If they can't do that effectively, or they need government currency intervention to create a "permissive" environment, then the sooner those Banks go bankrupt the better.
And yes - it IS possible to survive a banking/currency crisis... Actually...
It is NOT the end of the world.
Totally agree. There is no reason to hold national sovereignty hostage because the banks cannot perform basic banking operations. Let them go BK, if they cannot get the job done.
Without a gold- and silver-backed national currency, there is no national sovereignty. Whoever, outside the nation, determines the value of the substitute money rules the nation as its sovereign.
True and I would go even further. The more the government of a fiat nation decides to print, the more the govertnment of a real money nation ought to raise tariffs. Without that added measure of protection, your real money country will be bought out by a horde of fake money countries. Going much further- the government should not have the power to issue a national currency, or mint coins. Money is too important to be left in the hands of government. History shows us they consistently try to escape the obligation to keep their money sound as a way to cheat and get more of it. And who enforces the contract to keep money sound when government is a party to that contract? No my friend, government should just be there to insure that the mint whose products I am using as money does not try to cheat on the stated weight and purity of their product. After that, they should be made powerless to rob us through the use of fiat money, or even government issued money, but only able to protect us from the corrosive effects of the fiat of other nations. Such ideas and more here. http://www.amazon.com/Localism-Philosophy-Government-Mark-Moore/dp/06922...
Backing a currency with something tangible doesn't alleviate that problem, because the price of the currency is determined in the marketplace by interest rate spreads' impact on demand vs available supply of the currency.
I was speaking about national sovereignty. There is a difference between "marketplace" and "free market". For example, Rome had a huge "marketplace" but little "free market" because when Rome conquered a nation, Rome would require the conquered nation to sell only to Rome. That kept the price of conquered nations' exported goods cheap, and Roman merchants rich. Today, if a small group of nations holds cruise missiles to the heads of a large group of other nations, there may also be a huge "marketplace" but little "free market". So I believe that, while one can say that, theoretically, a nation's currency's value might be determined in the "marketplace", one may not, today, unfortunately, say that all nations' currencies' values actually are determined in the "free market". There isn't a "free market". And the other nations, in effect, have been stripped of their sovereignty as effectively as the nations which Rome conquered were stripped of their sovereignty. The backing of national currencies by gold is what could restore the free market and make it free and honest.
But how does simply backing a nation's currency with gold (i.e. a fixed percentage of the central bank's balance sheet/currency supply) deliver sovereignty?
Despite what clueless economists say about the decreasing velocity of money in the US, the Federal Reserve alone cleared over 1 quadrillion dollars in transactions last year, against a money supply 12 trillion and a GDP of just under 18 trillion. So the FED clears more than the annual GDP of the world's (supposedly) largest economy every week. Because of the anarchic nature of the marketplace, that size and velocity allows for some very "unfree" actions against others if certain parties so choose to exercise their "freedom".
Every central bank's gold holdings (yellow or black) are treated as "backing the currency", a peg only ties the (generally irresponsible) hands of the central bankers, while it is the Army's guns that ultimately back both the currency and the reserves which underpin it.
Backing the US's 12T money supply, there is supposedly 8,000 tons of gold. Backing Russia's 0.7T money supply, there is supposedly over 1,000 tons of gold. Turning to the "black gold" backing- the Russians are (and will continue to be) net exporters, while the US is (and will continue to be) a net importer. They both ultimately back their currencies with thousands nuclear warheads, yet it is the Russian currency that is in the shitter right now, despite relatively larger backing of both yellow and black gold.
Sovereignty cannot exist until the private monopolies over the public money supplies are eliminated. Armed with a private monopoly, the banking syndicates are free to structure the money supply around the net issuance of debt, and both directly and indirectly control interest rates.
The royal "we" have tried returning to gold backing from purely fiat currencies numerous times in last couple centuries, when the banks were relatively weaker than they are today, but since we never learn our mistakes and do it better the next time- it never lasts.
A few comments (all on the same page) from a much more thorough discussion of the point.
http://www.zerohedge.com/news/2014-06-13/currency-war-140-years-monetary...
http://www.zerohedge.com/news/2014-06-13/currency-war-140-years-monetary...
http://www.zerohedge.com/news/2014-06-13/currency-war-140-years-monetary...
http://www.zerohedge.com/news/2014-06-13/currency-war-140-years-monetary...
My final (hopefully) argument in this thread is that it appears to me that you agree with me on the essentials.
Let me try a metaphor. Let's say you have a job and bring home a paycheck, but nobody else in your family does. But you have a family bank account, and these other people in your family can "issue credit" against it, meaning that they can borrow from the family bank account, into which, again, you are the only one actually depositing money. When you close that bank account, you become the sovereign of your personal affairs. They can scream all they want, but they'll have to get their own paychecks if they want their own spending money.
Globally, of course, some "family members" don't go to work and get their own paychecks, but instead inflict physical violence on you, or threaten to. Nevertheless, if you want to be sovereign in your personal affairs, you HAVE TO close that bank account. There is no other way.
Certainly, this won't be as easy as it sounds. There will be repercussions from the other "family members". So you have to plan carefully.
Have fun storming the castle! But keep in mind, unless you actually close the bank account (and the borders) and become self sufficient, then the country is still part of a larger marketplace, and that creates opportunities "they" will exploit to come after you with their central banks and treasury departments. It's a very challenging proposition on a nation-state level, unless you are willing to pull a Pol Pot on the useless eaters, and then threaten the non-believers with the same. Even barter doesn't fully solve this problem in practice... just ask the Iranians (who at least have the ballz voice support for commodity/asset money but unfortunately have to use physical gold to settle certain cross border trades).
Yep. I just wonder whether homo sapiens will survive, or whether a hundred years from now there will be nothing but a dystopian "1984" world.
I call BS on your comment. As I so often do. From my perspective the central problem is the private (Rothschild/Rockerfeller) Central Banking "Debt Money" system wiith fiat paper backed by nothing except an ever increasing "Flow" of printing and more debt. It's going to collapse, it's just a question of when. At that time, you will be left holding a stack of paper assets?
Can't you understand that free market capitalism is dead, There are NO markets now, just central planning.
The system is going to collapse either from within (HY, Derivatives, Equities) or without, as in all you Wall Street assholes finally push the Middle Class too far and they have nothing left but to take to the streets. And get shot, Then it really begins....
Keep sucking Rothschild cock. Do you even understand the meaning of the term FREE MARKET?
Now prove (or at elast demonstrate) how the price of an asset backed currency is NOT determined by the marketplace, irrespective of, and distinct from, the price whatever "asset" supposedly backs the currency, or STFU.
BTW - to give you idea of how utterly lacking your perspective on gold manipulation is... it would be like trying to argue with a mechanic that French tanks really have five reverse gears and one (only) forward gear.
Your comment about the french mechanic doesn't help me.
Maybe you could explain how the marketplace of the derivative and paper market of PMs is operating wrt to the physical PM.
Specifically the supply of that paper and the futures of that paper. I believe that was your point, that price follow demand....
My point was with respect to currencies, not commodities. However, the same holds true with commodities, the "disconnect" arises when the price for a paper commodity is misconstrued/misused as the price for the supposedly "underlying" commodity, they simply aren't the same thing. The pure bullshit of the paper gold market just highlights the point, since there isn't even theoretical convertibility of paper central bank notes against official central bank gold reserves (unlike GLD or CRIMEX "banknotes"). As to the difference of scale between the spot and forward market, the spot market reflects what is available (the sum of buyers and sellers) at a single point in time- (right now), whereas the forward market is the sum of many points in time (primarily within 12 months, but there are longer term contracts for people who need to duration match or actually hedge further out) -- so why shouldn't the forward market be much larger than the spot market? (Not that the current collateralization requirements or lack of collateralization/rehypothecation regulations in most of the paper gold markets are in any way appropriate for those markets, but that is a different beast to slay that the fact that forward market is significantly larger than the spot market.
The tank analogy had to do with this exchange. Dumping 9 billion in paper gold profitably is so easy a caveman could do it (or the E-TRADE baby assuming he could write algos and had a real prime broker). By the same token, if someone wanted to manipulate the of paper gold higher, it can also be done using the same risk mitigation strategy, and it doesn't require a central bank balance sheet or printing press.
no matter what happens the bankers will end run the law one way or another with wordsmith contrived gold equivalents. introduce the gold bond backed by francs, hey as good as gold, if ya could only find where dat gold is,ha...
Until they have one world currency, they will have this trouble. Actually even afterward they will have a large trouble See the trouble northern euro has with southern euro.
There will always be risk to banks. The issue is not that there is risk, it is that they are offloading their business risk to others that don't get compensated for that risk, namely the taxpayer.
Gold and silver are the One World Currency. The problem is it is not in general use. The simplicity of precious metals as money is that there is no need for any other. No complexity, no market manipulation, no interest inflating debt notes.
the international use of gold and silver will put hundreds of thousands of paper pushers and computer controlled fat fingers out on the street with a tin cup or actually having to produce something of value.
Agreed, the fiscal discipline of a PM based worldwide currency is why they will fight it to the last dying breath.
That includes CB, MIC, IBs, old time Banksters, etc. Even large Non profits and NGOs will fight it. They will form the most unusual alliances just to fight PMs.
Frankly, who gives a S&*t what the Banks and Corporations want? Can't the people wake up and see that they are being screwed by the Central Banking system. If this initiative fails, it is truly a lost opportunity for the people to tell TPTB to F Off?