This page has been archived and commenting is disabled.

Bear Market Open Thread

Tyler Durden's picture


Since Zero Hedge updates over the next sevearal few hours will be sparse, please use this opportunity to share your transitory outlooks on current events, life, google trending topics, and pretty much anything else.


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 08/20/2011 - 01:51 | 1580295 Apocalypse Now
Apocalypse Now's picture

How Does The Western Financial System Work?  I will try to compress this into a few brief paragraphs so everyone can understand.

Central banks are private banks owned by families since the 1700's.  They realized they could loan to governments for guaranteed returns based on the labor of the citizens paid in taxes and understood the power of compounding small percentages over a long time period (parable of a grain of rice doubling on each square on the chess board is an example).  A symbiosis exists since the arrangement in the US for example allows all the central bank to rebate all the IRS (private agency) tax returns back to the government except for 1% that goes to the fed which is owned by the big banks which is owned by powerful families.  This is where Bifden's comment comes in that we have to spend money or we will go broke.  The interest on the debt is booked as revenue, so within the system more debt looks good as it appears as revenue.  The banks like deficit spending since it creates loans from them to government, and this is why banks promote both socialist agendas (welfare state deficit spending) and neo-con agendas (war deficit spending).  They often fund both sides of the countries in war and other corporations they own shares of supply the weapons.  The higher the debt to the central bank, the more assets get pledged/liened based on it and in the event of a financial default the banks are able to secure real assets in foreclosure for pennies when they created loans out of thin air.  In this position, you could imagine printing as much paper as possible and makiing as many loans as possible to eventually secure real assets (paper for real goods is a good trade - don't think of the $ as an asset, it's actually a note and an illusion of its former self that was exchangeable for gold).  The fed now owns more homes in the US than any other entity and more than 11 million homes are vacant.

Richard Nixon saved the US from losing all its gold in 1971, after having 20,000 tons and after two wars (Korea and Vietnam) required deficit spending which weakened the dollar and caused other countries like France to redeem dollars for gold we were left with 8,000 tons.  Gold has always had value and gold is the primary reserve asset for most countries despite what they tell you in school that it is a barbarous relic.  It's so valuable they rarely move the physical from vaults but use a leasing arrangement to move assets on paper.  This system is based on trust with all the gold assayed in secure storage, but based on revelations on the CME trading it appears that 100 times the volume of gold trades versus gold available - therefore if everyone requested delivery we would have a problem.  This is how fractional reseerve banking started, as goldsmiths realized few people came back to take position of their gold due to vaulting.  They started producing multiple receipts for the same bar of gold and sold the receipts on believing everyone would not ask for their physical gold at the same time, but when rumors start or evidence shows malfeasance in the system it has resulted in a lack of trust and people line up to get their gold back out.  Hugo Chavez just did this, and we typically see this done with deposits in a bank.  I don't see any risk today of cash deposits because you can print as many as you want at virtually no cost (since you can't exchange it for fixed gold anymore).  A real bank run today would be people moving out of government securities and cash going into precious metals. 

All charts like Prector EW that go back before 1971 are ridiculous because before 1971 the dollar = gold, but after 1971 the dollar is fiat that could be exchanged for gold at a variable rate so cash before 1971 was gold.  Saying that the market could go back to 400 doesn't take into account that printing is not tied to something like gold production which restricts printing - they can just add trillions as an accounting entry so real return is important.  I propose that we can't compare any chart after 1972 to any chart before 1971 due to the disconnect and the longer the time from 1971 the larger the distortion. So we we had the reserve currency and they we had an extreme priveledge by taking away the gold but still getting the reserve currency status which allows us to trade paper for real goods like oil.  So what backs our dollar today you ask?  Our military protects oil lanes around the world and OPEC nations trade oil for dollars.  Many of those countries immediatley take the dollars and convert to gold and sometimes diversify with other currencies.  From a game theory perspective aside from what is "fair", the military advantage can help procure needed resources around the world.  If we were not in the middle east you might be paying $20 per gallon for gas.  Based on this knowledge, most people would complain less about being in the middle east and would be thankful we don't have $20 gas - however we pay for gas in a roundabout way through taxes for american military bases.  If all the faith was in gold, a goldfinger event could be planned to wipe out the gold so from a strategy perspective the U.S. is in an enviable position.  With this benefit well known, the central bank in the US helps out other western banks due to the tremendous priveledge (just paper after all) and because of all the mortgage fraud issues.  As long as those dollars don't come back to buy goods / companies or compete with US resource acquisition abroad it wouldn't impact us much propping up a foreign bank balance sheet.  The central banks are also a franchise owned by the same families so they help each other out around the world regardless of national boundaries.

The benefit of fractional reserve lending is access to capital (theoretically) for good ideas in a healthy system with fair capital allocation methods and growth expansion.  This should promote collaboration between savers and spenders/business expansion by using capital for jobs growth rather than just sitting in a vault with no velocity.  It's also great not to have to carry heavy precious metals around.  The problem is that they repealed Glass Steagall and started levering up 40 to 1 so that a very small move down would wipe out their equity and bankrupt the bank.  The extreme leverage also affects people that were responsible and had no leverage because asset prices boomed due to leverage and then busted when leverage had to decrease due to solvency (floats and sinks all boats).  They also began to bribe politiciains or blackmail them into voting for their lobbyist bills taking away all reasonable structural oversight to ensure a fair system.  With an unaudited fed, you could theoretically print trillions, hand it to your friends, buy up all assets around the world, and nobody would know.  Recall the missing $2 trillion speech by Rumsfeld (perhaps used for Deep Underground Military Bases or new weapons giving us an advantage).  We now have central banks, market makers, and exchange owners from the same family that have rigged the markets and bought off regulators (SEC just questioned over shredding documents).  They can see all positions in all bank accounts as well as all orders going into the market due to HFT and purchasing order flow info.  Trillions have gone into the markets over the last twelve years but we have lower asset values nominally and major losses based on real returns after inflation.  We need a cash flow statement for the entire market over this time period.  You will see the Cohen's, market makers, and others rigged the system ito benefit while most have lost.  This is what the Dylan rant was about.  They have killed the goose that laid the golden eggs though due to a collapse in trust & faith, and the volatility is from machines battling over low volume crumbs and churn.

Zimbabwe recently had the highest increase in stock returns, but their currency dropped dramatically so real returns after inflation are the only thing one should look at.  The fed should not have telegraphed locked in rates - silver and gold should really be good over this time frame since there is no opportunity cost related to interest rates.  The only thing that brought down gold prices in the 80's was Volker raising interest rates so people moved to savings for the return.Instead of hoarding precious metals, let's make sure to give just one silver american eagle as a gift for special occasions to the ones we love as a gift symbolizing freedom along with instructions where they can buy more if they want them.  Most fiat currencies have not lasted as long as ours has, and for our standard of living we prefer to keep the dollar the world reserve currency and the cureency of the United States of America - the greatest empire in the history of the world.

You can actually drink gold and increase your IQ:  as you know gold is used in computers for super conducting. 

Perhaps we should give gifts of american silver eagles to people we love on special occasions to ensure nobody can accuse coin enthusiasts of being hoarders.  Once people feel the heft and design on a great product like the US eagle, they will most likely procure more themselves or even better take up the tradition and buy an eagle for one of their loved ones.  Help someone deal with inflation over the long term, show them you love them, and help the government out by providing them with a revenue source.

Sat, 08/20/2011 - 02:33 | 1580386 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Copy and paste material of the decade.  The world in a nutshell.  Brilliant!  Thank you!

Tuco Benedicto Pacifico Juan Maria Ramirez

Sat, 08/20/2011 - 07:06 | 1580599 Moe Howard
Moe Howard's picture

Thank you for that nice piece.

I have been giving an American Silver Eagle to my 4 young Grandchildren since they were born on birthdays and Christmas. They will have these coins much longer than a lead paint Chinese toy. I also give adult family members holiday silver bars at Thanksgiving and Christmas. Last year AMPEX had Thanksgiving 1 OZT bars for under spot the day after Thanksgiving. We must teach our circle about real money right now. There no longer is any time to waste.

Sat, 08/20/2011 - 11:54 | 1581101 wisefool
wisefool's picture

+1. The people who hate Nixon with regard to the Gold Standard are similar to the people who hate the farmer who does not bake a cake with next years seed grain.

I know Ron Paul has to advocate the Gold Stard as the extreme position to keysianism, for now. But if he gets enough traction he can modify his position to many, quality, sound money systems that are fiat, but fiat that represents commonwealth. Instead of fiat that represents reatrded social and political engineering piled on higher and higher every 4 years.


Sat, 08/20/2011 - 11:55 | 1581106 Hulk
Hulk's picture

God damn, that was good...

Sat, 08/20/2011 - 00:52 | 1580298 Atomic10ex
Atomic10ex's picture

I live in Jackson Hole.  30 private jets at our tiny airport yesterday.  Fed Reserve must be in town Bichez!

Sat, 08/20/2011 - 10:10 | 1580815 tip e. canoe
tip e. canoe's picture

you should take the world how they live as they preach austerity.

Sat, 08/20/2011 - 01:19 | 1580303 G-R-U-N-T
G-R-U-N-T's picture

Emerging global export model collapse-O-rama-bitchez...While the Federal Reserve commandeers the global flight to hell...Don't panic!!! Everything is under control, please calm down!!!

Sat, 08/20/2011 - 01:13 | 1580328 Alienated Serf
Alienated Serf's picture

 i'll throw a 100,000 lb walrus right through the walls

Sat, 08/20/2011 - 03:04 | 1580422 mt paul
mt paul's picture

i'll eat that walrus

Sat, 08/20/2011 - 04:17 | 1580481 KowPie
KowPie's picture

I want the tusks.

Sat, 08/20/2011 - 11:56 | 1581108 Hulk
Hulk's picture

And I thought I was strong!

Sat, 08/20/2011 - 01:13 | 1580329 iNull
iNull's picture

You think a little 500 pt decline is bad? You aint seen nothing yet. Wait till you see what what's coming in the next two weeks. You'll be hugging your grandmother's ankles.


Sat, 08/20/2011 - 12:42 | 1581234 snowball777
snowball777's picture

That's pretty fucked up...Grandma's been dead for decades.

Sat, 08/20/2011 - 01:20 | 1580331 sixdollarsix
sixdollarsix's picture

$10,000 @ close of market on August 1, 2008

Gold = $909.70 = almost 11 ounces (10.992)

Silver= $17.50 = 571 ounces (571.428)

August 1, 2011 =

Gold = 11ozt x $1619.70/ozt = $17,816.70

Silver = 571ozt x $39.46/ozt = $22,531.66


Gold = 11ozt x $2500.00/ozt = $27,500.00

Silver = 571ozt x $80.00/ozt = $45,680.00


The choice is yours…


Sat, 08/20/2011 - 01:21 | 1580338 iNull
iNull's picture

Wow. You can really cut 'n paste.

Sat, 08/20/2011 - 03:37 | 1580456 old naughty
old naughty's picture

and soon,

gold = $50,000/oz

silver = 500/oz,

what will the numbers be?


hey 1000 comments coming up

Sat, 08/20/2011 - 01:58 | 1580366 Sequitur
Sequitur's picture

And the bullshit continues.

Global Bank Capital Regime At Risk As Regulators Spar Over Rules

Silent Participations

During the 2010 negotiations, Germany sought to maintain recognition of so-called silent participations -- hybrid securities that act like debt and equity at the same time -- which some banks rely on for more than half their capital. While Germany lost the battle to exempt silent participations last year, the EU’s implementation proposal was written to allow the securities to be included if they fulfill certain conditions, according to an EU official who asked not to be identified because he wasn’t authorized to speak.

At Landesbank Hessen-Thueringen, a state-owned lender based in Frankfurt known as Helaba, silent participations account for more than 50 percent of the bank’s 6 billion euros ($8.6 billion) of capital. Helaba withdrew from the Europe-wide stress tests in July after regulators refused to count some of those hybrid instruments as capital.

Italy fought during Basel talks last year to include deferred tax assets -- future deductions from tax liabilities resulting from current losses -- when calculating top-tier capital. Basel III restricted use of these assets to no more than 10 percent of a bank’s capital. The EU’s proposal would allow unrestricted use of deferred tax assets if they comply with certain requirements. Italy modified its tax laws in February to enable the assets to meet those conditions.

Counting tax assets would raise the capital ratio at Banca Monte dei Paschi di Siena SpA, the oldest bank in the world and Italy’s third-largest, by about 1 percentage point, according to a February Mediobanca SpA report on the benefits of the tax-law change to Italian banks.

Double Counting

Basel III also sought to put an end to the double counting of capital in insurance subsidiaries, which many European lenders do. The proposed EU rules don’t require banks to deduct investments in these subsidiaries from their capital, which will allow the double counting to continue, said analysts including Andrew Stimpson at KBW Inc. in London. That would benefit banks such as France’s Credit Agricole SA (ACA), whose insurance subsidiary accounts for 10 percent of income.

"Each adjustment may be justified in each country's case, but when you put them all together, there will be differences between how the EU implements Basel III and how others do," said Tobias Moerschen, a European bank analyst at Moody's Investors Service in New York. "And if other countries feel compelled to go down the same road, you’ll end up with a less level playing field, and that is negative."

Sat, 08/20/2011 - 02:20 | 1580377 PulauHantu29
PulauHantu29's picture

The GDP is already negative. Military spending gives a false rise to the GNP. Consumer spending does not produce anything and we do not export much of value anymore. GS says 1% GDP? Looks more like -4 or -5 to me.

I don't see the Nation turning around for the better unless we are able to produce more goods the world needs. Larry Summers said two years ago the only way out of this recession is through exports...a weaker dollar. rnank is giving Larry the weak dollar but what would Larry like to export?



Sat, 08/20/2011 - 07:18 | 1580610 Moe Howard
Moe Howard's picture

Larry made his choice of what to export more than twenty years ago - he came up with exporting pollution. It just happens that the jobs go with the pollution.

Google it. Larry Summers owns it.

Sat, 08/20/2011 - 14:07 | 1581552 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Adjusted for inflation we are going backwards.  Double dip "recession" what a joke!

Sat, 08/20/2011 - 02:19 | 1580379 Hapte
Hapte's picture

Has human industrial civilization collapsed yet? Will this revolution be televised? Blood in the streetz please.

Sat, 08/20/2011 - 02:48 | 1580400 Dempster
Dempster's picture

I’m a self employed working Joe, and here in the UK it’s 7.45 a.m. Saturday morning, and I’m about to set off to work.  I’ve got a ‘Saturday job’ to do.  Which today is going to be an eight hour flog (or six if all goes well) on the top of a retail unit. 

In any event, if there is a currency crisis and fiat money becomes worthless, which seems to be what many are predicting, I wouldn’t swap what I’m going to do today for a small part of yellow metal disc. I’d want something more useful.

I know gold is trading at a very high level, but if currency ever collapses and it comes down to barter, I can’t see gold being worth what it is now.

And as regards backing a currency with it, why gold? 

Why not platinum, or copper, or aluminium, or food, or land or anything that’s useful. 

Sat, 08/20/2011 - 02:50 | 1580405 KowPie
KowPie's picture

Reloading Equipment...check

Powder... check








Spare Benny Buks on hand...check

6 Month Emergency Food Supply...check

Solar Water Pump+Spare...check

Soap Making Supplies...check

Vacuum Sealed Heirloom Seeds...check

Beer Making Supplies (minimum 50 gallons)...check (I like beer)

Hmmmm.... all set.... bring it BITCHEZZZZ!!!!

Sat, 08/20/2011 - 03:00 | 1580419 props2009
props2009's picture

Can someone tell me who these guys are. They say they are traders with 25 years of experience at a hedge fund.


Have been eeing their trades for some time and they seem to be hitting their taargets regularly.



Sat, 08/20/2011 - 03:10 | 1580429 Kina
Sat, 08/20/2011 - 03:32 | 1580449 Kina
Kina's picture

Bikini shoot of those 3 very same smokin Japanese singing bitches bitchez.

beware seizures...

Sat, 08/20/2011 - 04:22 | 1580484 KowPie
KowPie's picture

Lucky bear.

Sat, 08/20/2011 - 03:17 | 1580438 props2009
props2009's picture!/Capital3x



Sat, 08/20/2011 - 03:29 | 1580445 eazyas
eazyas's picture

Nearly 1000 posts Bitchez

Sat, 08/20/2011 - 03:36 | 1580454 frugartarian
frugartarian's picture

closed out crm puts b4 earnings, still have some cmg puts since 300, gona sell most at 265. up 12k for the week. Most of money is in gold since low 1600's. Looking forward to monday


Sat, 08/20/2011 - 03:40 | 1580458 Arkadaba
Arkadaba's picture

I really do love America, When I was a kid I thought this was a Canadian song:

Sat, 08/20/2011 - 03:59 | 1580470 acdcbag1
acdcbag1's picture

where are the true opportunists scum bags on this board?  bitchez  where's the Prince who will take from B of A and then ATM them later, bitchez?  fight club alturism is so freaking boring, sluts.

Sat, 08/20/2011 - 04:10 | 1580474 whisp
whisp's picture

Something is wrong. Everybody even the glorious analysts expects bear market. Last bear market didnt expect anyone.

Sat, 08/20/2011 - 04:10 | 1580475 whisp
whisp's picture

Something is wrong. Everybody even the glorious analysts expects bear market. Last bear market didnt expect anyone.

Sat, 08/20/2011 - 04:10 | 1580476 whisp
whisp's picture

Something is wrong. Everybody even the glorious analysts expects bear market. Last bear market didnt expect anyone.

Sat, 08/20/2011 - 04:24 | 1580485 KowPie
KowPie's picture

OK. I know this is patently wrong...

Sat, 08/20/2011 - 04:24 | 1580486 KowPie
KowPie's picture

...I just can't help myself...

Sat, 08/20/2011 - 04:25 | 1580487 KowPie
KowPie's picture's almost 0430...

Sat, 08/20/2011 - 04:25 | 1580488 KowPie
KowPie's picture

...I'm half in the bag...

Sat, 08/20/2011 - 04:25 | 1580489 KowPie
KowPie's picture

...tired, and probably the last one awake...

Sat, 08/20/2011 - 04:26 | 1580491 Arkadaba
Arkadaba's picture

Very misunderstood east european industrial band (80's) :

Sat, 08/20/2011 - 04:26 | 1580492 KowPie
KowPie's picture

...but I will see this thread...

Sat, 08/20/2011 - 04:26 | 1580493 KowPie
KowPie's picture

....before I pass out....

Sat, 08/20/2011 - 04:27 | 1580494 KowPie
KowPie's picture

...hit 1000 posts!

Sat, 08/20/2011 - 04:28 | 1580495 KowPie
KowPie's picture

...little help here???

Sat, 08/20/2011 - 04:29 | 1580497 KowPie
KowPie's picture

...someone, anyone??? (sound of voice echoing)

Sat, 08/20/2011 - 04:29 | 1580498 KowPie
KowPie's picture

...must stay awake...

Sat, 08/20/2011 - 04:29 | 1580499 PhattyBuoy
PhattyBuoy's picture

1000 posts bitchez !

Sat, 08/20/2011 - 04:32 | 1580503 KowPie
KowPie's picture

I respectfully call bullshit! It was only 996 at that time! You will not take my glory. Ahh, hell. F*ck it. Nite.

Sat, 08/20/2011 - 04:33 | 1580504 PhattyBuoy
PhattyBuoy's picture

I'll turn out the lights ...

Sat, 08/20/2011 - 04:30 | 1580500 KowPie
KowPie's picture

...almost there....

Sat, 08/20/2011 - 04:30 | 1580501 KowPie
KowPie's picture


Sat, 08/20/2011 - 04:30 | 1580502 KowPie
KowPie's picture

Woohooo!!! 1000. Goodnight.

Sat, 08/20/2011 - 04:48 | 1580509 WorkOutWellForAll
WorkOutWellForAll's picture

We lazy, inefficient Americanz can learn from out thrifty army contractors..

"WASHINGTON, Aug. 18, 2011 -- The Army announced today the award of contracts to BAE Systems Land and Armaments, L.P., of Troy, Mich., for $449.9 million, and General Dynamics Land Systems, Inc., of Sterling Heights, Mich., for $439.7 million, for the Ground Combat Vehicle program technology development phase."

""The Army enthusiastically welcomes the formal launch of the Ground Combat Vehicle program, which will provide much needed protection and mobility to soldiers in combat," said Secretary of the Army John McHugh. "Given the economic environment the nation currently faces, the Army recognizes that it is imperative to continually address requirements as we build a versatile, yet affordable, next-generation infantry fighting vehicle.""

Sat, 08/20/2011 - 05:03 | 1580516 tocointhephrase
tocointhephrase's picture

Worldwide QE coming Bitchez, Au & Ag Hyperbolic Bitchez.

Sat, 08/20/2011 - 05:06 | 1580518 tocointhephrase
tocointhephrase's picture

All of you shall witness the day


Sat, 08/20/2011 - 05:13 | 1580522 Anonymiss
Anonymiss's picture

chill bitchezzzzzz

Sat, 08/20/2011 - 05:14 | 1580523 foofoojin
foofoojin's picture

Well in the life department, my goto gold prospecting store is closing after 30 years in business. Sad bear is sad and so is most of Northern California hobby prospectors.


Sat, 08/20/2011 - 05:32 | 1580531 falak pema
falak pema's picture

Read this :

What Europe Can Learn From America Stefan TheilThe Daily Beast | Aug. 19, 2011, 1:11 PM |; background-attachment: initial; background-origin: initial; background-clip: initial; background-color: initial; color: #f47512; background-position: -100px 0px; background-repeat: no-repeat no-repeat;" title="views">406 |; background-attachment: initial; background-origin: initial; background-clip: initial; background-color: initial; background-position: -60px -26px; background-repeat: no-repeat no-repeat;" href="">4


    Stefan Theil


    Stefan Theil is Newsweek’s Berlin bureau chief and covers European politics, business, and economics.

    Recent Posts

    Why can’t Europe be more like America, where the debt problems of Illinois or California could never threaten a breakup of the entire Union? Not so in Europe, where the problems of tiny Greece have set off a financial storm that is now threatening the entire dysfunctional EU, engulfing Italy and even exposing cracks in France and Germany.


    Italy was only saved from out-of-control interest rates on its mountains of government debt by the European Central Bank’s emergency bond-buying last week. France is now widely considered next in line after the U.S. to lose its AAA bond rating. Even Germany, the most rock-solid of the West’s major economies, no longer looks invincible. Since July, the cost to insure German government bonds against default has doubled, and now exceeds that for British bonds for the first time in living memory.

    Amid wildly gyrating markets, the leaders of Germany and France, Angela Merkel and Nicolas Sarkozy, met for an emergency crisis summit at the Elysee Palace in Paris on Wednesday. The result — drum roll, please — was a few meaningless platitudes about the euro being “part of our health and peaceful coexistence,” vague plans for an EU-wide financial transactions tax, and a promise to create yet more jobs for French bureaucrats in a soon-to-be-formed “Eurozone Council.”

    Such verbiage and dithering in the face of market mayhem helped Europe get into its mess in the first place. You might remember this same duo reacting to the first near-meltdown over Greece in May 2010 by insisting that bankrupt Greece would never be bankrupt, lashing out at foreign “speculators”, and banning short sales of stocks and bonds. Then, as now, the markets’ reaction was to keep falling.

    To suggest Europe needs to adopt a dose of American federalism to get its crisis under control might be hard to swallow given America’s own serious problems, not least the sad spectacle of a polarized Congress taking the country to the brink before agreeing on some first baby steps in attacking the country’s ballooning debt.

    But the idea is this: If only these countries took a big step forward toward a true United States of Europe, settling their ancient grievances to create a stronger union in which rich Germans and Dutch shared their wealth with the less fortunate Greeks and Italians, then these crises would be a thing of the past.

    Economists call this a “fiscal union,” a key part of which is that all the countries using the euro share joint responsibility for each other’s debt and finances by issuing a common “Eurobond.” These Eurobonds would be guaranteed by all 17 countries using the euro so no individual state can go bankrupt, and future crises like Greece’s are avoided.

    The “fiscal federalists” are probably right that Europe could use a few lessons from America, whose 50 disparate states have long lived in a currency union. But the lessons American federalism can teach the Europeans may not be what the supporters of more European integration usually have in mind.

    America’s federalism works precisely because there are no bailouts between the states. As the economic historian Michael Bordo explains, there was a time when U.S. states regularly ran up out-of-control debts in the expectation that Washington would bail them out. It was only after a wave of state bankruptcies in the 1840s (after Washington said, ‘sorry, no bailouts’) that the states shaped up and institutionalized tough balanced-budget rules, which 36 states have today and which have prevented the worst excesses. So it was no surprise in 2009 when Obama said ‘no’ to a bailout out for California—nor that Californians declined to trash the streets of Sacramento and call Obama a Nazi for not paying their debts, as many Greeks are insulting Angela Merkel now.

    Or take the exceptional bailout of New York City in 1975 (which Gerald Ford, playing the role of Merkel, first rejected before approving with tough conditions). The U.S. federal government and New York State forced a financial control board on the city that enacted deep cuts in services, reorganized the budget process, and instituted several years of oversight. Compared to such tough love, Greece is still getting the velvet treatment, and has barely begun the necessary reforms.

    Europe’s current troubles started in 2010, when its leaders began to bail out Greece without any plan for dealing with the insolvent country’s vast overhang of debt, worth over 160 percent of GDP and made unsustainable by a deeply uncompetitive, import-dependent economy and a society addicted to government largesse but refusing to pay taxes. The bailout followed earlier implicit promises that no creditor to any European bank or country would ever have to write off debts. Investors quickly looked at all the other countries with shaky banks and big national debts, put two and two together, and drew the inescapable conclusion that Europe’s politicians were bluffing.

    It was only on July 21 of this year, after more than a year of bickering (mainly over Germany’s insistence that the banks who’d recklessly lent to Greece and others share the burden with Europe’s taxpayers), that Europe got some of the building blocks in place that could help it get out of the crisis. One is an end to total and open-ended guarantees. Banks will now be forced to restructure the debt and take part of the losses. That can be a model for sharing (and thereby limiting) bank and taxpayer losses on other present and future debt, says Berlin bond-market expert Achim Duebel. Second, the ECB can now intervene in the bond markets to lower interest rates for countries like Italy, which is basically solvent. Third, Europe has a new rescue fund that, while not big enough at the moment, could be turned into a European version of the IMF--a model just proposed by Thomas Meyer, chief economist of Deutsche Bank, and Daniel Gros, director of the Center for European Policy Studies in Brussels. For the first time now, this EU-wide fund can recapitalize banks, attacking another crucial source of continued European dysfunction.

    Eurobonds, which Merkel and Sarkozy insisted are off the table for now, would create more problems than they would solve, argues Duebel. One widespread proposal is for each country to be permitted to issue jointly guaranteed Eurobonds up to a certain limit, such as 60 percent of GDP. If a country wants to splurge, it will have to raise additional funds on its own, at whatever interest rate it can get on the market. So far, so good. But the model seems guaranteed to crash in a crisis, when government debt suddenly explodes because of bank bailouts, for example. To think that a government like Greece’s can then raise all that extra debt on its own in a freezing market is wishful thinking, says Duebel. It’s a recipe for more EU bailouts. Instead, Duebel proposes the EU jointly guarantee a fraction of each bond that would give investors a limit to their losses, like the 50 percent guarantee they're getting on Greek bonds now.

    As Germany is finding out, guaranteeing Greek and Italian debt comes with tremendous, possibly existential political risks, not least a backlash among rich-country voters. And this is perhaps the main reason why Europe can’t just act like the United States. The EU is a gradual construction that has to maneuver around ancestral obstacles; psychologically, most European countries aren’t really republics at all but in many ways modern tribes, each with different languages, ethnicities, cultures and historical memories. The German tribe doesn’t want to pay the debt of the Italian tribe, and the proud and ancient tribe of Greece takes no orders from those upstart chieftains of Germany. Europe's last attempt to forge a more perfect union once and for all, a grand constitutional convention from 2001 to 2003 that evoked America's own convention in 1787, ended in disaster, with voters in Holland, France and elsewhere rejecting the 465-page document.

    The EU has tamed these ancient tribalisms in fits and starts. That there has been only one genocidal war on this blood-drenched continent since 1945 (the Balkans conflict in the 1990s, which, tellingly, the U.S. had to come in and end) is in itself an astonishing success. The best and most realistic hope is that the EU will once again muddle through as it always does. Just don’t expect silver bullets or clean solutions--and pray that this won't be another case, like the Balkans, where Europe can't help itself.

    This post originally appeared on The Daily Beast.

    Please follow Money Game on Twitter and Facebook.

    Read more:

    Sat, 08/20/2011 - 05:43 | 1580536 Motorhead
    Motorhead's picture

    Anybody looked at GM's stock price lately?  It's now a a 'whopping' $22.16.  Government Motors at its best.

    Sat, 08/20/2011 - 05:44 | 1580537 falak pema
    falak pema's picture

    Another good read on Austrian economic model and their view on the gold standard.


    Myth: The gold standard is a better monetary system.

    Fact: The gold standard causes deflation and depressions. 


    The far right advocates the gold standard because it gets government out of the business of controlling the money supply. They fear that printing money creates inflation, and retracting money causes recessions. But the opposite is also true: printing money cures recessions, and retracting it cures inflation. Governments in the last 60 years have used these policies with tremendous success. There has not been a single depression or bank panic in any nation anywhere in the world using Keynesian monetary policies. But during the Gilded Age of the late 19th and early 20th centuries, depressions and bank panics were common. The historical record is so strong that mainstream economists reject the gold standard almost universally. 


    Once the subject of heated national debate over 100 years ago, the gold standard today has nearly disappeared as a political issue. The world has abandoned the gold standard in favor of so-called "paper money," and only a diminishing group on the far right continues to call for its return. However, if mainstream economists (on both the left and the right) have anything to say about it, there will never be a return to "that barbarous relic," as John Maynard Keynes called gold over 60 years ago.

    Even so, defenders of the gold standard include such former presidential candidates as Jack Kemp and Stephen Forbes. Furthermore, the rise of well-funded, right-wing think tanks in the last few decades has managed to resurrect the issue. Therefore, reviewing the arguments of the "gold bugs" -- as they are irreverently known in academia -- is well worthwhile, if only to screen our presidential candidates for obsolete economic ideas.

    The reason why the far right opposes the current money system is because it allows the government to control the size of the money supply. They argue that an unscrupulous government might pay its bills by printing more money, which would cause inflation. They also argue that shrinking the money supply allows the government to create recessions. Under a gold standard, the total value of money would be fixed (or nearly so), and the market would adjust itself efficiently around it. In his book, The Theory of Money and Credit,Ludwig von Mises wrote: "The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit's purchasing power independent of the policies of governments and political parties." 

    Mainstream economists, however, have a powerful counter-argument. The current system might, in theory, allow an unscrupulous government to create inflation or unemployment, but it also allows the government to fight inflation and unemployment. And that is a tremendous achievement, because not one nation around the world using Keynesian monetary policy has experienced a depression in the last six decades. It appears that we eliminated depressions when we eliminated the gold standard.

    It hasn't been for lack of opportunities. In 1987, the U.S. stock market crashed, in a "meltdown" that was even worse than the Crash of 1929. But the Federal Reserve had learned its lessons from the Great Depression, and this time it responded correctly: with a sharp expansion of the money supply. And not only was there no depression, but there was no recession either -- in fact, the remarkable economic boom of the 80s continued without even a bump. Under a gold standard, the Fed would have been robbed of this anti-recessionary weapon.

    Of course, the gold bugs have developed a set of apologetics for arguments like these. To put everything in perspective, it is helpful to trace the evolution of the monetary system, from its very beginnings to the rise and fall of the gold standard. The reason for starting at the beginning is twofold: even the basics are disputed by people who believe themselves informed on the issue, and many lay persons might not know them anyway. So, with apologies, let's start with the invention of money.

    The history of monetary systems

    The first economic activity was undoubtedly bartering. Two people would make a direct exchange: say, food for furs. However, bartering is a most inefficient trading system. If the person with furs wanted food, but the person with food wanted wood carvings, they would have to search for a third party with wood carvings before they could make their trade. And the third party may not want either of their tradeables, requiring a search for a fourth party -- as you can see, the process quickly becomes unworkable.

    The invention of money solved this problem. As a medium of exchange, money allows people to conduct multi-person bartering without all the effort of searching for a hundred people before making the transaction that everyone wants. True, a hundred people may indeed be involved in the final transaction -- but no thought or planning has to go into it, because money, by some miracle of economics, eliminates such a need. In short, money is a tool that allows for easy and painless multi-person bartering. In and of itself it has little or no intrinsic value.

    But the invention of money presented a problem of what should be used for it. Suppose that a common resource like stones was used for money. The problem is that tradeable goods are limited -- it may take all day to hunt game or weave a rug. When you put your final product on the market, buyers will compete for it, because, after all, everyone desires to hoard wealth. The first buyer may pick a rock off the ground and offer it to you, whereupon a second buyer will pick up two rocks and better the offer. Soon a bidding war erupts, with buyers picking up rocks as fast they can. In the end you might receive an entire rock quarry for your marketed good. This example highlights two absurdities. First, this is the essence of inflation. When there is too much money available, prices soar, and tons of money are needed to buy things. Second, it is a waste of human and natural resources to dig up so much money -- people might as well devote all this effort to producing the actual goods. 

    So early money had to be made out of something rare. Silver and gold met this requirement, although some societies used other rare materials, like conch shells among African tribes. However, money that is too rare has the opposite effect described above. Suppose that a village is using gold for money, but unfortunately there is only one gold nugget. Whoever possesses that nugget will be able to buy literally anything in the village -- but only once. After surrendering the nugget for an item, that person will then have to turn around and offer literally anything to get it back. Because the village has numerous people waiting in line to use the nugget for money, economic activity will slow down to a crawl, unemployment will rise, and the result is a recession. This example highlights another principle: money needs to be divisible. The village's economic activity would be doubled just by cutting the gold nugget in half. Of course, dividing money is the same thing as expanding the money supply.

    So the amount of money has to be optimal -- not too much, but not too little, to support the natural amount of trading that goes on. As you can see, this calls for some knowledge of the amount of economic activity that normally occurs. An economist would need to measure this activity, and calculate how many coins would cover this activity without causing either inflation or unemployment. One of the practical ways to do this is to watch the economic indicators: when inflation starts rising, cut back on the money supply; when unemployment starts rising, expand the money supply. This approach is called Keynesian monetary policy, after the British economist who devised it, John Maynard Keynes. But when the money supply is determined by some completely arbitrary factor, like the amount of gold that happens to be in the hills, then the odds that the money supply will match the amount needed are virtually zero.

    An insufficient money supply is not the only thing that can cause a recession. Recessions commonly occur when people start hoarding money. In normal economies, there is a circular flow of money, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But for some reason, you may see tight times ahead, and decide to save your money to get through them. But this only makes things worse on me, because I am depending on your spending. So I respond to tight times by hoarding my money also. The result is a drop in economic activity, rising unemployment, and recession. Keynesian monetary policy calls for expanding the money supply, which puts more money in the hands of consumers, restores their confidence, and encourages them to begin spending again.

    Gold bugs argue that we don't need to adjust the size of the money supply to match the level of economic activity -- the value of money will automatically adjust itself to the level of economic activity. Here's how it works. Suppose three people live in a village, and they have 100 gold coins among them. And suppose this covers 100 units of work. A loaf of bread may require five units of work, and therefore cost five gold coins. Now suppose that their economy grows to 120 units of work. There are two ways for the money supply to adjust to this new activity. The villagers could simply add 20 more coins to their money supply, so they now have 120 coins. Or they could let the value of the coins increase. 

    How would that work? Well, suppose the extra 20 units of work is being produced by just one of the three villagers. Obviously, he is eager to sell his product, just as the other two are eager to buy it. But no one can afford the sale, because there is insufficient money. So they artificially "create" money by lowering their prices for all their other goods, to increase their savings so they can buy it. For example, a loaf of bread still requires five units of work, but they may lower its price from five to four gold coins. The extra gold coin can now be used towards the purchase of the new product. This process is called deflation.

    Prices do indeed inflate and deflate in this way. The problem is that this process is terribly inefficient. In real economies, prices tend to be "sticky" -- that is, enormously resistant to change. (At least in a downward direction. In an upward direction, they climb easily. This is good if you want to fight inflation, bad if you want to fight unemployment and recessions.) 

    There are several reasons for price stickiness. One is psychological -- people hate to cut their prices and wages. Another is that salaries and wages are often locked into contracts, the average of which is three years. And for many, raising prices incurs certain costs (reprinting, recalculating, reprogramming, etc., not to mention a dip in business) that may not make the price change seem worth it. Even if they do decide to change prices, it takes many companies quite some time to put them into effect. Sears, for example, has to reprint and remail all its catalogues. But perhaps the most important reason is that in a big and complex economy, people just don't realize at first when goods start becoming excessive on the market, and the glut may have to reach severe proportions before people notice it and take action.

    Price stickiness means that the value of money is slow to adapt to changing economic conditions. Economists have found it much faster and simpler just to expand the money supply and cut the recession short. The Great Depression, for example, dragged on for ten years, with the natural deflation of money proceeding at a glacial pace. It wasn't until World War II that the government was forced to conduct a massive monetary expansion (to fund its defense spending). The result was such explosive economic growth that the U.S. economy doubled in size between 1940 and 1945, the fastest period of growth in U.S. history. Another example is Japan in the 1990s. Its economy has stagnated for five years now, and many economists have criticized its government for not doing enough to expand the money supply. But whatever the solution, the important point is that Japan's government has done very little, and its economy has not deflated or adjusted itself -- Japan's economic pain continues five years later.

    But let's return now to our history of money. Historians debate the exact sequence and nature of events that led to our current monetary system, but the following fictionalized account is often retold and widely accepted as reasonable.

    Suppose that an economy starts by using gold coins. There are disadvantages to circulating gold: large purchases require lugging around lots of the heavy metal, and a family might be worried about protecting its gold reserves from thieves. So people may decide to store their gold in a secure, centralized location: perhaps the goldsmith, who already protects his store of gold in a large safe. The goldsmith accepts their gold, and, to keep a record of who owns what, writes them a receipt for their deposit. So the goldsmith has now become a banker.

    When the people have spent their pocket change and need to draw on their gold reserves for more, they can visit the bank and make a withdrawal. But that wastes a lot of time and effort. Instead, people can just buy their goods with their receipts for gold, rather than the gold itself. The seller then becomes the new owner of the receipt, and the share of gold it represents, and he can visit the bank and trade the receipt for gold any time he wants. Of course, he may want to use the receipt himself in another sale. In this way, people start circulating receipts for money, and paper money is born. 

    The banker soon decides to facilitate this system, by issuing receipts that say, "This bank will pay the bearer of this note 10 gold units upon demand." Now the receipts have becomebanknotes, and the bank has become a bank of issue. The banknotes, like the gold coins they represent, are called commodity money, because they are based on commodities like gold or silver.

    But under the new system, the banker notices that people are visiting his bank much less frequently. His gold stocks are just sitting around. So he gets a bright idea: he'll print up some new banknotes and issue them as loans. The new banknotes are not backed up by actual gold reserves, but he can get away with this because only a percentage of the note-bearers come in on a given day asking for their gold. It's profitable for him, because he collects interest on the loans, and it's profitable for the people, because they can increase their productivity. So from now on the bank will issue banknotes on a fractional reserve, and the bank itself will become a trust, because people must now trust that the banker will have the gold reserves to cover their withdrawals. And the banknotes are no longer called commodity money, but fiduciary money, after the Latin word fide, meaning trust. 

    Of course, if too many people come in at once demanding their gold, the banker is out of luck. Experience may teach him that he needs to keep a reserve ratio of 1 gold unit to 3 banknotes. Any more banknotes and he might not be able to cover withdrawals. Still, this is a somewhat risky business, because it creates the possibility of a bank run or bank panic. That happens when people become afraid that a bank may not be in sound condition, and they start withdrawing their gold to protect themselves. Once this process starts, however, it becomes a vicious circle, as disappearing reserves create yet more panic and more customers running to the bank to be the first to withdraw their gold. The result is a bank failure, leaving most of the customers holding worthless banknotes. These sort of bank panics have the effect of reducing the money supply, which can -- and often did -- result in higher unemployment, recession and even depression.

    Fiduciary money was widespread in Europe by the early 19th century. During the Napoleonic wars, however, Britain found itself hard-pressed to fund its war effort. So the Bank of England temporarily scrapped the fiduciary system and issued fiat money instead -- money whose value was determined not by gold, but by the command, or fiat, of the government. After the war, England returned to a fiduciary gold system, although people were not allowed to cash in their notes for gold unless it was for very large amounts, usually for international trade.

    Temporarily suspending the gold standard in favor of fiat money during times of war became common over the next century. During the American Civil War, the government interrupted its policy of gold convertibility and issued nonconvertible "greenbacks" instead. During World War I, all belligerent nations did much the same. It is interesting to note that during times of war, when a nation's survival is on the line and it must boost productivity, the economic policies its leaders resort to are always liberal ones. Fiat money, tax hikes and Keynesian monetary expansions result in booming economies, hence the truism that "war is good for the economy." It took economists and politicians over a century to learn that these policies could be applied during times of peace as well.

    In 1821, Britain became the first nation to switch to a full gold standard. Until then, nations had used a bimetallic regime of gold and silver. In the 1870s, the U.S. and the rest of Europe followed suit, after the discoveries of huge gold deposits in the American West. From then until 1914, the world would operate under a unified gold standard. This era is known as the Gilded Age, and it offers us a chance to assess the advantages and disadvantages of the gold standard, or at least an early version of it.

    Bitter controversy over the gold standard was a hallmark of the Gilded Age. It was widely regarded as a tool of the rich. Democratic presidential candidate William Jennings Bryan spoke for the poor when he charged, famously, that "You shall not crucify mankind upon a cross of gold." The U.S. suffered three depressions during the Gilded Age, and the gold standard and its bank panics were often held to blame.

    Throughout this era, the value of gold was fixed at a certain price. One U.S. dollar, for example, was defined as 23.22 grains of pure gold. A British pound sterling was defined as 113.00 grains of pure gold. This meant that the total value of a nation's money supply was determined by the size of its gold reserves. Furthermore, fixed rates meant that international exchange rates were also fixed. In other words, the world operated under a single, unified monetary system. One British pound always equaled 4.8665 U.S. dollars (113.00/23.22), at least according to the official rate. The actual rates might fluctuate, due to the shifting supply and demand of international trade, but the nations set up a system to make sure that they never fluctuated too far from the official rate. This system was rather complex, but basically it kept exchange rates stable and close to the official rate by making sure that nations with trade deficits paid their bills quickly and directly in gold. (1) 

    But there were economic consequences to such a system. Suppose Britain ran up a trade deficit with the U.S., and promptly paid in gold. The U.S. money supply would expand, and its economy would experience a mixture of inflation and growth. Conversely, the British money supply would shrink. Theoretically, this should have resulted in deflation, but in practice it resulted in widespread unemployment, due to price stickiness. Therefore, outflows of gold from a country were often very painful to its economy. And when people learned that gold was leaving the country, they often conducted bank runs, trying to withdraw their gold before it ran out. Thus, the Gilded Age was replete with bank panics and failures.

    The Gilded Age was brief, lasting from the 1870s to 1914, when World War I broke out. During the war, nearly all nations either placed restrictions on gold convertibility or issued non-convertible paper money. But one of their top priorities after the war was the recreation of the full gold standard. It took several years before they succeeded. Britain restored its gold standard in 1925, but in an act of folly, made the pound worth $4.86 again in U.S. dollars -- its old, pre-war parity. Unfortunately, the pound was overvalued at this price now, due to changes in the price of gold, and Britain subsequently experienced a drastic outflow of gold. Again, severe unemployment was the result, not the expected deflation. Britain would struggle with unemployment for the rest of the decade. 

    By 1928, all the major currencies and most of the minor ones had returned to the gold standard. But the coming Great Depression would lay bare all its disadvantages. A unified monetary system meant that no nation could protect itself from a disaster that occurred in another nation. When the depression struck in the U.S., it quickly ricocheted across the Atlantic. In the U.S., two gigantic bank runs caused over 10,000 bank failures. So many people were left holding worthless banknotes that the money supply shrank by about a third -- a catastrophic reduction. 

    When Roosevelt took office in 1933, unemployment had soared to nearly 25 percent. His inauguration took place literally in the middle of a third bank panic. Roosevelt stopped it in its tracks by doing something novel: he intervened. He declared a "banking holiday" that closed banks to the public for eight days, to prevent further withdrawals. During that time, the banking system was reorganized. When banks finally reopened, banks deposits actually exceeded bank withdrawals. It was a tremendous political success for Roosevelt, and America's last bank run. Later under the New Deal, bank deposits would become insured by the federal government.

    After the Great Depression struck, the world wasted little time severing its ties to gold. Britain left the gold standard in 1931, as did the U.S. in 1933. By 1937, not a single country remained on the gold standard. After World War II, the U.S. partially restored the gold standard for international trade. And to prevent citizens from bank panics, it made its currency inconvertible at home. In 1971, a diminishing gold supply and growing deficits caused the U.S. to suspend the gold standard even for international trade. Ever since, international trade has been based solely on the dollar and other paper currencies. Today, there are no mainstream economists who call for a return to the gold standard; it is widely regarded as a fringe idea of the radical right.

    Modern arguments on the gold standard

    Gold bugs cite two reasons in particular for returning to the gold standard. The first is that it prevents nations from an irresponsible expansion in the money supply to pay its debts. This is what happened to Argentina. After printing too much money and suffering disastrous inflation, Argentina passed a law tying its currency to the U.S. dollar. This may not be the optimal strategy for Argentina, but it's far better than what it was doing. Likewise, Italy has sought a measure of monetary responsibility by tying its currency to the German mark. So the gold bugs do have a few case histories to point to.

    Even so, this reason is weak. Argentina did not need a gold standard to tie its currency to a more responsible country and solve its problems. Furthermore, a monetary policy that's right for one country might be completely wrong for another. For example, in the early 1990s, Europe tried to unify its currency by tying it to the German mark. But subsequently the German economy boomed while the rest of Europe became mired in double-digit unemployment. And following Germany's anti-inflationary monetary policy only made things worse, because it was exactly the opposite policy they should have been following. Finally, many countries have established long and sound reputations with fiat money -- Switzerland, Japan and the U.S., for example.

    The second reason cited for a gold standard is because it creates certainty in international trade by providing a fixed pattern of exchange rates. The current system contains a degree of uncertainty -- in the last five years, the dollar has swung between 80 and 120 yen. This tends to make economic analysis and planning difficult for international traders. The costs of such uncertainty are difficult to determine, but they are expected to be significant. However, trade comprises only 10 percent of the U.S. economy, and compared to the enormous benefits of fiat money, these costs are minuscule by comparison.

    What are the benefits of the current system? The most important has already been mentioned: the elimination of depressions. Being able to expand the money supply in times of unemployment and recession is a critical tool for government. Before World War II, eight U.S. recessions worsened into depressions (as happened in 1807, 1837, 1873, 1882, 1893, 1920, 1933, and 1937). Since World War II, under Keynesian monetary policies, there have been nine recessions (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, 1990-92 ), and not one has turned into a depression. In fact, no nation in the world has suffered a depression under Keynesian policies. 

    The current monetary system also gives us protection from less scrupulous or unfortunate countries. A bank run that starts in Europe is not going to end up in America, thanks to the flexibility and autonomy of the Federal Reserve Board.

    And fiat money also gives economists a chance to tie the appropriate size of the money supply to what's actually happening in the economy. In the end, the amount of gold a nation has is completely irrelevant to its level of economic activity. Gold is a commodity that experiences price swings. A change in dentistry or electronics is enough to change the entire market. To see how unrelated it is, consider the following trends. Since the U.S. dropped the gold standard in 1971, the price of gold has risen tenfold. But consumer prices have risen only two and a half times. If the U.S. had instituted a full gold standard in 1971, the result would have been the worst deflation since the Great Depression. And considering that widespread unemployment is usually the result, not deflation, it is easy to see the why such a policy would increase the risk of a depression. 

    Gold bugs also face an enormously challenging question: what kind of gold standard would they like to create? One based on fractional reserves? But that led to countless bank runs. Furthermore, as a practical matter, it doesn't stop banks or governments from changing the money supply, simply by changing the amount of fiduciary notes. 

    So the only purist alternative is a return to commodity money, where a bill is backed 100 percent by gold. But there is no longer enough gold in the modern world to cover the needed economic activity. We have already mined all the major deposits, and without new discoveries to match the growing economy, a pure gold standard would see a troublesome fall in commodity prices. Even worse, industry is also increasing its demand on the gold store. In past centuries gold had very little secondary use, so it proved useful as money. Today, modern technology has found a growing number of applications, and industry is consuming more and more of it. In response to all this, a monetary authority could periodically reduce the amount of gold defined as the dollar, but this is no different from the floating, fiat money that the gold bugs so bitterly criticize.

    So the gold bugs would have to resolve historical and theoretical challenges of King-Midas proportions before they could ever reinstate the gold standard. But if a workable gold standard requires a tremendous amount of design, effort, regulation and safeguards, we might as well use fiat money, which is already simple and enjoys a successful track record.

    Related Essay: Austrian School of Economics

     Return to Overview


    1. The method of paying trade deficits during the Gilded Age worked something like this. Suppose Britain bought more products from the U.S. than vice-versa. Britain therefore owed the U.S. money; it had a trade deficit. Obviously, the British needed to pay the Americans in their own currency, dollars. So the British demand for dollars rose, and this drove up the price of the dollar on the foreign exchange market. The British could have simply paid the higher price, but they also had a second option by international agreement. They could convert their British pounds into gold, ship it to America, and then sell the gold for dollars at the higher American price. This saved them money only when the deficit became large enough to justify the cost of a trans-Atlantic shipment of gold. This cost threshold was known as the "gold point," and it ensured that the actual exchange rate did not fluctuate too far from the official exchange rate. In short, this system meant that Britain paid its deficit quickly and directly in gold.

    Sat, 08/20/2011 - 07:49 | 1580651 hardcleareye
    hardcleareye's picture

    How about just posting a link?  Cutting and pasting of this magnitude is considered bad form.... it is also nice to consider the source of this "information", in this case it is from this link

    This is the author's background, 

    You waste my time......

    Sat, 08/20/2011 - 07:56 | 1580658 falak pema
    falak pema's picture

    sorry lady...will remember next time.

    Sat, 08/20/2011 - 09:18 | 1580741 sherryw
    sherryw's picture

    How about doing a critique on Antal Fekete.

    Sat, 08/20/2011 - 10:49 | 1580918 snowball777
    snowball777's picture

    Keynesians want a bike with no brakes. Austrians want a bike with square wheels.

    Real bills doctrine still rests on the shaky edifice of banks only making well-collateralized loans at appropriates rates of interest so they'll be able to meet their liabilities, but in the real world, bankers have proven time and time again that they will accept trash and make ill-informed loans in the name of their bonuses for this quarter. Shortening the duration of the high-wire act doesn't prevent nasty falls all that much. Confetti is confetti and bank runs eventually ensue.

    Near full-reserve (say 2:1 reserve ratio) banking with fiat currencies using a well-managed float to something backed by oil and gold would be vastly superior to any system tried to date.

    Leave any part of the puzzle as per the status quo (fractional reserve at 40:1, floating fiat with no real-world peg, etc) and the end result will be the same.


    Sat, 08/20/2011 - 10:20 | 1580838 snowball777
    snowball777's picture

    Complain about the format, ad hominem attack the source, but no substantive criticism to be had. Yup, you're an Austrian alright.

    Now give us a link to so we can read about how math is hard and we should have faith in self-organization and unicorn farts.

    Sat, 08/20/2011 - 10:54 | 1580934 thedrickster
    thedrickster's picture

    I endured platitudes, fallacious suppositions and setting the table with loaded language until I came across this gem, at which time I ceased frontal lobe engagement:

    "Another example is Japan in the 1990s. Its economy has stagnated for five years now, and many economists have criticized its government for not doing enough to expand the money supply. But whatever the solution, the important point is that Japan's government has done very little, and its economy has not deflated or adjusted itself -- Japan's economic pain continues five years later."

    Sat, 08/20/2011 - 11:29 | 1581032 snowball777
    snowball777's picture

    So much attention to incorrect and failed little to the avoidable causes and correct ones.

    Sat, 08/20/2011 - 11:49 | 1581082 thedrickster
    thedrickster's picture

    Huh? My point was rather clear, the essay isn't worth dick given the entirely fallacious charecterization of Japan's lost decade (and all of the fallacious history that follows, e.g. Hoover's inaction).

    As to your 2:1 reserve/commodity backed float, agreed, infinitely preferable. I would however like to see it coupled with a repeal of legal tender laws so that an entirely gold backed currency could compete, the marketplace (main st) could then decide which was a better medium of exchange/store of value.

    Sat, 08/20/2011 - 10:37 | 1580880 thedrickster
    thedrickster's picture

    " A bank run that starts in Europe is not going to end up in America, thanks to the flexibility and autonomy of the Federal Reserve Board."

    We shall see.

    Sat, 08/20/2011 - 06:02 | 1580545 papaswamp
    papaswamp's picture

    The contagion spreads..Argentinian Ind. Prod. drops 1.2% to 7.1%. Columbian Ind. Prod drops 2% to 2.2%. Mexico GDP drops 1.3% to 3.3%.

    Sat, 08/20/2011 - 06:10 | 1580548 tocointhephrase
    tocointhephrase's picture

    A thought for the weekend. Is now a good time to short Silver Muwaha MMMMuwwwwarha warha w w w warha WARHU HU HU HU A ho ho ho ho hoooowarrrrrrhu huu hu hu breath breath ahooooo

    Sat, 08/20/2011 - 10:09 | 1580806 thunderchief
    thunderchief's picture

    Yeah, that about sums up the silver market.  It's the quire boy in a dark room full of ministers, and its about time someone turned the lights on and found out what's going on.  

    Sat, 08/20/2011 - 06:15 | 1580558 HongPong
    HongPong's picture

    O Hai Hedgers. I found out about CONPLAN 3502 for civil unrest in America... it just got picked up a few days ago by Marc Ambinder, Atlantic, Russia Today, UK Daily Mail... it all started here.
    So all you lolcats and assorted goldbugs should give me a little credit for the advance warning of secret military plans resembling martial law...

    Sat, 08/20/2011 - 06:18 | 1580559 tocointhephrase
    tocointhephrase's picture

    The far right advocates the gold standard because it gets government out of the business of controlling the money supply (and the Left, thank you!)

    Sat, 08/20/2011 - 13:59 | 1581518 Tuco Benedicto ...
    Tuco Benedicto Pacifico Juan Maria Ramirez's picture

    The "right" "left" argument is a false paradigm to keep us from noticing the man behind the curtain.

    Sat, 08/20/2011 - 06:20 | 1580560 tocointhephrase
    tocointhephrase's picture

    They fear that printing money creates inflation. FACT!

    Sat, 08/20/2011 - 07:01 | 1580571 tocointhephrase
    tocointhephrase's picture

    printing money cures recessions??? Sitting at my desk in the West End of London selling what most of you call Real Estate I see no evidence. Fact: I have exchanged (10% Paid) on two deals 1. £740,000 2. £1,740m X 2%. That is what I have done for my boss. Sweet FA. He has to pay me 10% plus a good basic, If it was not for him having a strong Lettings Portfolio I would not be in a job! I work with all the agents bar Foxtons (Who don't work with anyone else), 2007 the phone was off the hook, its fzuzczkziznzgz Tumble Weeds in w1 Bruv W1, The Pulse, the heartbeat. Nuda. Sorry pal you are a Moron or a Troll and if you are not a Troll you will be crushed. May G-d bless you and keep you x

    Sat, 08/20/2011 - 06:34 | 1580573 DrStrangelove
    DrStrangelove's picture

    The US debt service cost exceeds total federal revenue around 15.5%. 


    good article called 

    "This is a stick up, everybody get your interest rates on the floor and give me the money!"


    lol nicely done!!



    Sat, 08/20/2011 - 11:00 | 1580947 snowball777
    snowball777's picture

    And if they missed a payment, it would be there even a point to this hyperbolic digression?

    Sounds like we better bolster up that "revenue" and make some cuts then.

    Sat, 08/20/2011 - 06:49 | 1580582 tocointhephrase
    tocointhephrase's picture

    Backwadazon in Gold market Citchez

    Sat, 08/20/2011 - 06:56 | 1580587 tocointhephrase
    tocointhephrase's picture

    Zair aintz no powerz likez daz powerz of demz peoplez coz demz powerz of demz peoplez wontz stopz

    Sat, 08/20/2011 - 06:59 | 1580590 tocointhephrase
    tocointhephrase's picture


    Sat, 08/20/2011 - 07:00 | 1580593 Ferg .
    Ferg .'s picture

    My own personal opinion is that the next few years will be characterized by political , social , economic and financial upheaval . Quality of life will fall and windows of oppurtunity will close . Therefore my suggestion to everyone is this : if you want to do something , something that you've been thinking about for weeks , months , years or even decades  ( as long as it is legally and morally sound) ,  now is the time . Don't procrastinate . Do it before the brewing shit storm is unleashed .

    From a "risk" perspective in the financial markets I think we'll bottom some time in the next week or two . Following this I expect a correction lasting a few months ( possibly catalyzed by an announcement on QE3 ) before everything falls apart and we continue lower ; much much lower .

    Sat, 08/20/2011 - 07:22 | 1580617 hardcleareye
    hardcleareye's picture

    Ferg, I concur with your view.

    Sat, 08/20/2011 - 07:49 | 1580650 falak pema
    falak pema's picture

    What will you wear to the fancy dress ball at Foggy Bottom in the Fall, must we come naked as toad stools or dressed to kill like drunken, gold plated fools?

    Sat, 08/20/2011 - 07:05 | 1580598 tocointhephrase
    tocointhephrase's picture

    Rule Britannia, Loading up my draws, then one day JPM will stop fucking whores! Mu wooo  fuking warrrrrrhu Bitchez

    Sat, 08/20/2011 - 07:07 | 1580602 tocointhephrase
    tocointhephrase's picture

    Morning Blythe!

    Sat, 08/20/2011 - 07:15 | 1580608 tocointhephrase
    tocointhephrase's picture


    Sat, 08/20/2011 - 07:25 | 1580621 tocointhephrase
    tocointhephrase's picture ONLY FOR THOSE THAT KNOW!

    Sat, 08/20/2011 - 11:34 | 1581044 snowball777
    snowball777's picture

    Just because the drum machine can't feel doesn't mean it deserves to be tortured so.

    Sat, 08/20/2011 - 07:41 | 1580634 economictsunami
    economictsunami's picture
    ZH appears to hit a nerve in Canada on the 'soundness' of our banking system. Attaboy ... Erman for The Globe & Mail: Canada's banks: Next dominos to fall? Who is Zero Hedge, and why should we care? Is Zero Hedge looking at the wrong numbers? The Canadian banking herd, has a deer caught in the headlights expression ... 
    Sat, 08/20/2011 - 07:49 | 1580649 mainuh1
    Sat, 08/20/2011 - 08:23 | 1580685 Ignorance is bliss
    Ignorance is bliss's picture

    Manipulation of the masses: I was watching a mini-series about King Henry the VIII, and noticed some parallels between the ruling class of 1490 and the ruling class of 2011. In 1490 the clergy and the noblemen had access to the written word of God either in English or in the case of the clergy, they had an understanding of written Latin. The Bible was written in Latin. The clergy would deliver mass in Latin to the common man. Obviously, most people in 1490 England did not speak Latin and would therefore rely on the Clergy to communicate God's will. To know God's will in 1490 was a powerful thing. Fast forward to 2010. If you have ever taken the time to read any of the laws passed by our Govt then you will notice that an army of judges, lawyers, and lawmakers decipher and manipulate the meaning of the laws that govern the land. We the people have a new order of clergy to decipher the law. It was written to obscure, and manipulate the masses. The law is open to interpretation and manipulation by the established order. It is the law because someone told you what the law stated. We don't read the law, its interpretation is fed to us by CNN, various pundits, and  Govt servants. They are in effect the new clergy. Wielding the law in 2011 is a powerful thing.

    How is that for history repeating itself?

    Sat, 08/20/2011 - 08:30 | 1580697 falak pema
    falak pema's picture

    Dead On. And if you want to know its justification remember the key phrase originally said by a religious prelate:

    "A little learning is a dangerous thing, because it makes those who have it unwilling to learn more. The unlearned are more open to conviction, because they are not so foolish as to think that they are wise."

    From "Homilies on the Epistles of Paul to the Corinthians," 5.2, published in P. Schaff et al., eds. 

    Read more:

    Sat, 08/20/2011 - 09:25 | 1580749 Sathington Willougby
    Sathington Willougby's picture


    You'll be happy to know that you're a second class citizen in America.  You have agreed to this through fraudulent contracts enabled by the 13th and 14th amendments.  For all intents and purposes you are a citizen of DC.  Congress makes the law for you.  Of course that law doesn't have to abide by the constituion.  You can rescind these fraudulent contracts and become a free individual citizen of the state.  Then foolish things they have set up become defunct, like the mandate to buy insurance through yomammacare.  If enough people do it, the federal govt is decimated to its inteded size.

    Sat, 08/20/2011 - 11:27 | 1581027 snowball777
    snowball777's picture

    You dropped your hood, "Christian Soldier". Oh what a happy day it will be when your kind sloughs off and disappears into antiquity.


    Sat, 08/20/2011 - 11:56 | 1581107 thedrickster
    thedrickster's picture

    "Christian Soldier", what the fuck are you on?

    The poster is entirely spot on that a republic built on decentralization and competition amongst sociopaths has been undermined by stealth, today nothing more than oligarchical rule over a continental state of 300M from an Imperial capital.

    I am going to go out on a limb and suppose that the OP meant 14th & 17th amendments, in which case I am in total agreement. It will indeed be a happy day when I am free of rule by sycophantic, state worshipping collectivist scum hailing from your avatar and other foreign lands.

    Secession or emigration, this is my future.

    Sat, 08/20/2011 - 11:22 | 1580957 snowball777
    snowball777's picture

    Middle-men are and will always be a pervasive problem. And definitely watch out for the ones that can't distinuish between the law of man and the laws of their God.

    Sat, 08/20/2011 - 14:00 | 1581522 disabledvet
    disabledvet's picture

    Phucking economists. I knew we never should have endowed that department. SOPHISTS!

    Sat, 08/20/2011 - 08:31 | 1580700 Implicit simplicit
    Implicit simplicit's picture

    We are in the youth of the creative destuction change necessary to purge the corruption in the system that threatens survival. The collective consciousness of the masses is transforming worldwide. The demise of the banks is poetic justice, and it will continue into the turning that has begun. Stay vigil while enjoying the process. Yield, and Bear rightfully

    Sat, 08/20/2011 - 12:00 | 1581119 dogbreath
    dogbreath's picture

    you think loan sharks will dissapear

    Sat, 08/20/2011 - 08:55 | 1580722 Joshua Falken
    Joshua Falken's picture

    The people of the USA are finally realising the Federal Reserve Bank system has operated for 98 years primarily for the benefit of its private US and European bank shareholders.


    After 2002, credit insurance derivatives allowed the banking shareholders of the Federal Reserve banks to lend out more money to circumvent debt provisioning laws and make vast profits.  Governments loved it as more people were going to be raised out of poverty by borrowing.  


    However banks have no restraint when profit and bonuses can be earned, so they got greedy and lent money to people who had no way of paying it back and the whole house of cards collapsed.


    This all started when Governments worked out how easy it was to borrow money after WWII and went on borrow and spending binge to attract voters that is now truly out of control.  Banks also expanded consumer credit to unsustainble levels.

    Everybody has borrowed and spent to much money which now needs to be either paid back or written off.  As the Federal Reserve is owned by US and European creditor banks, not the US government they will do everything to ensure their survival and profitability.


    Only the UK has embraced austerity and debt service, where America and Eurozone Europe have yet to stop spending and realise the party is over.  


    Japan has been 22 years in a defaltionary spiral and only politicians and corporate executives have prospered


    Unless the American people do something bold in the next election, that is your future

    Sat, 08/20/2011 - 13:55 | 1581503 Tuco Benedicto ...
    Tuco Benedicto Pacifico Juan Maria Ramirez's picture

    Governments do not want to bring citizens out of poverty.  They want a burgeoning dependent class.

    Sat, 08/20/2011 - 09:16 | 1580740 Sathington Willougby
    Sathington Willougby's picture


    Sat, 08/20/2011 - 09:23 | 1580746 Eugend66
    Eugend66's picture

    Happy Birthday Pres. Paul !

    Sat, 08/20/2011 - 09:35 | 1580764 Sathington Willougby
    Sathington Willougby's picture



    Sat, 08/20/2011 - 10:26 | 1580854 RSloane
    RSloane's picture

    I like the way that sounds.

    Sat, 08/20/2011 - 09:28 | 1580757 Cult of Criminality
    Cult of Criminality's picture

    Good morning heres some market burning music


    AC-DC Riff Raff

    Cheers and good day

    Sat, 08/20/2011 - 10:17 | 1580831 Maddeafandblind
    Sat, 08/20/2011 - 10:24 | 1580847 The Turdman
    The Turdman's picture

    Well, I'm taking the browns to the super bowl and brought along my ipad for reading. On the first dump, I googled millionaires in the Congress and Senate and read that there are 261 Congressmen ans 54 Senators who are millionaires, however, there are more because net worth excludes valuable paintings on the wall and second homes. So, we have corporate America funding lobbyists who essentially buy these guys and we think the gov't is the culprit. Corporate America is the entity that I'm afraid of every time I walk out the door every day. Like voracious man-eaters they got their collective hands in my pocket trying to steal everything. On the second dump, I recalled that Tyler in the Fight Club wasn't going to blow up Gov buildings but corporate buildings. Now that everyone thinks the gov is the problem, we'll elect some freaking corporate stooge who will really let it rip. On the third dump, I realized that my son and I will be working in some mine, 2 miles below the ground for $2.00 an hour in some toxic waste because the child labor was abolished along with the EPA and minimum wage laws. Cleaning up my act, I realized that on this trip to the Baja, I should stay there.


    Sat, 08/20/2011 - 11:19 | 1581001 snowball777
    snowball777's picture

    Ron Paul 2012! /sarc

    Sat, 08/20/2011 - 11:59 | 1581115 thedrickster
    thedrickster's picture

    I will never again vote in a federal election so I have no skin in the game but I am curious, who is "your" horse in the "race"?

    Assuming such things interest you, who would be a better candidate?

    Sat, 08/20/2011 - 13:53 | 1581491 Tuco Benedicto ...
    Tuco Benedicto Pacifico Juan Maria Ramirez's picture

    Exactly, we have a corporate fascist state out of the Mussolini model.  Gigantic corporations and international banks have hijacked our country and are sucking it dry.  Monsanto with their worldwide genetically modified food program along with the big drug companies weaponizing vaccines are two  good examples. 

    Sat, 08/20/2011 - 11:28 | 1581030 PulauHantu29
    PulauHantu29's picture

    Will Greenspan win the Nobel Prize in Economics? He was gvine the Medal of Freedom and other gifts from GS...oops, I mean DC.

    Isn't it Alan who gleefully enocuraged consumers to "spend more...go to the Malls...spend, spend, spend?"

    Isn't it Alan who told people to suck out their houses' equity so they could spend themselves into oblivion?

    The guy deserves some special prize....I'm not sure what, but another Medal is on order.

    Sat, 08/20/2011 - 12:23 | 1581171 Chicken_Little
    Chicken_Little's picture

    If it looks like a bull and the MSM says it's a bull, it's probably a bear. If it walks, qwacks, and sounds like a duck, it's probably a duck. If it makes rooster noises and sez the sky is falling and cries "wolf wolf", then it might be me.  :)

    Sat, 08/20/2011 - 13:00 | 1581298 Moe Howard
    Moe Howard's picture

    New & Updated!!!!

    Republican Rundown:

    • Cain = Decepti-con - Would you like anchovies on that Federal Reserve Board Membership? "I agree with the questioner. What was the question again?" "Audit the Fed?" Huh? Yes, I agree with the questioner."
    • Perry = Decepti-con - Bilderberger Seal of Approval - Al Gore Texas Campaign Manager. Changed parties by order of "TPTB". "Is Rick Perry Gay?" top google search. Bush without family Nazi connection.
    • Romney = He make socialism work "better". Inventor of RomneyCare, model for ObamaCare. Father was an illegal alien from Mexico, may explain greasy hair. MSM front runner "just because".
    • Huntsman = Obama white | lite. Never met a Chinese business partner he didn't like. Expert at exporting jobs and making socialism work for him. Two supporters - Dad and Mom.
    • Pawlenty = What do you want me to say that you would like? Does anyone have a personality I could borrow? Is Romney hiring? Do you need a new paperboy?
    • Gingrich = The original Decepti-Con, nickname: Megatron. Prevented Republican Revolution from cutting anything, made Clinton look good. Pushes AGW, The Third Wave, etc.
    • Bachman = Autobat. Former IRS Tax Lawyer. She will adopt us all and grant freedom through the Patriot Act. Able to swallow an 18" corn dog without touching the sides. $2 gas for all.
    • Ryan = Decepti-con - "Gosh, if you insist, maybe I will run." Great budget plans, however, votes the straight party line - the Bankster Party Line. Never met a TARP he wouldn't vote for. Perry lite.
    • Sanitorium = Let me control your family and morals, and I'll attack Iran for you too. Never met a pro-Israel position he didn't like. The flip side of the Glen Beck Coin. Designated Paul Hitman by TPTB.
    • Paul = The only Conservative in the race, strict Constitutionalist. MSM and Bilderberger Seal of Disapproval. The only rational candidate. Voted most likely to be 'eliminated' by the Banksters. First in Iowa Online Straw Poll, Second in Iowa Straw Poll, but it does not count because "It's Ron Paul and it never counts when it is him". The only candidate that does not think the Republican Party Headquarters are located at the Wailing Wall.
    Sun, 08/21/2011 - 01:07 | 1582899 i-dog
    i-dog's picture

    That's a nice rundown, Moe ... BUT, again, I ask: Why does anyone here waste time assessing presidential (or congressional) candidates when it is obvious that the Federal Government -- comprising a Bilderberg-sanctioned President, a CFR-appointed Administration, 535 lobbyist-captive CongressCritters, all with their snouts in the trough, and a luciferian-majority Supreme Court derailing any outside interference in the scam -- is the problem, not the fucking solution!

    Ron Paul is NOT a solution ... he is, whether wittingly or unwittingly, just another diversion into false hope for a centrally-planned solution to a centrally-planned collapse.

    The only solution for America (and Europe) at this late stage of the collapse is a massive secession from the globalist federations back to sovereign states ... with local solutions to local problems and desires. Local politicians are far more answerable and loyal to their local constituencies than are appointed central planning bureaucrats in DC and Brussels.

    Sat, 08/20/2011 - 15:41 | 1581800 parch702
    parch702's picture

    Anyone notice that within a 26 hour period between Thurs. and Fri. Gold was up over $US 80 per ounce? Which leaves me lamenting I wish I had more.

    Sat, 08/20/2011 - 15:54 | 1581835 Me XMan
    Me XMan's picture


    Sat, 08/20/2011 - 17:01 | 1581963 Kurion
    Kurion's picture

    I'm feelin Fuedal.

    Hope for the best, prepare for the worst.

    Sat, 08/20/2011 - 17:33 | 1582058 Orémus
    Orémus's picture

    still alive bitchez !

    Sat, 08/20/2011 - 22:53 | 1582713 mt paul
    mt paul's picture

    bear market...


    buy one seal

    get one free

    Sun, 08/21/2011 - 01:27 | 1582960 Danielius
    Danielius's picture

    I saw this, and imagined there would be some interesting reading....  I just dont get it.  Maybe I am too old.  Are the readers of Zero a pack of morons?  Or are the readers/ posters on every site everywhere a pack of blithering idiots?  Or are they very intelligent people who want to pretend to be idiots... but for what purpose?


    I just don't understand.  Can someone clarify this for me?  I came to this post with a crazy idea there might be a lively exchange of interesting viewpoints.  Wouldn't it show greater respect for the hard work Zero Hedge does to try to appear as if their followers are as a group-a rather insightful and intelligent bunch.  Thats how I always imagine them, until I read the comments.


    What am I missing?  Is this just what to expect, and I am all wrong about everything?  Is this as good as it gets?


    Thanks all,



    Sun, 08/21/2011 - 23:58 | 1584991 time123
    time123's picture

    Gold has had a tremendous run, but it is likely topping out in the very short term, only to give us yet another buying opportunity. Until a collapse of sovereign debt occurs somewhere in the world, and it goes parabolic and much higher.


    admin at

    Do NOT follow this link or you will be banned from the site!