Friday, June 3, 2011

Open Letter to Ron Paul


Dear Dr. Paul,

I would like to share with you what I think is a brilliant opportunity for you to lead the revaluation of the US gold stockpile from its present book value of $42.22/oz. which, as you say in the video below, "makes no sense whatsoever." I think that when a rare opportunity like the one I’m about to describe presents itself, the least we can do is to give it fair consideration.

While watching your recent hearing on YouTube, I was struck that the Fed's General Counsel Scott Alvarez had to explain to you that the Fed doesn’t own any gold. Here's the clip to which I am referring. It should begin automatically at 1:35:



Had you been reading my blog (not that you would be, of course, but maybe now you’ll start ;) you would have known this by at least last October when I published It’s the Flow, Stupid. Here is an excerpt, and this is important to the opportunity I will present:

Here is something you need to understand about the US gold. The Fed does not own it. The US Treasury does. Following the Gold Reserve Act of 1934, the Treasury gained title to the entirety of the US monetary gold (including $3.5 billion which was currently being held by the Federal Reserve banks). From that point on, the Fed has received [from Treasury] private issues of new-fangled gold certificates in $100, $1,000, $10,000 & $100,000 denominations -- not to be paid out and not for circulation.

So the Treasury took 175 million ounces of gold from the Fed, paid the Fed in DOLLAR-DENOMINATED certificates for this gold at $20 per ounce, then revalued gold to $35 per ounce. So if the Fed had even been able to redeem those certificates for gold in 1935, it would have only gotten back 100 million ounces. The windfall of 75 million ounces of gold ($2.6 billion), in this case, went entirely to the US Treasury and not the Fed.

The entire Treasury windfall was $2.8 billion and was the reason and the funding for the establishment of the ESF, the Exchange Stabilization Fund in 1934. So following the Gold Reserve Act of 1934 100 million ounces of gold were already automatically monetized. The rest of the US gold was eventually monetized through the Fed. The way this happens is the US Treasury issues fancy new non-negotiable, dollar-denominated gold certificates to the Fed and the Fed credits the Treasury account with dollars.

Today, all of the US gold has been "spent" in this way, but only at the price of $42.22 per ounce. That's 261,511,132 ounces of gold monetized at roughly $11 billion, money that was spent long ago.

So you see, the Fed cannot mark the US gold to market. It cannot even revalue the US gold. Only Congress can. And even if Congress DID revalue the gold, it would not change the Fed balance sheet by one penny. The Fed only holds dollar-denominated certificates worth $11 billion, payable in gold, but not really. It's kind of like Aramco in 1945 who owed the Saudis $3 million, payable in gold.

If Congress DID decide to mark the US stockpile of gold to market today it would find it had a new stream of revenue. At today's price of $1,328 per ounce, the US gold would be worth $347 billion. Subtract the $11 billion already on the Fed balance sheet and Congress could immediately ask the Fed to credit the US Treasury with $336 billion new dollars to be spent.


Here is a little more background from a couple of my more recent posts. Hopefully it'll start to be clear where I'm heading with this. This next one comes from January in my post, RPG - Update #1:

"Meanwhile, due to the woefully outdated paradigm established by the US Congress for gold held by the Treasury Department, the gold reserves of the United States are effectively anemic and bedridden upon the books of The Federal Reserve System, where they exist only in certificate form — valued at a static $42.22/oz., forming a paltry $11 billion stake."

That's right! The Fed doesn't even have actual gold on its balance sheet that can be used as a reference point. It has "gold certificates" issued to it by the US Treasury from the past monetization of US Treasury gold at $42.22/oz. I suppose, technically, if the US Treasury wanted to revalue its gold to the market price today, the proper yet antiquated process would be for the Fed to credit the Treasury's spending account with new dollars representing the difference in price. Today that would be about $355 billion fresh dollars for Congress to spend. Yet there would still be no existing mechanism to automatically account for the new and emerging Reference Point: Gold. Something technical is going to have to change!


Did you notice that I underlined $355 billion? And farther above, which was from back in October, it was "only" $336 billion. Well, here's an excerpt from my very recent April post, RPG - Update #2:

Rather than selling the gold, why don't you just value it like the rest of the world? Why not just mark it to the market price of gold on the Treasury books? If you, Congress, are going to insist on an honest accounting of America's liabilities, why not properly account for her ASSETS as well?

And then… the US Treasury, under the daft guidance of [Geithner], can issue new gold certificates to the Federal Reserve. As anyone with even a rudimentary understanding of double-entry bookkeeping knows, the balance sheet must balance. For every asset there is a liability, and vice versa. This is basic stuff. You don't need to be a banking "expert". And so far the Fed only carries $11 billion of the Treasury's gold on the asset side under the gold heading. Today we have room to add $370 billion more, and that means fresh Fed liabilities—also known as US dollars—accruing as fully paid-up credits to the Treasury account for the government to use however it deems appropriate.

Again, I realize this doesn't solve any of the big problems, but it does buy some time. And furthermore, it is not a bad or reckless thing to do. It is the right thing to do! America has an untapped asset. You can use it without selling it for gosh sake! And just like the old gold certificates, the new ones will NOT be redeemable by the Fed or any other banks in physical gold. They will simply be an accounting entry on the Fed balance sheet. In the future, that gold can be mobilized, if necessary, in defense of the US dollar. But only with the approval of Congress. The physical gold remains the property of the United States. It will simply be monetized by properly revaluing it as the monetary reserve asset that it is, and placing it—at its proper valuation, updated quarterly—on the asset side of the central bank's balance sheet, just like the ECB.


That's right, it jumped again. From $336 billion in October, to $355 billion in January, to $370 billion in April. And guess what it is today. $390 billion! That's the amount of untapped equity the US Treasury has in its gold today. And that equity can be monetized without selling the gold, by the simple act of Congress ordering the revaluation of the gold.

This is simple logic, Dr. Paul. It doesn't take a room full of lawyers to figure out if it is feasible. It is plainly obvious, which is why it is so stunning to me that Tim Geithner is playing the ridiculous juggling game that he is today, essentially plundering retirement accounts ("disinvesting intragovernmental debt") by $66 billion to keep feeding the big government Frankenstein monster:

"Since May 16, the debt subject to the debt limit has been $14.293975 trillion each day, showing that Treasury has $25 million in breathing room under the debt ceiling.

"...it's not completely transparent how Treasury is managing the debt versus the debt limit on a daily basis... We do know that Treasury has used three of the tools available: Suspending G-Fund reinvestments, redeeming investments of the Civil Service Retirement and Disability Fund (CSRDF), and suspending new CSRDF investments.

"...The ultimate day of reckoning comes when Treasury runs out of cash, not when it runs out of room to issue new debt. Many in Congress and the press appear to confuse the two, and Treasury hasn't worked that hard to draw a distinction..."
[1]

Perhaps there is another "tool". One that doesn't require raiding the retired and disabled.

The gold certificates on the asset side of the Fed's balance sheet are not even paper certificates with fancy fonts and pictures. They are electronic book entries representing the dollar-denominated amount of $11 billion. They no more represent the US gold by weight than they are redeemable in that gold. They are a nominal dollar token accounting entry.

The Fed's "Fisher" was wrong [here] when he said, way back in 1997, that a revaluation of the gold would require selling off other assets to balance the Fed's books. Firstly, if Congress were to revalue Treasury's gold, that would not automatically revalue those "certificates". They have no market value because they are irredeemable, non-negotiable and obviously unmarketable! Secondly, even if it were to automatically affect the Fed balance sheet in some cartoon universe, selling off other assets is not the only way to balance a gold revaluation. The more logical way is for the Fed to issue new Fed liabilities, aka dollars, to the owner of that collateral that is rising in value.

Think back to when house prices were actually rising. If you bought a house for $250K and it was suddenly worth $350K did that revaluation automatically appear on your bank's balance sheet as an additional $100K asset? Of course not! But you, as the homeowner, could put it on the bank's balance sheet with a HELOC or a second mortgage.

Maybe you could call this gold revaluation a GELOC to tide you DC spendaholics over until you can get your act together later this year. And that (soon to be) $400 billion "bridge loan" will not even be debt in the traditional sense, and it certainly won't be "debt subject to the debt limit" any more than Bernanke's QE is subject to limit.

Honestly, the Eurozone is so far ahead of you DC guys on this it's not even funny. They mark their official gold reserves to the market price every quarter, and they just voted to make gold a system-wide acceptable collateral asset. [2]

"The European Parliament's Committee on Economic and Monetary Affairs Tuesday agreed unanimously to allow clearing houses to accept gold."

OMG! Can it be that a collateral asset that is consistently rising in free market value makes boatloads more sense than ones you have to prop up with quantitative easing and open market "print to purchase" operations??

One last thing. If you start to marking to market the effects of all this money printing, it will not only at least bring some benefit to the country, but it will also highlight the growing value of gold reserves for every American to see and learn from. Perhaps a few will even "save their savings" before it's too late. All those peeps you save might even nickname RPG "Ron Paul Gold!"

Okay, I promised myself I'd keep this post short since it is an open letter to an important and (I'm sure) busy man. And as my readers know, some of my posts tend to run a little bit on the long side. That said, Dr. Paul, I'd like to also invite you to read my last post, which is titled The Return to Honest Money. It's about you, and Rothbard, and Menger, Mises and Hayek as well as a few more. I think you'll like it. But at least it might be worth your fair consideration.

Sincerely,
FOFOA

[1] Treasury Continues To Dip Into Retirement Accounts, Prepares To "Take Out" $66 Billion Chunk To Make Room For New Bond Issuance
-Zero Hedge
[2] Bid to Use Gold as Collateral Advances -WSJ

349 comments:

«Oldest   ‹Older   201 – 349 of 349
Joel said...

"And it's not about having read every economics book out there, or knowing everything there is to know about Mises and Marx and whoever."

Amen, Ash. You have said it perfectly. You can read all the books in the world, but it doesn't make you an expert on anything. Until you get down in the trenches and try to actually do something yourself an make a profit, you will never understand anything. I get my "common sense" from real world experience, something in which you are sadly lacking. I am now officially done responding to your "high minded" theories and arrogant self praise.

"Now, here's the thing: How you gonna run the world, if you haven't ever even run a seven eleven? "--H. Ross Perot







"

radix46 said...

Terry,

If it has the same level of verifiability, probability and credibility as the flying spaghetti monster orbiting Saturn (technically possible, but highly unlikely and you'll never be able to find out anyway), then it should be given the same amount of consideration, ie, none.

victorthecleaner said...

Casper,

There will be no breakup if the ECB is able to deliver what the're supposed to - price stability. If anybody listened to mr. Trichet answering questions today, no doubt he/she noticed two important things... price stability and no default.

I call BS. And the problem here is once more

[...] hyperinflation is the process of saving debt at all costs, even buying it outright for cash. (FOA)

Take a look at the ECB balance sheets before the 2007/8 crisis and today:

http://www.ecb.int/press/pr/wfs/2007/html/fs070327.en.html
http://www.ecb.int/press/pr/wfs/2011/html/fs110607.en.html

They have expanded their balance sheet by at least 400bn by explicitly monetizing bad or questionable debt (item 7). On top of that, a good part of the collateral that the commercial banks had offered under items 5.1 and 5.2 already in 2007, is Greek, Irish, Portuguese, and Spanish government bonds (the Greek part alone is 90bn thereof).

Monetary base in 2007 was around 800bn. If we neglect the expansion of the euro zone by Malta, Estonia, Slovakia, Cyprus (all tiny), I see a dilution by at least 50%. I do not know a single example in history in which this has not resulted in corresponding price inflation in the long run.

If Trichet had wanted price stability, he should have let Greece and the others default rather than monetizing their bad debt. Such a default would have made the euro strong. But in 2007/8 it was already too late to get out of the trap. The commercial banks had long planted the ticking time bomb deep inside the ECB balance sheet.

Victor bashing the ECB again? Yes, indeed.

Victor
PS: Yes, I know, Japan, UK and US are in even worse shape. Do you feel better now?

Indenture said...

From jsmineset.com ""Saudi Arabia has just pulled off one of the most remarkable public relations operations in many years. Last Sunday Saudi Aramco announced it was reducing the discount offered for its medium and heavy grades of crudes. The reductions in the discounts will make Saudi crude oil less profitable to refine and should, other things being equal, lead to a reduction in purchases of Saudi crude. The cuts will, however, likely boost Saudi revenue – the goal of every profit maximizing entrepreneur.

However, the country’s leaders cannot be seen to be trying to raise prices, even if it is the optimal decision for an oil producer. Thus, the country’s oil minister went to Vienna and called for an increase in quotas. When the proposal was rebuffed by six other members of the organization, the oil minister held a press conference and said Saudi Arabia would offer more oil. It was a brilliant coup. Saudi Arabia comes out looking like a friend to the west, promising to produce more oil. In response, energy policy officials in consuming countries will back off from their threats to release strategic stocks.

In the mean time, the firms that buy and refine crude oil are left holding the bag. Their losses will mount if they buy more crude. On the other hand they will be attacked by politicians across the globe if they do not buy oil and build inventories for the later part of 2011.

The really stunning development was the failure of any of the reporters to understand the game. I can understand the failure of market analysts in New York to understand the Saudi strategy. These individuals have been taught and now teach that the Middle East and OPEC quotas are everything. Truly amazing!"

costata said...

Indenture,

I logged in to provide a link to that jsmineset post about oil which you reproduced above. I think it is important.

Did you see the link I posted to an article by Jeff Rubin? Together I think they complete an emerging picture.

IMO we can expect another 2008 meltdown as oil prices move higher.

Casper and VTC,

I double the call of BS on VTC's observation about the Euro. This is still a young currency and a lot more Euro will be issued before this transition is over. Inflation in the EU - Yes. HI in the EU - not a chance.

As JR has pointed out several times the Euro is a currency "designed to print".

Default on some of this sovereign debt - quite likely though not necessarily explicitly. I think it will be dressed up as a restructuring. When - 2013 and beyond.

costata said...

More oil politics (my emphasis):

"And speaking of China, its economic interest in trade devoid of Washington's hectoring political lectures has found a warm reception in Caracas. China has agreed to provide more than $32 billion in assistance to Chávez's government, with the loans to be repaid in oil, in increasing amounts of it during the next decade. China is now Venezuela's biggest foreign lender, enabling Chávez's to boost social spending ahead of the country's 2012 presidential election, leading Chávez to exclaim "Viva China!" on national television.

Venezuela is now exporting to China about 460,000 barrels a day, about 20 percent of its oil exports, according to official figures, which Caracas hopes to double soon. Chen Ping, political counselor at the Chinese Embassy in Caracas noted simply, "Venezuela has what we need."


http://www.financialsense.com/contributors/oil-price/2011/06/09/china-and-the-politics-of-venezuelan-oil

Casper said...

Hi Victor,

"If Trichet had wanted price stability, he should have let Greece and the others default rather than monetizing their bad debt. Such a default would have made the euro strong."

But the euro is! strong...right now.

I agree with you that all that collateral (bonds) is crap but the very fact that

"P.S: Yes, I know, Japan, UK and US are in even worse shape. Do you feel better now?"

is a big bonus for the euro.

The big questions for me in regard to price stability (and I don't mean 0% increase of prices) are:

a) how do I ensure the flow of goods/commodities?

b) how do I prevent savings (majority of) moving into commodities?

Should they (ECB) succeed (and I believe they will) or have an answer to both questions, then in my opinion the dissolution/breakup of the eurozone is unlikely.

Casper

costata said...

Some interesting developments in the Russian rouble.

http://www.zerohedge.com/article/about-gold-backed-russian-roubles-and-eurobonds%E2%80%A6

The writer's conclusions are questionable but the comments attributed to the Russian finance minister are significant IMO.

mortymer said...

OPEC, 159th meeting.
- Opening session;
- Thee words after the conference;
For those who missed it, now uploaded.

http://www.opec.org/opec_web/en/multimedia/350.htm

Robert LeRoy Parker said...

Krugman:

 Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump ... but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.
Who are these creditors I’m talking about? ... The ... only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.
And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it’s the class that has personal access to policy makers — many of whom go to work for these people when they exit government through the revolving door. The process of influence doesn’t have to involve raw corruption (although that happens, too). All it requires is the tendency to assume that what’s good for the people you hang out with, the people who seem so impressive in meetings — hey, they’re rich, they’re smart, and they have great tailors — must be good for the economy as a whole.
But the reality is just the opposite: creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else. And the only way to get a real recovery is to stop playing that game.

mortymer said...

@costata, do you see any connection with the Ruble statement and the OPEC meeting fiasco?
- I wander if one topic in the OPEC meeting was the trade-settlement currency option for oil (?).
- Was this a victory for Iran? Who has gained? Those whose oil is traded in different currencies (?).
- IMO the Russia clearly states that their currency is stable like Euro and is worth, ready for trading their export commodities, products in bilateral trade. "You can follow our Russia-China example"

Lets re-read and see if that makes sense [@c: your link]:

"More specifically on gold, the reserves grew from $35.778 billion to $40.95 billion in 2011, an increase of 14.45%!

Per ITAR-TASS:

Speaking at a press conference on Saturday after a meeting of the CIS finance ministers, Kudrin said, “This proves that the Russian rouble is strong.”

According to the minister, “Today the Russian rouble can be used in international settlements on the wish of economic entities.” “Today there are no restrictions for the rouble. The rouble is convertible currency,” he said.

The Russian government is clearly stacking up on gold to make its national currency much stronger against the current international fiat money standard, like the US dollar or the euro.

In his words, this became the largest emission of the local currency, which is not reserve. “This proves that an important step has been taken on the way to settlements in roubles,” Kudrin said.

“The rouble will become the more stable currency if Russia curbs inflation within 3-4 percent within 5-6 years,” Kudrin said. “This will be a new quality of the Russian currency,” he added.

“Then the Russian rouble will be trusted and settlements in roubles will be expanded,” he said. The minister recognised that till now the rouble has not corresponded to the standards to be met by reserve currencies. "

--
Note, a catch from a poster:

"Itar-tass got it wrong, you are an idiot republished junk w/out facts checking..

here's official data from central bank

http://cbr.ru/eng/hd_base/mrrf/main.asp?C_mes=01&C_year=2011&To_mes=06&To_year=2011&mode=&x=26&y=2

gold/curr reserves grew only 10% since start of year..

01.01.2011 479,379
01.02.2011 484,158
01.03.2011 493,835
01.04.2011 502,460
01.05.2011 523,950
01.06.2011 521,092
...
INFLATION IN RUSSIA IS 9 % (official), real life inflation is closer to 20%,prices are HIGHER THAN IN USA CAUSE MOST STUFF is imported, avg salary 500-600$ per month , deposit %rate is 5-7%.. not much happiness there.. ~alx"

Blondie said...

OPEC Conference President, Iranian Minister Aliabadi:

”All participants in the oil market , producers and consumers alike, bear the responsibility of the stability of the market...”
The stumbling block preventing consensus? ”The most important issue is the production ceiling... Nobody opposed production increases, but it was the timing and the amount of... “

de Vasconcelos, Angola Minister:

A lot of problems impacting the oil price? ”Geopolitical (MENA) affect the prices... also the relation between the Euro and Dollars, they have some impact... Japan, they have the problem, the PIGS they have the sovereignty doubts... we are here to analyze these variables and to take some decision...“

mortymer said...
This comment has been removed by the author.
mortymer said...

Iran: Supreme Leader Calls Year 1390 "Year of Economic Jihad"
Source: Mehr News Agency

http://www.payvand.com/news/11/mar/1177.html

"In a Noruz (Persian New Year) message to the Iranian nation the Supreme Leader calls the year 1390 the "Year of Economic Jihad". "I call this year the 'Year of Economic Jihad' and I expect the officials of the country and also our dear nation to work in a jihadi way in the economic areas," Ayatollah Seyyed Ali Khamenei, Leader of the Islamic Revolution, said in his televised message..."

[http://en.wikipedia.org/wiki/Jihad]

mortymer said...
This comment has been removed by the author.
mortymer said...
This comment has been removed by the author.
mortymer said...

Two continents compared
Keynote address by Jean-Claude Trichet, President of the ECB at the “ECB and its Watchers XIII” conference
Frankfurt am Main, 10 June 2011

http://www.ecb.int/press/key/date/2011/html/sp110610.en.html

Anonymous said...

I offer profound thanks to FOFOA for giving me better insight into the economic events unfolding. I have become pretty much convinced about Freegold and hyperinflation.

But I have wished for an intelligent critique of FOFOA's writings because you can never be sure of a perspective until you understand the good arguments against it. So I thank Ash too, and look forward to reading the next installments of his series on the future of physical gold, at TAE. Perhaps it will undermine my tentative conclusion that FOFOA is right. Perhaps it will only lead to a more tempered version.

Reading all this stuff is a hard slog, especially when I have to work, and maintain a family. It is always a struggle to see the world aright.

But once again, thanks to both. I will be reading what both of you have to say with great avidity.

DP said...

Victor: Such a default would have made the euro strong

Is this always a desirable outcome? I feel like sometimes you'd want your currency to gain strength, other times you'd want it to weaken. At all times, you want it to depreciate mildly (~2%) against a wide basket of goods and services: no fire; no ice. Goldilocks.

As you highlighted, the euro base has diluted (devalued - but against what?) 50%. General prices for goods and services have not, I think, doubled (?). My goods and services certainly haven't! Have yours? Sometimes it does feel like it when I hear my wife talking about the price of the groceries, but at the same time we can't ALL be thinking this, and also ALL be thinking our goods and services for sale haven't kept up. But then I look at a chart of €gold, and I see that, yes, you're right -- gold has doubled (€ devalued by 50%). Economic shock absorber, soaking up a deflation problem like a sponge. This is because demand for goods and services has been increasingly weak, and that has been defrosted by letting the currency take the strain, rather than letting the economy completely freeze over. Brrr!

mortymer said...

“The Devaluation Against Gold Is The Inflation“

http://www.larsschall.com/2011/06/08/%E2%80%9Cthe-devaluation-against-gold-is-the-inflation%E2%80%9C/

"...The most interesting story in the future for me is the point in time when the Middle East countries will no longer sell their oil and natural gas for paper money. When do think will they be paid for it with precious metals?

Well, this is all part of an evolution away from the dollar. It has a number of ways to go. I do think that what may happen is that gold will be used as a pricing mechanism. In other words, Middle Eastern and also Russian natural resource exporters may begin to price their goods in units of gold, but accept dollars, but the problem, of course, is that the amount of dollars won’t be fixed. Simple example: right now oil is, I use rounded off numbers, around $ 100 a barrel and gold is around $1500 an ounce, so it takes 15 barrels of oil to purchase one ounce of gold.

By the way, if you look at the oil to gold ratio it has been very constant for a very long period of time. Of course, the price of oil has moved between $30 per barrel and $150 per barrel, and the price of gold has moved between $200 an ounce and $1500 an ounce, but if you look at the ratio, it always hovers around that 15 or 16 to 1 ratio, and that tells you something about the real intrinsic value of commodities.

But be that as it may, you could have a situation where somebody in Saudi Arabia says: From now on a barrel of oil will be 1/15 of an ounce of gold. Now, if you want to pay me in dollars that’s fine, but you have to do the dollar-gold conversion (to figure out how many dollars you owe me in a world of an increasing gold price) that means that you have to pay more dollars for a barrel of oil. So even if they accept dollars you can still have a world where it’s priced in gold, but gold is convertible to dollars and you can pay with dollars but you have to pay a lot more.

I think that is one of a number of solutions on the table. Another one is of course the SDR. The IMF is trying to promote the use of SDR as a basket of currencies. But none of this is feasible yet. It will require some years to study, it will require a conversion process and some pre-announcement for the market. But the bottom-line on the whole thing is: the exporters of natural resources and manufactured goods in the Middle East, in Russia, China, Brazil, they all have indicated deep, deep dissatisfaction with the current international monetary system and the role of the U.S. dollar in particular, so I think you will see some shifting away from that in the years ahead..."

mortymer said...

23xth comment:
http://www.youtube.com/watch?v=YIIEeS2ljcY&feature=player_embedded#at=343

DP said...

Wow! Any band that uses a laundry airer as an instrument, gets my respect. I had to stop myself after watching Across the Void the third time. That's entertainment! Thanks! :-)

DP said...

@Mrt, here's the best I could do so far today for "economic shock absorber".

Sadly, my own vehicle could use a new set. There is still some hope, though.

victorthecleaner said...

DP,

As you highlighted, the euro base has diluted [...] But then I look at a chart of €gold, and I see that, yes, you're right -- gold has doubled.

Very nice comment. It raises the following question. We see that the monetary base has been expanded by 50%. The question is what is this money going to do. So far, it has been lying still as cash or in current accounts.

If it is used to go shopping for groceries, then in the long run, the euro will probably devalue against all real assets accordingly. So far, this has not yet happened.

If, however, the money is used as savings or investments, it will bid up stocks, private equity or gold. This has not yet happened either. In particular, if the money will be used to bid up gold, then the price of gold will go up in the future. Not in the past.

Which one has happened historically? Textbook macroeconomics says

(money supply) * (velocity) = (price level) * (sum of all transactions)

Now the sum of transactions would need to be subdivided into those that affect GDP (purchasing goods and services) and those involving only financial assets (stocks, bonds, real estate, gold, silver (ha!)) - this is not textbook macroeconomics, but Richard Werner macroeconomics.

We would need to predict whether the different components of the sum of transactions change their relative weight or not.

If history is any guide (e.g. Bernholz, Monetary Regimes and Inflation), the change in composition is not dramatic, and so you would expect that both the price of gold and the price of groceries go up at a similar rate.

You see that the freegold idea of a revaluation of gold is not a consequence of the usual inflation-of-a-paper-currency argument. It is rather a bet that "This times is different" and needs to follow from a different mechanism. Which is fine with me.

Victor

victorthecleaner said...

DP,

further on my previous comment. I mentioned only half of the story, and so you might read it and think it was false.

I said, historically both the price of gold and the price of other real assets increased. The full story is that the price of gold increases first and the retail prices follow only with some delay. This is compatible with the observation that the real price of gold anticipates negative real interest rates.

Victor

Indenture said...

tripper: "The whole Euro deal looks more and more like a failed experiment. Apparently, "one size fits all" does not work for currencies. It did not stop all those socialist states bury themselves in huge pile of debt, that's for sure.
I am interested in your view and would like to hear more on why you feel the Euro will fail.

DP said...

(1/2)

VtC: The question is what is this money going to do. So far, it has been lying still as cash or in current accounts.

If it is used to go shopping for groceries, then in the long run, the euro will probably devalue against all real assets accordingly. So far, this has not yet happened.

If, however, the money is used as savings or investments, it will bid up stocks, private equity or gold.


I could be very wrong about this, and my feeling is you're likely a person well-placed to correct me and I'll thank you. But, my impression is most, if not all, of the euro liquidity injections have been used to take depreciating bonds off weak hands that can't simply stash them away in the cupboard until maturity, which the CB and/or the stability fund can. If that's a correct assumption, it then follows for me that the kind of people who previously invested in those bonds, aren't about to take the principle down the shops for a few cheap suits and a cream tea. Which is good, because I don't know about you but I don't want the price of our cheap suits and cream teas going up thanks!

You see that the freegold idea of a revaluation of gold is not a consequence of the usual inflation-of-a-paper-currency argument. It is rather a bet that "This times is different" and needs to follow from a different mechanism. Which is fine with me.

Times don't, for me, seem to get much more different, than the CB dynamically monitoring the HICP index and adjusting the currency's value to suit ongoing commitment of 2%pa "inflation", via the most appropriate of the three tools at its disposal:

a) buying and selling gold -- and only gold mind you (ha! please, don't break the glass and pull the S-word cord already... :) )
b) issuing/retiring liabilities
c) adjusting the base rate

The focus is myopically on the HICP index, and a fixed target of 2%. The price of gold might go up, might go down: whatever is most relevant to achieving the mandate. As many other people are writing all over the web, we have a massive deflationary issue -- so while in the short term there might be ups and downs, my feeling is that until those massive deflationary issues are washed out, the trend for gold seems to be firmly up.

...cont'd

DP said...

... (2/2)
This is somewhat better than the US playbook, which looks to me a lot like:

Step 1) Print more USD to pay the bills
Step 2) Have a little party and laugh at the silly foreigners

For a non-US CB under the cosh of the $IMFS paradigm, option (a) would involve buying/selling USD rather than gold, which clearly means that local monetary policy is subordinated to US policy, making stability and predictability significantly more difficult to achieve. Also, I think we can strip out the notion of any of the other major CBs actually retiring any of their issued liabilities. This drives people to search for yield, trying to stand still or perhaps hope to do a little better. But if the reference point for your currency was gold, and you don't really feel like trusting your CB to do its one job well enough, you get a much better degree of certainly, IMO, by just buying that reference point and sleeping at night.

$IMFS: Everybody holds hands around the sinking USD ship, tries to stand on everyone else's head to get to the surface and keep breathing.

RPG : Everybody chooses how much rope to reel in/out from the fixed platform, gold, to suit their own economic requirements. At the CB level, but also down to the personal level too. As more and more people figure this out, the demand (and price, clearly) for gold will increase, and the demand for hoarding other commodities and "investments" will, I believe, wane. Even hoarding cash/T-bills/etc.

Finally, a nice side-effect of this paradigm shift is it'll starve the political beast. It'll probably have to pay as it goes, or at the very least it'll have to offer a suitable yield.

I've ... I've stuffed too much into this comment now, haven't I? Oh well...

Have a great weekend!

sean said...

Blondie, dude, chill out! I agree with you completely that "form (of society) follows function (of monetary system)".
Disappointed you didn't realise my "Blondie-world" comment was both tongue in cheek and meant in respect.
Then again your reply was the only one I got so I suppose I should be grateful for small mercies. :)

Blondie said...

Sean,

It doesn't hurt to clarify from time to time; readers of your comment have not necessarily read all my comments previous to give your tongue in cheek context.

victorthecleaner said...

DP,

my impression is most, if not all, of the euro liquidity injections have been used to take depreciating bonds off weak hands that can't simply stash them away in the cupboard until maturity, which the CB and/or the stability fund can

In the short run, I think, what matters first is where these bonds came from when the ECB purchased them. If they were already held inside the commercial banking system, then they had already been turned into money, and the inflationary effect happened when they were first purchased by a commercial bank (with some delay). If they were held by investors who had bought them with true savings (no credit created), then these investors now have cash instead that they need to redeploy. So in the short run, it depends on what these investors choose to do. If they purchase gold or stocks, then, yes, we will get only inflation of asset prices, but not retail price inflation.

In the long run, what matters is what happens to these bonds. If they are paid off at maturity and the ECB pockets the cash and then cancels that amount of base money, all traces of the bond buying are cleared from the monetary system. Then it was merely a temporary liquidity operation that perhaps temporarily lifted some asset prices.

This is the big lie. The truth is that the entire operation is not about liquidity, but about solvency. These bonds will never be paid back. Therefore, in the long run, there is still a discrepancy between the monetary base (which has increased) and GDP (which has not). Even if at first, this is resolved by unusually high asset prices, historically, it has always leaked into retail prices (the delay can be considerable though).

There can be various mechanisms for this: Investors might push up commodity prices when they purchase iron ore (or silver (ha!)) rather than gold. Also, these investors have an untypically high return (because the CB has saved them from losing the principal on their poor investment into Greek bonds), they get more wealthy and then eventually spend more.

...

victorthecleaner said...

...

QE would work only if you could either force these investors to invest in the expansion of GDP only, i.e. basically set up new businesses (this is why Richard Werner originally proposed QE - I am confident his idea will be abused in the same fashion as Keynes' recipes against the Great Depression are being abused. Werner explicitly proposed to control credit volumes in order to achieve this. Those who enacted QE, of course, never talked about this.) Or if you force these investors to purchase only gold and never make use of this gold in order to improve their standard of living.

If you apply this reasoning to QE in the US, you conclude that QE1 (when the Fed purchased toxic paper from the commercial banks) was not inflationary immediately, but all I wrote above, applies. QE2 in the US and QE in the UK, however, were outright printing of the running government expenditures. If you guess that government expenditures are 90% consumption and apply Werner's reasoning, this will directly lead to retail price inflation. Voila. This is what is happening to the UK and which, I think, will happen to the US (QE2 in the US started in Nov 2010, but QE in the UK in April 2009, i.e. the expected delay would be 19 months).

Another problem I have with the ECB is that the ongoing support of the PIIGS government bonds, for example, the direct purchasing of bonds in the market, is like QE2 and not QE1. This will go directly into consumer prices.

Victor

Blondie said...

Lots of interesting developments in the last few days, and an undeniable sense of deja-vu (2008 all over again?).

Russia now appear to be “Oil”, as the swing producer Arabia was until recently. The Russian leadership is not their position (as leaders) due to American support, unlike the Saudis.
Russians have little interest in seeing the US dollar continue to extort massive usage demand and exorbitant privilege from ROW, as far as I can tell.

Kitco are in receivership, amid fraud allegations. Lots of unallocated gold uncertainty there today, no doubt.

If markets are soon to crash, as they appear ready to do, look for gold and the dollar to rise in tandem, as capital must pass back through dollars seeking safety in tangible assets, especially gold. This is only relatively shortlived, as the dollar then deflates too. People are a lot more aware of the nature of the system than was the case in '08, so I expect events to rhyme rather than repeat. Gold is much more prominent in minds of those controlling the bulk of the capital than it was three years ago... you, FOFOA comment reader, being a good case in point. All the big players read FOFOA, even if they don't do it publicly.

If debt is in a balloon, then that balloon is made from paper gold, IMO.





Of course I could be wrong, and the status quo may go on forever... but I don't like the odds much.

victorthecleaner said...

To everyone,

If somebody could explain kitco to me, I would most appreaciate this. I have to confess that I do not know much more than their nice charts that everyone uses.

Do they participate in market making in physical gold in exchange traded bars (as opposed to just retail products)?

They have charts of the Gold Lease Rate on their website. This is not the GLR published by the LBMA. You can see this because they quote a lease rate even on UK bank holidays. And you can see that the chart is patchwork - on UK bank holidays, the kitco published lease rate is 0.3...0.5 higher than usual.

Who is it that offers to lease gold on days on which the LBMA banks in London are closed?

Victor

DP said...

@VtC,
Thanks for another great comment. I haven't come across Werner until you've pushed him across my radar screen this evening, so I think I am going to have to look him up a bit because he clearly has some things to say that I am certain I would find interesting. If you happened to have a good steer to an article summarising his view, that would be most generous of you?

This is the big lie. The truth is that the entire operation is not about liquidity, but about solvency. These bonds will never be paid back.

A good point, well made. :-) However, would you not agree that, if there must be a widespread deflationary implosion of value in the system, it might be best if the issuer of the currency was the one holding the bag, rather than some other helpless parties that the long, looong line of dominos forming the rest of the financial system rely upon heavily? It feels kinda like turning over a string of tick-tick-ticking bomb problems to ... the bomb squad! For controlled explosion. This bomb squad are to absorb the detonation of these debts, stopping the entire system getting sucked under in a massive and unstoppable chain reaction meltdown of epic proportions; they can survive the explosions while they're isolated on their balance sheet, because they issue/retire the currency it's all denominated in. (BTW Some of you may like to try using your supercomputer to model that under a classic fixed Gold Standard, if you're still following along at home.)

I'm pretty much on your page with the US/UK QE and QEII/QE situation. But these are currencies still mired in the $IMFS paradigm, and the outlook is pretty different IMO. The key in my view, for the ECB, is that the currency and its toolkit are designed from the ground up to constantly and dynamically absorb both deflationary and inflationary deviations, as local economic needs dictate.

Retail prices starting to heat up beyond 2% target? This must be due to excess liquidity, creating elevated inflation expectations and thus leading to increased velocity. Cure? Drain euros! Choose one of: just not rolling over a term liquidity operation at maturity; raise base rate, put a brake on credit expansion; buy back euros with gold (sell gold cheap, encourage buyers and strengthen currency exchange rate).

Retail prices heading too far below the 2% target? Turn on the heaters, before the chill starts to take hold. Choose: term liquidity injections; lower base rate, coax credit expansion; sell new euros for gold (buy gold above market, encourage sellers and weaken currency exchange rate).

I reckon one day, by hook or by crook, we'll get back to having that One World [RPG] Currency everyone's been talking about!

DP said...

And, l@@k, no S-word! :) Ha!

victorthecleaner said...

DP,

somebody here asked Richard Werner for an introductory article, and I think he replied and suggested a paper submitted to the commission that reviews the regulation of the UK banking system. Unfortunately, I forgot all details. Perhaps someone else remembers it and can help?

Apart from this, the most comprehensive source is probably the book

Werner, Richard (2005) New paradigm in macroeconomics: solving the riddle of Japanese macroeconomic performance, Basingstoke, Palgrave Macmillan, 440pp.

if there must be a widespread deflationary implosion of value in the system, it might be best if the issuer of the currency was the one holding the bag, rather than some other helpless parties that the long, looong line of dominos.
[...]
Retail prices heading too far below the 2% target? Turn on the heaters, before the chill starts to take hold. Choose: term liquidity injections; lower base rate, coax credit expansion; sell new euros for gold (buy gold above market, encourage sellers and weaken currency exchange rate).


and

I feel like sometimes you'd want your currency to gain strength, other times you'd want it to weaken. At all times, you want it to depreciate mildly (~2%) against a wide basket of goods and services: no fire; no ice. Goldilocks.

If you were a Central Banker, how would you view your job? Do you feel like God steering the economy? You simply tweak the amount of liquidity provided to the commercial banking system and direct the stupid free market into the Goldilocks environment that your boss, the politician, favours?

In reality, I think, you are usually ripped off by your friend, the commercial banker. He has the advantage that he knows all the dirty tricks (you, in contrast, attended only the state admin school), and his main advantage is that he is not accountable. As long as his company runs profitably, he gets a nice bonus, but you don't. Once his company goes bust, he retires to the Hamptons and passes the buck on to you. Poor you.

He actually used your repo liquidity operations in order to stuff your balance sheet with PIIGS government bonds. You thought it was a liquidity operation and you would be able to put the bonds back to the commercial banks whenever you pleased. In reality, your friend was using the nuclear option. He simply created way more PIIGS debt than they would ever be able to pay off, and so he turned your liquidity operations into PIIGS solvency operations long before you figured out what was going on. When you noticed in fall 2009, it was too late.

This is why I often bash the ECB. I think they are just not up to their job, at the technical level. It was them who accepted all the PIIGS debt as collateral in repo transactions with the commercial banks. It was them who knew that the credit volume in the periphery was growing like crazy while it was stagnant in Germany, France, Netherlands. It was them who had all the data and the statistics to see that they were inflating the credit volume in the least productive region where it went into consumer loans rather than into business investment.

How can you possibly trust them with the currency wars that are ahead of us?

Victor
PS: Don't tell me the French and the Germans got together and decided they wanted the euro lower, and so they had to inflate a bubble that they could puncture as needed. Where did they create that bubble? Well, not in France and in Germany, of course. So they decided to screw the Greeks (who did not deserve any better since they had always cheated) and perhaps some other southerners. No, I don't believe that. Wishful thinking. I don't think they were in control. It was the commercial banks who were in control.

Indenture said...

For any Newbie: I would consider these past FOFOA posts suggested reading.
The Waterfall Effect
All Paper is STILL a short position on gold
Gold is Money - Part 1
Gold is Money - Part 2
Gold is Money - Part 3
Thanks deadfauvi. I had forgotten my manners.

Biju said...

JUNE 8, 2011, 8:15 P.M. ET
Wall street Journal : Heard on the street.

"Overheard: Mining Profits"
"Blame Australia? African Barrick Gold investors might be inclined to do so. Its shares fell 7.8% on Wednesday after Tanzania's government unexpectedly suggested that it could bring in a super profit tax on the mining industry: ABG is the country's largest gold miner by output. Tanzania's state planning commission said higher minerals prices justified windfall taxes, adding that a similar move in Australia had brought in $9 billion of extra tax revenue. Whether those figures are right or not, Tanzania's discussed tax rise is the second sign this week of rising resource nationalism: Peru's newly elected president,
Ollanta Humala, also has talked of raising taxes on the mining sector. For investors, the only certainty is that governments have spotted a tempting source of extra revenue."


Date: Sat Mar 07 1998 23:37

ANOTHER (THOUGHTS!) ID#60253:


Mr. Mozel,

The USA placed a special "windfall profits" tax on domestic oil during the last major rise in prices. I do think the oil stocks would have shown a greater value had this tax not been in place. Because gold will soon become a currency, mines will be taxed in a much greater way. Also, domestic mines will be asked to sell directly to the treasury at the "preceived commodity value" value of gold, plus an operating margin. As no private company will be allowed do your treasury job, "produce money". Gold in the hands of the public will be thought of as a good thing, as citizens are asked to "pull own weight" as the government is much under.


Date: Sun Apr 19 1998 15:09

ANOTHER (THOUGHTS!) ID#60253:

............
............
............

The governments will revalue gold and "demand" that the public carry it and use it! It will be the source of all gold, the mines, that will be controlled! That's Controlled, with a capitol "C", not confiscated!"

costata said...

Hi All,

I posted two more of my 'longer responses' in the Open Silver Forum Part 2 a few minutes ago. They are:

Part A - Leverage and Manipulation Revisited

Part B - Artificial Markets

Motley Fool said...

Hi Ash

Nah. My rough draft isn't even complete yet. I can use the time, and prefer a comprehensive reply as per your request. I have the patience to wait for your final two posts.

TF

Casper said...

I really regret not being able to participate in yesterdays discussion.. both VtC and DP some great comments!

The following metaphor was extremely good IMO:


"It feels kinda like turning over a string of tick-tick-ticking bomb problems to ... the bomb squad! For controlled explosion."

I also think that all those euros will disappear in some lonely basement just outside Frankfurt.

Casper

Casper said...

VtC,

I can agree with you regarding the commercial banks and their "dumping" of PIGS bonds in the ECB lap.

I just don't think that the central bankers are stupid and don't know what they are doing... at least the big ones.

You've said it so good yourself:

"I don't think they were in control. It was the commercial banks who were in control." - creating credit that is.

But we're in a deflationary times right now and money rules, while credit/debt burns which puts CB's firmly in control since they can print and print they will.

Casper

Casper said...

With "money" I meant cash...

Of course you can also think of it as gold which they can not print but can provide.. for a good amount of currency/cash that is!

Casper

julian said...

Blondie said,

All the big players read FOFOA, even if they don't do it publicly.


Not Eric Sprott, by what he says on this recent KingWorldNews interview. Unless he's faking it ;)

In one breath, he says he prefers/advocates the paper gold right now, rather than the "commodity" (which i take to mean the physical).

In the next breath he talks down the dollar to the point of utter collapse and reset, meanwhile praising dollar denominate assets.

What? Did I misunderstand?

Then he goes on to say that gold is already the de facto reserve currency, but still wants medium of exchange to be tied to the store of value role.

Either he doesn't read FOFOA, or he just doesn't get it yet.

I lean toward the former, based on what I just heard.


Kindly,


Julian

julian said...

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/6/11_Eric_Sprott.html

forgot to include the link

myanmarinvestor said...

Julian,

Sprott is a proponent of owning physical gold (he has stated this many times), however he is a fund manager, and his interview articulated relative asset allocation to/from silver previously, and to/from gold miners currently.

If he advised ONLY holding physical gold, he would be doing himself out of a job.

As a PM fund manager he also has a benchmark i.e the rising price of Gold in USD to beat, so some re-allocation is essential or why pay the fees.

For one of my family, I have invested in a UK based Gold fund, whose CEO is sometimes featured on KWN. They have returned over 40% (less fees, in USD terms) in 9 months, where the major investment is gold bullion stored in Switzerland, but where they trade the balance on miners and volatility and charge fees for doing so.

For this family member, this makes sense, however personally I just hold the physical, which took much longer to record such gains, not that I care because I count in Oz's not USDs.

Edwardo said...

Make of the news report on DSK and Ft. Knox gold what you will.

http://www.321gold.com/editorials/hoye/hoye061011.html

SilverHead said...

Hi Costata,

I don't think those two links on your silver posts are working

sirch said...

FOFOA,

You have frequently cited that the MTM gold held by the ECB represents about 60% of ECB's reserves. Well, I wanted to figure out the analogous percentage of gold as reserves in the US if the US marked their gold to market prices too.

I know that the Fed doesn't own the gold - the Treasury does - but does that mean this calculation won't be analogous to the 60% ECB gold ratio if we use the market value of the Treasury gold and not the $-value of the Fed's gold certificates? Besides, how does the ECB consolidated financial statement count its gold - does it only count the gold held by central banks or does it also count gold that is held by the government of certain EU countries?

This page reports the gold holdings of the US Treasury to be 261,498,899 troy ounces. So at the latest gold price of $1,530 the market value of US gold would be $400,093,315,470.

But where do I get the US number that is the equivalent to the ECB Line 2: "Claims on non-euro area residents denominated in foreign currency," i.e. foreign currency reserves?

Wikipedia's Foreign Exchange Reserves list lists US forex reserves at $140,000 million and gets its data from this IMF page but it includes the gold certificates.

The Fed's official website has the most recent financial statement and balance sheet, but I honestly don't know which is the equivalent number. I see on the combined financial statement that there is "Foreign currency denominated assets, net" but is that the only line I should be looking at?

If we could know each country's reserve ratio of gold to foreign currency denominated assets, couldn't we see how well each country is prepared for Freegold - which could possibly correlate to how much each country is aware of or blind to the true value of gold and the evolution of RPG.

sirch said...

Well, after all that searching I just realized that Wikipedia's Gold Reserves chart includes a column with the calculation of gold as a percentage of forex reserves. The citation points here so I'm not really sure how this info was calculated, but it does list the Euro area as having 60.7% of its reserves in gold so that's a good sign the data may be correct. Maybe the fact that the "forex reserves" is a link to another wikipedia page means it uses the data from that page.

It lists the US at 73.9% for gold's share of forex reserves, but I don't know if that is gold MTM or the gold certificates at the Treasury valued at $42/oz.

costata said...

Hi SilverHead,

Those aren't links. Just the titles. Those comments are at the bottom of the second last page and top of the last page of comments in open forum 2. Click on "newest" and then "older" to find part A. They are both in multiple parts.

If you have any trouble locating them I will create some links.

costata said...

sirch,

It's worth noting that the US doesn't need to hold large foreign currency reserves because nearly all of their trade is conducted in US dollars.

FWIW 70+ per cent of gold in US FX reserves is a figure I have seen several times over the years. I have always assumed that to be based on a value of $42 and change per ounce.

Jim Sinclair has some interesting calculations on the implied value of the gold if it was revalued to reflect the US "money" supply. These calculations give a value of $12,500 per ounce for the US gold.

victorthecleaner said...

Casper,

I also think that all those euros will disappear in some lonely basement just outside Frankfurt.

I don't think so. Historically, the following rule has always applied. It is the rule that when you turn bad credit into base money, this base money will eventually leak out and contribute to the general price level.

But we're in a deflationary times right now and money rules, while credit/debt burns which puts CB's firmly in control since they can print and print they will.

I honestly think this is the same misconception as Rick Ackerman had before FOFOA converted him. In real terms, the future will be deflationary: The price of goods produced and services offered domestically will decrease relative to gold. The risk adjusted real interest rate will be negative (in the 1930s because of 'risk adjusted' and in 2007-20xx because of 'real'). Aggregate salaries will decrease relative to retail prices (in the 1930s because of unemployment and in 2007-20xx because of some unemployment and a lot of retail price inflation). The aggregate savings of the people relative to pre-crisis GDP will decrese (in the 1930s because of bank failures and in 2007-20xx because of inflation).

The only control the ECB has is that they can adjust the value of the euro relative to real assets, i.e. adjust the control between old-style 1930's deflation and hyperinflation. The control they have is to spread the losses (in real terms) uniformly over the entire economy as opposed to those who are so unlucky to have their account with the wrong commercial bank. I admit is has some social function because it replaces one sort of uncertainty with a somewhat less bad sort of uncertainty.

I just don't think that the central bankers are stupid and don't know what they are doing... at least the big ones.

My main criticism is that this was entirely avoidable. And that the ECB had all the data and all the statistics to see it coming before fall 2009. They could in fact have seen it in 2004/5 the latest. And they had all the tools to slow down the PIIGS bubble before it got out of hand, but they didn't.

...

victorthecleaner said...

julian,

In one breath, [Eric Sprott] says he prefers/advocates the paper gold right now, rather than the "commodity" (which i take to mean the physical).

He did not say this. Paper gold would be gold denominated bank credit aka unallocated accounts. Sprott, however, invests in shares of mining companies. As far as I can recall, ownership in a company is a real asset. Is there something I missed?

[I know that ownership of mining companies is risky because governments can change the laws and start imposing taxes. What do you think will happen when the first unallocated accounts fail and people realize that physical gold deserves a premium over gold denominated bank credit? When your coin store has sold out, but gold mining shares still trade? I also know that the government can expropriate shareholders. They can also expropriate private owners of physical gold. Will they do it? Will the Gestapo 2.0 walk from door to door with a metal detector and and an X-ray spectrometer? All this depends on how far you think our legal system will deteriorate before the financial system resets. But this is the canned food in the basement discussion again. At some point you do have to enter this discussion I suppose.]

myanmarinvestor.

not that I care because I count in Oz's not USDs.

I suppose even if your family member counts in oz's, he increased that amount? I other words, they purchase additional physical for a part of their speculative gains, don't they? The real question you have to answer for yourself is whether you want to invest/speculate or whether you just want to save. Both you can benchmark in ounces. John Paulson does it, too.

...

victorthecleaner said...

sirch,

You have frequently cited that the MTM gold held by the ECB represents about 60% of ECB's reserves. Well, I wanted to figure out the analogous percentage of gold as reserves in the US if the US marked their gold to market prices too.

I don't think this ratio is what you should calculate. The reason is that some CBs hold large reserves in foreign fiat (mainly US$) for historical reasons or in order so sustain a manipulation of their FOREX rates. But these do not have any value as a wealth reserve and they are also not intended as such. So I propose to ignore non-gold reserves (unless they were other real assets, but I am not aware of any CB that had any such other reserves).

Under a freegold scenario, reserves in other fiat currency reserves would be questionable and often essentially useless compared with gold, and so one should just ignore them. So you need another denominator. Take one that's economically meaningful. The numbers I would consider are "gold reserve per capita", "gold reserve of CB plus privately owned gold per capita" (total gold wealth of the nation), "gold reserve per GDP" (ability of official gold to support liquidity) or even "gold reserve per monetary base" or "gold reserve per total bank credit" (puts a limit on fiat inflation risk - don't underestimate this - confidence is key).

costata,

Jim Sinclair has some interesting calculations on the implied value of the gold if it was revalued to reflect the US "money" supply. These calculations give a value of $12,500 per ounce for the US gold.

You need to be very careful what sort of money supply you use. If you take base money alone, you get 4100$/oz. If the banking system were sound, this would be the exchange rate in an old fashioned 100% backed gold standard. With 2/3 gold backing and 1/3 commercial bills as was the case before WW I, you get even less!

If you are after a target price for gold as a result of the financial crisis, Mike Maloney takes M2 and gets 15000$/oz. This is a better estimate than today's base money because the crisis is not over yet. What he probably really wants to do is estimate which part of the debt in the US banking system is unsound and add this to the base money before performing my calculation above. If you could do that, I can imagine you would get an even higher number than with M2.

What is surprising, by the way, is that the US$ debt that is held abroad does not make a huge difference (less than 50% of the problem). You could look at the wikipedia tables of US$ reserves held by foreign central banks and assume that the foreigners put them back to the US and that the US have no option other than putting it on the assets side of the Fed's balance sheet. In fact, this is what happened to the agency debt held by the Chinese until 2008. If you read FOA you would think the reserves held abroad were the main problem for the US. Everyone should do the calculation to see that that's not the case. Everyone should also do the calculation to see that the ECB has exactly the same problem as the Fed, just to a somewhat lesser extent.

Jim Sinclair takes 50% of foreign held public US government debt and gets 12500$/oz. This is more in the spirit of freegold because it reflects the view of foreigners who hold US$ and see the US gold reserve as its only backing.

Both Maloney and Sinclair stress that their estimates are compatible with what the market demanded in 1982.

Victor

costata said...

victorthecleaner,

You wrote:
"My main criticism is that this was entirely avoidable. And that the ECB had all the data and all the statistics to see it coming before fall 2009. They could in fact have seen it in 2004/5 the latest. And they had all the tools to slow down the PIIGS bubble before it got out of hand, but they didn't." (My emphasis)

Commercial bank regulation is the responsibility of national governments in the EMU. Also in relation to Greece, for example, they misrepresented their debt levels and overall fiscal position.

From the perspective of the German exports this internal trade deficit with the Club Med EMU members was a net positive for the German economy.

The debt funded booms in the Club Med nations and the former soviet satellite states in Eastern Europe was also a hugely profitable business for banks from the UK, Sweden and the EU.

The political will to rein in banks seems to have been absent in the EU but the same could be said for most countries with excessive levels of public and/or private debt.

What tools did the ECB have to overrule the governments of the EMU countries and intervene in commercial bank regulation?

I'm also mindful that both Germany and France were exceeding their agreed debt to GDP ratios in the years leading up to the GFC. I'm wondering how the ECB could force all of the EMU countries to rein in their borrowing because it wasn't just the Club Med and non-EMU members of the EU who were borrowing excessively.

Lastly I understand that European banks were using off-balance sheet vehicles to circumvent regulations in Germany and other EMU countries in order to participate in debt offerings peddled by the Wall Street banks. The regulators may have known what was going on and turned a blind eye but that still doesn't explain how the ECB could be held responsible for this mess.

Blondie said...

VTC said:

"My main criticism is that this was entirely avoidable. And that the ECB had all the data and all the statistics to see it coming before fall 2009. They could in fact have seen it in 2004/5 the latest. And they had all the tools to slow down the PIIGS bubble before it got out of hand, but they didn't."

An obvious option that has not been considered is that they did see it coming, and for whatever reason chose not to act.

5 minutes later and I see this posted at ZH: Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went, which may well answer that very question, as well as being the biggest must-read revelation recently... I won't bother pulling quotes, everyone will want to read this one.

Why would the Fed do this rather than the ECB, and what does this imply? ;)

costata said...
This comment has been removed by the author.
costata said...

DP and VTC,

This is the comment that contains the link to the paper by Werner.

henq said...

@victorthecleaner, @Micheal H and others:

I send a mail to Richard Werner and asked if he had a summary of his credit theory, I go this nice reply:

>>Many thanks for your mail. I appreciate your interest.

>>[..]please find a recent submission of mine to the Independent Comission on Banking. [...] posted on my Centre for Banking, Finance and Sustainable Development website:
http://www.management.soton.ac.uk/research/Towards-Stable-Banking-2010.pdf

>>I realise it is too long for your immediate purposes. But it is an easy to read summary of core ideas, not too technical.

>>Many thanks and warm regards,
>>Richard
March 30, 2011 6:34 AM

victorthecleaner said...

costata,

What tools did the ECB have to overrule the governments of the EMU countries and intervene in commercial bank regulation?

I agree that bank regulation can also be improved substantially. But the amount of credit growth in the commercial banking system is monetary policy.

The ECB could have stopped accepting PIIGS government bonds as collateral at face value, but rather apply a haircut. The ECB could have restricted the amount of repo transactions with commercial banks. They could have made the volume of such transactions grow only with GDP but not any faster. They could have adjusted the reserve requirements as needed.

From Richard Werner: ECB must share blame for Greece's excesses (May 8, 2010) [yes, it is him again, but this one could have been written by everyone else]:

"So when Greece joined the eurozone, it delegated monetary policy to the ECB. This has left Greece without monetary policy. But it does not mean that there was no monetary policy. Quite the contrary, the ECB has for most years since its creation pursued a policy to encourage governments in the southwestern periphery, especially Greece, Ireland, Spain and Portugal, to make unrealistically high revenue growth (and hence spending) projections. It did this by its perennial--though little- known--policy to boost commercial bank credit growth in these countries at an unsustainably fast pace in the double-digits (at times even exceeding 20 percent annual growth in these countries).

Bank credit is primarily determined by central bank policy. Stoking this massive credit bubble in Europe's periphery--like a "ring of fire"--has been the ECB's clandestine regional policy. Bank credit growth means money supply growth.

While in public the ECB would emphasize its interest rate policy--which is identical across the eurozone--unknown to the public, the ECB implemented regionally diverse credit growth policies: boom in the periphery, with banks encouraged to print money as if there was no tomorrow, and bust in Germany, where bank credit was almost entirely shut down, causing weak growth and rising unemployment. It is this ECB policy that is now coming back to haunt us.

Thus Greece is not solely to be blamed for its crisis. The institution it had entrusted monetary policy to, the ECB, also must share responsibility, for it was the ECB that created the unsustainable economic boom that encouraged an overoptimistic fiscal stance. It was also this ECB policy that rendered the Greek banking system fragile to the effects of the financial crisis, and this also added to the fiscal burden on Greece.

Why did the ECB adopt such irresponsible and regionally diverse credit policies? We have to ask them--though ECB staff tend to remain silent on this issue.

When I asked ECB President Jean-Claude Trichet at Davos in 2003 about this regionally diverse credit creation policy, he merely replied: "I don't know what you mean with 'credit creation.' We use interest rates as our policy tool." Perhaps he has read up on the role of bank credit in the meantime--but so far he has been keeping his insights from us."


Victor

victorthecleaner said...

costata,

Lastly I understand that European banks were using off-balance sheet vehicles to circumvent regulations in Germany and other EMU countries in order to participate in debt offerings peddled by the Wall Street banks. The regulators may have known what was going on and turned a blind eye but that still doesn't explain how the ECB could be held responsible for this mess.

Well, the German regulators were asked and allowed these vehicles. Spain (or Canada), in contrast, did not allow them. Although the Spanish banking system is heavily loaded with bad mortgages, it did not implode right in 2007/8. At least that part was well done.

Blondie,

5 minutes later and I see this posted at ZH

Why is this done by the Fed and not the ECB? Well, quite obviously, the ECB can only create euros, and if you wish to create dollars, you need to call in the Fed. The Fed provided hundreds of non-US banks with cheap dollar swaps because these banks were experiencing a run on their dollar reserve. Without the Fed, they would have had to borrow dollars in the open swap market, (1) driving the dollar up compared to the euro; and (2) driving the dollar into serious backwardation compared with the euro. The Fed tried to counteract both effects.

Victor

Robert LeRoy Parker said...

Blondie,

Thanks for the link. The multitude of implications from that article is somewhat mind boggling to me.

Victor et al,

Great conversation going on here. Who was making the run on dollar reserves at local european bank branches?

costata said...

Blondie,

I think this comment on that ZH article has some substance as well.

http://www.zerohedge.com/article/exclusive-feds-600-billion-stealth-bailout-foreign-banks-continues-expense-domestic-economy-#comment-1362553


VTC,

Thanks for the clarification of your perspective of the tools available to the ECB.

The oldtimers from the Bundesbank must have been spinning in their graves when German regulators permitted the German banks to get involved in the exotic derivatives coming out of Wall Street and London.

costata said...

RLP,

I'm not being facetious here.

"Who was making the run on dollar reserves at local european bank branches?"

It was global. The answer is literally everyone who had any exposure denominated in US dollars. They were chasing US dollars anywhere they could be found. That is part of the reason for the bank deposit guarrantees that most of the G20 countries stumped up. It was contagious.

BTW I posted a link a while back to a post by London Banker that claimed that the underlying cause of the meltdown in 2008 was a $2 trillion dollar margin call by the big banks in London and Wall Street. He claims that it unlocked some very cheap assets for them and their cronies to pick up.

Robert LeRoy Parker said...

Costata,

That comment seems pretty reasonable. Especially given the treasury markets reaction to the end of QE 1.

Robert LeRoy Parker said...

Clarification: the zerohedge comment seems reasonable.

Your next comment makes sense for 2008. Is this supposed operation just for recapitization in prep for the next meltdown?

Seems like the ECB may firmly believe the dollar collapse is inevitable at this point and is content to watch like Another.

Blondie said...

Looks to me like the Fed is in a more difficult spot than the ECB.

Werner: "... it was the ECB that created the unsustainable economic boom [in Eurozone]..."

VTC:"My main criticism is that this was entirely avoidable. And that the ECB had all the data and all the statistics to see it coming before fall 2009. They could in fact have seen it in 2004/5 the latest. "

RLP: "Seems like the ECB may firmly believe the dollar collapse is inevitable at this point and is content to watch like Another. "

I agree. Looks to me like the ECB has been quite aware of what it was doing the whole time, as counter-intuitive as that may appear initially. Making the best of the inevitable.

Just as A/FOA/FOFOA maintained.

Dante_Eu said...

Well, as this blogs tradition mandates, here's appropriate video for ZH's revelation of Fed and its bailouts of foreign banks:

http://youtu.be/F_wtHnZytyQ

Enjoy! :-)

Edwardo said...

I wish I had the link, but some sources have claimed that the meltdown in '08 was triggered by tens of billions of narc funds that threatened to immediately pull out of the system in the face of a pending threat to what was a huge money laundering op going through BofA In any event narc funded liquidity- someone remind me why we are in Afghanistan again-propping up the system should not be underestimated.

Casper said...

Hey VtC

Regarding euros disappearing and not leaking out.

As far as I know government bonds are usually traded only in some 10-20% of the whole issuance. The other 80% are HTM (hold till maturity). It therefore safe to say that owners of those 80% aren't interested in in trading profits but yield.

Can you imagine this scenario:

The ECB creates euros and buys every PIGS bond in sight..then offers gold at several thousand euros per once and exchanges those euros for some oz gold. Since 80% of bond holders were interested in HTM anyway they would be willing to sell eur to buy gold, especially if it turns out (as it has for the last 10years) gold also offers yield, just in capital gains.

At the end we have bonds and euros in some basement outside Frankfurt and several oz gold in the eurozone.

I have always wondered how likely this is.

"I honestly think this is the same misconception as Rick Ackerman had before FOFOA converted him."

Maybe I've expressed myself a bit poorly, but I didn't want to imply we would experience deflation in any currency.. I just wanted to say that CB's are in the driving sit right now due to credit collapse.

I agree with you regarding the B-S model of negative real interest rates and their connection to the price of gold.

Casper

Indenture said...

All I have to say about QE2, 600 Billion being used to recapitalize European Banks is, 'What the F&*k?'

Indenture said...

mortymer: How the War on Drugs Destabilized the Global Economy
"This is not to say that the financial crises was caused by drug money - it wasn't. All those crazy mortgages and masses of consumer debt created a house of cards that was teetering away. But it could be that the sudden end to access of vast billions of Latin America drug money did tip the system over the edge.

or Drug money saved banks in global crisis, claims UN advisor

Either way, proceeds from drugs and crime were "the only liquid investment capital" available to banks on the brink of collapse.

yea, Bitcoin will be allowed

Ash said...

Sorry, was out of town for the weekend without internet.

Part IV of my series went up yesterday, for those interested:

The Future of Physical Gold, Part IV - Deflationary Canyons and Caves

Ash said...

Indenture said..."All I have to say about QE2, 600 Billion being used to recapitalize European Banks is, 'What the F&*k?'"

I'd say this is further (and quite damning) evidence that "re-capitalization" efforts for both "domestic" and "foreign" financial institutions in the developed world must be carried out through fiat currency/debt mechanisms, and specifically through the Treasury and USD markets.

The Future of Physical Gold, Part IV - Deflationary Canyons and Caves

If this process of short-term (within the next 10 years) debt-dollar deflation is likely to occur within developed economies, then one should not be surprised to see both paper and physical gold holdings liquidated along with other investment assets as investors are forced to meet their margin requirements, and average workers are forced to pay their consumer debts, bills and expenses, all of which are denominated in fiat currencies (primarily the U.S. dollar). A gold price collapse in dollars could occur just as it did in 2008, since nothing has fundamentally changed in financial markets since then, except there is more debt and less ability of governments and central banks to intervene.

We could even see several large institutions, such as central banks and governments in Asia, Europe or Japan, flood the markets with (sell) a portion of their gold holdings to temporarily relieve pressure from their dire private and public funding situations. The sheer momentum of financial capitalism will lead them to conduct their "re-capitalization" efforts through established fiat currency and debt mechanisms, rather than through an ongoing revaluation/monetization of gold by central banks such as the ECB (as argued in FOFOA's Reference Point: Gold - Update #1 and Update #2).

Darbikrash provides us with another insightful observation of why such a MTM revaluation and monetization process is practically precluded by the "coercive laws of competition" in a capitalist system, through the example of "competing" currencies, with my emphasis in bold [Chris Martenson's Forums - John Rubino Thread]

Darbikrash: "Beyond these points, competing currencies violate one of the fundamental requirements, that of universality. Note we all currently have access to competing currencies, we can use dollars, yen, francs, German marks etc. if we are so disenfranchised with any particular flavor of fiat. But then we face the onerous task of currency conversion, due to lack of universality. We must convert one currency to another, and suffer devaluation risk as well as a arbitrage fee to operate between currencies.

The notion of free market forces attempting to migrate patrons to a common system based on perceived stability or any other inherent advantages is not practical and subject to the same coercive laws of competition that any other unregulated commodity will precede. This means regulation is needed, and we come full circle back to the eventuality of regulatory capture, centralization and consolidation, and ultimately fewer choices for the consumer and just another, slightly varied distribution of the same wealth."


Seems like there are very few differences between major US banks and major European banks, and almost as small of one between institutions such as the Fed and the ECB. ZH's data analysis was really good though, and I would have never guessed that the entire QE2 dollar cash flows would end up in the reserves of European banks.

victorthecleaner said...

Blondie,

Looks to me like the ECB has been quite aware of what it was doing the whole time

Given the facts on which we all agreed above, how likely is that?

You watch a shopkeeper being ripped off by a trickster. Then the shopkeeper looks away and the trickster takes even more money. How likely is it that the shopkeeper is acting on purpose?

Making the best of the inevitable.

It was in fact quite the opposite of inevitable.

Casper,

Can you imagine this scenario:
The ECB creates euros and buys every PIGS bond in sight..then offers gold at several thousand euros per once and exchanges those euros for some oz gold.
[...]
I have always wondered how likely this is.


The likelihood is exactly zero. The alternative was to not let the commercial banks inflate the PIIGS bubble in the first place and to not get screwed by them putting all the bad debt onto the ECB's balance sheet. If you know what you are doing, why would you purchase garbage and dilute your currency and then later sacrifice your gold in order to fix the damage? When the alternative was to not purchase garbage, to not dilute the currency, and to not have to sacrifice the gold?

The assertion that the ECB knew what they were doing completely fails the common sense test.

The ECB has probably also no clue that gold ought to be worth around 30k euros per ounce and that this might be a way of avoiding the euro collapse right along with the dollar. The sad truth is that we have to hope that it will be the market that forces the revaluation of gold, even against resistance by the ECB - they will probably be just as clueless as with the PIIGS situation.

Victor
PS: Current affairs: German Minister of Finance and President of Bundesbank both openly criticize ECB and demand maturity extension of Greek government debt.

Casper said...

VtC

"why would you purchase garbage and dilute your currency and then later sacrifice your gold in order to fix the damage?"

Perhaps to get some leverage and consolidate/transfer power in the center? Like playing chess?

How come you make such a big issue out of these purchases? Surely you know that you can borrow money from the ECB if you post collateral? Mostly government bonds but also bonds of several financial institutions. What do you think would happen to these bonds in a market meltdown and the mechanism that supports the ECB's ability to "print" euros?


"The ECB has probably also no clue that gold ought to be worth around 30k euros per ounce"

I agree with you here... I don't believe anyone knows what the price should be in order to bring stability to the system.

Casper

victorthecleaner said...

Casper,

Perhaps to get some leverage and consolidate/transfer power in the center? Like playing chess?

How would that work? The Greeks know fully well that they can say "sorry, but we cannot pay anymore" whenever they please. Similarly the Irish or the Portuguese.

What the ECB holds, looks like a losing hand to me.

Victor

Casper said...

VtC

I'm quite certain they can't pay. At least not with income stream of current level of taxes. But that also applies to Spain, France, Germany, USA,.. so the payment will be made in "seizing" collateral.

Thet became clear long ago and the government bonds were supported mainly due to owners'(80%) desire for yield (rollover of principle) and the implied guarantee of that same principle ultimately by the CB's ability to print.

Would you agree?

Casper

Blondie said...

Forbes Op Ed: Talk Of the Euro’s Coming Demise Is Greatly Exaggerated

"... if the euro’s survival or viability is the goal, then the ECB should make the currency viable in the markets. One way to do so, though it wouldn’t work very well given the dollar’s weakness, would be to peg the euro to the world’s currency.

Even better would be to define the euro in terms of gold, and make euros redeemable in the yellow metal. If so, the euro’s staying power and eventual rise to preeminence among currencies would almost be assured... "

mortymer said...

@Indenture, if you are interested in BitCoin I offer you few articles at this fine blog:

http://themonetaryfuture.blogspot.com/2011/06/senator-schumer-vs-bitcoin.html

There is a lot info in his "The Monetary Future Archive". Good study read.

mortymer said...

IMF HACKED: "VERY MAJOR BREACH"
(imf hacked, emails and large quantity of data stolen)

http://www.businessinsider.com/imf-hacked-2011-6

...plus one accompanying song to add:

http://www.youtube.com/watch?v=BwALo2TpO-Y

FOFOA said...

Hello Victor,

Were you under the impression that "freegolders" (stupid word, by the way) think the euro was designed to be a "harder" currency than other fiats? Or that the ECB wouldn't print to save its own banking system? Was it your impression that the euro was designed because of the need for a new debt-control tool? Personally, I find very little surprising in what's happening with the euro. But then again, I may be a little slow.

I think that entertaining the longer view of the euro as graciously shared by Another and FOA reveals Blondie's comment to be quite likely. When you write things like "The likelihood is exactly zero" and "completely fails the common sense test" it makes me smile, because I just learned something new about you. Well, not new, but let's just say it was confirmation of a suspicion I had. (Please don't be a nit and insult me by pointing out that those comments were to Casper, not Blondie, even though they were in the same comment.)

Victor, why even bother debunking freegold bit by bit when you obviously reject the main premise of, at least, this particular blog?

You write: "The ECB has probably also no clue that gold ought to be worth around 30k euros per ounce"

Another wrote: "In CB circles, it is well known that the world debt markets as we know them, can only be maintained with cheap and cheaper oil! Without cheap oil the entire system fails and reverts back to pay as you go economies. This is the central reason for "two price gold".

With gold discounted to its production cost and below, those that have it can trade it for its monetary value. Make no mistake, the BIS knows gold in the many thousands. The future "reset value" of gold is the key. "support the dollar with oil and the currency system works" "fail the currencies and the dollar will come off the oil standard and the BIS will reset gold to $10,000+ with many conditions"

That is why they continue to accept the dollar as a reserve."


I would say one of two things is true. Either Another was an insider and knew what he was talking about, or he was not an insider and he was speculating or lying. By the way, and just for the record, FOA didn't take over after Another left. FOA posted all of Another's comments, from the very beginning. Like this: Another was not willing to risk exposing his identity by logging on to Kitco or USAGold from his own computer, so he sent emails to FOA who posted as Another, and later as himself.

So either you reject the premise of this blog or not. Okay, maybe it's not a stated premise. But it is stated that this blog is a tribute to A/FOA. So I think that implies I think they were not frauds, which seems to be a mutually exclusive position to yours.

It seems that you reject that premise, and if so, why are you even wasting our time as well as your own? I'll even concede all ground to you that lies beyond that premise. How's that? Not asking you to go away or to stop commenting, but just to consider how your arguments come across to those of us operating under a premise that you obviously reject. Honestly, they are sometimes insightful, and other times just a bit amusing. But if you really want to engage "the trail" you should work on your footing.

Here's just a tad to whet your appetite. These are a few excerpts from FOA, obviously (at least to me) based on what he was told by someone who was close to the process from the very beginning in the 70's. They all come from the first page of the Gold Trail.

Cont...

FOFOA said...

2/4

The modern gold era never changed. Banks lend the currency that is invested in South Sea - like companies. Then the companies and governments create ever more currency debt at the request of the populace. At first the currency is a receipt for gold, then it becomes a receipt for more receipts. Then more currency is created to save these same failing debts receipts, but no gold is there to back it! The endless cycle goes on, all the while hiding our modern value of gold in the process. As the game reaches the end, we even begin to think that the "natural things" and "real things" of life are not the only wealth. Rather, a contract can also be held as one's life savings. It will end! […]

It seems the only explanation for the continued support of the dollar [in the late 70s and 80s] came in the form of "buying time": time to recreate a world reserve currency. But this time, make it subject to a whole group of diverse nations of conflicting political wills. In this format no one country can call the shots for the world. In addition, take away the need to compete with gold. Let gold be a supporting "reserve asset" that trades in a free market, unlent and non monetary so as to circumvent its manipulation.

In this position a modern digital fiat currency can only represent the productive efforts of the nation blocks it represents. No different from the fiat schemes we have endured for the last 60+ years. Only this time without an illusion of gold backing and its [illusionary] discipline. As such, a free market for gold will, on an ongoing basis, constantly devalue any and all currencies of the world. Just as in a somewhat similar concept where the stock markets of the world today currently discount the inflation of their local currencies.

Perhaps the payoff will be worth the past sacrifice of so many productive assets and savings. Perhaps we will never know just how far the world would have sunk had they written off the dollar back then. Without that knowledge as a measuring stick, we cannot compare if the recent loss was worth it. […]

Many political problems confronted any drive towards an EMU. In order to build a consensus for a Pan European currency, the architects had to have time, years of it. The last thing they needed was a world-wide economic downturn brought on by a failing dollar system. Working between 1976 and 1982, the software for such a system was only just beginning to really take shape. It was a slow, hard process because during this period and many years prior, the dollar was already experiencing convulsions. They needed at least another ten years, but without something to make the dollar more acceptable even five years was too long.

Working within a large group of nations required painstaking discussion of all ideas out in the open, so their agenda had to offer something for everyone. In addition, this new currency could not be seen as a competition for dollar use, otherwise the US would most certainly try to split the group.

It's important to understand that most of the world wanted to at least see another currency that could share some of the dollar's function. It didn't have to replace it. To this end, most every country gave some philosophical and political support in its creation. But, by supporting a dollar that was now completely removed from any commodity backing system, would require the help of some major players. […]


...

FOFOA said...

3/4

After 1976 they [oil producers] jumped into gold but soon found that their excess dollar flow could never even partially be shifted into gold as it was traded on this new commodity arena. For them, gold wasn't just a "trade", it was payment in the form of real "reserve assets". Oil assets for gold assets! If the CBs hadn't sold into the storm, gold would have gone to the moon from oil flow alone. So they, and everyone else soon found out that there was a world of difference between trading "gold dollars for real gold" at your Central Bank and "buying commodity gold in a trading arena". In truth, the gold market was only a free market for commodity trading. It was never allowed to trade as a "wealth reserve asset".

The options were few. Buy gold outright and see its price run past its "money for oil" value, or include gold in a currency basket for payment of oil. In essence saying: "straighten this currency problem out or you will be the one buying high priced gold"! They optioned for a third way. Continue to sell oil for ever cheaper dollars, all the while waiting for something to replace the failed reserve system. So they [oil] watched as [option 1] the US said they would fix the dollar and [option 2] Europe said they would replace it. […]

It was here, between 1980 and 1985 that both the US and Euroland proved that they could keep gold on an even level if oil could play the game. […]

The US and Britain were busy building a contract gold marketplace that would channel money away from real gold, thereby freeing up more physical to partially exchange for excess world dollars their oil imports produced.

Still, this didn't explain all of the game. It bought time for the EMU to build, but who was going to carry all the eventual excess dollars that would flow from a booming US? By 1986 a booming US economy was the result of still cheap oil. It was being sold to them and everyone for expensive dollars that flooded the world in an ongoing trade deficit! From my "First Walk" post:

------It worked in a broken pattern for a number of years. Oil and gold defied all predictions of higher prices as they retreated from every advance. Central banks gorged themselves with worthless dollar reserves and prevented a hyperinflation of the dollar in the process. They did this, because they knew that gold had the ability to completely replace any and all loss of dollar reserve value once a new system was in operation. -------

In this new format (post 1982), the US and its dollar system would only work if oil was sold to them cheaply and in dollars. It's no secret that cheap oil is created by opening the valves. But, dollar settlement without gold [post 1971] was a political agreement just waiting for a reason to change its mind. Foreign Central Bank support for the dollar was the key that kept this temporary condition working. […]


...

FOFOA said...

4/4

The US had already proven that it could not be trusted with any form of gold currency. At least most of the major European countries still had a good record of trusting gold. This is where we saw the impact of oil in the building process of the EMU. If they were to be at least attracted to a new Euro system, it had to accommodate a new attitude in dealing with gold. They looked at the 1976 "Jamaica Accords" and said, "why not use it as it's written, keep gold as a "reserve asset" not a "money asset". Once outside the money system, at a high enough price, it could become a possible world oil currency without destroying anyone's economy."

These were the early thoughts that have continued to evolve through today. But the trick was in keeping the gold market functioning between now and then. It had to supply some gold to exchange excess dollars, keep the price within reason and maintain the major mining structure for supply. The last was most important because the BIS knew how the dollar faction was using gold to try to fix the dollar. Their agenda worked with the EMU process, but was outside the EMU agenda. Both factions wanted the dollar maintained, but the US was willing to sink gold if it brought ever cheaper oil. It was a short sided political process, but it brought votes.

The BIS was willing to maintain gold above $280 until the EMU. If they didn't, they would lose the support of oil for the Euro system. It wasn't just the fact that this price kept most of the major mine supply online, it was that crude at around $8.75 in gold was their bottom price.


Sincerely,
FOFOA

mortymer said...

[mRt: A cLuE aBouT aNoThEr?]

5/11/98 USAGOLD

Dear ANOTHER:

I read your last correspondence with a great deal of interest. One question that immediately comes to mind is what exactly do you mean by old world order reasserting itself? The old European aristocracy? Is the political/economic power in Europe as it was prior to World War I? Also, if Europe undermines U.S. does it not also undermine its own security? Is not the Russian bear far from dead but simply in hibernation? Is Europe able industrially to gear up its military defense industry quickly enough to replace U.S. protection? I would think that the same applies to the Gulf and Saudi Arabia. Iraq and Iran are not friendly countries and Europe cannot protect the region from unstable societies. One would think that the U.S. would protect corporate interests in that part of the world no matter what happens in Europe, but if America goes bankrupt it will have other concerns.

On the subject of gold: Do you have any information as to the backing on the euro percentage-wise? Does it actually make any difference if its 10%, 20%, 30%? Or is the psychology the important factor? Any gold backing would make the euro more appealing than the dollar.

This morning a Portuguese central bank governor implied that gold was drawing such a nice interest rate that Portugal would probably would not sell gold. Implied in that statement is a willingness to lend. What would happen if borrowing entities suddenly found themselves unable to pay back their gold loans. Wouldn't this undermine that nation's balance sheet not to mention their sovereignty? Do you know of any instance where central bank gold loans have gone bad? And by the way, just WHAT DO YOU AS A CENTRAL BANKER take for collateral on a gold loan? Is not gold the ultimate, liquid collateral? Do you take back a piece of paper representing the right to future gold delivery? What good is that. To me it is pure folly. I've never understood this idea of a gold loan from a practical point of view? By its nature, it must by necessity be an unsecured loan.

Along these lines I have one more related question, then I must go. How long do you think those playing this game of paper selling can continue? We have heard for many months that there will come a time when physical demand will force the shorts to bid up the price to cover. It has not happened. Why not? Can LBMA play this paper game forever? Are you and I underestimating their ability to play the magician in this regard and keep us all mystified?

Though we are in a new market because of the euro, there is still much of the old because of the Bank of England and LBMA -- do you agree?

Thank you

Michael Kosares

***
5/21/98 ANOTHER (THOUGHTS!)

Mr. Kosares,

I offer simple thoughts for hard questions.

"And by the way, just what do YOU AS A CENTRAL BANKER take for collateral on a gold loan?" (USAGOLD question)

Sir,

I think, the currency of a country does no longer hold "backing". This term, it is used often, but is not correct. Today, all modern money does have "reserves", and such is used only for "the dirty float" in currency warfare. As in war, the larger and better equipped army in "reserve" does rule over the lesser force. Perhaps we should think in this way: in "cold war" of modern exchange rates, "digital currencies from reserves are used", however, when "hot war" of major default does begin, "nuclear weapons of GOLD" are deployed!

As in real war defense, of today, some countries hold a much lesser army, and depend on "the alliance" with other stronger nations to defend them. Such it is with the currencies! Many states hold but a few "digital currencies" as reserves for currency wars and see no need for "gold nuclear weapons". They sell off these weapons and do join "the currency alliance" of stronger nations. We see this in Europe, yes?

DP said...

The conversation has moved on apace over the weekend. I go back a ways to review the many interesting things various people have said, to see if there's anything I feel I should add at this point...

@VtC/costata, many thanks both for your steers on Werner. I observe that, unfortunately, the link to his PDF no longer appears to be current. I guess I'll just have to buy the book and add it to my bedtime reading pile! The long summer nights must just fly by for the missus... :)

VtC: Another problem I have with the ECB is that the ongoing support of the PIIGS government bonds, for example, the direct purchasing of bonds in the market, is like QE2 and not QE1. This will go directly into consumer prices.

Consumer prices, where? If the ECB lives up to its mandate, which is a pretty safe bet given there is only one mandate and meeting it is an existential question for them, general consumer prices across the Eurozone aren't going to go up. They'll strengthen the currency (using gold and/or $surplus and/or interest rates) as they see this unfolding, which given the global $market nature of commodities today will mean a €price suppression [or boost at times, if and when the alternative is applicable]. So IMO yes... and no. Significant $price bumps and potholes will be soaked up via the euro damper.

If you were a Central Banker, how would you view your job? Do you feel like God steering the economy? You simply tweak the amount of liquidity provided to the commercial banking system and direct the stupid free market into the Goldilocks environment that your boss, the politician, favours?

In spite of the small matter of my personally thinking all religions are a bunch of horse sh!t, I would perhaps feel like Noah steering his Ark through the storm, reacting in the best way I can see to all the cross-currents and amplitude waves that I encounter in my journey. I don't really see them as the ultimate Central Planners, so much as Reactionaries. The wider market does what it wishes to do, and they react to help guide the economy as best they can towards a stable monetary equilibrium. A tough job but, clearly, someone's gotta do it!

How can you possibly trust them with the currency wars that are ahead of us?

IMO the ECB/BIS have their hand hovering over the board in readiness to make the next move that will put the $IMFS, once again, at mate. I only wish my country was playing on the winning team rather than being chased around the board like this, destined ultimately for crushing defeat. :-\




FWIW my own feeling is things with the commercials weren't so very bad (although, clearly, by no means perfect!) while Glass-Steagall was in place. The wheels have really fallen off since it was repealed and the bankers were allowed to run amok. I have witnessed a growing list of dignitaries adding their voices to the calls for reinstatement in some form and I can't see the status quo in this regarding remaining indefinitely, which IMO will be no bad thing.

DP said...

The theme tune I've heard when reading what the ECB are up to:


----> HERE



mortymer said...

Mrt: Each time I check there are some surprises from India:

"...Currency Internationalization and the Role of the SDR

12. In principle, it is desirable to develop a MULTI-CURRENCY SYSTEM with several currencies operating as BROAD SUBSTITUTES and reflecting CHANGING economic WEIGHTS and global realities. In this context, we note that there have been recent EFFORTS by the IMF to PROMOTE the use of SDR as a POTENTIAL RESERVE ASSET for the EVOLVING international monetary system. For the SDR to take on this significant role, several prerequisites have to be in place. The SDR has to be accepted as a LIABILITY of the IMF, has to be automatically acceptable as a MEDIUM OF PAYMENT in cross-border transactions, be FREELY TREADABLE and its PRICE has to be determined by FORCES OF DEMAND AND SUPPLY. As the SDR does NOT SATISFY these conditions, it CANNOT BE A RESERVE CURRENCY in the international payment system. In principle, one needs a GLOBAL CENTRAL BANK to ISSUE SDRs which take the characteristic of UNIT of global payment and settlement system. Thus, we see the move to multicurrency world as a GRADUAL EVOLUTION. Another dimension of this issue is to change the COMPOSITION of the SDR basket. Going by the recent initiatives, if at all there is a move to alter the composition of the SDR basket, WE COULD CONSIDER including currencies of those dynamically emerging market economies that satisfy the existing inclusion criteria: in particular, a fully convertible capital account and a market determined exchange rate..."

http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=561

mortymer said...

Saudis still planning more nukes. Do they know something we don't?

http://www.energybulletin.net/stories/2011-06-10/saudis-still-planning-more-nukes-do-they-know-something-we-dont

"...While Germany, Italy and other European nations have announced that they're planning to follow Japan's example and pull away from nuclear power, the Saudis are planning to spend $100 billion in the next 20 years to construct 16 nuclear power stations. That will take them from zero nuclear power today to 20% by 2030. At least, that's the plan..."

+

Onkalo
http://transitionvoice.com/2011/06/nukes-are-forever/

Indenture said...

Bitcoin is the Economic Singularity
"Since bitcoin appreciates in value very rapidly during the singularity phase, you should convert all of your liquid assets to bitcoin as quickly as possible. Do not keep any cash, savings, or checking beyond what you need to pay for goods and services that cannot yet be paid for with bitcoin. The more things you can buy with bitcoin, the more bitcoin you should keep. "

and in this corner weighing in at 196.96655 grams per mole.... Gold.

The 'Singularity' sounds like an epic battle. Pay per View baby.

Crack said...

Since South Sea Company stock appreciates in value very rapidly during the singularity phase, you should convert all of your liquid assets to South Sea Company stock as quickly as possible. Do not keep any cash, savings, or checking beyond what you need to pay for goods and services that cannot yet be paid for with South Sea Company stock. The more things you can buy with South Sea Company stock, the more South Sea Company stock you should keep.

Stop wasting money on excessively expensive meals, televisions, cars, and anything else that loses value quickly or instantly. Instead, put your money into South Sea Company stock. You will be much richer that way. You may think having less stuff is less fun, but actually the pleasure of financial freedom far, far outweighs any losses.

During the singularity phase, you should also take out loans to buy South Sea Company stock, since South Sea Company stock appreciates far more rapidly than interest on any fiat currency loan. When South Sea Company stock gets near saturation, which is the end of the singularity, you should pay off the loans, because at that point the rate of appreciation will probably be a lot closer to the interest on the loans, and you may not be able to reliably earn money that way anymore.

Jeff said...

Does anyone believe the Greece fire/Euroland problems will be enough to press the freegold reset button? Every time it looked bad in the past they managed to kick the can a bit further.

victorthecleaner said...

Casper,

I'm quite certain they can't pay.

Sure, in the long run, most of them won't be able to pay (at least not in real terms).

But even in the short run, it is now the Greeks and the Irish who call the shots. As long as they oblige and pretend to impose "austerity", the ECB will be able to kick the can further down the road. Once they stop playing and say "sorry, not any more austerity", they can force the ECB to put some 500-1000bn euros in toxic assets onto the ECB balance sheet.

Now this would still be somewhat less bad than the Fed, but no longer by a full order of magnitude, but rather merely by a factor of about 2. So the euro would hyperinflate a bit slower than the dollar. FOA (if he is still around) would be shocked to see how fast the euro has aged.

Well done, ECB.

DP,

Consumer prices, where?

I think, the first round effect is pretty obvious. In those countries whose government debt is monetized. So when the ECB puts Greek bonds on its balance sheet (rather than Greek pension funds investing savings into said bonds), then they bid up the prices of all services and goods that the Greek government pays for. This is, basically, salaries, and so it will affect everything in the shopping basket of the average Greek.

Then, there are second round effects because once the ECB buys almost all Greek bonds, some other investors can switch to other investments, and the consumer price inflation starts leaking into other areas of the euro zone.

In the very long run, it is almost guaranteed to spread out evenly across the entire euro zone. Just because of cross-border competition and capital flows.

If the ECB lives up to its mandate, which is a pretty safe bet given there is only one mandate.

The game is over. This has become impossible. There is no way the ECB would be able to fulfil that mandate anymore. Exactly like the Fed (with that half of their mandate).

which given the global $market nature of commodities today will mean a €price suppression

No, won't help. Monetization of government debt (or consumer loans) is the main factor that drives consumer prices, given that government expenses today are largely consumption. Commodity prices also have some influence, but that is only a second round effect, not the major one.

mortymer,

the Saudis are planning to spend $100 billion in the next 20 years to construct 16 nuclear power stations.

They know best when their oil wells are going to run dry.

Victor

Jeff said...

Russia is now the biggest oil producer. They have no love for the US or the dollar. They also have not enough gold (if they are telling truth about their holdings) to push for freegold. So they keep buying gold. But they only hold less than $200 billion in treasuries. They recently declared the ruble 'a fully convertible currency'.

Russian losses on a dollar HI would be minimal. The offsetting increase in value of gold and oil would be large. They could technically back the ruble with oil, gold, or a combination. Is Russia ready for Freegold?

Thoughts?

DP said...

VtC: I think, the first round effect is pretty obvious. In those countries whose government debt is monetized. So when the ECB puts Greek bonds on its balance sheet (rather than Greek pension funds investing savings into said bonds), then they bid up the prices of all services and goods that the Greek government pays for. This is, basically, salaries, and so it will affect everything in the shopping basket of the average Greek.

You think Greek workers are getting salary increases, and this will enable them to bid up prices at the grocery store? This differs from my view of the situation, where I see it as more likely those Greeks feel lucky to keep their jobs, those that do being still frightened they're next to go and saving up their pennies and cutting back their expenses as best they can. This view appears incompatible with a view that consumer prices are going to be bid up by these actors within the economy. But I guess that if people generally start to feel that retail prices are getting a bit out of the comfort zone and might well stay there and/or get a lot worse, yes this could change things. So the key thing is for the authorities to manage those inflation expectations. Most people tend to only invest in things that they believe "can only go up", I suspect. Like property.

Of course, if people notice that something starts to roar ahead of all other things, even the shoeshine boy might choose to invest in that to beat inflation, perhaps they would jump en masse all over something behaving like that, who knows. That could soak up a lot of nascent inflationary pressure. Maybe Bitcoins... or tulips... or whatever...

I guess we'll just have to agree to disagree in our views, for the time being, and let everyone else run their own supersliderule over it for themselves.

Cheers! :-)

costata said...

Jeff,

"Is Russia ready for Freegold?"

IMHO very close to being ready. They announced a reduction in their rate of gold reserve accumulation a few months ago from 154 m/t in the year prior to 100 m/t per year while increasing production.

Between Europe and China almost all of their energy exports are not subject to interdiction by naval power (unlike the ME) and their agricultural production has plenty of room to grow.

They do not need to explicitly back the rouble with anything except their economic output. The FX market will price their currency and their growing gold reserves will provide the buffer for their trade balance. The transition to a Freegold-RPG regime should be relatively painless for the Russians.

victorthecleaner said...

DP,

You think Greek workers are getting salary increases

No need trying to ridicule the argument. It is empirically pretty well understood.

The mechanism for inflation in the euro zone is basically the same as in Germany 1919-23.

In 1919-23, the worst thing the Reichsbank did was print cash for the government to give it to the workers in the Ruhr area although they were on strike (against the French who tried to collect reparations). Lower than usual industrial output, but still the usual amount of money chasing that little output.

Now in the PIGS countries, output is as low and they are as uncompetitive as usual, but rather than having domestic demand for goods decline as a consequence of their trade deficit, the ECB artificially props up that demand. The ECB takes PIGS government bonds onto their balance sheet. This allows the PIGS governments to pay salaries with 'fresh' money rather than by taxing the PIGS people. This means their lack of competitiveness and their negative trade balance do not reduce domestic demand as they should. Demand is rather propped up artificially. Same consequence: Too much money chasing too few goods and services.

Now Germany 1922-23 was extreme. Printing money to pay workers who are on strike. That's a 100% discrepancy between output and money supply. I don't remember the precise number, but the Reichsbank probably printed some 20% worth of GDP in additional money supply in the year of the strike.

What the ECB is doing in the PIGs case, is less drastic, but if you watch their balance sheet, you see that they are also increasing their monetary base at a considerable rate. Take a look at the figures, just for Greece, they must be printing at a rate of 50-60% of Greek GDP (Greek GDP is 230bn euros, the ECB acquired 130bn exposure to Greek government debt since winter 2009/10). Now this is going to leak into the entire euro zone, and as a percentage of euro zone GDP (over 9000bn euros), this is still under 2%.

Then there is Ireland and Portugal, and there will be others. Total monetization of consumer (including government) debt by the ECB has been closer to 500bn since 2007/8. Oooops. There we are. Getting into the 5-10% GDP region.

Fasten your seat belts.

FOA knew it: Hyperinflation is the process of saving debt at all costs, even buying it outright for cash.

The ECB is doing it today. I wonder who in the ECB read FOA, but I am not surprised Axel Weber threw in the towel.

Victor

victorthecleaner said...

DP,

That could soak up a lot of nascent inflationary pressure. Maybe Bitcoins... or tulips... or whatever...

Let's say, I am a paper pusher somewhere in the Greek administration and the government pays my salary with freshly printed ECB paper (or I am a coal miner on strike, but nevertheless the government pays my salary with freshly printed cash). Assume I fear inflation, have a little money left that I don't need immediately, and I walk into a coin store and buy physical gold.

This does not absorb the sort of inflation that arises from monetizing consumer debt, just because the owner of the coin store now has my cash, ready to spend. By purchasing gold, you cannot get rid of the cash. Quite the contrary, it begins to circulate even faster (than when I just left it in my bank account)!

Victor

Casper said...

VtC

if you offer people a store of value to park their savings you'll get inflation but no HI. Since Germany had to pay war reparations in dollars/gold they were a buyer of dollars/gold in the market and as an issuer of the currency, could easily overbid everybody so people were left with no real alternatives to protect the savings.

Of course during my years of attending the University a heard several definitions/verions of HI to be "rising prices of more than 100% p.a". So, who knows...

Casper

Casper

Casper said...

VtC

"This does not absorb the sort of inflation that arises from monetizing consumer debt, just because the owner of the coin store now has my cash, ready to spend. By purchasing gold, you cannot get rid of the cash."

Unless that owner happens to be the (E)CB.

Casper

victorthecleaner said...

Casper,

Unless that owner happens to be the (E)CB.

Sure. Of course, they can sell gold to prop up their paper currency (and prevent it from inflating too much).

This is precisely what the US have been doing between 1933 and 1971 (at a stupidly low dollar price though).

My criticism was this: Why didn't the ECB prevent the inflation from happening in the first place rather than eventually having to sell their gold in order to fight it? The ECB certainly had all the data and all the tools to do that.

Victor

victorthecleaner said...

Casper,

when I used the word HI, I didn't want to commit to more than 20% per month or whatever you think the threshold is.

I was using the work HI to describe the dilution of the currency in a deflationary economy as opposed to consumer price increases because of capacity constraints in a booming economy.

Victor

victorthecleaner said...

work -> word

radix46 said...

vtc,

"Assume I fear inflation, have a little money left that I don't need immediately, and I walk into a coin store and buy physical gold.

This does not absorb the sort of inflation that arises from monetizing consumer debt, just because the owner of the coin store now has my cash, ready to spend."

If he went and spent all of revenue on stuff other than gold, he would be out of business.

At a time of rising demand for gold, wouldn't he go and replenish his stock with the revenue from previous sales, perhaps keeping his own profits in gold and taking whatever's left for the necessities?

When business is booming entrepreneurs throw the kitchen sink at their businesses in order to maximise profits from the boom times. This isn't done by draining the business of capital. On the contrary, it is likely that less cash will be released from his business.

Casper said...

Hey VtC,

I don't have a definite answer to why they let the bubble's in EU periphery to emerge.

I don't think they're (ECB) stupid but also don't have some crazy illusions their mission is to "save" the little man and that there aren't factions within. Maybe some internal struggle is being played out and that reflects itself in their tactical decisions.

Since I believe the story FOFOA is telling and also many before him, I don't think their (among factions within the ECB) strategic decisions are diverging.

Many, many posts ago a nice metapfhor for the euro was given (Can't remember by whom - maybe by FOFOA):

"euro is a booster rocket for launching a alternative monetary system to the present one. Once in orbit euros job is done"

What exactly is your stance on the story FOFOA is telling?

Casper

mortymer said...

http://anotherfreegoldblog.blogspot.com/2011/06/overview-of-monetary-standards.html

http://www.youtube.com/watch?v=Bkwp7YQBXIg&feature=related

victorthecleaner said...

radix46,

At a time of rising demand for gold, wouldn't he go and replenish his stock with the revenue from previous sales

Sure. Once he has done this, the refiner has the cash. Then the mining company. Then Caterpillar and the mining workers. And the freshly printed cash circulates nicely.

Casper,

What exactly is your stance on the story FOFOA is telling?

Not 100% sure. Somebody witnessing the creation of the Euro around 1999 must have been full of hope that the dollar might one day be replaced without world trade coming to a standstill. I think I understand why FOA was so enthusiastic.

But then a number of things went differently. The ECB may have been one of them.

Victor

radix46 said...

vtc,

"Sure. Once he has done this, the refiner has the cash. Then the mining company. Then Caterpillar and the mining workers. And the freshly printed cash circulates nicely.
"

Yes, it circulates nicely, within gold, bidding up gold. Each link in the chain doing the same - maximising profit by not draining capital in the boom times. It all remains within the gold circuit, bidding it up in each time around.

DP said...

Hi Victor and good morning.

I wasn't setting out to ridicule your argument, far from it and I apologise if that is how I came across on this occasion*. I just am unable to share your view is all I was attempting to say. :-)

The way I see it, the problem is fighting against a deflationary headwind. Inflation is the last thing people in the Eurozone ought to be concerned about now. Monetary inflation at the ECB, via the tool of gold that is calling out to anyone who'll listen, is going to have the stops pulled right out trying to counteract the deflationary force. As we witnessed above, already the money balloon is 50% deflated in Europe, against the current gold market [which itself still needs to deflate against an honest gold market, but I'm not seeking to expand this conversation into that theme right now]. Even with this, people are taking to the streets to express their anger and frustration -- what would it be like, if the currency hadn't been cut in half by this objective measure, and the deflation was already twice as bad at this point? Rather this, in my view, than a '30s-style Greater Depression, or perhaps The Global Revolution. There aren't enough guillotines to go around! What would the world be like afterwards if there were? No, for me, much better the money/finance bubble gets pricked like this and we all share the problem together as we drift back down to reality. We all of us had some varying degree of share in it on the way up [again, I don't seek to go down the cul de sac of apportioning past blame and injustices either right now]. We might still retain a civilisation that we can build upon once more. Not all socialism is bad socialism.

TBH, I think our views are not really so far apart in truth? (As often turns out to be the case around here!)

---> I was using the word HI to describe the dilution of the currency in a deflationary economy as opposed to consumer price increases because of capacity constraints in a booming economy.

The problem is more for people outside of an RPG currency zone, where the tools are just not in place to dynamically adjust. For example in the UK and US as you already indicated; these are currencies built for inflation, but unable to cope fairly gracefully with deflation as in the case of the euro.

I guess we'll just have to agree to disagree in our views about the ECB and RPG, for the time being, and let everyone else run their own supersliderule over it for themselves.

Sincerely,

DP :-)

* I'm well aware that it wouldn't be the first time I have set out to ridicule someone's argument, and I feel sure it won't be the last, so I fully appreciate you might by now assume I do that as a matter of course. But really I'm just a million different people from one day to the next.

FOFOA said...

Hello Victor,

You wrote: "Somebody witnessing the creation of the Euro around 1999 must have been full of hope that the dollar might one day be replaced without world trade coming to a standstill. I think I understand why FOA was so enthusiastic."

I don't think FOA was posting anonymously on an obscure forum he didn't even relate to because he was enthusiastic about the euro. I think he was posting to share some inside info that previously couldn’t be shared, but now could. This anomaly was thanks to the Bank of England (BOE) breaking the long-standing information barrier by releasing the private data of the LBMA in hopes that it would establish confidence in the resilience of the $IMFS-sponsored paper gold market in the face of languishing prices.

The release of this surprising (to the gold market) information came on Jan. 30, 1997. From THE GRAND LBMA EXPOSÉ: A Collective-Mind Analysis:

"It shyly emerged upon the news airwaves on January 30, 1997. Its appearance was almost as an after-thought, deceptively innocuous with few superlatives to distinguish it from the daily diarrhea of financial news spewing forth from the bowels of the world's money centers. Few readers took note of it... most gave it little import. To my knowledge it was an esoteric select few at the Kitco Gold Chat group, who really zeroed in on the draconian significance of the news.

Was the news a bureaucratic slip of utmost discreet information - indeed top secret data - or was it a well-timed and methodically planned leak to the press. Or perhaps it was the "whistle-blowing" of an irate employee, who was passed over for promotion? Who really knows? In any case we will provide all the details surrounding this monumental announcement... and allow the reader to draw his own conclusions."


Who really knows? Well, now we do. As it turns out, it was none other than the BOE itself slipping out this information. From a Freedom of Information Act (FOIA) release acquired by GATA earlier this year:

"The Bank of England recently released, for the first time, statistics that it has collected for many years, on trading volume in the London market… Last year London settled 950 tonnes of gold daily --or roughly $10 billion --giving some scope for the volume of trading outside of London as well. He noted that gold had traditionally been a secretive market and some dealers had even resisted releasing this information, but most thought release was helpful in demonstrating the market's resilience even though the price has been sluggish."

That was Ted Truman of the Fed recounting his notes taken from speaker "Smeeton" of the BOE during an April, 1997 meeting. That one little data leak spurred tonnes of speculation about the state of the modern gold market on the only gold discussion forum of the day (hosted by Kitco). Here is a link to the index of a ten part summary of that massive discussion, put together by Red Baron.

Cont...

FOFOA said...

2/2

ANOTHER didn't show up until part 5 with his very first post on Sept. 14, 1997. This post is not even archived on USAGold. Only at the Red Baron link above:

"Internet Commentary #26 -

Posted on the Internet September 14, 1997 by "ANOTHER"

(an answer?):

This could be an answer directed to the "Red Baron"?

The CBs are becoming "primary suppliers" to the gold market. Understand that they are not doing this because they want to, they have to. The words are spoken to show a need to raise capital but we knew that was a screen from long ago. You will find the answer to the LBMA problem if you follow a route that connects South Africa, The middle east, India and then into Asia!

Remember this; the western world uses paper as a real value, but oil and gold will never flow in the same direction. Big Trader"


This was Another's coming-out party. Notice he quoted "Big Trader", another Kitco contributor that he later claimed to know but whom disappeared forever from the online chat forums after this post.

"The CBs are becoming "primary suppliers" to the gold market. Understand that they are not doing this because they want to, they have to."

I ask you, is it not a bit odd, that in 2011 we are just now learning (through an FOIA request to the Fed) that it was the BOE that surreptitiously released that data in 1/97 to "demonstrating the market's resilience," and then two years later announced the sale of half of its gold?

I have to admit, I feel some cognitive dissonance about this until I read ANOTHER's first comment from 9/97 once again:

"The CBs are becoming "primary suppliers" to the gold market. Understand that they are not doing this because they want to, they have to."

Note, for redundancy, that the BOE is part of the $IMFS faction, not the euro.

I wonder what the LBMA clearing volume looks like today, since the (one time only) event that will supposedly transform the gold market to a physical-only market (thankfully) hasn't happened yet.

Sincerely,
FOFOA

mortymer said...

The International Monetary System in the 21st Century: Could Gold Make a Comeback? by R.Mundell

http://anotherfreegoldblog.blogspot.com/2011/06/international-monetary-system-in-21st.html

...but pls read the whole original paper. Highlighted parts are just my picks relevant for Freegold.

DP said...

Casper: I don't have a definite answer to why they let the bubble's in EU periphery to emerge.

I certainly don't either. However, I have this idea that, if I was in a fight (to the death, if necessary) with some big bully opponent and I figured out he had a weakness that I didn't share, would I give him enough rope to hang himself while he's busily pummeling me in the playground, then I pick myself up and walk right on as I see him swinging from a tree? Just an idea, I'm still working on it.

ad said...

With effect from 1 July 1962 De Jongh was promoted to Executive Assistant – until his appointment as Governor of the Reserve Bank as from 1 July 1967. He served as Governor for 13 ½ years until his retirement at the end of 1980.

During his term as Governor, De Jongh faced various international monetary crises. The two-tier gold-marketing system, which was introduced in 1968 had important implications for South Africa as the world’s largest gold producer and caused considerable uncertainty regarding gold marketing. However, after considerable success with secret gold sales, including sales to monetary authorities, the South African negotiation team under the leadership of De Jongh was able to conclude the so-called Gold Agreement with the International Monetary Fund in Rome in December 1969. This agreement gave the Reserve Bank more scope for marketing the country’s gold and dealt the final blow to the movement for the demonetisation of gold. In the nineteen-seventies, gold swap transactions were concluded with foreign institutions to reinforce South Africa’s reserves. These swaps demonstrated that gold still played an important role in the international monetary system.

From time to time adverse domestic monetary and economic conditions also demanded appropriate action from De Jongh. The rising inflation rate, excessive credit extension by the banking sector and balance of payments problems required careful formulation of monetary policy. The confidence crisis in the South African banking sector early in 1977 presented a major challenge. The Reserve Bank’s handling of the problem soon restored domestic and international confidence in the South African banking system. De Jongh attended the annual meetings of the International Monetary Fund and the Bank for International Settlements. He was also involved with the deliberations of the Group of Twenty on international monetary reform during the period 1972 – 74.

He also acted as Alternate Governor (1967- 72) and Governor (1972-80) for South Africa at the International Bank for Reconstruction and Development, the International Finance Corporation and the International Development Agency. He was South Africa’s representative at the Bank for International Settlements during the period 1967-80. It was his initiative that the South African Reserve Bank became a member of the BIS in June 1971 – at that stage the Reserve Bank was one of only five banks from outside Europe that were members of the BIS.

Previous Governors of the South African Reserve Bank

This book was written at the prompting of the present Governor of the SARB, Dr Chris Stals. He suggested that it would be useful if a record was compiled on the broad monetary policies pursued by the Reserve Bank under the Governorship of Dr T.W. de Jongh, that is from 1967 until 1980.


Monetary policies under Dr T W de Jongh, 1967-1980

mortymer said...

@ad, from BIS:

X P Guma: Communicating reserve management and exchange rate policies - a South African perspective (Central Bank Articles and Speeches)

http://www.bis.org/review/r080514e.pdf


South Africa’s experience of regional currency areas and the use of foreign currencies

http://www.bis.org/publ/bppdf/bispap17o.pdf

ad said...

thanks Mortymer,

While reading, this jumped out at me:

That perhaps explains the sea change that has occurred in thinking about communication by central banks.

The object of their communication [in the past] was to create such uncertainty as to ensure that their decisions would be treated with the kind of awe that attends the devotions of the converted.

Having come of age in central banking at a different time, my purpose today is to be brief, to the point and as clear as possible.


He goes on to make this statement...

Second, the SARB has made a public commitment not to participate in the market for foreign exchange in an attempt to influence or to determine the nominal exchange rate.

But the Governor yesterday says.

The South African Reserve Bank will continue to accumulate foreign reserves to tame the strength of the rand despite running up a financial loss over the last year, Governor Gill Marcus said on Tuesday.

Reminds me of the line..."I'll tell you all my secrets but I lie about my past"

She goes on to say..

"The reserve bank is not for profit. We take decisions in the interest of the country and the exchange rate is important in terms of its impact," Marcus said

Not for profit and in the interests of our country!!

Now I know why I hold all savings in gold, as Martin Armstrong says; as a hedge against the mismanagement of the state.

victorthecleaner said...

FOFOA,

This anomaly was thanks to the Bank of England (BoE) breaking the long-standing information barrier by releasing the private data of the LBMA in hopes that it would establish confidence in the resilience of the $IMFS-sponsored paper gold market in the face of languishing prices.

How about this interpretation: The European CBs had started to lease gold in the mid to late 1980s (in order to support the dollar gold market and in order to keep oil cheap in dollars, as Another said). But they did not fully understand the operation of the bullion banks. The bullion banks went out of control and used part of the CB gold leases in order to go outright short gold (gold carry trade) or at least give hedge funds the opportunity to do so and, as a consequence, gave others (Big Trader) the opportunity to go long. By 1995 it had become clear that the BBs were abusing the gold lent by the CBs and that there was a huge counterparty risk in the form of hedge funds and bullion bank prop trading.

The European CBs were not only on the hook for all the gold that had gone to Saudi Arabia in order to keep oil cheap in dollars, but on top of that, the bullion banks (in tacit agreement with the US) could now blackmail the European CBs with the excessive counterparty risk. The US, on the contrary, had kept all their gold in a safe place.

When the European CBs made their first attempts to reign in the bullion banks gone wild, the LBMA released these data in order to display the magnitude of the mess they had created as a message to the European CBs: We have made this thing too big for you to deal with. Keep your hands off our market!

The minutes of the G10 foreign exchange committee you quote are worth reading indeed. Look at how little the CBs had understood of the operation of the London bullion banks.

The resolution took two more years and came only with the Washington Agreement which basically made it official that the gold leased up to that point would never be returned. But the Agreement also stated that the game of gold leasing was over, at least as far as the Europeans were concerned.

About the gold sale by the BoE and the SNB, I can only speculate. It might have been just about HSBC and UBS, i.e. to fix some collateral damage of the Washington Agreement. The sales by Australia, Canada, IMF would then have been ordered by the US. Note also that Chase Manhattan suddenly ended up in a shotgun marriage with JP Morgan.

Victor

FOFOA said...

Hello Victor,

"How about this interpretation:"

I like it! Now you're starting to think like a hiker!

Here are a few notes you might want to weigh into your fine analysis.

First, "Brown's Bottom" was 4 ½ months before the WAG, so I don't think its purpose could have been to fix damage from something that was yet to happen. But yes, a few questions do come to mind about this BOE announcement. How did the BOE gold sales compare and contrast to the gold sales of other European CBs that were done more secretly, so as, perhaps, to either get the best price, or to at least provide physical to the commodity gold market without disrupting the price. And were all European CB gold sales done for this purpose (providing physical to keep it all going), or were some done CB to CB for rebalancing as directed by the BIS? And finally, how did the European CB gold leasing differ from the European CB sales (and from the BOE sales) in both purpose and effect?

Remember, FOA wrote: "Both factions wanted the dollar maintained, but the US was willing to sink gold if it brought ever cheaper oil."

And Another wrote: "The CBs are becoming "primary suppliers" to the gold market. Understand that they are not doing this because they want to, they have to."

Putting these two statements together I think we can get a picture of how Brown's Bottom might relate to the WAG which came a few months later. Here are some quotes from Another that, perhaps, foreshadowed these events:

Date: Tue Oct 07 1997 22:37
ANOTHER (THOUGHTS!) ID#60253:

You see, when paper trading volume dries up it's a bearish sign, but when real physical gold volume drops it's bullish! That's because gold is being cornered on a scale never seen in history. LBMA is doing its best to show real volume exists!


Well, now we know it was the BOE that coordinated the release of that LBMA data. So we could try a word replacement in that last sentence: "The BOE is doing its best to show real volume exists [at the LBMA]!" But of course actions speak louder than words, so we can certainly wonder if the BOE gold sales had anything to do with the lack of real (physical) volume.

Date: Sun Oct 05 1997 21:29
ANOTHER ( THOUGHTS! ) ID#60253:

The Western governments needed to keep the price of gold down so it could flow where they needed it to flow.

Date: Tue Oct 07 1997 22:37
ANOTHER (THOUGHTS!) ID#60253:

Ever notice how many important Middle Eastern people keep a residence in London. It's not because of the climate. The most powerful banks in the world today are the ones that trade oil and gold. It is in the "city" that the deals are done by people who understand "value"! Westerners should be happy that they do because the free flow of oil and gold has allowed this economic expansion to continue this past few years.


And some FOA from late in 1999, after both Brown's Bottom and the WAG:

(cont...)

FOFOA said...

2/5

FOA (12/04/99; 21:34:03MDT - Msg ID:20282)

Earlier this year, old bullion supply dried up and it looked like the last of the private "old stocks of gold" had finally run out. Then the price shock from the Washington Agreement flushed out some more. I've written on this before (and ORO told it better than I), but the more the old holders sell out in return for holding "unallocated gold accounts" the worse the shortage will be when the marketplace fails. Slowly, over many years, the people that now hold the real bullion that was sold to create a lot of paper gold, have literally locked up the ownership. The old liquid gold market we used to know in years past functioned because of all the private physical holders that traded it. Now, it's all paper being shuffled around.

This gets back to your LBMA item. The old, deep private bullion pool has been replaced with a paper commitment pool. In the past, if someone defaulted, we just grabbed their bullion. Today, if they default, they just default! Again, if that big African mine does tell them to take a hike, the whole modern gold market could just collapse. This is why I smile when I hear someone question why the big funds and traders don't just take delivery against OTC paper. The question is just exactly what are they going to take delivery of?

All the gold movement is just for show. Same for Comex. Sock a little gold in there and complete a few deliveries so it all looks right. It's all the same game we played with the dollar before 1971. Only when everyone asked for delivery did we find out that the world was awash in paper gold,,,,,I mean dollars!


But what about the Euro CB leasing and sales? How did they differ from each other and from the BOE sales?

Date: Sun Nov 16 1997 10:20
ANOTHER (THOUGHTS!) ID#60253:

In today's time the CBs do not sell physical gold with a purpose to drive the price down. They sell to cover open orders to buy what cannot be filled from existing stocks. Look to the US treasury sales in the late 70s. They sold 1 million a month using open bid proposals with much fanfare. If the CBs wanted physical sales to drive the price they would sell in the same way.

The sales today are done quietly with purpose. The gold must go to the correct location. That is why these sales do not impact price as they occur, there is a waiting buyer on the other side…

… Banks do lend gold with a reason to control price.


So the BOE sold like the US Treasury auctions in '76, "with much fanfare." But the Euro CB sales were done "quietly with purpose" so as to "not impact price as they occur" because "there is a waiting buyer on the other side." This sounds pretty consistent with the discussion in those minutes, does it not? But gold lending (leasing) was done for a different reason: to control price.

Date: Sun Apr 19 1998 15:49
ANOTHER (THOUGHTS!) ID#60253:

If they sell gold, a way is clear to "bring gold back" for the nation! Canada has local mines, Australia has local mines, Belgium has South African mines! If they lease gold, it is for a purpose…

FOFOA said...

3/5

So the leasing was done "for a purpose" "to control price," which, as you pointed out, Victor, ended the same year they launched the euro, when, in your words, the WAG "basically made it official that the gold leased up to that point would never be returned. But the Agreement also stated that the game of gold leasing was over, at least as far as the Europeans were concerned." And, of course, we now know which direction the price went in the decade following that European CB "agreement".

I agree with you that the US kept its gold safe (so far), and that the BBs went wild, which was fine with the dollar faction, and that, perhaps, the Euro CBs wanted to reign in the BBs. Or did they? Could it be possible that the BBs (LBMA) are (is) a bigger threat to the dollar than to the euro. Could it be that the WAG put the BBs on notice but at the same time the Euro CBs didn't really care how the BBs reacted because they knew the BBs would only blow up the dollar in the end? Is it really as you say, that the BBs (and by implication, the $IMFS) played it smarter than the Euro CBs and now has them over a barrel?

Or could it be that Casper, Blondie and DP are correct that the euro has been slyly sitting back, taking punches, protecting its own where possible through its printing press, just buying time while giving the dollar enough rope to hang itself?

FOA (5/8/99; 20:16:12MDT - Msg ID:5772)
BOE!

…the ECB / BIS have grown the gold market into massive proportions by encouraging the many year expansion of holders through paper securities. All denominated, ultimately, in dollars. We will see $10,000 gold, count on it! It's the only way this can be resolved

Date: Sun Nov 16 1997 10:20
ANOTHER (THOUGHTS!) ID#60253:

[Central] Banks do lend gold with a reason to control price. If gold rises above its commodity price it loses value in discount trade. They admit now to lending much where they would admit nothing before! They do this now because of the trouble ahead. Does a CB [receive] collateral to lend its gold? Understand, they only lend their good name on paper, not the gold itself. The gold that is put on the market in these deals belongs to someone else! The question is not "Are the CBs worried for the return of gold?" but, "Has our paper been lent to the wrong people?" The BIS will not allow the distribution of all gold to settle claims.


Say what? That leased gold "that would never be returned" was paper gold that would actually never be settled with physical?

5/3/98 Friend of ANOTHER

Merrill Lynch, et al, don't grasp the gold valuations by the BIS. Gold is valued by the number of outstanding claims against it. Kind of like a house for sale with ten bidders. Each bidder thinks the house is in the bag, because they have a valid bid ticket [BB credit]. Each one thinks he can have the house at any time,even though nine others want it too, because all I have to do is bid a little higher [pay for allocated storage?] and take it! Insane, but that's what is going on! Somehow, the BIS and the major private gold holders know the total claims, as does Another. The Euro group is going to force those claims into real bids instead of just claims!

FOFOA said...

4/5

What, like this? But how?

Date: Tue Nov 25 1997 10:06
ANOTHER (THOUGHTS!) ID#60253:

Make no mistake, the BIS knows gold in the many thousands. The future "reset value" of gold is the key.


Okay, now that I've indulged myself quoting Another and FOA (one of my favorite pastimes), let's wrap this thing up with FOA's comment posted the day after Gordon Brown's announcement of BOE gold sales:

FOA (5/8/99; 20:16:12MDT - Msg ID:5772)
BOE!

ALL,
Well, by now everyone must be aware of the "open management" of the gold price. "Another" had been bringing this picture to light long ago. In puzzle form, he offered ideas, Thoughts and directions for consideration. Only a short time ago most analysts completely wrote off such "thinking" as being absolutely "on the fringe of reality"! Today, the "absolute fact" is that gold is used and managed as a "world currency" of major importance. After the BOE announcement on Friday, currency traders are grasping the concept that gold is, as never before "at the center of reality"!

Many different factions are maneuvering gold these days, and each has their own agenda. The IMF / dollar faction, many years ago, went along with Europe in lowering the gold price in dollar terms. It made the dollar look stable and enforced its continued use as the "currency of settlement" for strategic commodities. Any country running a balance of trade surplus of dollars, was free to buy gold at a stable to lower price, and partially replace the paper dollar reserves. Because the dollar is the "world reserve currency" many countries ran dollar surpluses with trading partners outside of the US. In this light we can see how the integrity of the dollar was expanded, even in countries of nonnative dollar origin!

Not only was physical gold purchased, but paper gold with distant CB backing was also accepted. Ever wonder how all of this gold was placed? You see, over the last many years, there has been a quiet boom going on in gold ownership. The sheer number of world gold buyers has more than doubled, along with the amount of gold owned! The problem is that the amount of physical gold in existence has not doubled, only the warehouse receipts.

Most of it never, ever left the vaults, as the true placement was done in receipt form. Yes, slowly, over the years, even major private bullion holders offered up their physical for "convoluted, future delivered, leased and released gold". Much of what is now held is little more than a form of gold options for "future deposit". Not unlike the "cash dollar that is supposed to be in your bank", but really isn't? As the bank only holds your deposit as a "credit" to your account, so is much of the world traded gold "only a credit of account"!
...

FOFOA said...

5/5

...When Central Banks (mostly the European, at first) began to lease / lend gold, they were beginning what was to become "the master plan". The creation of a broad, liquid paper gold market that would ultimately undermine the dollar, in time. As I said above, initially it was offered as an "appeasement" for continued dollar use. However, even the IMF / dollar faction never expected the successful creation of another competing reserve currency, the Euro! Right up to its offering, the political money was on the side of a complete failure, 100% with ten to one odds.

Not only did they lose, the Euro even accepted a percentage of gold as Euro reserves. If that wasn't enough, the ECB also instituted a policy of "marking to the market" its gold reserves and effectively blocking any new sales or leases. These actions, as subtle and misunderstood as they were have had the effect of officially making gold money again. Yes, this new broadly traded paper gold market, standing side by side with the physical market has become a world currency.

The problem this creates for the IMF / dollar is that most, if not all of this new gold market is settled in dollars! Dollars that broke a contract with the world in 1971 and went off the "gold exchange standard" at $41 to the ounce. The same dollar reserve currency that is not supported when the gold price rises. If the ECB does nothing but stand firm by not allowing physical out of its vaults, the dollar will be trapped by gold. The US treasury cannot use gold as a backing reserve as the ECB does, because the BIS would claim it at $41 to settle trade imbalances. They have that authority and as such it leaves the US the only option of outright gold sales. However, with the dollar as "the" reserve currency, we can expect many nations to bid "aggressively" for any US gold. China, among others comes to mind! That is what America found when they tried to auction its gold in 1978. The Euro carries no such baggage.

This all leaves us in the present political situation, where the IMF entity, that was formed to replace the gold standard, is now trying to back the present paper gold with physical to prevent a run on the dollar. It is a futile effort as the ECB / BIS have grown the gold market into massive proportions by encouraging the many year expansion of holders through paper securities. All denominated, ultimately, in dollars. We will see $10,000 gold, count on it! It's the only way this can be resolved. That same figure will create massive backing for the Euro and hasten its journey into world reserve currency status. Expect most of the ECB liability for gold to be easily converted into Euros at the dollars expense.


And finally, Victor, I pondered in my last comment: "I wonder what the LBMA clearing volume looks like today."

Curiously, it has grown substantially YOY in both currency value and weight!! You'd expect the former, but maybe not the latter. YOY (April '10/April '11) from $18.3 bn to $33.1 bn. And by weight, from 500 tonnes to 700 tonnes transferred every day. That's "the amount of metal transferred on average each day." They exclude from that number "allocated and unallocated balance transfers where the sole purpose is for overnight credit." They also exclude "physical movements arranged by clearers in locations other than London."

So here's my question to you, Victor. Does that 700 tonnes of gold being "shuffled around" every day in London represent the volume of BB credit changing hands between clients of the banks? Or does that amount represent the "base money" those banks use to clear their credit transactions each night?

Sincerely,
FOFOA

victorthecleaner said...

DP,

Even with this, people are taking to the streets to express their anger and frustration -- what would it be like, if the currency hadn't been cut in half by this objective measure, and the deflation was already twice as bad at this point?

This is exactly what I am criticizing. Why inflate the PIGS bubble in the first place if you don't like the deflation that follows when the bubble pops? Still looks completely avoidable to me.

In addition, the money printed by the ECB can only temporarily placate the angry Greeks on the street because the fresh ECB money does nothing to make Greece more competitive, more productive, or reduce their trade deficit. So they are just papering over the symptoms without improving the real economy which remains deflationary.

Here is a Deutsche Bank analysis on how the euro repo market works and how even a bankrupt Greek government can put additional debt on the ECB balance sheet through the Greek commercial banks as long as the ECB accept Greek government bonds as repo collateral at face value (as of today, they still do it).

However, I have this idea that, if I was in a fight (to the death, if necessary) with some big bully opponent and I figured out he had a weakness that I didn't share, would I give him enough rope to hang himself

The ECB (that is the French and the Germans) wanting to silence the southern countries? Make them dependent on the ECB for years to come? But why?

Another idea might be the observation that through CDS, US banks have an exposure to PIG debt comparable to both France and Germany, but only in the case of a credit event. US banks have hardly any direct exposure:

http://streetlightblog.blogspot.com/2011/06/betting-on-pigs.html

So as long as the Greek situation is in limbo, the Europeans can threaten with escalation. What makes this idea implausible though is that when the ECB originally let the bubble inflate, they could not have known that US banks would later write insurance on that phony debt.

Victor

victorthecleaner said...

FOFOA,

on the LBMA clearing volume. When I look at the table, I don't see any clear trend since 2009. It fluctuates around 18mm ounces/day. But this is down from 21mm around 2007/8 and down from 30..40mm in 1997/8. I'd say the market has been drying up slowly over the past decades.

Now I still have some questions about the aggregate position of the bullion banks. I have something particular in mind, but first a few naive questions.

1. What do you think is their average reserve ratio (outstanding paper gold credit per physical reserve)?

I have heard figures such as 5:1 to 40:1. I think the "100:1" alleged lapse by Jeff Christian did not refer to that ratio, but was rather saying that in the futures market, most participants book a dollar gain/loss rather than taking delivery of the physical. What is the best information you have?

2. What do you think is the aggregate balance in unallocated gold accounts?

I have seen claims in the range of 8000-10000 tonnes around 2002/3. If that's true, how much have they been able to cover since? What is the best information you have?

3. Who owes bullion to a bullion bank? I.e. who has taken out a loan that has to be paid back in ounces (physical or paper)? Who still has open physical gold forward sales with bullion banks?

The pure gold mining companies have long closed their hedge books. How about copper miners and others for whom gold is a byproduct?

Also, when a mining company gets a loan from a bullion bank, that loan might be denominated in ounces. This is different from the classic hedge books because it refers only to the principal of the loan but not to the entire mine production. I am not sure you would see this easily from their balance sheets. This sort of deal might be underestimated by the goldbugs. What's your guess on that one?

If you give me estimates for 1,2,3, I would want to estimate whether the aggregate position of the bullion banks is possible with banking (lending, borrowing, swaps) alone or whether some entity needs to be net short and have price exposure.

I always thought the estimates that are around in goldbug circles do not square. But first, I'd like to listen here.

Victor

mortymer said...

Those last 2 Mundell finds are really nice, bringing it here once more for one small visual thingy, please follow; if the 2 bits from those 2 papers are combined:

"...The Evolution of the Dollar Standard

From 1666 to 1934, seven great powers existed. With the possible exception of Britain, there was no superpower, Britain was the first of equals. Think of gold as the sun and theses superpowers as the planets..."

[Mrt: Here Mundell writes about the rise of Dollar system but lets apply it to the decline of it as well]

"...What if one of the planets in our solar system, say Jupiter, keeps getting bigger and bigger until it becomes bigger than the sun? What would Newtonian dynamics tell us about what would happen in that case? Eventually, if it gets really big, Jupiter is going to take the position of the sun and the other planets are going to move around Jupiter rather than the sun. Eventually, the sun itself would orbit around Jupiter..."

http://robertmundell.net/ebooks/free-downloads/#56

[Mrt: And here we get for it visual interpretation for the decline of dollar and a rise of the new center; pg.19 and pg.20:]

http://adb.org/AnnualMeeting/2011/Seminars/rmundell-presentation.pdf

"...Conclusion
...Let me just conclude with a final thought: Bismarck once said that the most important event in the 19th century was that England and America spoke the same language. In the same spirit, the most important event in the 20th century was the creation of the Federal Reserve System, the vehicle for the spread of the dollar. Without that, you would not have had the subsequent monetary events that took place. Let us hope that the most important event of the 21st century will be that the dollar and the Euro learn to live together." "

[Mrt: Carefully look at the picture from pg.19; those countries which buy gold are gravitating to the new center as we speak (e.g. India, Mexico, Russia...), Australia, Canada, S.Af, have mines, Gulf countries he has already under Euro account. Will Korea be the next?]

mortymer said...

@VTC, relevant/significant to your discussion, already posted but anyway:

Speech by Graham Young at the London Bullion Market Association...

www.bankofengland.co.uk/publications/speeches/2003/speech198.pdf

Speech given by
GRAHAM YOUNG
SENIOR MANAGER, FOREIGN EXCHANGE DIVISION
At the London Bullion Market Association Annual Conference, Lisbon; Tuesday 3 June 2003

THE ROLE OF THE BANK OF ENGLAND IN THE GOLD MARKET

"1 This morning I would like to talk about the role of the Bank of England in the gold market. One element of that is our management, on behalf of the Government, of the UK’s official gold reserves, and I’ll be saying a little about that. But I will be saying more about other aspects of our involvement in the gold market that may be less familiar to some people in the audience here. In particular I will describe the Bank’s provision of custodial and account management services to central banks and to commercial firms active in the London market, reflecting our role in seeking to ensure the efficiency and effectiveness of the UK financial sector. And I will explain the Bank’s contribution to the self-regulation of the wholesale gold market. In all these areas we cooperate closely with the LBMA, and I shall explain how that relationship functions..."

FOFOA said...

Hello Victor,

I think it would behoove you to explain the difference in perspective between weight and value when making analytical statements about gold. For example, you write: "the market has been drying up slowly over the past decades."

This is a very shallow analysis in my view because it is a weight-based judgment on a monetary commodity. Weight matters in industrial commodities where commercial users need a certain weight in order to make their goods. From a monetary perspective, don't you think it's more useful to look at the amount of currency that is trying to be judged by gold, than the amount of gold trying to be judged by currency? We are up to $33.1 billion from a low of $4.3 billion a decade ago. If we're talking about BB gold credit being used as a hard currency in FX-type transactions, that matters a lot more than weight.

So while you say this market "has been drying up," I say it has exploded. We are each looking at it from a different angle. Which one is correct?

Obviously a price explosion stretches the same weight to cover much more value, which is why it is kind of surprising that the clearing volume is up in both weight and value recently.

As to your first question, I'm pretty sure you are aware that Christian amended that comment later saying it's about 10:1 in this particular arena. I view this BB credit system as fractional reserve gold banking in its most original (primitive) sense, revitalized and computerized for modern times. And I think that sans official CB backing, self-regulation would probably mandate about 10:1, so I can live with that number regarding unallocated BB credits.

Your second question is one of opinion, since we don't have facts. Of course I do have an opinion, but I think that this is a difficult number to deduce. And it probably fluctuates in magnitude. One thing to factor in is that the more banks you have involved, the greater the interbank clearing volume relative to the overall credit volume. For example, if you only had one bank, every transaction would be cleared internally and the information would be near perfect so a bank run would be very unlikely and reported clearing would be nil.

Another factor is stock versus flow. You might have a really ignorant billionaire heir sitting on bank credits that never trade, and therefore never show up in the flow volumes. So the clearing volume relates (in some way) to the flow of bank credit, not the stock.

In this case we have six official LBMA "clearers". They are basically the BBs that are also custodians. There are BBs that are not custodians, and custodians that are not BBs, but those that are both are "clearers". The conspiracy-minded individual would expect them to act as one big bankster unit, basically as one bank in which most clearing would be handled internally preventing a run and revealing a very small publicized clearing volume relative to the overall credit flow or stock.

So, because the clearing volume is almost 70 times larger than the flow of new gold from mines, we are either looking forward to a super-duper Freegold revaluation, or else the conspiracy guys are somewhat wrong and the banks are basically in competition against each other.

On your third question, I'd be more interested to know, who do the BBs still owe physical to as a middleman, after the mining source has closed out its account with cash? As you study the trail, you'll find that this was a channel for oil to acquire physical gold indirectly and inconspicuously.

Sincerely,
FOFOA

DP said...

Hi Victor,

Me: [...] However, I have this idea that, if I was in a fight (to the death, if necessary) with some big bully opponent and I figured out he had a weakness that I didn't share, would I give him enough rope to hang himself [...]

You: The ECB (that is the French and the Germans) wanting to silence the southern countries? Make them dependent on the ECB for years to come? But why?

As FOFOA clearly understood, I was really talking about the ECB and the Fed, not intra-eurozone play fights. Apologies to all if that wasn't sufficiently clear to everybody, but I really did think it was: especially with my choice of guest and content on the link. Evidently I get another 4/10 must try harder on this. It's been a long, long time since I was at school, but still I'm getting bad grades! :)

Texan said...

I have to say I find this entire discussion about the far-sighted chess master European technocrats (one of whem is in house detention in NYC) to be exceedingly amusing, considering the current circumstances.

It seems the Germans and Norse have drawn into the "savers" camp, with the French (and ECB!) leading the charge for the Med country "debtors". The euro project looks pretty hopeless to me, at least as it is currently constituted. Either Trichet gets his wish and they all effectively abandon sovereignty, or they split into some kind of two tier euro, or they firewall at Spain and eject PIG. All of these seem highly painful, but something is going to change.

I would not want want to be holding euros going into this, because literally any outcome is starting to look equally possible.

I have no idea what any of it means for "freegold".

Beanie said...

You're Still A Bunghole For Loading Up On Gold And Silver

mortymer said...

@Beanie, I heard that in Australia they walk on their heads. Nice one, thanks. :O)

http://anotherfreegoldblog.blogspot.com/2011/06/rmundell-about-dollar-imfs-versus-gold.html

mortymer said...

@Texan:
...try to zoom out a level. On each scale there are problems. Not all can export to prosperity, Its a sum game.
I wander how Greek Drachmas would help. Would loans be automatically renegotiated from Euros into them? Not a chance. Eu split because of creditors demand?
Isnt this internal issue spoken on external level? Imo internal solution will be found.

Robert LeRoy Parker said...

Here's a pretty gigantic flaw with bitcoin.

Bitcoins stolen by hacker

radix46 said...

RLP,

I think that Bitcoins can be held on a zip drive or memory card, so that would solve that problem. I think if there were a hacking risk people would simply adhere to this protocol.

Of course then there is physical theft risk, but that is the same for cash or gold too.

Indenture said...

radix: Bitcoins can be held on any drive and you can have copies, but each time a Bitcoin is used (either from the copy or the original) that Bitcoin now has a new owner.
With the theft, the only way the guy could have 'saved' his Bitcoins is if he used (or transferred) them, from his copy, before the thief could use them from the stolen laptop.

Question for the group: Did the Fed pump 600 Billion into European Banks to stop the default of the banks to stop the explosion of Credit Default Swaps held by Goldman Sachs to save Goldman?

Texan said...

Mortymer,

For all our sakes, I hope you are right.

But right now things don't look very good in euroland.

Edwardo said...

DP,

FWIW, I understood that you were talking about The Fed versus the ECB.

radix46 said...

UK talking about effectively reinstating Glass Steagall.

That will make it politically very difficult to save all the debt in those evil investment banks if they won't affect depositors.....

Hmmmmm.

radix46 said...

"The UK Chancellor of the Exchequer's guiding philosophy is refreshingly pro-market: 'All banks should be allowed to fail safely without affecting vital banking serviceswithout imposing costs on the taxpayer.'" George Osborne

radix46 said...

The above quote is from Jesse

DP said...

@radix,

Capitalism (the unknown ideal) at last and finally, eh?

Did anyone else just hear a whisper-on-the-wind say "2013"? Perhaps it's just me hearing things.

radix46 said...

How does this rhetoric (it's not an action yet) fit in with being paid up cheerleading member/enforcer of the $IMFS?

Perhaps it fits exactly? Is Osborne willing sacrifice the banks in order to fight the transition to RPG?

UK doesn't have as much ammo (gold) to fight hyperinflation and I have no idea about the amount of physical in possession of UK residents, although I can't imagine it's much. Perhpas he's looking for a mother of all deflations, betting that the good old Brits will grin and bear it. Stiff upper lip and all that, old chap whatto chocks away!

Edwardo said...

Regarding what credence one should give George Osbourne. Very little as talk's cheap.

DP said...

Osborne is saying just what Osborne believes voters wish to hear from his mouth.

I think the world needs some Statemen, before this widespread rash of career politicians run out of time.

DP said...

Balls has at least got teeth. But what he really, desperately lacks, is a f*&k!ng clue. Current holder of the much-coveted "DP's most dangerous man in British politics" badge. I need to get it unpicked from Mandelson's boy scout uniform before he can't have it though.

radix46 said...

DP,

"DP's most dangerous man in British politics"

Yours and mine both.
I was really hoping he would lose his seat at the last election.

:(

olde reb said...

FOFOA is a very profound economic blog. Would the host wish to pass comment on the article RIP OFF BY THE FED which includes a mathematical analysis and concludes the Fed is running a Ponzi scheme that is inherently destined for bankruptcy; that the FRBNY received $8.4 trillion from the auctions of Treasury securities last year and hid that profit from Congress; among other conclusions. Recent versions of the article are posted at http://www.usa-the-republic.com/banks/Federal_Reserve_Ripoff.pdf and
http://www.scribd.com/doc/49040689 Earlier versions are scattered on the net.

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