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!”
Thursday, October 21, 2010
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.
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
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
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:
Gold reached a new nominal high of over $1,340 today.
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.
Thursday, September 23, 2010
Are There Any Doors Open for the Fed?
Jim Willie, AKA the Jackass, thinks we're like Japan only worse.
Japan has proved without confusion that 0% is a permanent stuck position. The United States will repeat the path, but with a vast mudslide. Japan has had the advantage of a strong industrial base, a sizeable trade surplus, and no war budget. Thus it has been capable of funding much of its own deficits. It does possess a big debt burden. But the US has $1 of new debt for every $1 in government revenue. The US war budget is almost as large as its total revenue. The US depends upon foreign creditors, many of whom have been thoroughly alienated.Read the rest.
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