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The Fed’s Fatal Flaw: Gold And The Predictable Endgame
Submitted by Thad Beversdorf via FirstRebuttal.com,
So last week a very savvy investor asked me my view (h/t Simon Popple) on – When and what will break the chains on gold by those seemingly omnipotent forces that so assuredly keep its price in check? In essence, the belief is (and I expect for most honest and impartial analysts this is true) that because there is potentially significant downside risk to a global monetary system built upon a currency to which gold represents the proverbial kryptonite (we’ll discuss why), there are checks in place within the system, to ensure that kryptonite doesn’t become too potent. The architects of the existing system would have been foolish not to implement checks on gold.
And due to traditional physical gold transactions being cumbersome in a world of click, point and trade, checks on gold come surprisingly simple (paper market). However, there now exists a broadening network of architects (think China’s Silk Road Fund, gold ATM’s in Dubai and electronic exchanges like Allocated Bullion Exchange) creating a modernized electronic infrastructure where physical gold transacts as efficiently as all other financial markets but while maintaining the inherent intrinsic and enduring value. Modern logistics for a monetary system with 5000 years of staying power will make it incredibly difficult to rebuild checks on gold subsequent to the death of the Fed.
Below I will provide the Hypothesis, Groundwork, Empirical Evidence and Conclusion that will speak to the title of this essay. With that, grab a coffee and enjoy!
Hypothesis
The monetary system enacted in 1913 (and all fiat monetary systems), issuing currency backed by interest bearing indenture, was fatally flawed due to a requirement for its very survival to create an ever-increasing stock of money, without also providing the means for perfect investment, resulting in a system where debt ultimately consumes all profits and labour over time. A system only a banker could love. Because such a system is predicated on devaluation (by its requirement for perpetual growth in money stock) and because that sealed its fate, the system’s end was perfectly predictable upon its inception.
The system’s fatal flaw is inherent in that its very survival necessitates that each dollar supplied requires more than a dollar returned. With that the economy necessarily became a mechanism for ever increasing trade (cash) flow (a banking objective and function), conflicting with its natural mechanism as a means to a rising standard of living (a societal objective and function). The result being an unsustainable build up of debt by way of artificial money creation, which would force economic inefficiencies such that capital allocators would necessarily forsake labour for profits – an unnatural behaviour given labour (i.e. consumer) is the subsistence of profits in the same way profit (i.e. employer) is the subsistence of labour.
With that natural bond broken, the economy would become an impediment rather than a mechanism for growth. Ultimately the amassing inefficiencies overwhelm the monetary system’s ability to make adequate adjustments, transitioning it to the final stage of mass contraction (economic cannibalism – we have now entered this stage) and then death. This will result, as it always does upon the breakdown of intrinsically valueless currency systems, in gold’s chains being broken. Once again establishing gold as the basis for both transactional currency and storage of wealth (as we saw during the 1930’s banking crisis and then more recently with gold’s meteoric price rise post 2008 banking crisis).
This may sound like quite a grand hypothesis and I can see the monetarist disciples rolling their eyes already (as a Booth grad I know how you think!); and so to give the non believers a glimpse at the validity of the hypothesis, allow me to provide a quick observable microcosm lending significant credence to the subject hypothesis before we get started. Think about the 2008 credit crisis. The entire debacle began when policymakers decided to artificially create value out of nothing. That is, they wanted to create housing wealth to those that had not earned it as evidenced in the following excerpt from “The National Homeownership Strategy: Partners in the American Dream”, which was the Clinton Administration official proposal to the banking sector that kicked off the entire housing disaster.
“For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.”
And so false value was created but to each dollar of false value created was attached a very real obligation that required repayment of that dollar plus interest. And so despite an increase in trade flow (housing by way of mortgage, and consumer expenditures via inflated housing equity) the system predictably failed to achieve the only (impossible) premise for which the system relied on for its survival, namely perpetually increasing property values. And so the system collapsed as was entirely predictable.
As we know, the false value or the illusion of wealth creation ended with total wealth for 90% of the US falling by 40% (a staggering statistic that remains unimproved even 6 years on). The thing to understand is that this was entirely predicable and was predicted by Ron Paul in a 2001 speech to Congress (and Peter Schiff, and many others subsequently). The point being the system was fatally flawed from its very birth and so its death was, in fact, absolute and predictable. There was no uncertainty as to its fate, as the system design necessitated its own end. I will show that inherent within our monetary system exists a similar fatal flaw and predictable end.
The (Required) Groundwork
Now to truly grasp the when and what it is imperative to understand the how and why underlying the monetary system and it’s inherent fatal flaw. To do so requires laying some groundwork. And so let’s begin….
I believe a useful way to understand gold and its interrelatedness to the financial, economic and markets universe is as a physicist understands gravity in the physical universe. Relative to other forces it appears mostly passive and almost tepid. Something we pay little mind to despite being cognisant it is always there in the background. That said, gravity is ubiquitous and despite generally remaining on the “no danger” end of its continuum, given the right physical scenario (e.g. supernova), it becomes perhaps the only force in the universe that can literally tear a whole in the fabric of the space-time temporal, creating a point called the event horizon beyond which its attraction simply overwhelms all other forces.
Generally gold has a similar character in that it is the one monetary force that has stood the existence of human trade and there is no corner of the financial economic universe in which gold is rejected. Further, given the right financial economic scenario its attraction becomes stronger than all other assets and we’ve seen this proven time and time again, for literally thousands of years. The architects of the fiat banking system themselves are among the worlds largest hoarders of physical gold. That very fact alone should resonate to the non believers as one simply cannot explain it away. Bernanke once stated to a Congressional Finance Committee that he believed the only reason banks bought physical gold was tradition. And he should have either been prosecuted or fired, as he was either lying or grossly ignorant about his own organisation’s activity.
But so then the question becomes what is the right scenario to turn gold from a domestic cow to a raging bull? And the answer is naturally as complex as the system to which it poses a threat. Now I apologize for the (perhaps) excessive metaphors but they serve a point of understanding; so think of an airplane’s autopilot system. There are literally thousands of stimuli being checked every second (wind speed, fuel, air temp, etc) in order to keep on an appropriate course. And as these stimuli change the autopilot system makes continuous slight adjustments to maintain its course. However, when enough stimuli begin to deteriorate sufficiently the physical laws actually begin to overwhelm the software’s ability to adequately adjust and the plane goes down. Likewise in our current monetary system we have checks in place that make continuous adjustments as the stimuli change. We call this monetary policy.
Over the past 100 years of monetary policy we’ve seen our system make several major adjustments to foster the desired course. Early on, the first major failure (great depression) of monetary policy clarified that the new system could not be trusted to safeguard one’s wealth and gold again became the trusted currency. This required the new system make some material adjustments which were highly focused on offsetting the potential for gold to interfere with the new system taking off once again. In fact, the threat gold represented was so severe to the survival of the central banking monetary system that the implemented ‘adjustment’ was to literally confiscate all gold within the US and lure as much of it from foreigners as well. The idea being if you, in effect, criminalize its use you might be able to break its age old hold on the people’s trust.
(Interestingly, the US government enlisted a private entity – the Federal Reserve – as the middleman to confiscate the gold but allowed them to take a spread of 75% on the trade. That is, the Fed paid people $20/oz for the confiscated gold but just 10 months later sold that gold to the Treasury for $35/oz. Fortunately by the 1930’s Americans had mostly forgotten about the Revolutionary War and so the strategy was implemented and successfully transforming America back into a nation ‘by the bankers for the bankers’.)
Now pulling gold out of the new system was not just to make people forget about gold and hop on the dollar train. It was much more substantive than a simple promotional strategy. Gold is primarily a storage mechanism of purchasing power. And the new monetary system couldn’t survive if wealth was being stored. The system required the expenditure of wealth and income (we’ll prove why). And so getting gold out of the hands and homes meant the storage mechanism was gone.
And so cash began to flow again out of the hands and homes as there was no longer a way to protect one’s purchasing power beyond the short term. This concept was not so much a policy as it was the very lifeline of the central banking system. However, it meant that as money flowed out, money had to subsequently flow back into the hands of those who, by system design, couldn’t hold onto it, lest the system collapse. And so the culture of commercialism was born.
The reason is inherent in the system. As each dollar added to the system is backed by an indenture requiring some interest, that printed dollar must become materially more than a dollar to not only pay itself down plus interest (to the banking system) but to also provide enough return to allocate between profit (shareholders) and labour (consumers) such that the cycle can begin again.
Now on paper, one could suggest that efficient allocation of that dollar will provide enough return to pay down the principal dollar plus the interest plus some return left over to split between profit and labour. However, and I’m most comfortable suggesting, the boys of Jeckyll Island were acutely aware that economies don’t work that way. Economies are not steady state but dynamic and sufficient investment returns would not always be achievable.
And when sufficient returns are not achievable through productive economic investment, the system, requiring new dollars the same way humans require new air, has no option but to increase money supply to cover the cashflow deficit (think debt ceiling debate which is not at all a debate but good political theatre over an infinite debt envelope implicitly approved in 1913).
The system requires continuous monetary expansion which is not a naturally occurring economic phenomena and so relies on a safety net of artificial monetary expansion (debt monetization). But because the currency was exchangeable for gold, more money printing also required more gold available for exchange, which by no coincidence, confiscating America’s gold also provided. Quite a brilliant strategy, if one has the (perceived) authority to thieve an entire nation’s gold holdings.
However, that artificial process of monetary expansion hinders the natural process of output expansion by weighing the process down. In an economy with a fixed supply of money, output expansion occurs through deflation, which shows up in rising money velocity. In effect, the economy is the system and its objective is efficient output (i.e. improving standard of living). However, in a central banking system, the economy’s objective is cashflow not output. Output is simply one tool to increase cashflow. The difference is critical. The result is that output is inefficient and expansion results through inflation (i.e. declining standard of living), which ultimately shows up in declining money velocity (and elsewhere). We will put all of this to the test empirically below.
And so with the gold confiscation having provided a means for more money printing, the central banking monetary system once again took off. This was sufficient to keep the wheels greased for a couple decades, however, by the end of the 1960’s and with LBJ’s Great Society (a massive societal income subsidy) it became obvious that, despite the increased gold reserves backing monetary expansion there just wasn’t enough of the vexatious metal to support the kind of money stock required to feed the beast. Gold was still preventing the monetary system from reaching its ideal cruising altitude. This was because gold still had a defined and exchangeable value tied to the the currency underlying the monetary system. In effect, gold was acting like a leash on a dog, preventing it from full freedom to run and play at will and this just wasn’t going to work.
And so the next major monetary system adjustment (taking place under Nixon in 1971 – the end of Bretton/Woods) was to cut gold loose, creating a pure fiat currency constrained only by the fiscal discipline of the nation itself. And quite literally fiscal discipline was but a fanciful dream. Even today, it is being delivered to Americans as an ardent goal on which to base one’s political campaign. But the system, by design, doesn’t allow for fiscal discipline. And there exists a dark irony in the move to a pure fiat currency in that the central banking system had to necessarily move to a pure fiat currency for its mere survival. That was a literal certainty meaning it was wholly predictable in 1913. The irony lies in the fact that doing so also guaranteed the system’s death, which was also absolute upon its creation and thus entirely predictable.
But because Americans had been separated from gold for so many decades at this point, and because households were beginning to feel the fiscal drain of rising inflation the system architects felt there was little risk of the age old metal making its way back into the hands and homes of everyday consumers. And this was true, at least in the short run. Shortly thereafter, the monetary system reached full cruising altitude, seemingly having neutralized gold’s natural bonds with the economic world.
For decades gold remained dormant while the nation believed it was unfettered by debt ratios, monetary devaluation and exorbitant consumption. A belief Americans are to this day, force fed from Pampers to poppy fields. At the same time, corporations and their shareholders (capital allocators) believed a healthy economy no longer required capital be split between profits and labour but instead determined the goal should be to allocate as much capital as possible directly to profits.
Labour was no longer seen as a harmonic and intricate part of the ecosystem and the economy was no longer maintained as a construct for the American standard of living but a precision tool for profit and cashflow. And so introduce the Free (hardly) Trade Agreements (circa 1990’s – NAFTA, GATT, etc), which allow corporations to circumvent high labour/regulatory costs by moving capital to lower cost but higher risk regions. The trade agreements offset the higher risk by defining that international law will protect their capital and profits via the executed trade agreements, which limit the host nation’s autonomy to set policies that would impede on profits.
And so the party got bigger and bigger and things seemed great. Corporations were cutting labour costs by a ratio of 25:1 and unrestrained money supply was supporting the debt subsidized incomes. And because the money was flowing nobody felt compelled to pay any mind to the winds getting heavier, the sky getting darker and the engines losing power.
At this point I’d like to share an interview (h/t Mickey Shendrick for clueing me in on this) from 1994 with Sir James Goldsmith on the Charlie Rose show. I’ve embedded just Part 1 of 6 (from YouTube each about 10 mins) but I would recommend everyone take the time to watch the entire interview at some point (part 3 has a particularly good debate), as SJG proves himself as prophetic as Orwell and as enlightening as Jesus.
So certainly some were paying attention to the fact that the economic landscape was beginning to change sufficiently so as to create that right scenario whereby gold would no longer remain passive. In fact, 19th century Nobel nominee, Michal Kalecki had predicted that a monetary system that targeted full employment by way of stimulating private investment via interest rates (e.g. the Fed) would necessarily beget negative interest rates. And some 70 years later he was proven right. Furthermore, Kalecki predicted that the system would also require income subsidies which has also proven dead on.
And this really takes us to the promise land in terms of finding our answer. When and what breaks the chains on gold pricing? For it is the culmination of time and a fatally flawed great experiment, whose architects superciliously believed themselves capable of circumventing the laws of economics, that will bring about the main event.
I think we are ready to start applying the facts to our theoretical construct that the monetary system is fatally flawed and will result in gold breaking out of its cage as the warden succumbs to its forlorn fate.
The Empirical Evidence
So now we must generate an analytical and empirical diagnosis upon the primary elements of the central banking monetary system. Namely, we are going to study interest rates, debt levels, output, money supply, profits and labour in an attempt to both substantiate the patterns discussed above and to determine if there is a predictable point of system death. And if we can predict that point, we also predict the point at which gold will break free from its chains to once again take its place as the world’s only enduring currency.
Let’s start with interest rates, debt and output.
The first chart above depicts the perpetual deterioration of the 10 yr rate (blue line), using 10 yr as a proxy for average rates. By looking at the debt-service-to-GDP (green line) we can see that rates have declined such that debt-service-to-GDP remained in a range of 2% to 5%, with an average around 3% for at least the past 50 years. Had rates not declined perpetually, debt service would have become an unmanageable detractor of GDP. So perpetually declining interest rates is one of the adjustments the system made to maintain its course (as Kalecki predicted in 1943).
Next let’s look at output. Remember because the fiat system requires ever increasing trade (cash) flow it is essential that output never move to a state of extended contraction. And what we find is that while GDP (output) growth (purple line) averaged between 3% and 5%, regularly peaking above 6% from 1965 to 1990, the 25 years since is not only averaging less than 3% it has failed to produce even 1 peak above 6% while still producing several major troughs.
The takeaway being output growth has been deteriorating for the past 25 years and has been struggling to maintain 2% real growth for the past 6 years (the last time things were this bad for an extended period we started WWII; do you see a similar pattern emerging today??). We must note that to maintain even the dangerously thin 2% growth the system has implemented monetary policy adjustments so extreme that even the most adventuresome academics would not have considered them outside of theoretical discussion (refer to red line in the above chart- discussed below).
Be cognizant that when extended real GDP growth falls to or below 0% it will necessarily end the central banking system i.e. death of the Fed – as it exists today (a mathematical certainty). And so, we must comprehend the importance of and implications on official CPI and thus on ‘official’ real rates vs ‘real’ real rates. ‘Real’ real rates are beginning to impact G7 bond markets despite the Fed’s hesitation to raise rates.
The crux of the issue is what does a monetarist do about supply side (cost-push) inflation when discretionary demand is already on life support?
If you raise rates you further hurt nominal output but if you don’t raise rates the supply side inflation begins to swallow up the real in real output, pushing real GDP into negative territory. The supply side inflation is a natural consequence of corporations propping up earnings by contracting operations (i.e. forsaking labour for profits). For the past several years the Fed has remained steadfast on trying to stimulate nominal demand by maintaining ZIRP, however, with supply side inflation becoming a real problem they might be forced to raise rates to prevent a deterioration of real GDP. These are the impossible conflicts that arise as the system breaks down.
And now let’s move back to the above chart to see how we are achieving the dangerously thin real 2% growth in output over the past 6 years. The answer is simple, debt (via money printing). If we look at debt as percentage of GDP (red line) we find that since the early 1980’s growth in output has required proportionately and perpetually more debt, eventually exploding post 2008 with growth rates never imagined possible (or necessary) by economists, in such a sophisticated US system. In fact, over just the past 6 years we have been forced to increase debt to GDP by 70%, with debt now larger than GDP. That figure is as staggering as it appears in the above chart (red line post 2008) given we are now talking trillions not billion or millions (the equivalent of each working American taking on roughly $70K in additional debt over those 6 years).
The following chart shows that we have built up so much debt that we are no longer generating sufficient return to cover even the principal $1 let alone interest, profits and income. The red circles depict periods where returns were less than the principal dollar.
But the above two charts are a reaction to an underlying set of economic inefficiencies below the outer surface of the macrocosm. And to dig into those we need to look below the surface to see the underlying elements of our economy, which the system relies on to provide efficient growth.
The underlying elements we need to review are profits and labour.
What we find is that while the macrocosm has been in decline for the last 25 years, the underlying elements appear to have been running strong until the end of the 1990’s. And then around 2000 we have a massive dislocation between labour and profits. Specifically, since 2000 labour participation rate has dropped by 7% and real median incomes have dropped 10%. But the real story is the nominal story. While corporate profits have seen an incredible 360% increase since 2000, nominal incomes have managed only a 25% increase. This begs the question, how do corporate profits increase 1500% faster than incomes?
Well remember the system predicted that due to the economy being maintained as a means to trade (cash) flow (serving a bankers objective) rather than a means to rising standard of living (serving a societal objective) capital allocators would eventually forsake labour for profits due to inherent inefficiencies leading to strategic operational contraction (think reallocation of capex and wages to div payouts and share buybacks).
But to really understand the dislocation between profits and incomes we need to look further down the rabbit hole.
And so let’s breakdown GDP, employee compensation (wages and salaries) and personal consumption (PCE).
We see in the above chart nominal GDP (green line), PCE (purple line), compensation (red line) and a forth line (blue line). What we find is that nominal GDP and PCE appear to maintain a fairly decent growth trajectory relative to compensation. But so we need to explain how consumption is growing faster than compensation. And the answer is in the mystery (blue) line. What we find is that in order to get from employee compensation to the growth in personal consumption we must add in both consumer debt and welfare and when we do so we get the blue line which tracks PCE growth almost perfectly.
But let’s really dial in on these relationships in the next chart to fully understand the dynamics and to get to the bottom of these dislocations.
This chart shows us that while personal consumption is increasing as a percentage of GDP (green line) it is not increasing by way of compensation. We can see that compensation as a percentage of GDP (orange line) has been steadily declining since the late 1960’s. This really solidifies the concept that GDP is not a representation of standard of living but of trade (cash) flow. Perhaps more telling is the fact that employee compensation to personal consumption (light blue line) has declined by some 25% and since the late 1960’s.
This chart perfectly confirms the fallacy of continuously available sufficient efficient returns resulting in the need to subsidize incomes; necessitating the ‘grow at all costs’ policies that provide for perpetual welfare and consumer debt expansion. All of which is required for the system’s very survival, given the system dies without monetary expansion (each dollar must grow larger than a dollar). It is these relationship dynamics that underlie the long-term deterioration of the macrocosm we saw in chart 1 above (interest rates, GDP and public debt).
It must be understood that the existing central banking system, by its very design with each dollar supplied obligating more than a dollar in return, naturally requires (but doesn’t naturally deliver) perpetual increases in cashflow with output acting as part mechanism and part red herring. And this really pinpoints the fatal flaw. As consumer debt and welfare are forced into the system the system gets ever less efficient, ultimately burying itself.
And this is not ring fenced in the US. The central banking system is a terminal disease that has metastasized globally as depicted in the following chart (source: Bloomberg), with global growth now below 3%.
And by the following chart.
With the following chart depicting how this entire system breakdown impacts the solvency of a nation itself.
You can see from 1971 onward, the point we moved to a pure fiat currency, the nation’s fiscal condition began to deteriorate with a negative inflection in 2000 and an even more severe downturn in 2008, which is the year that really represents the economic event horizon. That was the year the legs simply gave out and there is no coming back from that event. Not under the same system.
Despite a valiant and unprecedented effort by the monetary policy tsunami pushing into its 7th year, the past 6 months has been an absolute economic collapse and is getting worse. The only thing preventing unprecedented asset destruction (and thus our experience today vs our experience at the end of 2008) is an entirely false equity market no longer based on efficient allocation of a finite resource (i.e. money) but on inefficient allocation of an infinite resource (i.e. printed currency). But it is mathematically a matter of time now. The data couldn’t be more clear.
Conclusion
The monetary system enacted in 1913 (and all fiat monetary systems), issuing currency backed by interest bearing indenture, was fatally flawed due to a requirement for its very survival to create an ever-increasing stock of money, without also providing the means for perfect investment, resulting in a system where debt ultimately consumes all profits and labour over time. Only a banker could dream up such a system. And so upon the system’s creation, its death was wholly predictable. The grand experiment proving an instrument of almost complete wealth destruction (via devaluation and debt) for all but the very architects of the system itself. For them, the system has, as was the sole objective, amassed wealth beyond the imagination of men and gods alike.
And so to conclude, the what and when is the culmination of time and the Fed’s fatal flaw. As I noted in a recent article, the data is telling us the Fed is out of Aces; the adjustments now impotent. Build your models to forecast the next 4 quarter period printing negative real output. That will be the ‘what’ marking ‘when’ gold plants its Liberty Pole. And to those who believe the system is infallible and simply must work because we’re told it will… don’t be daft. It was built by bankers for bankers. ‘Nuff said.
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All I know is when it happens, this look will finally be back in...
http://www.timlybarger.com/blog/softt00.jpeg
I pity the fool with no gold jewels.
"I believe in the Golden Rule - The Man with the Gold... Rules." Yes, Mr. T said it too.
If only we had the A-Team as Federal Reserve Chairmen....https://m.youtube.com/watch?v=N1HMCArgqWM
Lordy - time is flying by waayyyy too fast... George Peppard already been gone for 21 years now...? Shit...
A "fiat monetary" system is a contradiction in terms. The decree can only be possible for counterfeit, not money. That a counterfeiting system ponzifies itself past the point that the thieves become fatter than their victims is no surprise.
In a monetary system where never another piece of counterfeit were ever introduced into the economy of productive work than how would bankers pay interest? Whomever borrows from someone else who has a lot of the existing pool of currency (again, the pool never gets larger), then that borrower has to earn more money than the amount that they borrowed. That borrower must do more productive work and earn enough to pay back the principal and pay back more in order to account for the lenders demand, their interest. The banker can then turn around and pay this earned money back out to accomodate someone else's interest.
In a banking system no new currency is required to be introduced. The value is in the productive work performed, not the medium that conducts its current. The lender, the borrower, and everyone else trading values must do productive work in order to obtain their share of the existing pool of currency. Value, naturally, and necessarily rises everywhere.
In a counterfeiting system new currency must always be introduced. The value is, as always, in the productive work performed, not the medium that conducts the current. The lender, the borrower, and everyone else trading values do not have to do productive work to obtain their share of the existing pool of currency if they introduce new currency themselves. They introduce it and steal from other's productive work.
What determines that the work is productive? Voluntary demand. But how can demand be voluntary if the counterfeiters maintain a monopoly on the business of banking? Monopoly is compulsion, compulsion violates individual rights...etc, etc...
the jew money scheme that supplanted the one created for we the people by true patriots, is vastly inferior to its predecessor.
articles like thos remind me that the reason gold is the best transmission vehicle for stored capital is precisely because it has no other applications (not exactly true, it is a useful metal in some applications were it less scarce).
It always makes me laugh when idiots say golds value is dubious because it has no commercial application. Duh, thats what makes it immune to the cyclical and secular vagueries of the commodity space. Still, some people like to build huge ocean going vessels with no/minimum lifeboats.
In a better, more rational universe, we humans would have no need for gold as money, because we would have figured out a better way to trade for goods and services. With gold freed from monetary use, it could then be turned into awesome jewelry for our wives and el-supremo speaker cables for our home theater systems.
Unfortunately, we don't live in a better, more rational universe. And so, to paraphrase Kyle Bass, having gold is like having an insurance policy against human greed and stupidity.
i disagree. Barter is inefficient, yet we need something that isnt abusable by the issuing powers.
gold may not be the best way yet found to trade for goods and services given people now transact over large distances. But gold absolutely should still be the foundation upon which whatever other medium is used to overcome distance - because all other mediums we have invesnted that overcome distance are subject to rehypothecational abuse.
only something genuinely and irrevocably scarce can overcome this, and you want that scarce thing to be durable, divisible, fungible, etc.
yes, that is scary
We keep seeing all these predictions, but better to listen to people like the last guy who called the 2008 crash, months before it happened. Get his latest video here ==> http://www.bit.ly/1GgvUtE calls are rediculously accurate.
He basically has a great knowledge and predicted the 2008, and just released his video on what he thinks is coming.
All janet yellen keeps saying is bullshit, she keeps putting the rumors out there, but we all know they will not lift rates, because they painted themselves, into a corner, of course. There is no quick way out. But they did do this on purpose.
Trade an email for a broken link....a-hole.
jerk hole spammer.
if his calls are as redickerous as ur spellin, best stay away.
Saudi Arabia pivoting east????
http://www.arabnews.com/saudi-arabia/news/763761
Don't forget what Volker admitted to back when he was Fed chairman:
"The only mistake I made was not to control gold." (Price went to $850)
They're obviously not making that same mistake now, or gold would be $2500 or more.
"However, there now exists a broadening network of architects (think China’s Silk Road Fund, gold ATM’s in Dubai and electronic exchanges like Allocated Bullion Exchange) creating a modernized electronic infrastructure where physical gold transacts as efficiently as all other financial markets but while maintaining the inherent intrinsic and enduring value. "
I may add this to the above:
Big plus for posting the 1994 Sir Goldsmith interview, which really deserves a post of its own.
Indeed. He was spot on that globalization would destroy Western economies while enriching a few at the top. The giant sucking sound predicted by Perot relative to Mexico was small fry compared to the massive transfer of wealth associated with moving the West's factories to China.
the fed's fatal flaw is that they are backing a huge ponzi scheme and will eventually have to buy all the stocks and all the bonds making them the biggest garbage repository in the world. then everyone will laugh at them and they will die of embarassment.
Central/Bullion Bank Futures ... M a n i p u l a t i o n
Dewa keywork seach; can't find it ...
Junk article.
[repeating here because I could not find the original on refresh]
Hmmm, multiple articles about Gold on ZH today, must mean the price is about to get Drunken Monkey Hammered again .......
Should be a good time to add few more to the AGE's stack very soon.
Read the Whole damn article.. what i think he means to say.. is the Plane is climbing fiercely, but the wings and engines are starting to shake....
oh yeah and the only parachute that is going to work will have golden threads....
What is often left out of the gold confiscation story is that the Fed's gold also got confiscated in the end, by the time it was revalued it was United States property ... to much wailing and gnashing of teeth of bankers.
I call dibs on Saddam Hussein's toilet.
Bookmarked for reading when I have hours to spare...
6000 words of total bullshit.
Gold will keep plummeting. It has little value in today's electronic world, except as jewelry.
You can lead a horse to water...but you can't keep eluding natural selection buddy. Watch how you go...
Gold bugs are the A-Team. I love me some bling. I pity the fool who thinks my bling ain't the thing.
+100 for linking to the Sir James Goldsmith interview!
Goddamn that is an excellent interview. Forwarded to my friends and colleagues.
Kudos for the author, however, some central bank last longer (the fed) by proxy bank confiscation (austerity in all forms) leaving socially bankrupt states in the wake with war as a daily reminder.
Wow - that was a REALLY long article!!
Content was good, but would have been much easier to grok in 1/10 the words. Let's try way less than that:
Fatal flaw with fiat currency is it requires countinuous growth.
85% of the "Money" that used to be paid to US workers, went to CEO's and Shareholders by paying foreign workers 15% of the US labor rate.
Losing a good percentage of the working class increased entitlement programs to the point of negtative revenues and real negative GDP.
Trying to stimulate consumer spending with low interest rates, bought time, but no increase in spending.
Zero % interest rates allowed Corporations to lay off more workers, and by using cheap money to buy back shares, appear to be doing great, but again, creating more consumers with no money to spend and no jobs, increasing entitlement program costs.
Debt increases to ginormous amounts as "money" needs to be "created" to keep the charade going.
System breaks.
Let me try and be even MORE succinct:
Fiat money has no built-in checks and balances, and as such, invites debt creation. There are no consequences to ever-increasing and unpayable debt, until there are.
Fiat; it's the (John) Law!
Worked so well when the Chinese invented it that they outlawed the stuff for centuries.
Got popcorn?
Well, since China, is accumulating most of the precious, China will be making most of the rules...Right?
Got Gold?
Well, Look who's finallycome to the party. I wrote about this over 10 years ago. Sell the gold to the peasants, have another E.O. 6102 and then use the gold to pay off debts or float loans or emergency spending.
I can see another Treaty of Versailles where American assets are shipped off. Boeing, Railraods, Caterpiller, Ford, GM and other major corporations.
Old News Tyler. Really old News.
I love, love, LOVE the yellow metal but am afraid to buy anymore.
I just can't see how the DC degenerates could NOT have a plan to either A) outlaw it, or B) seize it. More likely both.
One of my buds is in nothing but gold. Literally nothing else. He believes that's the winning hand.
Maybe he's right. But if he's wrong, all his eggs are in a single basket. One EO and he's screwed.
But what do I know...
That was an excellent article. Well written and coherent.
I believe the all gold hand mentioned below is likely a winner.
Confiscation of gold in America?? Not going to happen. Oh they may issue another order or pass a law, however, no one in America is stupidly "patriotic" anymore. Trust in .gov is at an all time low and rightly so. No, when they pass their law, and they just might, gold holders today are going to sit home and give them the finger. No one consciously buying gold today is going to fork over a dimes worth of gold. We will just sit and laugh until .gov collapses. The majority of Greek citizens are unplugged from the banks and the government. They are just biding their time till their .gov and the Euro trash elites fall apart. We will do the same.
Do you really believe no one in America is drinking moonshine? Do you think all those labor force dropouts are no longer working? Or, are they just no longer plugged in to the system of theft, death, and slavery?
http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=14001
JESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to The Real News Network. I'm Jessica Desvarieux in Baltimore.
So the big question in the world of economics is whether or not the Federal Reserve will raise interest rates and end their bond buying program known as quantitative easing. Chair Janet Yellen will give a quarterly economic and interest rate forecast at a meeting between June 16th and the 17th. But what would her announcement mean for everyday people? Joining us to discuss all this and the man behind the Hudson Report is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri, Kansas City. His latest book is Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.
Thank you, Michael, for joining us.
JESSICA DESVARIEUX: So Michael, just briefly can you start by explaining how quantitative easing works, for our viewers?
MICHAEL HUDSON, PROF. OF ECONOMICS, UMKC: The Federal Reserve created $4 trillion worth of credit electronically on its computers when the economy was in trouble in 2008. It could have used this $4 trillion to write down the debts. It could have used it to spend into the economy and create sort of a recovery. But instead it gave all the money to the banks, and its claim was that if you give $4 trillion to the bank reserves this is going to help the economy, because the bank is going to lend more money to the economy and drive it in, $4 trillion deeper into debt.
This was a crazy idea. Here we were in a debt crisis, and the Fed said what the economy needs to cure the crisis and get employment moving again, is more debt. So the banks got the $4 trillion. And of this was so much money that interest rates were driven down to 1/10th of 1 percent on government bonds. And the Fed was lending money to the banks at 1/10th of 1 percent. So the idea was, the pretense was that now the Feds can lend mortgage money at hardly anything at all, and people can [bid] prices, house prices even higher. And that will save the banks from losing all the money on their liars' loans--the liars were the banks--on their junk mortgage loans. Or the Fed will lend the money to industry, and corporations will now say gee, we can borrow so cheaply that all we need to do is make maybe a three or a four percent profit, and we can hire enough labor to make people all fully employed again.
DESVARIEUX: All right, Michael. Hold on, hold on, one second. Now that the federal government though is talking about ending quantitative easing, also known as QE, who would be the winners and losers of this policy ending?
HUDSON: Well, in order to say who would be the winners and losers I have to say what happened when they did the easing. When they did it it drove interest rates down to, as I said, to a fraction of a percent, what did the banks do with the money? They didn't lend to industry to hire, they lent to industry to essentially arbitrage. They lent to corporate raiders to buy out industrial corporations, and they, most of all, they lent to companies to buy back their own stock.
So in the last, for this year alone, Standard & Poor's and other agencies guess that the winners are going to be the corporations that are going to spend over a trillion dollars in buying back their own stock. Because they can borrow so cheaply, why not buy back their own stock with interest rates so low.
So this trillion dollars is not going to be invested in new goods and services and production. It's not going to be invested in hiring labor. So who will be the winners? Well first of all, the pension funds have been complaining that interest rates are so low that they haven't been able to make enough money in their funds to be assured to pay the pensions that are falling due. The cities and states, California, New Jersey now, Illinois, are all saying wait a minute, we're so far behind in our pensions because we haven't been able to make the money, that we need higher interest rates in order to make enough money to pay the pensions. And the insurance companies have said, well, look, we need higher interest rates to solve the problem that we're making so little money securely that we promised to pay all these annuities, and we may go broke.
So in principle the whole idea is to help the pension funds, insurance companies and retirees make enough money to live on. That's the promise. But it's a false promise. It's just really the cover story. Because what's going to happen, as is so often the case, solving one problem creates yet new problems.
So look at who the losers will be if the Federal Reserve stops quantitative easing. Well for one thing, if they raise interest rates here--and when they say stopping quantitative easing, Janet Yellen really means let's raise interest rates and get them high again, as if that's going to help the economy. Well the first thing is if the United States raises interest rates that's going to push the dollar way up against the Euro, and most of all against third world and Asian countries. This means that countries that owe foreign debt, that's almost all denominated in dollars, especially to the International Monetary Fund or the World Bank, they're going to have to pay much more money in higher-priced dollars for their own currency. So this is going to aggravate debt deflation and defaults in third world countries.
Secondly, all of a sudden when they raise the interest rates, all this arbitrage that's been occurring to bid up the stock market, to bid up the bond market and to bid up real estate markets is going to be reversed. Because if interest rates rise, banks are not going to lend as much money to buy stocks and they're not going to make as much money to lend real estate.
So the economy's really painted itself into a corner. Nobody's able to win at this point, that's the problem with the economy. And in that sense you can say it's not that we really have a problem. We have a quandary. And a quandary is something where there isn't a solution. Mathematicians call this the optimum solution, or the optimum position. The optimum position is one where you can't make any move without making things worse. And that's the position the United States is in right now. This is as good as it gets, which is another way of saying it's all downhill from here.
DESVARIEUX: Michael, you don't see any way of us being able to get out of this sort of, debt deflation, this worst case scenario options here? Do we have any sort of options that allow us to kind of get out of this?
HUDSON: There is one way to get out of it, but it's, they're not willing to do it. The way to get out of debt deflation is you write down the bad debts. And this is what should have been done in 2008. As a matter of fact, when President Obama was running for election he promised to write down the bad mortgage debts to bring the mortgages in line with what people could pay. Well, right now you have a lot of interest on mortgages. You have a lot of principal coming through. You have a rise in defaults on mortgages because the debts are not written down.
And as soon as Obama was elected, Barney Frank went to him and said look, I've got the Republicans to agree and Paulson at Treasury's agreed we can write down the debts. And Obama said, I changed my mind, I'm not going to do what I promised. I'm appointing Tim Geithner as the bank lobbyist in charge of the Treasury Department, and he said we have to help the banks and forget the voters. And so the debts are not written down. If you don't write down the debts, the economy is going to have to use its money to pay down the mortgage debts, to pay all the corporate debts.
Let's look at these corporations that are buying their own stock, for instance. They say, well, look. If our stock is paying, maybe, 6 percent dividend, or 5 percent, or even 4 percent, let's borrow money from the bank and buy the stock. But now if the interest rate goes up, the stock market may fall easily by 20 percent. That's what people are so worried about. Whenever Janet Yellen talked about ending quantitative easing, the stock market takes a couple of hundred points' plunge.
So if the stock price goes down, say, 20 percent, then here are these companies that have borrowed to buy their own stock. And instead of making a two or three percent gain, the difference between the 1 percent they borrow at and the 4 percent, say, that the dividend rate is, all of a sudden they lose 20 percent and they're in trouble. They've taken a huge loss.
So all of this seeming gain, this sort of fictitious capital that's been created is going to be wiped out if you don't simply write down the debts. And because you, the government and the politicians, Congress, have all said we're assigning economic policy outside of the government, we're letting the Federal Reserve be the central planner, well, the Federal Reserve is loyal to its customers and its owners, the commercial banks. So basically Congress and the executive branch has said we're going to save the banks, not the economy. And saving the banks means you impose debt deflation on the economy, you shrink the economy. There's not going to be a revival in employment under these conditions. There's not going to be rising wages. And the capital gains that have been spurring the stock and bond markets, and the real estate recovery, are going to be reversed.
No problem with a dollar created requiring a future dollar plus something in the future, as long as the pace of groth is set by free, not rigged forces. That is what "good credit creation" is about. But, guess what? It means interest rates go where they have to go, freely. Then credit just works fine, even if dollars create future dollars, because those future dollars will exist. Not the case of our system now, thanks to interest rates monopoly by central banks... so yes, we do have a problem.
It would have been useful to have the article talk about how ETFs and Fractional money can overwhelm the physical price of gold/silver and act as the tail wagging the dog in gold prices, but otherwise loved the article.
All true, now here's the rub. If you're expecting a gold standard to reemerge then you also need to recognize who now owns all the gold. If you create a dollar standard based upon gold, and the Intl bankers (plus china) own all the gold, what's to stop them from increasing and decreasing the supply available just as they have with fiat dollars?
Hmm, could be a problem. In fact, any system we create will inevitably be infiltrated by these same skumm bags because of the incredible wealth that they've created for themselves. After a few generations we'll be right back where we started.
So what's the solution? Logically the only solution is to root out every single one of these families, confiscate everything, and then hang them. Anything less will be a band-aid.
When Roosevelt confiscated gold in 1933, he also forced China to end their silver based currency through trade sanctions.
China's currency weakened just as they were fighting a war with Japan. Eventually China went bankrupt, and the government fell to communism because of it. China has a long memory and always said they would get even with the US for interferring with their currency.
As China hoards gold to start a new world reserve currency...they finally are preparing to shove it up our arse.
This is why I like to keep some gold...I may need some yuan one day.
I totally agree that present system is flawed. But please remember that argument "gold has always been foundation of finance" is exactly the same as just a century ago was argument "horses has always been foundation of transportation". And they ceased to be in just several years.