Gold, The Fed, Exter’s Pyramid – When John Exter Met Paul Volcker

Tyler Durden's picture

Submitted by GoldCore

Gold, The Fed, Exter’s Pyramid – When John Exter Met Paul Volcker

We have a fascinating dialogue with many readers. One of our readers living in the U.S. has first hand experience of people involved at the highest levels of the Federal Reserve. He is very concerned about the astronomical levels of debt in the U.S. and internationally and the fact that this debt continues to balloon in a completely unsustainable way.

With his permission, we are publishing his recent email to me (mark.obyrne at goldcore.com) in its entirety. It is about a private meeting between ex-New York Fed Vice President John Exter and ex Fed Chairman Paul Volcker. We have added a few images in order to help understand the gravity of the building financial and monetary risks of today.

Hi Mark,

 

While reading your piece last week on the US Federal debt having reached $18 trillion, it brought back my memory of a visit John Exter and I had with Fed Chairman Paul Volcker, back in 1981.  It was a instance I’ll never forget!

 

John and I had a mutual billionaire widow client whose husband had been a Washington DC real estate magnet. He had died suddenly and she decided she wanted to have a part of her assets in physical gold and mining stocks. I recall she set the allocation at $50 million.

 

The widow had us travel to DC for a morning consultation followed by a luncheon. It was early April 1981 and 91 day US Treasury Bill rates were near 18%.

 

Our luncheon ended around 1:30 PM and we had a few hours to kill before our flight back to New York.

 

John Exter and Paul Volcker knew each other having been at the New York Fed as Vice Presidents and John decided he’d phone Volcker to see if he could see us before our return flight. Volcker took the call, said he would cancel his afternoon engagements and to come right over to the Fed. We got to the Fed and there were 36? high lumber piles of one foot long 2?X4? pieces all around Volcker’s office and the offices of his staff. Sky high interest rates had turned the construction industry down and the masses of unemployed construction workers were mailing Volcker the 2X4 pieces with nasty messages written on them in protest of the high rates.

 

John and I were at the Fed in a private conversation with Volcker for nearly three hours and in fact we nearly missed our flight because we stayed so long.

 

US Federal debt, in 1981 was rising through the $1 trillion level and I remember Volcker lamenting over the situation and asking John what he would recommend to get a handle on Federal spending. John gave Volcker a stern lecture on the Fed’s expansionary policies and told him the Fed would eventually end up destroying the whole American economy and the dollar because the Fed had become a prisoner of it’s own expansionism and it was something it couldn’t stop. John and Volcker discussed all the pitfalls of Keynesian and monetarism and Volcker didn’t rule out an eventual collapse of the dollar and second deflationary depression. I remember Volcker asking John when he would begin dropping short term rates and John commented that rates would have to drop soon or else the economy would fall off a cliff. It’s interesting that it wasn’t long after our session that rates started to come down.

 

The meeting was an experience of a lifetime for me to be sitting there in Volcker’s office listening to one gold standard economist central banker conversing with a Keynesian economist central banker. John Exter spelled out his scenario for Volcker and warned him of how badly the Keynesian experiment would end if it went on for an extended period of time. Volcker just sat there and listened and showed his concern.

 

Here we are 33 years later with US Federal Debt of $18 trillion with the country’s GDP at $17 trillion. A pretty disturbing situation, to say the least!

 

 

Volcker has joined my old club The Pilgrims of the United States which is based out of New York. I’ve been a member for nearly 40 years but don’t get back for meetings and events because of the travel distance. I hear Volcker goes to all the events and a fellow Pilgrim friend has approached him at meetings and when the late John Exter’s name is mentioned Volcker stops and has nothing but kind things to say about him.

 

Thought you’d be interested in learning of my anecdotal experience.

 

Best regards,

—————-

When reading this, some will say that this was in the past and these are different times and may not understand this warning from our recent history. However, it offers a lesson from the past that has significant relevance for today. The debasement of currency has ended in economic debacles in every single country, in every single instance throughout history.

Today, we see currency debasement internationally on a global scale – this has never happened before and has never been seen throughout history. The uber Keynesians attack those who warn about monetary risks and proclaim that none of the ‘goldbugs’ warnings have come to pass. Except of course, possibly the worst financial crisis that the world has ever seen and meager, unsustainable recovery.

We would caution that ‘yet’ may be the appropriate word here and we should all be vigilant and focus on the long terms risks – not the short term panaceas, tentative recoveries and massive asset bubbles of today.

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38BWD22's picture

 

 

Much of the gold that I own I bought at a higher price.  But, my wife has told me not to buy anymore.  I do have enough, and I will keep my promise.

Anyone who does NOT own any physical gold has a wonderful opportunity to join the small group (1% - 2% of Americans) who own gold.  And at a good price.

Captain Debtcrash's picture
Captain Debtcrash (not verified) 38BWD22 Aug 13, 2015 8:04 PM

A move back toward sound money without upsetting the fiat apple care is possible!  Explained here. 

Uncle Sugar's picture

It would require honest men in Washington to get back to sound money.  Never going to happen. 

BC6's picture

The debt thankfully has been stopped at ~18.2T or at least it has for the last 150+ days. Thank goodness they solved the growing debt problem! 

SafelyGraze's picture

1) "John and I had a mutual billionaire widow client"

a lot of us did.

she was ok, but could be kinda whiny

2) "... whose husband had been a Washington DC real estate magnet"

magnet.

well. that's how he attracted his billions.

Reichstag Fire Dept.'s picture

The Fedsters will never give up their opportunity to manipulate their fiat rubbish. 

JC-BI's picture
JC-BI (not verified) 38BWD22 Aug 13, 2015 8:03 PM

The FED is what went wrong with MONEY in America. All our woes are at the FED's feet>>

https://biblicisminstitute.wordpress.com/2015/08/14/when-money-is-the-pr...

logicalman's picture

Based on the world's population and the amount of Au on earth, each person should have about 25g.

Best to be above average!

 

Latitude25's picture

The world could go on a gold standard if needed although I prefer freegold instead but:

World Population 1900 , 1.8B, total gold in existence - 24,000 mt or about .42oz per person

World population 2000 , 6.0B, total gold in existence - 165,000 mt or about .88oz per person

Most of the world was on a gold standard in 1900 but in 2000 there was over 2X as much gold per person with no gold standard.

 

Conclusion:  With twice as much gold available per person there is no reason we could not use gold again as a standard, with silver also of course. 

Marco's picture

Bimetallism didn't work very well before silver became an industrial metal with small bullion stocks. I doubt people would want daily repricing of products in their silver "currency" based on its swings relative to money.

Only after a global SHTF scenario and technological collapse would bimetallism again make a little sense. Since then trades to abuse mispricing take a little more effort and time.

Latitude25's picture

Funny.  I have gold and silver coins from the same years that were in circulation in the US.  Why didn't that "work"?

Marco's picture

Unless you make the silver coin nothing more than shiny fiat with a face value very much greater than it's melt value you get carry trades if you try to artificially fix the exchange rate between gold money and silver. If the US had tried to continue to make silver coins in the 60s it would have just been minting them to be melted during the Hunt corner.

If you make the silver coin little more than fiat, why use silver at all?

Latitude25's picture

The Hunt corner occured as a speculative bubble after sound money was abandoned.  Silver was rising in price because sound money was abandoned and central bankers wanted inflation.  You have picked an era in history where fiat money was created without control.  If you go back when gold and silver were used as money you will see that for the most part the value of money was very stable unless of course some bankers tried to create too many receipts for it when on deposit.  You assume that Keynsian credit expansion is the normal and only way to use money.  History has shown otherwise.

Marco's picture

Britain was forced completely off silver by using a fixed ratio long before fiat happened, after which the rest of the world was forced to follow.

Latitude25's picture

Following the discovery in the 16th century of large deposits of silver at the Cerro Rico in PotosiBolivia, an international silver standard came into existence in conjunction with the Spanish pieces of eight. These silver dollar coins played the role of an international trading currency for nearly four hundred years.

https://en.wikipedia.org/wiki/Silver_standard

Imagine that.  A stable monetary system for nearly 400 years.

However, in 1158, King Henry II introduced Tealby penny. English currency was almost exclusively silver until 1344, when the gold noble was put into circulation. However, silver remained the legal basis for sterling until 1816.

So that makes more than 600 years on a silver standard.  Which fiat reserve currency even comes close?

Marco's picture

I don't think the straw man will answer.

So can we get back to fixed rate bimetallism? Which had significantly less time in Britain before blowing up.

logicalman's picture

Are you suggesting that daily re-pricing doesn't happen in the present system?

 

38BWD22's picture

 

 

My arithmetic:

170,000 tonnes worldwide works out to approx. 1 toz per capita worldwide.

Typical family of three should have 3 oz then.

Americans are, perhaps, 10 x as "rich" as average world citizen...

So, a typical American family should own 30 toz of gold.   (1 * 3 * 10)

[How many do?]

Johnny Caine's picture

Lololo gold is owned by the banks, so what's the difference between fiat and being broke and gold and being uber broke?  Does anybody on Zerohedge actually understand money??

lasvegaspersona's picture

Gold is for savers, it is a savings vehicle. Your number is correct but not everyone 'needs' gold. It makes its way to saversmand to those who understand its function.

Vlad the Inhaler's picture

People who have lived through the rise of totalitarian governments know - gold is laughably easy to confiscate.  

Tall Tom's picture

People who escaped the totalitarian governments knew that Gold was the vehicle used as the means to escape the oppression.

Vlad the Inhaler's picture

Oh and not just confiscation; in those times, trading in gold was made a capital offense.

GMadScientist's picture

Can someone explain why RE and businesses are farther from gold than paper products in Exter's little pyramid there?

38BWD22's picture

 

 

My *guess* would be liquidity.  The closer to gold, the more liquid (easier to sell) the holding in a crunch.

Amish Hacker's picture

Agreed. The other thing about Exter's Pyramid is that as the slow-motion train wreck unfolds, investors will move down the pyramid. Right now, a lot of money is still in stocks and corporate bonds, but an equities swoon would have them running to the perceived safety of Treasuries, maybe sending the 10-year to 1%. Then, when people wise up to the UST grift, physical greenbacks will seem safer (which explains the recent media trial balloons about banning cash). Finally, gold will be recognized as the ultimate safe asset, as it has been for thousands of years. 

daveO's picture

Then there's the debt that eventually crushes paper asset prices. 

This guy says it doesn't matter. Sure, so long as interest rates never rise. Good chart, anyway.

http://www.marketoracle.co.uk/Article51725.html

http://3.bp.blogspot.com/-I-yH4yewVcY/UMDV9JV4JuI/AAAAAAAAWto/c5nUqyuDos...

Gold is money, all else is credit.

GMadScientist's picture

Thanks, but isn't there a big diff between being able to unload something and being able to get what ya paid for it back? :)

GMadScientist's picture

Strange definition for 'help', Earle. ;)

indygo55's picture

I have silver that cost 11, 14, 21, 30, 34, 28, 24, 19, 16. What a ride!! I still good but dont need any more. Weeeellllll unless it goes to 11 again.

 

logicalman's picture

Got most of mine at about 18, but that's compared to useless paper.

Unfortunately, metal sinks - paper floats.

Lake wins!

 

jakesdad's picture

silver is insurance, not investment.  if we get to the point of transacting in it it'll be priceless, otherwise it's just a paperweight.  I HOPE when I die my kids find it & say "why in the hell did he buy this much of this stuff?" but I don't see it going down that way...

logicalman's picture

I try to diversify.

The first thing I invest in is myself, physically.

My healthcare program is to be healthy - Good food and physical fitness.

60 and good for 60 miles on a bike any day - ride every day - -40ºC - +40ºC.

Useful skills and knowledge are the ultimate currency.

Go from there.

 

Chief Wonder Bread's picture

We are in a world of irredeemable hurt.

Inbetween is pain's picture

Did I miss something, or why is it I don't know who wrote that letter?

OC Sure's picture

 

 

 

No way, man!

Dictionary.com says money is any "medium of exchange."

Wikopedia says that the Federal Reserve oversees a system of "Banks."

ZH, contrary to their own Manifesto, says that "banks" "print money!"

So like, what the fuck?

thecondor's picture

Banks "print" money through the creation of credit. The more credit extended the bigger the money supply. The more credit paid off or writen off the smaller the money supply. So yes, banks print money. 

dojufitz's picture

If Banks could print money they would not need deposits.

thecondor's picture

So loaning out $0.90 for every dollar in deposits is not money creation?

dojufitz's picture

Its called leverage....not money printing.

logicalman's picture

You need to do some research - lots of it.

 

FIAT CON's picture

Banks Print Currency ie debt

 Money is alltogether different

Winston Churchill's picture

Legal definition,according to Blacks Legal Dictionary:
Money =is a store of value.
Currency=a medium of exchange.
I'd suggest you exchange your medium for money,
or get a real dictionary to start.

OC Sure's picture

Why refer to another book/author for the "definition?"

How about your own wits?

If you agree that money is a store of value, then please explain to the class why money is introduced as a medium of exchange.

Then, please explain to the class what determines value as it relates to the necessity of a medium of exchange.

Then, please explain to the class if currency is a MOE, then how can counterfeit be a store of value.

30 mins, then I log. 

Go.

logicalman's picture

To quote...

If you agree that money is a store of value, then please explain to the class why money is introduced as a medium of exchange.

You kill your own argument.

Money IS a store of value and CAN act as a medium of exchange.

Currency is a convenience and ONLY a medium of exchange, unless backed by something tangible.

Only currency can be counterfiet, real money can't be.