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Thesis
"Inflation is a man-made scourge, made possible by the fact that most
men do not understand it. It is a crime committed on so large a scale that
its size is its protection: the integrating capacity of the victims’
minds breaks down before the magnitude—and the seeming
complexity—of the crime, which permits it to be committed openly, in
public. For centuries, inflation has been wrecking one country after another,
yet men learn nothing, offer no resistance, and perish—not like animals
driven to slaughter, but worse: like animals stampeding in search of a
butcher.
"If I told you that the precondition of inflation is
psycho-epistemological—that inflation is hidden under the perceptual
illusions created by broken conceptual links—you would not understand
me. That is what I propose to explain and to prove."
-Ayn Rand
In Ayn Rand's Egalitarianism and Inflation she
demonstrates the consequences of the introduction of paper money into a
thriving agrarian gold-based economy. And she shows how the resulting
inflation actually destroys the real-world capital that had previously been
accumulated by shifting society's focus from production to consumption.
"Now project what would happen to your community of a hundred
hard-working, prosperous, forward-moving people, if one man were allowed to
trade on your market, not by means of gold, but by means of paper—i.e.,
if he paid you, not with a material commodity, not with goods he had actually
produced, but merely with a promissory note on his future production. This
man takes your goods, but does not use them to support his own production; he
does not produce at all—he merely consumes the goods. Then, he pays you
higher prices for more goods—again in promissory notes—assuring
you that he is your best customer, who expands your market.
"Then, one day, a struggling young farmer, who suffered from a bad
flood, wants to buy some grain from you, but your price has risen and you
haven’t much grain to spare, so he goes bankrupt. Then, the dairy
farmer, to whom he owed money, raises the price of milk to make up for the
loss—and the truck farmer, who needs the milk, gives up buying the eggs
he had always bought—and the poultry farmer kills some of his chickens,
which he can’t afford to feed—and the dairy farmer can’t afford
the higher price of alfalfa, so he cancels his order to the
blacksmith—and you want to buy the new plow you have been saving for,
but the blacksmith has gone bankrupt. Then all of you present the promissory
notes to your “best customer,” and you discover that they were
promissory notes not on his future production, but on yours—only you
have nothing left to produce with. Your land is there, your structures are
there, but there is no food to sustain you through the coming winter, and no
stock seed to plant.
"Would it make any difference if that community consisted of a thousand
farmers? A hundred thousand? A million? The entire globe? No matter how
widely you spread the blight, no matter what a variety of products and what
an incalculable complexity of deals become involved, this, dear readers, is
the cause, the pattern, and the outcome of inflation."
Indeed, this is a big problem. Wouldn't you agree? Perhaps she is right, we
must return to gold money if we hope to save the Western world from its ultimate
destruction. Maybe this is the only way. But what if returning to an economy
based only on gold and silver coins in your pocket is a complete pipe dream?
What if this will never happen? Is there no hope for our future?
Antithesis
Let's just try a little Thought experiment. Imagine Rand's community as
described above. And imagine that one entrepreneurial spirit in that
community started a gold coin dealership sometime after "best
customer" showed up with his paper promissory notes. Now, since we are dealing
on a much smaller size scale, we will speed up our time dimension as well. So
in our imagined community let us say that confidence in "best
customer's" notes disappears the second time he shows up with freshly
printed paper. People still accept them in trade for goods, but they don't
trust them enough to hang onto them for any length of time. They would rather
exchange them for gold, the old currency used before.
So now all of a sudden our gold coin dealer's business takes off. Those
market participants who are barely producing enough goods to sustain their
daily existence will be spending the notes they receive on other goods right
away. But eventually those notes will find their way to a super-producer,
someone who is able to save some of his efforts for the future. And he will
walk those notes over to our gold dealer.
Over the course of a few days all paper notes in circulation will flow to the
gold dealer, and pretty soon his supply of gold coins will run low. He may
try to give the notes back to "best customer" in exchange for some
more gold for his business only to find that "best customer" has no
gold, only more paper notes.
So our gold dealer's first response will be to raise the price of his
remaining gold coins. And then, since gold coins are his stock in trade, he
will have to venture out into the marketplace to replenish his inventory. He
will have to bid gold out of the hands of the agrarian workers with more and
more paper notes. And then he will have to sell those gold coins for even more
than he bid for them.
Very quickly this will raise the price of gold coins when priced in
"best customer's" paper notes. And agrarian traders coming to
exchange their paper for gold will realize that the cost of gold is rising.
And then they will have to charge more for their goods when paid with paper.
The end result of this little thought experiment is that on any given day the
price of goods in paper notes will seem stable to the naked eye, but over
time "best customer's" inflation will be absorbed into the price of
gold and will not affect the savers or destroy their capital accumulation
because they saved only gold.
"Best customer" will eventually have to bring wheelbarrows full of
his notes just to buy one apple. This development will expose his scam to
even the most retarded villagers, and he will ultimately lose his reputation
as "best customer".
The moral of this little story is that there actually is hope because
gold can absorb most if not all of the pain inflicted by inflation if it is
allowed to do its job as a wealth reserve. It is all about how long you hang
on to the paper. The longer you hold it the more you transfer the value of
your own labor into the hands of "best customer".
Recall my triangle diagram of the three primary functions of money:
In Gold is Money - Part 3 I
explained that the evolution of money is taking us to a place where these
functions will be fulfilled by different mediums. The transactional or medium
of exchange function will still be fiat currency, the very same that we know
today. And the store of value will be physical gold, the store of value par
excellence for the last 5,000 years or so. The unit of account for
bookkeeping purposes will probably be split between the two depending on the
time scale preference of the accountant.
You see, the ability to print transactional currency is a privilege that can
be legislated. But having people choose to hold your currency for any length
of time is an additional privilege that must be merited and earned.
And forcing people to hold your inflating currency longer than necessary for
trade, because there is no viable alternative, is an exorbitant privilege.
Gold can and will remove the exorbitant privilege from our monetary system
when it is allowed to do its job as a wealth reserve.
How do I know this is coming? Because today the exorbitant privilege is
almost completely claimed by the US Federal Government, and is paid for by
the labor of the rest of the world. The USG is today's "best
customer".
And the ability of the USG to eliminate the viable alternative of gold as a
functioning store of value depends entirely on the continued acceptance of
the dollar as the global reserve currency. Both this acceptance AND the
control over gold's price have been waning lately. And today, it is only a
matter of time until they are both gone forever.
Also, and this is very important, the rest of the world outside of the
"exorbitant privilege club" that I like to call the $IMFS (dollar
international monetary and financial system) has been preparing to support
gold as THE store of value should the dollar fail. Sure there is a lot of talk
about SDR's, new "monetary funds" and other forms of "new
fiat", but all you have to do is look at the concrete preparations that
have already been made if you want to see how things will actually
play out.
Synthesis
Europe views its privilege and its debt differently than the US. The US will
never give up its mountain of unfunded liabilities until it has printed its
dollar into oblivion. Europe is different. The Eurozone members gave up their
right to print to oblivion by joining the euro. And the euro only has one
single mandate: low inflation!
Now we can argue until the cows come home whether or not ANYONE should have
the privilege to print currency. The winner of that argument is probably no,
that no one should. But the flaw in the argument under today's dangerous
conditions is that people get caught up in what SHOULD happen and lose sight
of what WILL actually happen.
Fiat currency, for all its flaws, has provided the flexibility and
computer-age transaction ease and record-keeping that is valued by not only
those few ego-maniacs that believe they can control everything, but also by
business and productive enterprise. So it is not going away no matter how
good the argument. But the worst of its flaws can, and will, be neutralized.
And this is where (what I like to call) Freegold makes its debut.
Here is an important question: Is it theoretically possible for a fiat
currency to devalue, or more precisely, to hyper-depreciate against only one
single asset without affecting the price of a can of peas?
Of course it is! Just look at any number of investments that have appreciated
quickly by an order of magnitude or two. Look at GOOG! Or how about AAPL?
When an asset appreciates against a currency can we not also view it as the
currency depreciating against that one asset? Or more precisely, can we not
say that the asset was awaiting massive revaluation based on market
recognition of its value?
Now, what if the revalued asset is gold, a monetary asset held by Central
Banks? What could such a revaluation do to today's dynamics of national debt?
ECB v. FED
In many posts I have highlighted two important differences between the ECB
and the US Federal Reserve. The first is the separation of currency creation
from the control of a single sovereign government, or the elimination of
"exorbitant privilege". And the second is the demonetization of
gold making it a supporting reserve asset instead of a competing currency.
The Fed views gold as a competing currency, which was clearly shown in Adrian
Douglas' recent revelation titled: More Fed minutes document gold market
manipulation (a must-read for anyone who is still
reading my post).
The ECB, on the other hand, revalues all European gold reserves every three
months to their market value, reflecting the very real rise in reserves. The
Fed still has US gold booked at its 1973 price of $42.22 per ounce. The late
Dr. Willem F. Duisenberg, first president of the ECB, articulated these
differences in his acceptance speech when
"the euro" won the Internationaler Karlspreis zu Aachen, also known
as the International Charlemagne Prize:
"The euro,
probably more than any other currency, represents the mutual confidence at
the heart of our community. It
is the first currency that has not only severed its link to gold, but also
its link to the nation-state. It is not backed by the
durability of the metal or by the authority of the state. Indeed, what Sir
Thomas More said of gold five hundred years ago – that it was made for
men and that it had its value by them – applies very well to the
euro."
The Karlspreis is one of the most prestigious European awards. It
commemorates Charlemagne (Charles the Great; 742-814), King of the Franks,
the founder of what became the Holy Roman Empire and, according to the City
of Aachen where he is buried, the "Founder of Western Culture." To
put this award in perspective, have a look at the company the euro is in,
having been the only inanimate object to ever receive this award:
1999 Anthony (Tony) Charles Lynton Blair
2000 William Jefferson (Bill) Clinton
2001 György Konrád
2002 The Euro
2003 Valéry Giscard d'Estaing
2004 Pat Cox
2004 Extraordinary prize: Pope John Paul II
2005 Carlo Azeglio Ciampi
2006 Jean-Claude Juncker
2007 Javier Solana
2008 Angela Merkel
2009 Andrea Riccardi
My point here is not to heap praise on anything, anyone, or any point of
view. It is simply to show you how the euro is viewed by Europeans. When a
country joins the euro it takes on all the importance of a marriage and then
some. Divorce is not an option. As Jean-Claude Trichet said in a recent interview...
Le Point: Could
a scenario be envisaged in which a country is no longer able to meet its
obligations and leaves the euro area?
Jean-Claude Trichet:
I have always said that I will not comment on absurd hypotheses. Joining the
euro area is a major decision. It is not a membership that can be adapted to
suit the circumstances. It is about sharing a common destiny with other
countries.
For more on this please see my excerpt from Eric King's excellent interview
with Jim Rickards transcribed in Greece is the Word.
And now let's take a look at a few more differences between the ECB and the
Fed. I am not passing moral judgement on either institution, only practical
judgement on their policies, foundational architecture and underlying
monetary theory.
First we should start with their most basic motivation, their mandates. The
Fed has two conflicting mandates legislated by Congress. The ECB only has one.
The Fed's two mandates are price stability and full employment.
The ECB's only mandate is price stability. A third, unofficial and unspoken
mandate of the Fed is to guarantee the funding of the US Treasury to pay for
its ever-growing deficit, but we'll leave that one alone for the moment.
Price stability is a monetary mandate requiring a strong, stable currency.
Full employment is an economic mandate, and a poor one at that. According to
the Fed's prevailing economic theory this mandate requires a weak currency.
These are conflicting mandates, leaving the Fed to walk the proverbial
tightrope.
But as it turns out, the ECB's one mandate is the one that is good for the
savers and the capital accumulators. Which surprisingly enough is what will
ultimately make for a strong economy. Mandating your money printer to create
a strong economy through "full employment" is akin to taking
anabolic steroids for a healthy, long life. Whereas focusing solely on
keeping inflation under 2% builds the kind of confidence that draws in
capital investment and ultimately creates a healthier economy, socialist
politicians and taxes notwithstanding.
Okay, moving on. I'm just going to list out a bunch of differences here
including the ones already mentioned:
1. ECB severed the monetary link to gold. FED keeps gold a $42 prisoner.
2. ECB is independent of the state. FED is lapdog of the state.
3. ECB eliminated "exorbitant privilege". FED delivers
"exorbitant privilege" on a regular basis.
4. ECB has one clear mandate. FED has two conflicting mandates.
5. ECB supports orthodox solutions to states in crisis. FED supports
unorthodox (QE) solutions.
6. ECB is more democratic through its multi-polar membership. FED is more
plutocratic.
7. ECB is more transparent with predictable policies. FED is opaque with
unilateral surprises.
8. ECB is defensive in its protection of euro stability. FED is offensive
against competition through collusion with its primary banks.
9. ECB allows healthy competition with its currency through the MTM freegold
concept. FED stifles competition to hide its weaknesses.
10. ECB gives gold its own accounting line. FED obfuscates, lining Gold/SDR
together.
11. ECB zone encourages gold sales to public with 0% sales tax. FED zone
discourages gold sales.
12. ECB architecture is inspiring changes in other CBs and monetary unions.
FED is not so inspiring.
Each one of these twelve differences is probably worthy of its own post from
a Freegold perspective. But the point I am trying to make here is that the
ECB has created a new product for Europe. It is 10 years old now. The FED's
product, the dollar, and its offspring the $IMFS is now 97 years old. The
ECB's innovative creation was the result of lessons learned living under the
$IMFS for more than half a century. And the point is summed up most
eloquently in Another's own words, written before the euro was even
introduced:
"In the very same mindset that people buy the best value for the lowest
price (Japanese cars in the late 70s), and leave an established producer to
die, so will they escape the American currency and accept any competitor that
offers a better deal."
Just last week Trichet said, "We
did not create the euro against the dollar, the euro is for Europe.”
The euro architects were not trying to force a reserve currency on the world.
There is a big difference between creating a government product with
sovereign-monopoly backing that everyone must use, and creating a product
that the marketplace must freely choose. In this case, the marketplace consisted
of sovereign nations that chose to give up the privilege of printing their
own money in order to join in the benefits of the euro.
So what are those benefits?
Benefits of the Euro
In 2001 Robert Mundell wrote:
"The advent of the euro
has demonstrated to one and all how successful a well-planned fixed exchange
rate zone can be. After the 11 currencies of the zone were locked to the euro
and to each other, even before the euro has been issued as a paper currency
or a coin, speculative capital movements between the lira and the mark, the
franc and the peseta, and all the other currencies became a thing of the
past. It ended uncertainty over exchange rates and destabilizing capital
movements. The 11 countries of the euro zone are now getting a better
monetary policy than they ever had before. The creation of the euro zone
therefore suggests a viable approach to the formation of other currency areas
when prospective members can agree on a common inflation rate and a
coordinated monetary policy."
Each country is getting a better monetary policy. And this highlights one of
the lessons the euro architects learned after 47 years of living under the
Bretton Woods accord and the $IMFS. The euro does not do monetary financing
of sovereign budgets. According to the Maastricht Treaty there can be no
monetary financing of public entities. And it is the job of the ECB to
protect the integrity of the currency only (low inflation), not the
profligate ruling party of any member state.
Mundell continues:
"My own view about
the politics of the euro is that it will provide a catalyst for increased
political integration in Europe, which, after two centuries of a
Franco-German rivalry that has periodically engulfed the entire world, is
highly desirable."
Here is an important benefit: peace! I refer you back to the Jim Rickards
interview mentioned earlier for more on this. And then more Mundell:
"I also believe
that every country in the euro area is now getting a better money than they
had before. First of all, the size of the euro area is vastly larger than the
size of any of the national currency areas, and that affords to each country
a better insulation against shocks. The gains in this respect vary in inverse
proportion to the size of the country. The currencies of small countries can
get blown out of the water by speculative attacks. Germany may gain less
proportionately than the smaller countries, but the Germans now have, or will
have when the transition is complete, a currency that is three times larger
than the mark area alone.
...Apart from the United
States, most if not all countries would benefit from being part of a larger
currency area, for reasons of economies of scale, cushioning against shocks,
and a better monetary policy. Most of the 175-odd currencies in the world
should be classified as “junk” currencies, sources of instability
rather than anchors of stability."
Better money! Yes, bigger is sometimes better. This is not to argue for a one
world currency, but in some cases regional currencies can be better than the
sum of their parts. Here is a list of
the problems faced by more than 45 smaller currencies with reckless leaders
and bad monetary policy. Of course size does not guarantee stability, as we
will soon find out. Monetary policy, CB independence and systemic
architecture are also important factors.
Mundell:
"Exchange rate
changes can never be a substitute for the vast number of changes in
individual prices that have to be made in an efficient market. But the
possibility of exchange rate changes has nevertheless deflected the attention
of policy makers from the vastly more important subject of flexibility in all
individual markets. I believe that flexibility of individual prices will be
fostered by the euro area..."
Think about this one in light of the ECB's transparent quarterly Mark to
Market price policy for its gold reserves versus the US need to secretly
control market prices through the opaque Fed, the secretive Exchange
Stabilization Fund and the ghostly Working Group on Financial Markets.
"[A] country is
better off with a national monetary policy [only] if the monetary policy is
likely to be better than that in the rest of the world, as it could be if the
rest of the world is unstable. Short of a monetary union with the euro and
yen areas, the United States has no real alternative to inflation targeting
and a flexible exchange rate."
Hmm... seems like a deep statement coming from the man some call The Father of the Euro.
Moving on from 2001 to Jean-Claude Trichet just last week:
Jean-Claude Trichet:
Like everyone else who shares the single currency, the Greek economy has
– from the moment it joined the euro area – enjoyed a number of
significant advantages in monetary terms. Being part of the euro area has
strengthened the Greek economy. Thanks to the euro, it was no longer subject
to exchange rate risk, it has access to an integrated economy comprising 330
million European citizens, and it has benefited from having a currency which
inspires confidence and has therefore afforded Greece low medium and
long-term market interest rates. Its external current account deficit has
been financed by the very fact of belonging to the euro area. Of course, in
exchange for these significant advantages, the rules of the Stability and
Growth Pact must be fully respected.
Le Point:
All the same, we have just found out that Greece cheated. It hid shameful
secrets about its financial situation from its partners. How can we stop this
happening again?
Jean-Claude Trichet:
This situation is totally unacceptable. And it’s a major problem
because all of the countries in the euro area are suffering as a result of
this misconduct.
Now I would like to point out a key distinction here. In the first paragraph
Trichet nicely sums up the benefits the euro has provided to Greece. But then
comes the question of unsustainable Greek debt and even "cheating".
Well, where did that come from? It came from the $IMFS!
Europe is now living under a new currency, but it is still functioning under
the dollar's global financial system that encourages infinite debt
accumulation, infinite growth of imbalances, and financial trickery to
pretend the system is stable and extend its timeline.
All the benefits and architectural innovations of the ECB stand in place now
as a kind of safety net for the Eurozone for whenever the $IMFS collapses
under its own weight. And the signs of this happening sometime soon are
ominous and many.
It is easy and convenient for the financial press to blame the Eurozone
problems on the euro itself. But I am here to show you that they are actually
caused by the dollar system, counterintuitive as that may seem.
Problems of the
$IMFS
"[T]o what extent [does] financial innovation serve the real economy and
to what extent [does] it only serves itself? At some point in our recent
past, finance lost contact with its raison
d'être. It ceased to be a source of services for the real
economy and developed a life of its own. Finance became
self-referential."
-Remarks by Jean-Claude Trichet,
President of the ECB
at Stanford University, Stanford, California 12 March 2010
As every good bookie knows, whenever you can get groups of people on opposite
sides, the real money is made in the middle. And the more people you can get
in on the action, the bigger the profits and the biggest profits of all go to
the middleman. This is Wall Street. This is the $IMFS in a nutshell.
In Greece is the Word I
showed you how the entire purpose of the $IMFS is to act as a middleman
between the debtors/consumers of the world and the savers, investors and
producers:
Everyone is one of these two camps, the Debtors or the Savers. Even every entity
when netted out falls into one of the camps. So if there are serious problems
happening within the $IMFS it stands to reason that they could be viewed from
slightly different perspectives depending on which camp you're in.
Now I'm sure I don't need to list out all of the problems within the $IMFS
today. Most of you have spent the better part of the past 18 months reading
endless opinions on this subject. So I am going to focus briefly on one small
problem as viewed from each side.
On Tuesday Jim Sinclair and Marie McDonnell of Truth In Lending Audit &
Recovery Services - Mortgage Fraud and Forensic Analysts reminded us of a very serious ongoing problem
within the $IMFS:
Jim: Here is the top of the heap of strange goings on in finance.
How many of your mortgages have been securitized multiple times? What if your
servicer folded? The real owner of the mortgage might just knock on your door
demanding payment.
It has been held now by many recent court cases that only the party which
made the loan has the right to foreclose.
How would you like to find out that even though you have paid your mortgage,
the real party of interest says screw you, pay again or it’s
foreclosure time!
Please, those of you with mortgages on your homes track down the real owner
of your paper, and fast.
Marie: ...this is only the tip of the iceberg… not just for
Lehman, but for the vast majority of Wall Street Investment Banks that
securitized mortgage loans over the last decade.
I believe that Lehman-like balance sheet accounting fraud is inherent within
the nature of the securitization process; that “true sales” never
took place and the transfer of assets to and from the participants in the
securitization paradigm were book-entry financing deals; that consideration
was never paid by the participants; that the funding came from outside
sources; that the complexity of the structure was designed to cloak money
laundering; that the trusts never achieved their tax free REMIC status; and
that loans were purposely designed to fail so that the participants in the
securitization could control both the cash flow and the real estate assets
arising from these mortgage transactions when the bubble inevitably burst.
If I am correct, this would have serious implications for consumers whose
loans were securitized because the participants in the securitization
would be unable to prove that they legally conveyed the loans into the trust
fund. Essentially, U.S. Bank and Wells Fargo had this opportunity in the
Massachusetts Land Court cases last year and they could not produce the
evidence of ownership. They produced the Notes, but not the proof of how they
purchased the loans from the originators. The evidence also showed
conclusively that the mortgages were never assigned from party to party
according to the Pooling and Servicing Agreement and into the trusts. This,
in large part, is why Judge Long overturned two out of three foreclosures.
Much of the fraud is buried in the opaque OTC derivatives trading. I know I
am preaching to the choir on this topic!
This is clearly a huge problem for the $IMFS. And as you can see from the
above, Jim and Marie are addressing their warning to the debtors, those who
borrowed money to buy a home. But this same problem has another perspective,
that of the savers.
What do you hold in your 401K? What is your pension holding on your behalf?
Do you own any "assets" that may have no legal claim to anything if
examined in a court?
This problem runs very deep. Harley, one of Jim Sinclair's readers, writes in
with this:
Hi Jim,
I recently initiated Identity Theft coverage and in the course of that work,
I was asked to review my credit report. I discovered that my refinanced
mortgage, paid in full in July 2005, has been retained as current and OPEN
with a last payment of July 2005. The account is listed on the credit report
as current, not paid and closed as were other previously listed mortgages.
That mortgage was paid in full and closed (at least I thought it was closed)
when I rolled into a new mortgage (refinance) in July 2005. All was done with
the same financial institution (which closed and became Chase). The punch
line is that the paid and supposedly closed mortgage is owned by TA DA:
Fannie Mae. How many billions are being carried on the books that DO NOT
EVEN EXIST? The plot thickens, the whole episode sickens.
And how many billions are in pension funds, trusts and 401K's that DO NOT
EVEN EXIST? Okay, I think (hope?) we all get the point.
Unsustainable
Deficits
The pressure on the $IMFS is building EVERYWHERE! From Greece to California,
from the ECB to DC. And what exactly is all this pressure? It is
unsustainable deficit spending... DEBT!
Geithner Says U.S. Deficit Unsustainable
March 17, 2010
U.S. government's top economic policy makers acknowledged Tuesday that the
country's fiscal policy is unsustainable.
And what is the ONLY solution to this? What is the pressure release valve? It
is different depending on whether you are a sovereign net creditor/saver or
if you are a sovereign debtor. For the creditor/savers the ONLY solution is
CUT OFF THE CREDIT and thereby FORCE AUSTERITY. If you are a debtor, the ONLY
solution is DEVALUE THE CURRENCY, or more precisely, ALLOW the currency to
hyper-depreciate. Yes, default is an option, but not for a sovereign that
prints its own money, and not for any too-big-to-fail entities under the
umbrella of such a sovereign.
Greece is under the euro umbrella and California is under the US umbrella.
Germany is a creditor/saver, and also under the euro umbrella. China is a
creditor/saver not under either umbrella.
The US dollar MUST devalue (one way or another) against the entire physical
world. Think about this. The euro, on the other hand, might just
hyper-depreciate against only one specific asset. An asset that happens to
also be a MONETARY asset held by its member debtors.
As I said in Call Me Contrarian... "Do I think this magnitude of
a reset could happen overnight? Yes, I do. Why? Because that is the way you
get the most "bang for your buck". Surprise is the order of the
day! "Devaluations always happen by complete surprise as to exert
maximum leverage effect."
My point here and in Call Me Contrarian is not to predict timing or to
announce that something is imminent. It is simply to say that when it does
happen, it will happen lightning fast.
Devaluations always happen by necessity. They can be triggered either
intentionally internally, intentionally externally or unintentionally
naturally. They happen because they are ultimately necessary to both parties
and to nature itself. But the party that feels the pressure most, enough to
trigger the devaluation first tends to profit the most from it.
To us mere observers, all we can do is to be 100% prepared every day until it
happens, whether it takes one day or 12 years to arrive. And part of the
point is that being 100% prepared has its own spoils, even if it takes years.
But when it does happens, it will happen too fast to prepare any more.
I think a lot of people erroneously believe that because nothing catastrophic
has happened in the past 18 months that all changes will come at us in slow
motion. I think this is a dangerous belief to hold, especially if you act on
it.
Defensive Options
"All warfare is based on deception. Hence, when able to attack, we must
seem unable; when using our forces, we must seem inactive; when we are near,
we must make the enemy believe we are far away; when far away, we must make
him believe we are near. Hold out baits to entice the enemy. Feign disorder,
and crush him."
- Sun Tzu, The Art of War -
Things are not always as they seem. Let us now take a look at a couple
goings-on in Europe that may seem on the surface to be $IMFS-positive, but
may actually be the opposite once you scratch the surface.
Shorting the Buck
Portugal Prepares To Sell $1 Billion Of
Dollar Denominated Bonds In Goldman-Led Deal
Yes, Portugal is selling "buck bonds" through GS, seemingly invalidating
the previous ban of GS from selling Eurobonds. And yes, selling bonds in a
currency you cannot print or control is dangerous, especially for a
profligate government.
But Portugal cannot print euros either. Portugal gave up the right to print currency
when it joined the euro. So are these buck bonds really more dangerous for
Portugal than eurobonds would be?
And the essence of this trade is short-selling the dollar and going long the
euro. Portugal is borrowing dollars, selling them short, and then buying
euros (which are what it actually needs).
In the process it is shoring up its own short-term financial problems at the
expense of the dollar (shorting the buck) in an attempt to delay becoming the
next Greece (perhaps buying time until the revaluation of its 382 tonnes of
gold reserves), and possibly setting itself up to reap a big (Jubilee)
windfall when the dollar collapses and the euro doesn't.
One could wonder, did Portugal have the ECB's blessing to do this special
"deal with the devil", er, I mean Goldman Sachs? After all, Goldman
recently told its clients to go long the euro.
EMF
On February 18, 2010, in a guest article published by The Economist,
Daniel Gros of the Centre for European Policy Studies and Thomas Mayer of
Deutsche Bank proposed the creation of a European Monetary Fund.
On March 9 this idea gained attention when the German magazine FOCUS ran a
piece that said, "German
finance minister to present fund proposals soon. The European Commission has
said it
supports creating a European Monetary Fund (EMF) to help eurozone countries facing
balance-of-payments difficulties."
On March 12 Triche, in an interview from
Stanford, California, "in
response to a question on a proposed European monetary fund, said a proposal
forwarded by German academics deserves an examination although he was non-committal in
his support."
On March 14 Germany's Bundesbank said it "would oppose any government initiative to use
its gold reserves as backing for a European Monetary Fund (EMF), a
spokeswoman said."
Things are not always as they seem.
Remember the "nuclear option" discussed in Greece is the Word? As
far as practical applications go, one could be forgiven for wondering if an
EMF could be more of an EMP in practice.
Here are a few nagging questions I have about this EMF thingy.
Why discuss an EMF when the IMF is so eager to help? How would an EMF be
different from the IMF? How would it NEED to be different from a practical
standpoint? How could such a "gold-backed" EMF scheme work without
revaluing gold to Freegold prices? And could the end result of such an EMF
project actually be the balanced meritocracy of Freegold at the sovereign
level that we are watching for?
Randy Strauss over at USAGOLD had
some interesting comments as well:
The
Bundesbank’s resistance or opposition to this scheme is well
understandable from the perspective that its gold reserves provide a
stabilizing force as the strongest component residing on the asset side of
its balance sheet...
...That isn’t to say that a gold-holding EMF is an entirely bad idea,
it’s just that its own gold reserves can’t be simply pirated from
legitimate gold-holding entities through a paper-juggling enterprise. They
must be obtained, if at all, through the open market. And who
knows… at a sufficiently high (HIGH!!) gold price in the not-so-distant
future, even the Bundesbank itself might be more cooperative on the point of
dishoarding an acceptably small portion of its gold reserves for certain
political objectives…
So, is the idea of an EMF a flattering copy of the $IMFS' IMF, or a nuclear
$EMP?
Defensive Action
FOA (9/23/2000; 9:26:10MD - usagold.com msg#39)
ONWARD!
"Go back and read the most recent speeches and comments by the ECB
president, Mr. Duisenberg. Truly, the ECB is not interested in
"crashing" the system, rather let's "transition" the
system into a more fair order. If intervention is needed, it's needed to keep
the American economy from failing too fast from the coming hyperinflation of
its currency. If the ECB is worried about the "exchange rate" being
too far out of whack, it is a worry about its effect in generating a
dollar-system meltdown from deficit trade. Not a total failure of the Euro as
so many report. When the time comes, and it will, the dollar will begin its
fall away from its own past policy failure. Until that time, for the benefit
of oil producers and many others, let's move as far down this Euro / gold
trail as possible. Without a breakdown.
The hyperinflation of the dollar is already a done deal. It has been since
the 90's at least. Massive quantities of perceived dollars already exist
stored in debt held globally and inside the US. Europe knows this. They have
known this was inevitable since at least the mid-90's when they changed plans
and went with higher gold reserves for the new ECB. They have always been
willing to wait for it to happen naturally, unless the EU itself faces an
existential threat from debt brought on by the $IMFS. And in this case, I
believe their only option is a targeted hyper-depreciation of the euro.
By "targeted", I mean that the euro devaluation would be targeted
to go only into gold. Gold can absorb a devaluation if you do it carefully,
and in turn devalue the debt without causing inflationary havoc.
Of course this would cause the hyper-depreciation of the dollar as well. Only
the dollar's collapse would be against all of creation, not just one asset.
This is the risk that we all face today. The dollar is like a spring
snow-pack high on the mountain that is still fighting gravity. It wouldn't
take much more than a shout to bring it down. But then again, what have I
said time and again? The dollar's specific value does not even matter in the
context of its primary function. It only matters to those holding its debt as
the store of their life's efforts.
What happens if the
Euro project fails?
5/22/98 ANOTHER (THOUGHTS!)
If the Euro does fail, gold will become the "world oil currency".
We do know this full well, "the Central Banks will hoard all gold and
buy any offered if this new European currency does not work" and
"debt currencies fail". If this does come, no paper asset of world
economic system will survive, nothing! Not a good thought, no? Thank You
6/4/98 ANOTHER ( THOUGHTS! )
The last small gold war ended in the early 1980s, as the choice was to use
the US$ or go to a gold based economy. No other reserve currency existed, and
gold lost the war as all continued to buy dollar reserves.
But by 1980, Europe was working with the BIS to implement a new "reserve
currency".
The European plan was to support the $IMFS at least until a new fiat
"reserve" currency could be established, one large enough to absorb
the shock of a failing reserve currency, to avoid being forced back 100 years
into a physical gold-based economy which would have been very traumatic. This
effort took 20 years from 1980.
Did the Euro have some challenges along the way? Yes indeed.
5/3/98 ANOTHER (THOUGHTS!)
The urgent drive to create a new "reserve currency" began in the
early 80s, after the last small "gold war". The road to making this
new Euro did never include gold in large amounts, until the last few years!
Even one year ago, the news would say, 5% or less. Today, we speak of a much
greater amount! This is interesting, yes? The BIS did "hatch" this
deal in a very late fashion! The future of the Euro was found to be
"weak", as the Middle East oil imports onto the continent would
continue in dollars! This was so, from the dollar being made strong in gold.
Gold priced in dollars at near production cost offered a "no switch
currency" position, for oil. This position has been unstable for the
last year, and the alternative of a switch to gold was in progress! You have
read my "Thoughts" before. Now the BIS does offer to "change
the rules of engagement", a real reserve currency is offered!
Few do grasp what is happening and why! They think the holding of gold
reserves by the Euro is of a little point, as to what good are gold reserves?
One cannot use gold as Marks or Yen to intervene in currency market to
support the Euro. My friend, the BIS has played the, as you say, "big
poker hand"! The holding of large reserves by the ECB and the
withholding of sales from the market will not only bring the end of the
London paper gold market, it will, thru a high USD gold price, "make the
dollar weak in gold"! From this position, the dollar will lose the
"oil backing" from the Middle East! At first, all oil for Europe
will be in Euro's, then all producers want "strong currency"!
There is more: Many say, how to defend Euro without much currency reserves?
If gold go to many thousands US, what will be used to bid for Euro as
defense? I say, these persons will find a problem on their computer screens!
You see, the Euro will start as "nothing", no holdings of size,
anywhere! The dollar is held as reserves as "the stars in heaven"!
It is to say, "the dollar will bid for the Euro", not "the
Euro will bid for the dollar"! All currencies will "flow into the
Euro for trade". But, if the Euro becomes so strong, how to compete in
world trade? It will be the price of oil that will make the "trading
field" level! The soaring US$ price of gold will make even a 10% Euro
reserve be as 100% today, in USD! Oil will become, very, very cheap in Euros
and allow that economy to do well! Many other countries will see this and
also want to join the new "world reserve currency" that has
become"the new world oil currency"!
The politics of the ECB? It is as a "side show". We watch this new
market, yes?
6/14/98 ANOTHER (THOUGHTS!)
"Your question of Euro gold backing? The Euro will not be backed or
fixed in gold. It will, as Michael Kosares (USAGOLD) notes, be the first
"modern currency" to hold true "exchange reserves" in
gold. It is
important to understand that "exchange reserves" of gold are much
more powerful a tool for currency defense than gold backing!
In this system, gold must be traded in a "public physical market",
in that currency, Euros! As such, the Euro can "devalue gold" (Euro
price of gold falls) thereby making it strong in gold! In today's world, this
will happen as a "strong Euro physical market" displaces and
defaults "the old dollar settlement paper gold market"! The dollar
will become"weak in gold"!"
The Yuan
The yuan will not be the next global reserve currency because it has not only
NOT severed its link to the state, it is actually printed by Communists.
Those who are predicting this are still viewing the world through $IMFS
goggles that see the yuan currently undervalued. They think in dollar terms
and conclude that whenever China finally agrees to let the yuan trade on
foreign currency exchanges, they would like to buy it! Being undervalued
(against other fiats only) they see the opportunity to make fiat profits when
it rises. They view it as a "store of value par excellence"
compared to other fiats.
Things are not always as they seem.
Conclusion
Freegold is our destination with or without the euro. Even on the outside
chance that an SDR or a similar super-sovereign currency is accepted as the
new global reserve currency, it would have to contain gold at Freegold
valuations in order to be viable, accepted and trusted, in the same vein as
Randy's comment about an EMF. So any way you cut it, the future comes to us
with really high value gold by today's standards.
Be sure to get your share while we are still living on Fantasy Island.
Sincerely,
FOFOA
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