Friday, October 29, 2010

Who Will Pay for ForeclosureGate?

Is that really a question?

Is Deflation the Danger?

According to the Bureau of Labor Statistics the official inflation rate (CPI) from August, 2009 to August, 2010 was 1.1%.  Conclusion: prices haven't risen much, and in fact we could be in a deflationary spiral, which Chairman Bernanke and other Keynesians view with horror and which is why it's a virtual certainty the Fed will try another round of aggressive counterfeiting known as Quantitative Easing Two - QE2.

But does the official inflation rate mean the cost of living has only gone up 1.1%?  Only if you don't count food and energy, which the government excludes as too volatile.

Jake Weber, editor of the Casey Report, has produced a chart that shows how much prices have risen for things people actually buy, year over year to October, 2010.
On average, our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October. . . .
It is because stashing wheat and cotton in the garage is an impractical way to protect purchasing power that investors are increasingly looking to protect themselves with the monetary metals – a trend that is now very much in motion.

Thursday, October 28, 2010

Beware of "Paper Gold"

Fractional-reserve banking is not limited to national currencies.  The London Bullion Market Association (LBMA) runs the biggest "physical gold" market in the world.  But at least one expert on the LBMA, Jeffrey Christian of the CPM Group, filed a report in 2000 that the "London bullion market is actually a fractional-reserve gold banking system built on the presumption that most gold buyers will never take delivery of their metal but rather leave it on deposit with the LBMA members from whom they bought it."  GATA's Chris Powell explains:
GATA board member Adrian Douglas has studied the LBMA statistics and Christian's work and estimates that the great majority of gold sold by LBMA members doesn't exist -- that most gold sales by LBMA members are highly leveraged. How leveraged? How much gold is due from LBMA members that doesn't really exist? The LBMA doesn't report that. Like the Fed's gold swap arrangements, the world mustn't be permitted to know. The consequences might be catastrophic for the banking interests that run the world.

For then the world might understand why even at its recent price above $1,300 per ounce gold has not come close to keeping up with the inflation, the currency debasement, of the last few decades, why gold has not fulfilled its function of hedging against inflation. That is, gold's enemies figured out how to increase its supply by vast amounts without going through the trouble of digging it out of the ground. They invented "paper gold" -- gold that doesn't exist but that many buyers accepted, never suspecting that major financial institutions might deceive or defraud them.
Adrian Douglas adds:
I have recently written a series of exposes of the LBMA (see References 1-4 below) using the association's own data to show that the LBMA's bullion banks are operating on a "fractional reserve" basis. My analysis indicates that the bullion banks are holding only 1 real ounce for about every 45 ounces of gold that they have sold, a reserve ratio of just 2.3 percent.

When will the currency wars end?

Bloomberg reports:
Finance chiefs from South Korea to South Africa signaled they may act to slow gains in their currencies, just four days after the Group of 20 vowed to soothe trade tensions in the $4 trillion-a-day foreign-exchange market.

Asian currencies fell to a one-week low after Bank of Korea Governor Kim Choong Soo said today that measures to mitigate capital flows could be “useful.” Hours later, the rand dropped as South African Finance Minister Pravin Gordhan said his government will use part of higher-than-expected tax revenue to build foreign reserves as it attempts to weaken the currency.

The shifts suggest G-20 members will keep trying to defend their economies from the slide of the dollar and capital inflows even after the group promised Oct. 23 to refrain from “competitive devaluation” and to increasingly embrace market- determined currencies.
This is politics-as-usual.  As the central banks of the world engage in a race to the bottom, you should protect your wealth with investments that are racing the other way.

Wednesday, October 27, 2010

Did the Cream Rise to the Top - or Something Else?

Economics has been called the “dismal science” for over 150 years.  This is unfair.  Outside of the Austrian school, economics, in parroting the methodology of the hard sciences, has forfeited its claim to being “scientific.” [here, here, and here] Since World War II especially, economists have been mostly apologists for government growth and propagandists for more of the same. [Also here, here, and here]

A panel of distinguished economists recently deadpanned that the recession ended in June, 2009.   And it did end, if you believe in the power of free lunches and consumption multipliers.

Just don’t count the unemployed and underemployed and people who have given up trying to get employed - or the long-employed incubating ulcers about pink slips.  Don’t get upset with the legions of college graduates who have moved back in with their parents or are waiting tables while a staggering student loan hangs over their heads.

Never mind that the world is running out of suckers to buy government debt.  Pay no attention to the decade-long rise in the price of gold, forget that Alan Greenspan told a meeting at the CFR that "Our choice is not between good and bad. It's between terrible and worse,” and that gold’s rise in price is like the dead canary in the coal mine, signaling “a problem with respect to currency markets globally,” forget that currencies will continue their plunge because new Fed policymaker Janet Yellen is yet another believer in the power of quantitative easing, that in terms of real debt the U.S. is the most insolvent nation among developed Western nations, that according to John Williams of, on the basis of Generally Accepted Accounting Principles, “total federal obligations as of September 30, 2009, stood at $70.7 trillion“ - nearly five times the GDP reported for fiscal 2009.

Never mind all this.  If we want to be part of the Establishment’s solution, we need to embrace the Keynesian belief that national politicians can create prosperity with more easing and spending.   

What might be the outcome of a continuation of government and Fed salvos?  Making it easier for people to spend money will likely get them spending money.  As retail sales pick up more temps will be hired.  GDP figures will expand, and the government will issue assurances about possible controls should prices rise too much.  The economy will flash like a hypernova, and Krugman and his Keynesian allies will glitter for awhile.

As shelf prices begin to shoot up, the government will threaten selected wealth producers about various cards it could play, none of them pleasant for such a small voting bloc.  Backstage at the local market, highly depreciated federal reserve notes will be swapped for whatever people can get their hands on.  Spending, in other words, will become a desperate act of saving.  There will be arguments in the media about whether we’re experiencing inflation or mass inflation, with general agreement that other than the usual loons, no one saw it coming because the Fed is doing what it pledged it would do, create more inflation, which is not the same as real inflation or mass inflation.

Bargain stress-relief solutions will thrive as more people feel poverty closing in on them.  Fat-cat federal spokespeople will deplore the spike in street crime.  International tensions will increase as governments continue playing beggar thy neighbor or in some cases bully thy neighbor.  The CIA might even start another war.  The usual suspects will get blamed for everything.  Throughout all this the do-something gang will be undeterred because whatever losses they might suffer are discounted by the fact that they’re still in charge.  And the “experts” who never see a crisis coming will tell us we must once again abandon free market principles to save the free market system.

What form will the abandonment take?  Whatever is politically expedient.  Americans could end up shackled to a one-world super-bank manufacturing meal tickets at will, though with everyone looking for a free lunch the meals might become indistinguishable from the tickets themselves.

Of course, none of this has to happen.

Kris Kringle? No, Ben Bernanke

Kris Kringle?  No, Ben Bernanke


George F. Smith

What will Ben Bernanke do to restore economic growth?  He’s probably wondering the same thing.  Since he holds our future in his hands, it can be helpful to think through some of the politically-acceptable options he has, to see where they might lead. 

Everyone is speculating on QE2 - Quantitative Easing Two.  Will he or won’t he, and if he will, how will he implement it - all at once or gradually?  The financial press is convinced QE2 is a done deal in some form.  They’re probably right -- aren’t they usually? -- but if I were Ben Bernanke, I would think about it extra hard.  QE1 was not an American success story.  You don’t improve a gross blunder by repeating it.  The monetary base is at an all-time high, banks are risk-averse, corporations are loaded with cash, and the mortgage industry is in trouble again because of sloppy or fraudulent foreclosure practices.  Pouring more fiat money into the banking system, therefore, would have the same effect as setting the stuff on fire.  Bernanke would seem to be trapped.  He can print money all he wants but if the usual beneficiaries sit on it, what good will it do? 

According to my understanding of Keynesian theory, Bernanke has to get the money into the pockets of people who will spend it.  He needs to identify the spenders and make sure they go to their favorite retail outlets and buy things.

Who are the spenders?  You and me.  But Americans are too much in debt, and there’s always the chance that if he writes them a check they will use most or all of it to pay creditors.  How can he get people spending on stuff that’s sitting on store shelves?

How about a free Christmas - for starters?

The holidays are almost here, and people won’t be paying down debt for the next two months.  They will spend, but they will be frugal.  Frugality is a mortal sin in the Keynesian religion.  Frugality belongs to the same family as hoarding, and hoarding is public enemy number one to central planners.

Some people think of Bernanke in a helicopter dropping money on the masses to get them to spend.  He would probably enjoy doing it - after scattering the loot, he could hover overhead and watch the action.  He would be witnessing one of those rare moments in the life of a leading economist, the confluence of theory and reality.  It would sure beat watching a rat navigate a maze.  Moreover, he could attach sales fliers to the money, to further reinforce the idea of spending it.  Imagine: From his perch low above the ground he could see unsold inventories gathering dust, then watch those inventories being whisked away in a cloud of dust as consumers went on a spree.

Would this work?  Maybe, but while we wait for the econometric models to tell us for sure, we can dream up other possibilities.

In my opinion, Bernanke needs to think like the father of teenage daughters.  What is their ideal world?  One or more credit cards with astronomical spending limits -- credit cards that daddy takes care of when the bills come due.  Bernanke could issue Fed credit cards and scatter them over the American landscape.  Take a card to Macy’s, buy what you want, and Macy’s sends the receipts to the Fed.  Drawing on his capacity to produce digits and dollar signs with a few keystrokes, Bernanke prints Macy’s a check, Macy’s orders more inventory, and the cycle begins anew.  As the Mogambo Guru might say, “Whee!  This economics stuff is easy!”

You say, fine, but who would do the work in this scenario?  Who would produce the goods, and who would man the stores to sell them?  We already know the answer to the first part - foreigners would make the goods.  We’re still the world’s only superpower, right?  As for retail clerks and such, Bernanke could call on the military or hustle up prison inmates.  Soldiers would be well-suited to instill order in a frenzied crowd of shoppers, and prisoners would welcome a break from their confinement, while it would help acclimate them to rational society.

Not only will massive spending boost GDP, it will eliminate the nagging unemployment problem by bringing new meaning to the idea of work.  Inflation fears?  Who cares about inflation when you have unlimited credit?  Crime would plummet because there would be no need for private citizens to rob or steal.  People would have their faith restored - yes, indeed, there is a Santa Claus.  And that bad ol’ government that libertarians love to skewer - why, they’re wrong, it truly is our servant.  Man of the Year?  Ben Bernanke would be a shoo-in for the White House.

We don’t need another QE.  We need Fed credit cards.  If the Fed is generous enough, Christmas 2010 will be the best, and quite possibly the last, on record.   

Tuesday, October 26, 2010

Are we destined for Third World status?

We will only reach Third World status if we don't stop the planners and spenders who rule us.  It is up to you, it is up to me.  The Left-Right agenda of big government has brought us close to collapse, and there are no indications of a trend reversal.  On the contrary, the government acts as if everything else is the problem, as it spends and regulates us into oblivion. documents: 10 Signs The U.S. is Becoming a Third World Country.

Monday, October 25, 2010

"Keep Quiet About Your Gold"

Let's say you've purchased some physical gold and/or silver.  You paid for it in cash from a local dealer who doesn't know you, thereby assuring your privacy.  You bring it home and then . . . you do what with it?

Jeff Clark of Casey Research offers some suggestions.

1.  Put it in a safety deposit box - This is the easiest method, but it compromises your privacy.  Plus, with a safety deposit box you don't have access to your metals 24/7.

2.  Bury it - Advantages: "You don’t have to worry about losing your gold to a burglar or having it damaged in a fire. A lot can happen in the world that won’t disturb buried gold."  Be sure to bury it someplace inconspicuous where you can get to it easily.  Also, put it in a protective container first.

3.  Hide it in your house or put it in a home safe - Don't hide it anyplace obvious, and consider storing it in a home safe, preferably a floor safe that can't be easily moved.  I know someone who stores his valuables in a 700-pound safe he keeps in the basement.
However you store your gold, let exactly one person know the details. It needs to be someone in whose honesty and discretion you have complete confidence. It will be that person’s job to access the gold if you are incapacitated or die. If you are using a safe deposit box, his or her name should be included in the box registration, and they should know where to go to get the key.

Tell one person, but only one. No one else should know. This is especially important if you are using home storage. You don’t want to come home someday to find your house turned upside down because someone heard you’re living in a treasure chest. Even worse would be to come home and find your friendly local looter waiting to have a chat with you.

There’s just no other way to say it: keep quiet about your gold.

Stronger Yuan No Threat to Gold

Last week China said it would boost the lending rate on the yuan by 25 basis points.  Contrary to expectations the dollar got stronger.  What does this mean for gold?  Rick Ackerman writes:
Gold and silver came down because speculators believe that China, the world’s remaining economic engine, will continue to tighten in the months ahead. That would be deflationary, the thinking goes, and bullion prices should ease in anticipation.
The thinking is wrong, however, for the simple reason that the move toward fiscal austerity around the world, especially in euroland, is no match for the rampant monetary stimulus that is being used to counter the worst global recession since the 1930s. Beggaring-thy-neighbor via currrency devaluations is not merely in vogue, it is the Tulip-o-mania of these times.
If this trend is capable of causing the price of gold and silver to fall, then pigs can fly and the world is entering a period of unprecedented peace, prosperity, harmony, with high-paying jobs for everyone.  If you believe this, then you should be hoarding all the paper money you can get your hands on, stuffing it in your mattress, and in Treasury Bills and Notes that yield almost nothing.
For our part, we’ll put out trust in gold and silver, which for the last decade have steadily climbed in value no matter what investment story was in vogue; regardless of whether it was inflation or deflation that we feared; and even as the world’s financial system has edged toward the deepest imaginable abyss.

Gold-to-Go coming to US

A hostess in Berlin buys gold from an ATM

From the Sidney Morning Herald, October 23, 2010:
Apart from the gold-plated exterior - and the fact that they are bulletproof - they seem much like any other vending machine. But instead of chocolate bars, a network of ''gold-to-go'' machines dispenses 24-carat bullion.

Originally designed as a marketing device for an online gold trading business, the machines have become such a success that their inventor plans to build a global network, installing them everywhere from fitness centres to cruise ships.

The German businessman behind the machines, Thomas Geissler, said their success was the result of a rush on gold, the price of which has risen from $US250 an ounce in 1999 to about $US1330 an ounce.

''Ordinary people are starting to see its real value,'' he said.

Since the first machine was installed in May, in the lobby of Dubai's Burj Khalifa hotel, 20 gold-to-go machines have been installed across Europe. Next month the first machines will open in the US.

Mr Geissler is also meeting representatives of Harrods department store in London to discuss launching the first British machine. He plans to have launched 45 worldwide by the end of the year.

''We notice the sales peak whenever there are signs that the markets are wobbling. When the Greek crisis was revealed in its entirety, our sales went up tenfold. With the current troubles in currency markets, gold becomes even more attractive.''

It was no accident that the machines had taken off so well in Germany. ''Germans are still traumatised by the hyperinflation [of the 1920s], when people walked around with wheelbarrows full of notes, while Americans are still traumatised about the Depression.''

Mr Geissler said most customers of the vending machines were women, who tended to buy in smaller amounts. The larger pieces - it is possible to buy up to 250 grams for about €8,000 ($11,350) - are bought by ''well-off men, of on average 55 years of age''. The bullion are sold in smart presentation boxes.

The machines are monitored from Geissler's company headquarters in Reutlingen, Germany, and the price of the gold is updated every 10 minutes, according to the market price.

The company says its gold is cheaper than that available from the banks because its overheads are lower and the machine gold is available immediately, unlike at banks where customers have to wait for days.

Friday, October 22, 2010


The latest unintended consequences of the Federal Reserve-fueled housing boom is the wave of foreclosure problems sweeping the mortgage industry.  When someone takes out a mortgage on a house, they sign an endless stack of papers.  The mortgage company then sells the mortgage, including the papers, to a bank like Bank of America or JPMorgan Chase.  The bank bundles the mortgage with other mortgages and sends it through a depositor to a trust such as Deutsche Bank.  The trust then hires a servicer to collect the monthly mortgage payments.

So, the mortgage moves from a mortgage company to a bank, to a depositor, to a trust, to a servicer.  At each step of the process the appropriate papers should have accompanied the mortgage to identify who owns the house and who pays the mortgage.

Now suppose the original buyers can't make their mortgage payments.  After six months the servicer comes calling and says pay up or vacate the house.  This is entirely legal, as long as the servicer can prove that the trust for which it is collecting payment is the real owner.  Trouble is, with all the mortgages created and now with mounting foreclosures nationally, such proof is in question.

The original paperwork was transferred to a computer system called MERS, for Mortgage Electronic Registration System, and though the paperwork should still be available, it quite often isn't. 

As Elizabeth Shell explains:
To support the complaint that the mortgage hasn't been paid, the servicer must have an affidavit that verifies the trust actually does own the mortgage, and thus is owed six months of payments.

And that means someone at the servicing company had to personally swear on a affidavit in front of a notary that the note's ownership had been verified and that the homeowners owed back mortgage payments. This process is supposed to be done for each and every foreclosure.

With all the foreclosures from the financial downturn, critics claim "robo-signers" from the banks were robotically signing off on literally hundreds of thousands of affidavits.

This is where the waters can get incredibly muddy for that verification process. First, the servicer's robo-signer signing off on these affidavits may not have been checking every single one to see that the trust indeed owned the mortgage note. Second, the notary (which is required for affidavits) was often done at a later date than when the robo-signer signed off on the complaint. Sometimes months later.
With accusations of robo-signing, judges have become reluctant to accept affidavits in lieu of a printed note. As an Associated Press article reports:
Though some have chalked up the foreclosure debacle to an overblown case of paperwork bungling, the underlying legal issues are far more serious. Yes, swearing that you've reviewed documents you've never seen is a legal offense. But at the center of the foreclosure scandal looms something much larger: the question of who actually owns the loans and who has the right to foreclose upon them. The paperwork issues being raised by lawyers and attorneys generals have the potential to blight not just the titles of foreclosed properties but also those belonging to homeowners who have never missed a mortgage payment.

Trashing the dollar to pump stocks

Graham Summers writes:
What’s truly worrisome is that the Fed is hell bent on enacting the exact same policies that have created the Dollar collapse (and the rally in stocks) over the last few months, namely, additional Permanent Open Market Operations (POMO) ramp jobs. The name sounds clever, but it really just consists of the Fed buying US debt from the large private banks, which in turn take the Fed’s money and buy stocks.

Indeed, the Fed just announced it will be monetizing an additional $32 billion worth of US debt in the next few weeks. The schedule for these ramp jobs is as follows:
  • October 15:
  • October 18:
  • October 20:
  • October 22:
  • October 26:
  • October 28:
  • November 1:
  • November 4:
  • November 8:
In plain terms, the Fed is going to keep doing what it’s been doing: trashing the US Dollar to pump stocks. And it’s going to do this to the tune of some $10 billion per week over the next month.

Thus, as ridiculous as it sounds, the stocks up/ US Dollar down trend of the last two months is likely to continue into early November.  But if the US Dollar doesn’t bounce soon and start rallying with force, we’re heading into a VERY nasty period.

Thursday, October 21, 2010

The Campaign Against Gold

From The Gold Wars by Gary North:

The State has adopted several strategies in undermining the use of gold as coinage. Here are a few of the more common strategies.

1.    Issue paper IOU’s for gold, called gold certificates.

2.    Issue more of these certificates than there is gold to redeem all of them on demand on the same day. “Suckers!”

3.    Allow commercial banks to do the same thing. “Suckers!”

4.    Create a central bank that stands ready to issue gold to bail out any bank that experiences a gold run.

5.    Allow commercial banks to suspend redemption of gold during a national emergency. “Suckers!”

6.    Allow the central bank to confiscate the gold of the now- protected commercial banks. “Suckers!”

7.    Make the ownership of gold illegal for citizens.

8.    Create a gold-exchange system internationally in which foreign central banks buy interest-bearing bonds from one or two countries that back their currencies in gold: IOU’s for central bankers.

9.    Create a central bank for central banks that will lend gold during a national bank run. Call it something other than a bank, such as the International Monetary Fund.

10.    Suspend gold payments to foreign central banks when too many of them catch on that there are more IOU’s out there than gold to redeem them. “Suckers!”

11.    Persuade all of the other central banks to store their gold in the senior branch of a central bank whose nation used to redeem gold on demand by foreign governments, but which defaulted decades ago. “Suckers!”

12.    If the price of gold rises, calling attention to the monetary fraud of legalized counterfeiting, sell some of this gold to the grandchildren of those trusting citizens from whom you stole the gold. But call the sales something else, such as gold leasing. Don’t reveal a reduction in the official reserves of gold.

13.    Allow central banks make a substitution: written promises to pay gold, issued by private organizations called bullion banks, instead of actual gold.

14.    Wait for the price of gold to rise, thereby bankrupting the bullion banks, which will not be able to repay. These are all corporations, and so enjoy limited liability benefits. No one goes to jail.

In this final scenario, who wins? All those people who bought gold while the gold- leasing operations lowered the market price of gold.

Today, the central banks’ gold is steadily being repatriated to private owners. The central banks are subsidizing the future net worth of gold buyers.

When there is finally no more gold to lease, or when central bankers at long last figure out that IOU’s issued by recently bankrupted gold bullion banks are not really what central bankers need to establish public confidence in their forecasting abilities, the price of gold will skyrocket. At that point, the public will decide it’s time to buy -- at high and rising prices.

Those who have already bought will then look at the rest of the population, which failed to buy while the buying was good, and very quietly, in private circles, issue their unofficial assessment: “Suckers!”

Government and gold

From The Gold Wars by Gary North:

Political rulers throughout recorded history have asserted a monopoly over money. They have argued that the State possesses legitimate authority over the creation and distribution of money. Because gold and silver have been widely used as money metals, the State has asserted control over the monetary uses of these two metals.

This is the origin of the war against gold. Gold is widely recognized and desired as an investment. It is a highly marketable commodity. This was far more true in 1913 than it is today. Prior to the de-monetization of gold, which began in 1914, a person could take a gold coin anywhere where international trade was common and buy just about anything. It did not matter which ruler’s image was on the coin. The coin was valuable because of its gold content. The image may have helped to convey information about the coin -- so much gold of a certain fineness -- but the face on the coin had merely a brand-name recognition effect. The British gold sovereign was so widely recognized that James Bond carried sovereigns as late as the mid-1960s. In From Russia With Love, the coins were in the booby-trapped briefcase. The ruler’s image verified the quantity of gold in the coin. It did not add value except as a kind of Good Statekeeping Seal of Approval.

Gold’s value is not independent of governments. This is because governments buy and sell gold. This activity affects its price. Gold’s value is also affected by laws against the circulation of gold coins. The Soviet Union had such laws. So did the United States, 1933-1974. But gold’s value as a money metal can exist independently of a government’s actions to subsidize or stigmatize gold’s use as money. Gold circulates as money precisely because it has a value independent of government policies. Or it did. It no longer does. Gold has been de-monetized by governments and their acolytes, the economists.

As with any scarce resource, gold moves to those holders who bid highest. The more widespread gold’s use as money becomes, the more likely that trade will accompany gold. Gold reduces risk by reducing the likelihood of default or fraud on the part of the State or its licensed agents, fractional reserve banks. A government can go bankrupt, but its gold coins will still circulate at gold’s market value. The same is true of any coin-issuing agency. The gold may be marginally more or less valuable in a particular form because of the degree of recognition of the producer, but a government that accurately certifies its gold coins will find that its coins circulate at full value even if the government itself faces bankruptcy or extinction.

Gold’s independence from the fate of governments points to a political truth that governments despise: governments are not the source of the value of gold. To the extent that gold is money, gold testifies against the sovereignty of the State in the realm of money. It testifies to the sovereignty of consumers in a free market. The free market, not the State, is the primary source of gold’s exchange value.

This means that consumers can escape from the State’s anti-consumer policies. They can buy gold. This provides them with international money, black market money, and “hoard it and spend it later” money. It provides one group of citizens with the personal escape hatch from the effects of government power-seeking. Which group? Political skeptics who do not trust the government’s money.

In olden days, this escape hatch was an insult to a king, whose face was on the coins that he was debasing by adding metal of lower value. The king wanted to increase his spending, but there was tax resistance. So, he would call in the old coins, melt them, add cheap metal, and try to spend them into circulation at the old rate for coins with higher gold content. The plan never worked. The new coins would always fall in value.

This enraged the government. It made theft through deception less effective. The citizens who spotted the fraud early would buy gold by exchanging the debased new coins for old gold coins, leaving the less perceptive, more trusting citizens holding depreciated new coins. Private citizens did what the king was trying to do, and this invasion of the king’s asserted prerogative to steal enraged kings for centuries.

Today, there are no kings, other than “King” Farouk’s famous kings of clubs, diamonds, hearts, and spades. But politicians still play the old games, and play it much better. They want the monopoly of theft that comes from passing the new, counterfeit money to the suckers (citizens) at yesterday’s lower prices. So, when a few of the recipients of the new, phony bills and credit money start unloading them to buy gold, the politicians take action. They do not want to share the benefits of being able to buy at yesterday’s prices with today’s more plentiful money.

When gold’s price rises steadily when there seems to be no war imminent or other international disaster, people start looking for a reason. The main reason is that the government is inflating. If gold’s price is rising in one currency but not others, this is additional evidence of policies of monetary inflation.

The government wants people to believe in “something for nothing.” It wants people to believe that digital money creates wealth. But if one group seeks to gain a disproportionate share of wealth by exchanging fiat money for gold, only to see gold’s price rise, the politicians try to stop this. They cry out against “speculators” who are “acting against the public interest” by “profiting at the expense of widows and orphans.” This is a more acceptable way of saying: “These private amateurs are invading our turf in the ever-profitable business of looting widows and orphans.”

A rising price of gold is like a trip-wire alarm that announces: “The politicians are at it again. Bolt down the furniture.” It is a signal, published in the newspapers, that there is something untrustworthy about the central bank’s monetary policies. It alerts entrepreneurs to start buying goods before prices rise further. So, prices rise even faster. This makes it even more expensive to buy votes with fiat money. The new money buys fewer of the goodies that politicians hand out to buy votes.

The skeptics who say “the government should never be trusted” get rid of the new money and buy at yesterday’s prices. The trusting souls who say, “The government is our friend” hang onto the money, only to see it fall in value. The skeptics win; the State- trusting citizens lose. This is an affront to the politicians. It raises the cost of trust. Economic law then takes over: “At a higher cost, less will be supplied.” More citizens begin to distrust the government.

The politicians deeply resent this aspect of gold, for the same reason that a burglar resents the widespread installation of burglar alarms.

Thursday, October 14, 2010

Home prices and government credit

According to Robert Schiller in his book Irrational Exuberance, between 1900 and 2000 home prices in the U.S. increased by an average of 3.4 percent annually, slightly above the average inflation rate.  Prices were firmly tied to people’s ability to pay, which is a function of income and credit availability.

From 1997-2006, home prices gained an astounding 19.4 percent annually on average, yet incomes stayed mostly flat.  How could people pay so much?  The difference was credit.  Government made credit cheaper and easier to get.

Cheap credit today is made possible by our unsound monetary system.

---  From How an Economy Grows and Why It Crashes by Peter Schiff and Andrew Schiff, Chapter 15

Wednesday, October 13, 2010

Gold surges as Fed releases September FOMC minutes

"In minutes of the its last policy-setting session held September 21, the Fed said officials discussed several approaches to aiding the economy but focused on buying additional longer-term Treasury securities and ways to nudge the public into expecting higher levels of inflation in the future," Reuters reports.

Guess what happened to the price of gold?

"Gold sets record as Fed easing hopes hit dollar" - Reuters

"Gold Prices Rise to Record as Demand Mounts for Alternative to Currencies" - Bloomberg
“Both gold and the dollar agree that Ben Bernanke will be victorious in his quest to foment a robust rate of inflation,” said Michael Pento, a senior economist at Euro Pacific Capital in New York. . . .
Gold for immediate delivery reached a record $1,374.35.
Investors should be prepared for a correction in prices, Adam Sieminski, a Deutsche Bank analyst, said in a report. The 14-day relative-strength index for gold futures has been above 70 for the past three weeks, a signal to some traders that prices may decline.

Investors ‘Wary’

“Investors need to be wary of a short-term correction in the U.S. dollar during October, and with it, a possible setback to recent price advances” in gold, Sieminski said. “We view any correction in gold prices over the next three weeks as yet another buying opportunity. The next hazard for bullish gold investors will be the first four weeks of next year, which has seen the dollar strengthen nine out of the last 12 years.”  [Emphasis added]

Tuesday, October 5, 2010

FRBNY and PPT President Bill Dudley Guarantees QE2

The Fed claims to have a dual mandate: promote prosperity and keep prices stable.  In the nearly 100 years of the Fed's existence it has done neither.  The Fed works against prosperity and against stability.  Fed inflation keeps prices rising and keeps the market chasing after projects that don't make economic sense.  The pseudo-boom it creates results in a recession which it attempts to fix with more monetary inflation.  At Fed headquarters the way to dig yourself out of a hole is to dig the hole deeper.  And dig deeper still when that doesn't work.  The Fed is poised to open the monetary floodgates again by buying more assets, a move it calls "quantitative easing 2," or QE2.

How close they are to executing QE2 was signaled by Bill Dudley last Friday, October 1, 2010, in a speech at the City University of New York's Graduate School of Journalism:
Currently, my assessment is that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. In addition, the longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.
The key word is "unacceptable."  That's strong language for a FOMC official like Dudley.  According to former St. Louis Fed president William Poole,
It is hard for me to imagine a stronger statement that Dudley will be arguing for the Fed to buy more assets—the policy discussed at some length earlier in his speech. “Unacceptable” is a pretty strong word.
The Fed's greatest fear is deflation.  It will avoid it at all costs, even if the cost is the destruction of the currency.

Gold reached a new nominal high of over $1,340 today.

Monday, October 4, 2010

Why gold and silver are on the rise

Peter Degraaf explains why gold and its little brother are doing so well.  In a word, government.  In his words,
The upward pressure on price is due to fundamentals for gold that are extremely bullish and these include:

·         The US money supply is today twice as large as it was just a few years ago.
·         The Obama administration is without a clear economic policy – three out of four members of the economic team have just resigned - and the fourth, Tim Geithner, has never held a position in the business world aside from being involved in the banking business at Goldman Sachs.  The man can’t even keep correct personal income records.
·         Worldwide money supply is expanding at an average rate of 10%.
·         The US dollar is in a long-term decline against gold (see chart below).
·         The Euro is in a long-term decline when measured in gold (see chart below).
·         Gold is rising not only in US dollar terms but also as expressed in a number of currencies – this reflects a ‘flight to safety from fiat currencies.’
·         Gold production is declining, despite higher prices.
·         It takes longer (due to regulations) to build a gold mine than ever before, and the rising cost of materials and fuel makes it very expensive to build a mine.
·         The period between US Labor Day and Christmas is usually the most gold-bullish period of the year.  In seven of the last eight years gold rose during this period.
·         The expiration of options on August 26th did not have a negative effect on the gold price, compared to options expiration days in June and July.   This proves strong underlying physical demand.
·         China is buying up local gold production, thus withholding it from the market.
·         Russia is buying up local gold production, thus withholding it from the market.
·         Gold ETFs are more popular than ever before, drawing bullion away from the market.
·         The US gold supply that is stored at Fort Knox has not been audited since 1953 and is most likely all or partly gone.   It has either been sold or leased.
·         Central banks have stopped selling gold and some have become buyers.
·         Gold thrives when ‘real interest rates” (US T-bill rate less CPI) is negative - as now.  (People who are earning less than 7% per year on an investment are actually going backwards because of the inflationary effect which is currently 7% and rising!)   Gold on the other hand has been rising at an average +20% per year for the past five years.  Since 2001 gold has risen 400%!
·         Gold thrives during periods of price inflation and we are witnessing the beginning of increased price inflation:  Wheat, corn, oats, barley, oranges, cattle, hogs, salmon, copper, iron ore, cotton, sugar, coffee, palm oil, health care, education are just some of the categories that are rising in price.

The State Unmasked

“So things aren't quite adding up the way they used to, huh? Some of your myths are a little shaky these days.” “My myths ? They're...