Cheuvreux, the brokerage arm of
the French Credit Agricole, has issued a report on the gold
market. The Cheuvreux report cites Mises in three places (pages 4, 41,
and 43). The report endorses the research of GATA, an organization
that has been alleging central bank manipulation of the gold market. The
major conclusion of the report is that the western central banks have sold a
larger fraction of their gold reserves than they acknowledge in their offical
statements. The gold has entered the market through derivatives such as
leases, swaps, the writing of call options against the gold. The sale of the
gold is obscured in the central banks books through the representation of
leased, swapped, and otherwise encumbered, aggregated together with actual
physical gold held in vaults as a single asset on their books. An estimated
10,000-15,000 tons of gold has entered the market since 1996 (compared to an
official number of 2,000-3,000) through these mechanisms, according to the
report.
The purpose of these covert gold
sales is part of a larger effort to disable the functioning of inflation
indicators, which operate to limit central bank credit expansion. Appendix 2
of the Cheuvreux report, The Covert War on Inflation Indicators
mentions the rigging of the CPI, the end of M3
reporting, and the
discontinuation of issuance of the 30-year treasury bond as other prongs
in this effort.
The realization by financial
market participants that their money is losing purchasing power is one check
on the extent of credit expansion. To the extent that financial market
participants look to these indicators (the CPI, the gold price) as
measurements of excessively loose monetary policy, if the government can
distort the ones it controls and manipulate the others, the perception of
inflation can be controlled and credit expansion can be continued to a
greater extent than would otherwise be possible.
But, as the Cheuvreux report notes on page 43:
While the US was in a mild recession during 2001, US
consumers continued to take on more debt, but the rate has been slowing. The
year-on-year growth is now at its slowest for more than a decade and could
indicate that US consumers are almost "tapped out". The words of
Ludwig von Mises come to mind:
"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 a result of a voluntary abandonment of
further credit expansion, or later as a final and total catastrophe of the
currency system involved".
The report contains an excellent discussion of the new Fed Chair, Benjamin
Bernanke. Their discussion covers someof the same ground that I covered in an
article on LRC. In a series of speeches and research papers by Bernanke
and other Fed staff economists, "unconventional measures" for
fighting deflation, starting with the purchase of bonds and other securities,
to a direct tax on bank accounts, to a tax on cash, to the monetization of
goods and services, are proposed.
How serious are they about these
plans? Cheuvreux quotes from a
speech by Bernanke in 2003, regarding "unconventional measures"
Should the funds rate approach zero, the question will
arise again about so-called nontraditional monetary policy measures. I first
discussed some of these measures in a speech last November. Thanks in part to
a great deal of fine work by the staff, my understanding of these measures
and my confidence in their success have been greatly enhanced since I gave
that speech.
Chevreux concludes:
Our suspicion is that Bernanke will try to keep the US
credit expansion going as
long as possible (probably with the inevitable consequences). A further leg
in the current credit expansion and inflationary boom in assets (with
hyperinflationary risk) seems most likely outcome at this stage. At the same
time, the heavily debt-laden US economy is also at risk of a deflationary
slowdown. There is only one asset class that will perform under both of these
extreme scenarios: gold (and precious metals).
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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