The mainstream narrative about the current facts of economic life is just plain nuts. They were at it again this morning in a Wall Street Journal piece on Europe’s impending triple-dip. It seems that the grim reaper plaguing the continent is insufficiently exuberant consumer prices: Fears about perilously low inflation and weak growth continued to grip markets on Wednesday, with European stocks taking a fresh tumble and safe-retreat German government bonds notching up another record high. Now just what is so ‘perilous’ about a temporary period of consumer price stability and paychecks which maintain their purchasing power? The answer is exactly nothing, but today’s journalists are so lazy and subservient that they simply copy and paste the nostrums dispensed by the financial market gambling houses and the policy apparatchiks who pleasure them. In fact, anyone half-awake over the last 45 years would not be wringing their hands about too little inflation. Nearly stable prices are the vast exception. The temporary respite from the chronic depreciation of our money that is now being experienced is actually a godsend; it’s a reminder that before the modern age of central banking the alleged ‘peril’ of stable prices was considered the norm, and a salutary one at that. By contrast, the graph below shows what has happened to the purchasing power of typical European’s wages or savings since 1970. Nowhere on that chart are there more than brief – hardly detectable intervals – – when prices either plateaued or fell fractionally. Altogether, consumer prices rose by 11X over the last 45 years. Stated differently, most Europeans outside of Germany have experienced a 90% decline in the purchasing power of their money during the post-Bretton Woods era of so-called enlightened monetary management.
This may be excessively optimistic on my part, but there seems to be a slow change in the way the world thinks about reserve currencies. For a long time it was widely accepted that reserve currency status granted the provider of the currency substantial economic benefits. For much of my career I pretty much accepted the consensus, but as I started to think more seriously about the components of the balance of payments, I realized that when Keynes at Bretton Woods argued for a hybrid currency (which he called ‘bancor’) to serve as the global reserve currency, and not the US dollar, he wasn’t only expressing his dismay about the transfer of international status from Britain to the US. Keynes recognized that once the reserve currency was no longer constrained by gold convertibility, the world needed an alternative way to prevent destabilizing imbalances from developing. This should have become obvious to me much earlier except that, like most people, I never really worked through the fairly basic arithmetic that shows why these imbalances must develop. … Kenneth Austin, a Treasury Department economist ecently published what I think is a very important paper in the latest issue of The Journal of Post Keynesian Economics (‘Systemic equilibrium in a Bretton Woods II-type international monetary system’) which explains why currency war is really a battle over where to assign excess savings, and must lead to unemployment in the country whose assets are most assiduously collected by central banks. You need to subscribe to read the full article, but the abstract tells you what Austin set out to prove:
This post was published at Zero Hedge on 10/06/2014.
We had a nice bounce after an overnight smackdown with gold taggin the 1180 support area. There was intraday commentary about the interesting divergence between gold and silver here. I am focused keenly on what I consider to be one of the greatest macro-economic events my generation will probably see since the creation of Bretton Woods, and when Nixon took the world off the dollar/gold standard. That set the world out upon some very uncharted seas that were easily overlooked in the sturm und drang of the Cold War. But that all changed in the 1990’s. Few have yet perceived it, and what it implies for us. And so here we are. Peak Empire. China comes back from holiday on the 8th. Gold and silver need to break the downtrend of lower highs and lower lows. That is the technical market analysis in a nutshell.
Despite a low-volume melt-up in stocks off yesterday’s European close lows, US equities closed lower on the week with small caps once again the laggards. Even as stocks closed red, the costs of protection in credit and equity markets tumbled as the last 2 days volumeless liftathon in stocks took place against the background of very modest Treasury selling – this has the stench of high-yield bond exposure being significantly reduced (and synthetic hedges being lifted) – something we saw Wednesday into the close. The USDollar rose the most in 15 months today (up for the 12th week in a row – longest streak since Bretton Woods) led by Cable and EUR weakness. Jobs data losses in bonds today were largely reversed with TSY yields ending the week down 7-9bps. Commodities were ugly with silver and oil (under $90) joined at the hip and gold closing below $1200 for first time this year. The Russell 2000 closed lower for the 5th week in a row, the worst streak since Aug 2011.
This post was published at Zero Hedge on 10/03/2014.
Well-meaning conservative and libertarian groups beat the drum for something called "free markets." Liberal groups blame these "free markets" for many of the world's evils. Here's the harsh reality neither side will tell you. There ain't no such thing as a "free market." The free market ceased to exist more than 40 years ago. Nixon drove a stake through its heart by shutting down the Bretton Woods world monetary system, without which free markets cannot exist. It cannot exist in its true form because the very money that is the foundation of our economy now is just pieces of paper: "legal tender for all debts public and private." Money's value is controlled not by the markets but by a federal agency, the Federal Reserve.
With the USD experiencing its longest stretch of weekly gains since Bretton Woods, it appears, as SocGen notes, that recent currency movements have triggered nostalgia of the pre-crisis world when dollar strength was synonymous with a prosperous global economy. However, given the extreme positioning and potential for policy-maker complacency, SocGen warns the paradox is thus that a strong dollar tantrum could be a more worrying scenario than a Fed tightening tantrum.
This post was published at Zero Hedge on 09/29/2014.
In today’s TedBits we will be outlining a lot of smoke signals. They signal fires burning and about to break out. As everyone is aware, the Federal Reserve has been tightening monetary policy for almost a year now and has been joined by the Chinese central bank. The Federal Reserve has been reducing its balance sheet expansion from $85 billion a month (85,000 million) to zero in mid-November. While the fed does not characterize it as a tightening, it is one. Numerous studies have put the amount of interest rate reduction to -3 % when QE3 was at full bore. Now that the reduction is approaching zero negative interest rates are ending, they have raised rates by about 3% in real terms. We are Austrians at TedBits and believe in all of the core truths from Ludwig Von Mises: ‘There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.’ – Ludwig von Mises This is the state of the world today. The financial system and governments would collapse if credit could not expand and steal from the future. It is their lifeblood. They have created a world where they always can borrow, but have made no provision for the repayment. It is a Ponzi scheme. The math can no longer work anywhere you look. Since the math can’t be made to work it is obvious that covert techniques of money printing are fully engaged and no one within the system dares yell, ‘Fire!’ and call them out on their betrayals. Since Bretton Woods II in August 1971 when our leaders betrayed us by substituting IOUs for money, our world has become one big credit expansion, everywhere and always, REAL growth has INCREASINGLY ceased. If there wasn’t lending for consumption called growth, the world’s economies would rightly be called in a depression. It truly is INFLATE or DIE. Without it, our Ponzi economies and welfare states would collapse in the insolvency they inhabit. It is why our economies have become financialized to extract every penny in one way or another that they can from the public and transfer it to the government and the financial systems which control them (central banks and the their shareholders). We are debt slaves and serfs to global socialist elites, which are morally and fiscally bankrupt.
This post was published at GoldSeek on 26 September 2014.
By the beginning of the 1960s, the U. S.$ 35 = 1 oz. Gold price was becoming more and more difficult to sustain. Gold demand was rising and U. S. Gold reserves were falling, both as a result of the ever increasing trade deficits which the U. S. continued to run with the rest of the world. Shortly after President Kennedy was Inaugurated in January 1961, and to combat this situation, newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the U. S. and Europe should pool their Gold resources to prevent the private market price for Gold from exceeding the mandated rate of U. S.$ 35 per ounce. Acting on this suggestion, the Central Banks of the U. S., Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the “London Gold Pool” in early 1961. One wonders why they were so cooperative with the U. S. Granted the gold that left these nations ahead of the war was still in the U. S. and slowly but surely they felt it necessary to get it back. What happened in occupied Europe was that U. S. dollars became more abundant there and a market in ‘Eurodollars’ sprang up derived in part from U. S. soldiers still in Europe. But the volumes grew more and more as the U. S. established a perpetual Trade deficit feeding the rest of the world with them. The ‘Pool’ came apart as Europe, under Charles de Gaulle, decided enough was enough and began to send the Dollars earned by Europe back to the U. S. back and exchanged these for their gold. Then they were unwilling to continue accepting U. S. Treasury Bills & Bonds in return. Under the terms of the ‘Bretton Woods Agreement’ signed in 1944, Europe was legally entitled to do this. It would appear that by the time the gold sent to the U. S. before the war had returned to Europe, the U. S. pulled the plug on exchanging gold for dollars letting the London Gold Pool fold in April 1968. But the demand for gold from Europe did not abate.
This post was published at GoldSeek on 19 September 2014.
Here are a few interesting videos by YouTube’s belangp. The first one shows how the US economy is not getting better as the government’s massaged statistics try to portray. Instead, it’s so bad that only the Fed is left to buy up US debt as other nations are backing away. Are the elite preparing for a global reset?
And this third video explains further how gold flows between oil producers, bullion banks and miners. It also gives a great discussion regarding GOFO (Gold-Forward) rates and what they mean to the gold investor.
Mike Maloney reviews chart data from the St. Louis Fed and shows the great currency expansion that has ensued since Richard Nixon took the dollar off the international gold standard in 1971. The data also shows how the velocity of money has not increased, which is why we are not getting much inflation yet (as Jim Rickards has pointed out numerous times on this site already). Instead, this money expansion has only benefited the banks and the elite, who are buying up real assets with all this printed money, leaving the rest of us with pure debt.
Side note: It might be an interesting exercise to compare what happened during the fall of the USSR when government cronies were able to buy up all the nation’s assets on the cheap, while everyone else suffered. The fall of the US is similar – the assets might not be so cheap, but the money they’re using to buy them with is easy to get if you’re a banker or an elite crony.
The following video from OneTruth4Life explains how America’s founding fathers created a sound money system, framed within Article I, section 8 of the Constitution. It goes on to describe, in full detail, what’s happened since then – anti-Constitutional acts by certain government leaders and bankers, which debased the currency at various moments in history. These acts seem to become more blatant as history proceeds, and have led to, or have been the primary motive for most, if not all, the military conflicts. Furthermore, it will be the primary factor that will have brought the nation to its own doom at some point in the near future.
Here again is Mika Maloney from GoldSilver.com with a great (and quick) review of what’s happened to the global monetary system in the last 140 years. Mike explains how the world’s monetary system went from the classical gold standard in the late 1800’s to the floating fiat paper being used today. Also quite interesting is the observation that the world’s monetary system seems to change approximately every 40 years. America’s “good as gold” dollar became the world’s reserve currency after World War II and has enjoyed its status as the world’s reserve currency. After Nixon removed the dollar’s tie to gold in 1971, it freed the Federal Reserve & US Treasury to allow money to be created without limitation. But now, too many dollars have been printed so we may be about to see another change in the global monetary system.
The ‘bad idea’ to attempt to resolve the national debt problem by minting a trillion-dollar platinum coin. Supporters say the US Treasury would be able to deposit said coin with the Federal Reserve to act as an asset, backing part of the outstanding debt.
As Jim notes, this is not an honest approach to discussing the root problem – which is based in the monetary system, itself.
Besides that, the idea is preposterous and just shows how crazy this system has become. Things don’t hold value because someone says they have value. A thing has value based on the public/market demand for that thing.
Prior to 1971, government spending was constrained by both interest rates and the fact that there was some semblance of a gold-backed currency via Bretton Woods. But today, we have neither constraint – the Fed’s zero percent interest rate policy combined with the current, purely fiat monetary system has created the unstoppable spending spree that has led us to these extreme levels of debt. If there is anything left at all as a bar against further spending, it is the debt ceiling. But even that is now being threatened with a proposal to remove it entirely.
The just announced appointment of Jacob Lew as Treasury Secretary. Jim is holding judgement in order to see if there will be any honest discussion regarding the real problems of the monetary system.
There’s been much discussion on the Fed’s newest monetary easing policy. The markets received their much anticipated stimulus and are reacting positively (for now). But as previous posts have indicated, the Fed’s stated objectives and motives are questionable at best. For a few steps further down the rabbit hole, here’s a must-see video from CrisisHQ.
“If you want to understand what’s happening in the Mideast, particularly in Libya, Syria and Iran, you must first understand the main driving force behind U.S. foreign policy. Contrary to mainstream media propaganda, it is not our desire to spread democracy or to prevent tyrannical despots from murdering their own citizens. The real agenda is to protect the Petrodollar system, because it is the only thing that is currently preventing the total collapse of our fiat currency.”
On this day, 41 years ago, Nixon shocked the world by removing gold convertibility for foreign holders of US dollars – it would be the end of the agreement made at Bretton Woods, where it was decided that the US dollar would be pegged to gold and all other currencies would be pegged to the US dollar. The message was so important that Nixon’s administration decided to preempt the most popular TV series, Bonanza, on Sunday evening prior to the markets opening on Monday.
What’s most aggravating is Nixon’s claim that he must save the dollar from the evil speculators trying to destroy the dollar – something we hear so much, even from modern day politicians. Never do these con men ever mention that there wouldn’t be anything to speculate on if those in charge of the monetary system were honest and abstained from their blatant money-printing, inflationary policies.
Up until a few years ago, Central Banks of the world were selling their gold because they didn’t think they needed the ‘barbaric relic.’ But with all the money printing activities plunging the value of all fiat currencies around the world to their intrinsic value (=0), they’re now buying gold in substantial amounts. Here’s Simon Constable of the Wall Street Journal further explaining why they’re expected to be the buyers of at least 10% of the available gold in the coming years.
There’s a popular theory among the world population that the U.S. launched wars in the middle east in order to control its oil reserves. On the surface, this seems entirely logical, but the truth of the matter may be much more sinister, and one should look a little deeper into the situation. It’s not the oil reserves the U.S. is after, although oil does play its part in this charade. The main concern of the U.S. in these wars is more likely the maintenance of its hegemony with U.S dollar as the world’s reserve currency.
The U.S. dollar became the de facto world reserve currency after World War II, when delegates from around the world met and together agreed to what became known as the Bretton Woods System. Under this system, the U.S. dollar would be linked to gold at $35/ounce. All other nations would tie their currencies not directly to gold, but indirectly through the U.S. dollar. This meant that those nations would hold dollars in their foreign reserves to support their local currencies. In order to obtain dollars, those countries had to either borrow them from the U.S. Federal Reserve or earn them with a trade surplus. The U.S. got a sweet deal here – perhaps justified due to the fact that after the war the U.S. was indeed the strongest, most productive nation on the planet, along with a huge stash of physical gold.
This system worked well for the world and especially for the U.S. during the prosperous years of the 1950’s and 60’s. But with the U.S. printing its own dollars to cover its increasing debts, including the vast expeditures on the Vietnam War, the world became concerned. Suspicious that the U.S. gold reserves would not cover the existing issue of paper dollars, countries began to trade in their reserve dollars for gold at the U.S. treasury using the pegged value of $35/ounce. The U.S. gold stash was steadily declining.
In order to prevent the total depletion of U.S. gold supplies, in 1971 the Nixon administration closed the gold window – nations were no longer allowed to exchange their reserve dollars for gold. It was the end of the Bretton Woods System, but not quite the end of the U.S. dollar hegemony in world reserve currency status.
One must then ask the obvious question: Why would a nation now hold a seemingly valueless paper dollar as a reserve currency, especially since its tie to gold has been cut?
The answer: The Petro Dollar.
After Nixon closed the gold exchange window, the dollar was a free floating fiat currency, competing with other currencies around the globe. Inflation started to escalate since there was no tie to gold anymore. In fact, in 1975 the average price of gold was $160 – more than 350% increase in just 4 years since abandoning the gold window. Additionally, OPEC nations had been using the dominant dollar as a preferred payment method for their oil exports, but now they were starting to lose money as the dollar lost its value. In 1973, OPEC launched an oil embargo, raised prices and started internal discussions on the logistics for trading oil for other currencies including gold. Steps had to be taken by the U.S. if it was to re-secure the dollar as the strong world reserve currency.
The first step was taken in 1974 when Secretary of State Henry Kissinger launched the U.S.-Saudi Arabian Joint Commission on Economic Cooperation. Kissinger used the term “petrodollar recycling” to refer to the overall plan, which was to allow Saudi Arabia to purchase U.S. assets and services with the dollars it was receiving for its oil sales. A beneficial result for the U.S. was that the Saudi Arabian central bank (SAMA) could now use its dollar proceeds to buy U.S. debt (Treasury bills, bonds, etc.).
But the most beneficial outcome for the U.S. was that Saudi Arabia, the most dominant member of OPEC, would agree to continue to accept only U.S. dollars in exchange for its oil sales and would convince the other members of the cartel to do the same. By 1975, all OPEC member nations restricted their oil trade to dollar transactions. To this day, as long as these key oil states play along, their leaders are showered in luxury and are quite secure in that they’re guaranteed the defense by the U.S. military and its industrial complex.
Meanwhile, countries around the globe must accumulate dollars in their own foreign reserves in order to import the most vital energy component – oil. Nations have to aquire those dollars the hard way – by borrowing from the U.S. Federal Reserve or earning them by trading resources, goods and services to other nations for dollars. But the U.S. enjoys the outrageous advantage of being able to print as much of the world’s reserve currency as it wants. Not only has it been able to use these dollars to purchase its own oil on the cheap, it has been able to continually out-do itself in annual deficit spending, now in the trillions of dollars, because it has had captive buyers for its debt.
One would think someone would cry “Foul!” Well, someone did. The first nation to step away from this rigged system was Iraq. In November of the year 2000, Saddam Hussein declared that Iraq would no longer accept the dollar for trade in the Oil for Food program. Instead, the oil would be priced in and exchanged for Euros. Many said this would be a bad investment for Iraq at the time, but the move was actually beneficial because the dollar declined 17% against the Euro until the U.S. attacked and accomplished its mission in May of 2003. Of course, now that the country was “stabilized” the Iraqi oil trade was repriced in the dollar market again and things went back to “normal” for a while.
The system would be challenged a second time, this time by Libya. In February of 2009, Muammar Gaddafi was elected the chairman of the African Union and would continue the effort to create the United States of Africa, which among other things, would include a unified currency, a dinar based on gold. Gaddafi went so far as to suggest that the African nations’ oil trade would be switched from the dollar to this new gold currency. Here’s a segment from Russia Today:
Furthermore, it’s quite interesting to note that prior to the Libyan Revolution in February of 2011, Libya didn’t have a central bank linked with its western counterparts. It’s strange that before the “rebels” even had concluded battle, before they had even established a new government, they created a central bank.
And now the petro dollar has a third challenger – Iran.
However, attention should be given to recent events. Early in 2008, Iran launched a new commodity exchange known as the Iranian Oil Bourse. The intent was to allow for Iranian oil to be priced and traded with multiple currencies. As the system was ramped up, initially the exchange limited its trade to secondary petroleum products, with crude oil to be added “when the system was ready.” Iran recently announced it would be ready on March 20, 2012. This was a declaration of war on the petro dollar!
Japan, China, India and Turkey are among the countries who’ve been dependent on Iranian oil to some degree. Various discussions have been taking place between Iran and its trading partners on the possibility to enlist trade for other commodities such as gold or grain. Unless someone caves in here, another war – perhaps a big one – seems to be on the horizon.
If you want to understand what’s happening in the Mideast, particularly in Libya, Syria and Iran, you must first understand the main driving force behind U.S. foreign policy. Contrary to mainstream media propaganda, it is not our desire to spread democracy or to prevent tyrannical despots from murdering their own citizens. The real agenda is to protect the Petrodollar system, because it is the only thing that is currently preventing the total collapse of our fiat currency.
Source material from books (available at Amazon) on the petro dollar:
At the present time, all countries on the earth are using some form of fiat currency as their nation’s money. This has not always been the case, as gold and silver had historically been used to back currencies of ancient Rome and Greece. But after World War II, the agreement reached at Bretton Woods would make the US dollar the world’s reserve currency – the dollar would be based on gold, but all other nations would base their own currencies on the dollar. But in 1971, America decided to break the dollar’s tie to gold, leaving all world currencies completely naked with only the governments’ writ of fiat declaring its value.
Now, however, people all over the world are starting to question whether or not this is such a good system. Governments are spending too much and are increasing their deficits at an ever increasing rate. Debt is out of control and to repay it, governments are simply printing more money. But money creation such as this is inflationary in the extreme. Therefore, having some kind of gold standard in place would limit a government’s ability to print money and spend so easily.
The following are some discussions on this topic.
April 30, 2012
In this USNews article by James Rickards, author of Currency Wars, the views taken by Ben Bernanke regarding gold’s use as a backing for currency are challenged. Rickards explains how the Fed chairman regularly uses two primary arguments against a gold standard:
There isn’t enough gold available to back the currency
The gold standard is at least partly to blame for the Great Depression of the 1920’s
Both of these arguments, however, are false and the result of an incomplete understanding of the facts. It’s a matter of price in both cases. In the first instance, there indeed would not be enough gold at current prices, given the mass money printing that has happened all over the world. But at a price of $10,000/ounce, this would be closer to a realistic backing for the paper supply. Furthermore, while it is true that the Great Depression occurred during a time when the US was on a gold standard, the deflationary environment was the result of setting the price of gold too low. Back then, if the price had been set at an amount closer to $50/ounce instead of $20, the US might have limited, or even avoided the depression altogether.
Here’s Jim Rickards giving some historical examples of countries going back to a gold standard – both successfully and unsuccessfully, depending on their choice of setting the gold price to match their paper money in circulation.
The concept of the gold standard was also discussed on Bloomberg’s Reganomix segment and some interesting points were raised in honest debate between Rob McEwen, founder and former CEO of GoldCorp, and Michael Crofton, CEO of Philadelphia Trust.
April 11, 2012
Here’s an interesting MSNBC interview with Matt Bishop, author of a new ebook entitled In Gold We Trust?, where the gold standard – having a sound currency based on gold – is discussed:
A gold standard – making the dollar convertible into gold again – would serve as a measure of control. No one would have the ability to artificially inflate the currency system simply by printing because there would have to be a certain amount of gold backing up each representation of paper or electronic dollars in circulation. It would reduce politics and enforce responsible spending – a much needed thing for America today.