Oct 28, 2008

Wanted: Investors for film on gold's role as money

By James West
Monday, October 27, 2008

The campaign of disinformation and perception management continuously undermining gold's natural role in the financial universe inflicts damage on the economy, the scope of which we are now finally understanding.

If gold had not been so thoroughly abused over the last two decades, and were it in fact able to exert its normal moderating influence on monetary policy, the disaster we're in would have been much diminished, if it would have happened at all.

It is incumbent upon those visionaries who perceive clearly the truth of this situation to exert as much influence as possible to counteract the effects of market manipulation and disinformation, as it is only through these efforts that there can be any hope of returning to (or establishing) a transparent and equitable monetary system.

To that end, MidasLetter.com is hereby initiating production of a feature length documentary film intended for theatrical release initially, and then distribution by DVD, broadcast, and ultimately YouTube. The intent is for this film's success to facilitate the establishment of a follow-on television series that continuously scrutinizes fiscal and political policy as they evolve in the light of the theories of classical economists.

It is our objective to establish an opposing voice to the mainstream media's continuous delivery of information that is biased and/or just simply wrong, and syndicate this information in video format for broadcast throughout the world.

We are seeking expressions of interest from interested parties who are accredited or professional investors only. Contact me by telephone toll-free at 1-888-485-8029 or by e-mail at JWest@MidasLetter.com for a copy of the Film Production Plan and Script Synopsis.

* * *

Labels: , ,

Oct 25, 2008

Gene Arensberg: Bring the bullion banks down - take metal off Comex

'Think the futures price of metals is too low? The Got Gold Report reports on how to buy and actually take delivery of gold and silver metal from the futures markets that have savaged the price of them so much. If the COMEX is determined to under price its physical metal, then they ought not to mind seeing it leave their warehouse for the popular physical market'.

In his new "Got Gold Report" at Resource Investor, Gene Arensberg goes to war against the big gold and silver shorts on the commodities exchanges. He writes:

"If the two or three big U.S. banks that have savaged the gold and silver markets on the Comex with an avalanche of short sales since July have so little respect for gold and silver that they are willing to sell them down into oblivion -- when there is a raging shortage of metal in the real bullion marketplace -- then shouldn't some of us take them up on it?

"In other words, if the Comex doesn't respect the real physical market for gold and silver, shouldn't we remove the metal from them and send it into the physical market that does respect it? This report says yes, certainly we should. They are figuratively begging us to.

And then Arensberg explains how it can be done, with the help of Tony Klancic, senior account executive at commodities trading house Lind-Waldock in Chicago.

Arensberg's "Got Gold Report" is headlined "How to Buy Physical Gold and Silver on the Comex" and you can find it at Resource Investor HERE

Labels: , , ,

Oct 23, 2008

Karl Denninger: The Stark Choice Now Facing America

A juicy excerpt from today's "The Market Ticker" excellent post:

"..There are only two options remaining for America, and we as Americans, and our politicians, must choose one of these two paths.

Neither path is easy.

Neither path is pain-free.

The path that will lead us to where we can prosper involves a great deal of short-term pain. It involves forcing all of the bad debt - perhaps your mortgage, the bad corporate debt, the "Ponzi-Scheme" style debt that has been layered up one on top of another - out into the open and forcing it to default.

On purpose.

This means that if you are underwater on your home, you will lose it and your credit will be destroyed for a few years. It means you may have to file for bankruptcy. It means a great deal of short term pain if you are in this position. It means that companies that have taken on too much debt will be forced to either pay down what they can, or go bankrupt if they cannot.

This path will result in higher unemployment for a time, it will result in lower standards of living. You will not be able to spend money you do not have, and neither will our government. Both the government and we the people will be forced to live within our means.

The second path is for Ben Bernanke, Henry Paulson our government and you to attempt to do what we have been doing.

That is, to borrow more money to pay the interest on money we have already borrowed. To refuse to accept that those who borrowed too much, and who can't pay, must declare that fact and face the potential bankruptcy that comes from being too far in debt and unable to make good on obligations.

This is now a critical matter for our nation, because our nation's political leaders have chosen to take the private debt of companies and individuals and attempt to guarantee it with the credit of the United States.

However, The United States is just as broke as we are individually - in fact, more so.

Treasury will have to issue three trillion dollars of new debt over the next 12 months in an attempt to make this work. But Treasury has been using very short-term debt - mostly four week and 13 week "bills", to fund the existing debt, because they are cheaper. As such the total amount of these auctions could easily reach five trillion dollars over the next 12 months.

Already, Treasury is issuing more than $100 billion dollars in this debt a week, on average, including new issues and rollovers. This is about double the total amount of debt that foreigners (or US interests) hold in total, and we have barely begun to actually issue the debt necessary to make the "TARP" operate.

We are, in effect, borrowing to pay interest. If you have ever tried to do this personally, you know that doing so almost always leads to bankruptcy.

It will for us as a nation if we don't stop it now."

Please click HERE to access the complete article.

Labels: , ,

Oct 20, 2008

Ron Paul: Too Big to Fail?

In the midst of highly unpopular bailouts of Wall Street, many justifications have been given about why Washington feels the need to act. Some claim that capitalism and the free market are to blame, but we have not had capitalism. If you compare our financial capital to our aggregate debt, this would be obvious. In the same way, we have not had a truly free market. The monetary manipulations of the Federal Reserve, a complex tax code, the many “oversight” agencies and their mountains of regulations show that we are far removed from a free market economy.

Another unsatisfying argument is that certain entities have to be bailed out because of their economic importance. Supposedly, some entities can be so big, so important, that no matter what they do, citizens must perpetually sustain them.

Even limited government has a basic duty to defend against force and fraud. Some argue that force is somehow permissible just because the entity engaging in it is "economically significant." But one could use this reasoning to prop up slavery. It could be deemed unfortunate but economically beneficial, and indeed these arguments have been used historically to deprive people of their liberty. But slavery should never be tolerated regardless of any economic benefit, just as systemic fraud should not be tolerated. Some banks on Wall Street should fail. Fannie and Freddie should fail. They are perpetrating fraud against the people. Yet, government insists on rewarding behavior which should instead be investigated, prosecuted, and punished.

There has been much evidence of fraud at Fannie and Freddie, but when one man, Franklin Raines, defrauded the organization out of millions of dollars through illegal accounting tricks, and ends up agreeing to pay back just a fraction, one could argue that it was well worth it to him. Fannie went on to only get more deeply involved in subprime mortgages after this investigation. Several organizations are suffering right now precisely because the free market is trying to work and punish mismanagement, if only the government would get out of the way and let it. Perhaps banks are not lending to each other because they know that complicated accounting standards, created in part to defend against confiscatory tax policy, enables false fiscal pictures to be presented, which erodes trust. But this is not a time for the government to step in with more burdensome and complicated regulations, or more foolish liquidity injections. This is a time for some banks to fail, and remaining banks to deal honestly and transparently once again. More regulations will only result in more lies.

Just as economies that turned away from slave labor had a transition period, our economy would transition as well, but in the end, if we turned to honest, sound money and a truly free market, we would end up with a more just society, founded on truthfulness and decency, not subject to the violence of force or the whims of fraudulent institutions. Unfortunately, it seems we are headed into a new era of slavery, however, where all taxpayers will be forced to render to the Fed and big banking interests the bulk of the fruits of their labor, possibly through higher taxes but definitely through the eroding force of inflation.

Labels: ,

Oct 19, 2008

Jim Sinclair: The bullion market vs. the paper gold market

It is axiomatic that the most leveraged gold market most often (95 percent of the time) sets the price of any cash market. First derivatives (listed futures) command price.

This remains true as long as the COMEX warehouse of gold is NOT meaningfully depleted by long gold contracts by taking delivery from the exchange warehouse.

As long as an exchange maintains a warehouse that historically overwhelms historical demand for delivery, then the first derivative, the COMEX listed gold future, will be the primary cause of price.

Taking delivery from the COMEX warehouse is not an easy process, as the system is designed not to violate your contract but to be a world-class pain in the ass. The COMEX requires re-assays, assuming that you wish to re-deliver. This then places another raving pain in the ass in your way.

The COMEX market is effectively an international 24-hour market as there is no location where you cannot buy or sell a COMEX clone.

Cash bullion gold, as opposed to the semi-cash markets that non-USA banks trade, is the only totally private means of buying and selling gold.

As currency problems increase, first the knowledgeable public such as you clean out the coin market.

This is the first time that the international coin markets have been cleaned out everywhere. This did not happen globally in the 1970s.

Large gold bars are still available in major markets but the backup inventory is getting low.

As long as the COMEX warehouse remains adequate and large bars still are available, the paper market, the leveraged COMEX market, will rule the price.

Only with a decline in COMEX warehouse inventories and a rundown in large bar supplies of the cash market will the cash bullion market command the price of the COMEX futures market.

It was not the buying by the Hunt Brothers that caused silver to move above $30 into the $50 area but rather the universal belief that the Hunts would take delivery, which would deplete or exceed the COMEX warehouse supply.

The war between paper gold and bullion gold is a war to determine which will take command of the price of gold, nothing more, nothing less. There will be no two markets trading at different prices. All this battle is about is if the bullion gold market is going to take the lead in making the singular price away from the traditional axiom that the most leveraged market makes the price.

I believe that bullion, in these most unique conditions, will command the one gold price, making it hard to impossible to manipulate the gold price via the paper gold market, as is the practice every day.

* * *

Labels: ,

Oct 18, 2008

No credit? No assets?.. No problem!

The small print: "This offer depends on the willingness of the Chinese government to continue buying U.S. government debt. Terms and conditions depend on the whim of Congress and may be changed without notice. U.S. taxpayers may not apply"


Why the fall in the gold price when physical gold remains in huge demand?

Heavy secret gold leasing may explain disparity in gold prices

MineWeb's Lawrence Williams interviews Jeff Nichols of American Precious Metals advisers about gold's decline on the commodities exchanges even as demand for the metal explodes, and they come up with a likely explanation -- heavy surreptitious gold leasing by central banks.

Williams writes: "Nichols reckons it has been central bank gold loans -- even more so than official gold sales -- that have really pulled the rug out from under gold. Gold loans by central banks are an alternative -- and invisible -- means of injecting liquidity into the banking system. These gold loans to banks and bullion dealers by the leading central banks are probably a significant multiple of outright official sales.

"In simple terms, a central bank may lend or deposit gold with a banker or bullion dealer who simultaneously sells forward. Even with the recent substantial increase in gold-lending rates, at the end of the day the dealer receives cash in the transaction at a cost that may be advantageous to short-term money-market borrowing costs. Central banks have great freedom to lend gold outside their government-mandated rescue programs and these lending activities are typically hidden by their accounting practices."

That is, more market manipulation by central banks, kept secret from the public and most investors, concealed on the central banks' own books, but executed through a few favored financial houses that can trade on their knowledge of the secret government policy and make huge profits for providing the central banks with cover.

Williams' interview with Nichols is headlined "Why the Fall in the Gold Price When Physical Gold Remains in Huge Demand?" and you can find it at MineWeb HERE

Labels: , ,

Oct 16, 2008

Quote of the Week...

'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.' Thomas Jefferson, 1802

...how familiar does this sound to you?


Oct 15, 2008

Daniel Gschwend: Time running out for gold manipulation

In commentary posted today at Seeking Alpha, Daniel Gschwend, who manages a mining and metals fund, examines the manipulation of the gold price by central banks that are leasing gold as part of their scheme to rig the currency markets. Gschwend's commentary is headlined:
"The Countdown of a Manipulated Gold Price is Running Out" and you can find it HERE

Labels: , , ,

Oct 14, 2008

GoldMoney's James Turk interviewed on Korelin Economics Report

Over the weekend Al Korelin of the Korelin Economics Report interviewed GoldMoney founder and GATA consultant James Turk about last week's wild market conditions, the growing disparity between the futures and physical gold markets, and the gold cartel's continuing efforts to suppress the metal's price. You can listen to it here:

Labels: , ,

Steve Hickel: The golden bailout plan

Steve Hickel writes in his essay posted tonight at Gold-Eagle, "The Golden Bailout Plan", that central banks should stop fighting gold and let it rise far enough that they can eliminate their otherwise unpayable debts by selling half their remaining gold reserves. This is a bit similar to the suggestion made in 2006 by the Scottish economist Peter Millar, who wrote in a scholarly paper that central banks would need to let gold rise into the thousands of dollars per ounce in order to avert a catastrophic debt deflation (http://www.gata.org/node/4843).

Who knows? In a year or two or three you might be able to liquidate your home mortgage just by pawning your watch or wedding ring.

You can find Hickel's essay at Gold-Eagle HERE

Labels: , ,

Oct 11, 2008

Antal Fekete: Troubled Asset Relief Program


By Antal Fekete

Oct 10 2008 5:02PM

As the precipitous drop of the Dow Jones index of industrial stocks to the 8600 level on Thursday shows, the $700 billion bailout is an exercise in futility. The rescue effort administers one wrong medicine after another. Shunting rotten assets to the balance sheet of the central bank is not the way to go. Consolidating banks through forced mergers is not the way to go. Cutting interest rates is not the way to go. These measures make the problem worse, not better.

All the remedies to check the burgeoning credit crisis that have been proposed or put into effect are based on misdiagnosis. This is not a sub-prime crisis or a real estate crisis. It was not caused by loose lending standards, or by the banks recklessly and aggressively increasing their assets.

This crisis was caused by shriveling capital ratios due to the destruction of bank capital through 28 years of falling interest rates. As I have been saying again and again, falling interest rates destroy capital by increasing the liquidation value of debt ― an insidious process that has been missed by all other observers. Ignoring capital dissipation is possible only so long as capital lasts. As soon as capital is exhausted, dissipation stops. There is nothing left to dissipate. The problem at once becomes painfully noticeable.

The term ‘liquidation value of debt’ is self-explanatory, meaning the lump sum that will liquidate it before maturity, should it be necessary in case of a takeover, merger, shot-gun marriage, bankruptcy, or outright nationalization of the banking system. The point is that when the rate of interest falls, the liquidation value of debt rises. Why? Because the stream of interest payments is now discounted at a lower rate of interest. Therefore at maturity it will fall short of liquidating the debt.

Here is a familiar example. When the rate of interest falls, the market immediately bids up the price of bonds. This is the same to say that the liquidation value of the debt underlying the bond is raised. Debtors wanting to liquidate their bonded debt before maturity are not let off the hook on the same terms. The market demands more than the pound of flesh originally agreed upon for releasing the debtor from his bond. This example clearly shows that a fall in the rate of interest, far from alleviating the burden of debt, aggravates it.

Bank capital is debt, and it has been eaten away by persistently falling interest rates. Impairment of capital has been ignored and, after 28 years of negligence, the global banking system now stands denuded of capital. Those shareholders who can read balance sheets see through the fancy values banks are putting on their assets, and they dump the stock before bank capital goes all the way to zero.

The only way this crisis can be resolved is through recapitalizing the banks with gold. Contrary to Keynesian propaganda, gold is not a barbarous relic. It is not for decoration purposes. Nor does gold serve for the purpose of window-dressing in the balance sheet. Gold is unique among financial assets in that it has no counterpart as a liability in the balance sheet of others. It follows that gold, and gold alone, will survive any consolidation of bank balance sheets. Gold will not be netted out like paper assets are in case of mergers, acquisitions, and takeovers, or the nationalization of the banking system.

The fatal weakness of the present rescue effort is precisely this: consolidation of banks, just as consolidation of the derivatives monster, far from stopping the rot, will accelerate it. For example, if you consolidate the derivatives monster, claims and counter-claims through credit-default swaps will cancel out, and all risks will be exposed as being uncovered. Recapitalization with more fiat money will not work. It takes something more solid than irredeemable promises to pay. It takes gold.

Unfortunately our political leaders and policy-makers are lacking the moral fortitude to admit that they have been wrong all along about gold and its role in the financial system. Nor do they have the wisdom to realize that in cleaning up the train wreckage they have to go back all the way to the point where the train was derailed: to the insane decision to discard gold from the monetary system in 1971. Politicians and their academic sycophants will stick to their pet-rock, TARP, the Troubled Ass Relief Program (if you pardon my pun of cutting off the tail of the word ‘asset’). This is their cover-up of the fact that the credit-crisis is their own making.

The first of the Twin Towers, the Derivatives Tower of Babel, has now toppled, although you cannot see it yet as the dust is still settling. The toppling of the second, the Debt Tower of Babel, will follow in due course ― unless banks are recapitalized with gold with all deliberate speed.

The collapse of the Debt Tower of Babel would spell a disaster of the first magnitude, adversely affecting everybody. It would trigger the Great Grand Depression of the twenty-first century, making the Great Depression of the twentieth look mild in comparison.


This and other articles of the author can be accessed at the website www.professorfekete.com

Preliminary announcement: Gold Standard University Live is planning to have its Session Five in Canberra, Australia, in November, 2008. This Session will include a Primer on the gold and silver basis, prerequisite for a Workshop on the basis offered at Session Six (planned to take place in the Spring, 2009

Labels: , ,

Oct 9, 2008

Palinese: is this the U.S. of A.'s "Newspeak"?

Please read carefully, dear Reader, and draw your own conclusions as to the wits of the aspirant new American Vice-Leader (no pun intended):

That’s what I say that I like every American I am speaking with we’re ill about this position that we been put in where it is taxpayers looking to bailout, but ultimately what the bailout does is help those who are concerned about the healthcare reform that is needed to help shore up our economy, um, helping the, oh, it’s got to be all about job creation, too, shoring up our economy and, and, putting it back on the right track; so health care reform and reducing taxes and reigning in spending has got to accompany tax reductions and tax relief for Americans and trade... we have we got to see trade as an opportunity not as, a competitive, um, scary thing, but one in five jobs being created in the trade sector today, we we’ve got to look at that as more opportunity, all of those things under the umbrella of job creation, this bailout is part of that...”
- Sarah Palin

...is this a reflection of the collective ken in America today?...a continuation of the Bush-speak era? ...or just showing us the new shape of Leaders to come in good ol' U.S.?
Is this why the Dow keeps plunging despite the $700 + $900 billion boosters?...

Food for thought.

Oct 8, 2008

The value of the US dollar today...

Laura Gilbert, a Manhattan-based artist, has designed “The Zero Dollar” as a statement about what she calls “the current economic calamity.”
Ms. Gilbert was handing out yesterday signed and numbered originals on Wall Street. To reflect the current crisis in the financial markets, she has tried to lower the monetary value of the print itself to zero by creating a very large edition of 10,000.

Labels: , ,

Oct 5, 2008

Eric Sprott: The Financial System Is A Farce

Excerpt from the latest Sprott Asset Management's "Markets at a Glance" installment:

"Clearly, derivatives failed to avoid the monumental crisis in the financial system today – quite the contrary. They’ve increased the likelihood that if one financial institution goes down, they all go down, just like the house of cards it was all built on. As we wrote last year: “We believe if banks were allowed to go bankrupt, and their assets liquidated, then the true extent of the ruse would be revealed.”
Indeed, as predicted, there came a day when the ruse was revealed. This has resulted in an unprecedented intervention on the part of the Treasury and the Federal Reserve, taking the role of buyers of last resort for just about any and all paper assets in an effort to ‘save’ the financial system. Lest market-based adjustments prove too onerous for the economy to endure, government is now taking over the functioning of the free markets to a disturbingly great extent.
Unfortunately, this only exposes the other half of the ruse; namely, the erroneous belief that central banks can ‘solve’ financial crises with the same ‘solution’ that caused the crisis in the first place: throwing money at the problem. Alas, contrary to what Wall Street would have us believe, the road to riches does not lie through central bank actions of this sort."

Please click HERE for the whole three page analysis document in Adobe Acrobat .pdf

Labels: , , ,

Oct 4, 2008

Ron Paul: Statement on the Passage of the Bailout

United States House of Representatives
Statement on HR 1424
October 3, 2008

Madame Speaker, only in Washington could a bill demonstrably worse than its predecessor be brought back for another vote and actually expect to gain votes. That this bailout was initially defeated was a welcome surprise, but the power-brokers in Washington and on Wall Street could not allow that defeat to be permanent. It was most unfortunate that this monstrosity of a bill, loaded up with even more pork, was able to pass.

The Federal Reserve has already injected hundreds of billions of dollars into US and world credit markets. The adjusted monetary base is up sharply, bank reserves have exploded, and the national debt is up almost half a trillion dollars over the past two weeks. Yet, we are still told that after all this intervention, all this inflation, that we still need an additional $700 billion bailout, otherwise the credit markets will seize and the economy will collapse. This is the same excuse that preceded previous bailouts, and undoubtedly we will hear it again in the future after this bailout fails.

One of the most dangerous effects of this bailout is the incredibly elevated risk of moral hazard in the future. The worst performing financial services firms, even those who have been taken over by the government or have filed for bankruptcy, will find all of their poor decision-making rewarded. What incentive do Wall Street firms or any other large concerns have to make sound financial decisions, now that they see the federal government bailing out private companies to the tune of trillions of dollars? As Congress did with the legislation authorizing the Fannie and Freddie bailout, it proposes a solution that exacerbates and encourages the problematic behavior that led to this crisis in the first place.

With deposit insurance increasing to $250,000 and banks able to set their reserves to zero, we will undoubtedly see future increases in unsound lending. No one in our society seems to understand that wealth is not created by government fiat, is not created by banks, and is not created through the manipulation of interest rates and provision of easy credit. A debt-based society cannot prosper and is doomed to fail, as debts must either be defaulted on or repaid, neither resolution of which presents this country with a pleasant view of the future. True wealth can only come about through savings, the deferral of present consumption in order to provide for a higher level of future consumption. Instead, our government through its own behavior and through its policies encourages us to live beyond our means, reducing existing capital and mortgaging our future to pay for present consumption.

The money for this bailout does not just materialize out of thin air. The entire burden will be borne by the taxpayers, not now, because that is politically unacceptable, but in the future. This bailout will be paid for through the issuance of debt which we can only hope will be purchased by foreign creditors. The interest payments on that debt, which already take up a sizeable portion of federal expenditures, will rise, and our children and grandchildren will be burdened with increased taxes in order to pay that increased debt.

As usual, Congress has show itself to be reactive rather than proactive. For years, many people have been warning about the housing bubble and the inevitable bust. Congress ignored the impending storm, and responded to this crisis with a poorly thought-out piece of legislation that will only further harm the economy. We ought to be ashamed.


Labels: ,

Oct 3, 2008

Antal Fekete: The Gold Standard Strikes Back ...with a 36 year lag


by Antal E. Fekete,
Gold Standard University Live
October 2, 2008

The way to resolve the credit crisis:
Recapitalize the banks with gold

Privatizing profits, socializing losses

The 0.7 trillion dollar bailout plan of Treasury Secretary Paulson must be seen for what it is: a scheme to privatize profits while socializing losses. The scare tactics with which he was trying to railroad it through Congress has failed and the world is better for it. The malady has to be diagnosed properly. I summarize the popular diagnosis in five points.

1. The bursting of the housing bubble has led to a surge of defaults and foreclosures which has, in turn, led to a plunge in the value of mortgage-backed securities ― assets which are in effect capitalized mortgage payments.
2. These losses have left many banks short on capital account. Their problems were compounded by the fact that as their capital ratios were shrinking, rather than reducing their debt exposure they aggressively increased it.
3. “Leveraging” is the word to describe the deliberate shrinking of capital ratios, i.e., making smaller capital support a larger amount of risks. Aggressive leveraging was characteristic of the pre-crisis boom.
4. When they recovered after the dizzying ride, banks needed a microscope to read their capital ratios and they reacted in a predictable way. They were unwilling (unable?) to fulfill their mission to provide the credit that the national economy needs for its day-to-day operation.
5. As a defensive measure financial institutions have been belatedly trying to pay down their debt by selling assets, including mortgage-backed securities, but as they were doing it simultaneously, they drove down asset prices. This has damaged their balance sheets even more. A vicious circle is engaged that some call the “paradox of de-leveraging.”

Capital destruction

I should hasten to say that I disagree with this popular diagnosis which puts the cart before the horse. My diagnosis, described in the first part of this article, identifies the destruction of capital as the cause, and the credit crisis as the effect.

The problem goes back to the U.S. government foolish decision to destabilize the interest-rate structure (and, hence, bond prices) in 1971. As a consequence, long-term interest rates shot up to 16 percent per annum by the early 1980’s, from where they started their long descent that still continues.

Falling interest rates destroy capital as they raise the liquidation-value of debt contracted earlier at higher rates. By ‘liquidation value’ is meant the sum that will liquidate the debt, should it be necessary to pay it off before maturity. In a falling interest-rate environment it will take a larger sum to retire the same debt. Why? Because the scheduled stream of interest payments is now capitalized at a lower rate of interest and, therefore, it falls short in liquidating the debt.

This means that, paradoxically, falling interest rates do not alleviate but aggravate the burden of debt. All observers miss this point as they blithely assume that debt is automatically refinanced at the lower rate. It is not. Falling interest rates create a deficiency on capital account since it takes a bigger bite to service existing debt than originally provided for, and the deficit is made up at the expense of capital. Over-leveraging is not the cause; it is the effect. What it shows is that the banks do not pay heed; they persist in error. They simply ignore shrinking capital ratios. This ultimately causes wholesale bankruptcies, leading to the vicious downwards spiral.

The banks should have made provision to compensate for eroding capital as interest rates were falling. None of them did. None of them understood the insidious process of capital erosion in the wake of declining interest rates. They reported losses as profits. Then they were hit by the negative feedback: capital eroded further. When the truth dawned upon them, it was already too late.

Interest rates have been falling for the past 28 years. The liquidation value of outstanding debt has been increasing by leaps and bounds. It reached the tipping point in February, 2007 as indicated by the unprecedented jump in the price of credit-default swaps. It revealed that any further decline in the rate of interest would plunge bank capital into negative territory. At this point capital dissipation stops: there is nothing more left to dissipate. For the banks, this is sudden death.

No commentator could explain why banks have all run out of capital at the same time, while making obscene profits. My explanation is simple. There have been no profits, obscene or otherwise. The banks were paying out phantom profits in the belief that their capital accounts were in good shape. They weren’t. The banks were unaware that the falling interest rate structure has been making inroads on their capital. Since all banks have been working with microscopic capital ratios as a result of 28 years of capital erosion, the failure of one single bank would trigger the ‘domino-effect’ on the rest.

Why gold?

This puts the role of gold into high relief. Had gold been retained as a component of bank capital, credit-default swaps would have never been invented. Gold is unique among financial assets in that it has no corresponding liability in the balance sheet of others. Gold is the only financial asset that will survive any consolidation of bank balance sheets,in contrast with paper assets that are subject to annihilation (e.g., when the bank is consolidated with its counterparty holding the liability side of that asset). Suppose we consolidate the balance sheets of the global banking system. Then all assets will be wiped out with the sole exception of gold. But since the global banking system as it is presently constituted has no gold assets, under any consolidation the banks will be denuded of assets while note and deposit liabilities to the public remain. This is why the regime of irredeemable currency is susceptible to collapse that could be violent, taking place with lightening speed. It can also be seen that trying to save banks from collapsing through consolidation, mergers, takeovers, and shotgun marriages is pouring oil on the fire: it accelerates the meltdown of bank capital, rather than retarding it.

Implosion of the derivatives monster

My thesis also explains the explosive growth of the derivatives markets. First round insurance against decline in the value of bonds in the banks’ portfolio can be had by selling bond futures. Those writing first-round insurance need to cover their assumed risk in the form of second-round insurance, they do so by selling call or buying put options on bond futures. But those writing second-round insurance also need to cover their risk: they do it in the derivatives market by purchasing credit-default swaps. The point is that an infinite chain of credit-default swaps is being built on every bond in the banks’ portfolio, as shown by the derivatives monster’s more than doubling in size every other year, already having reached the size of one half quadrillion dollars and still counting.

Why is the derivative monster so dangerous? Because it is subject to implosion that could destroy an inordinate amount of bank assets. If the derivatives tower is consolidated, then its value collapses to zero as claims are wiped out by counter-claims. It is possible that this implosion has already started, but the banks (and their supervisory agencies) keep the lid on this information to avoid a world-wide panic. The earth quakes badly under the foundations of the Derivatives Tower of Babel. Its toppling may be imminent. If gold had been retained as a component of the bank capital structure, then there would have been no derivatives monster to fret about.

Those who explain the proliferation of derivatives by the popularity of “dry swaps”, that is to say, swaps created for the sole purpose of speculative profits they promise in view of their ultra-low price-to-reward ratio, are wrong. All those credit-default swaps were purchased by actual insurers insuring actual risks going with bond ownership, in trying to hedge their own risks.

Recapitalizing banks with gold

The credit crisis could be solved through the recapitalization of banks with gold. The Treasury should pledge to match subscriptions of new private capital, in gold, at the ratio of two to one. This means that two gold shares of capital stock subscribed by the private sector (individuals, firms, and institutions) shall invite one share of capital stock subscribed by the Treasury. Gold subscribed by the private sector should be constitutionally guaranteed against capital levy and confiscation.

There is no better use to which Treasury gold can be put which has been foolishly idled for the past 36 years. What is needed is the mobilization of gold hoarded by the Treasury, as well as of gold hoarded by the private sector. The trouble is that much of the privately owned gold is in hiding and won’t surface for reasons of lack of confidence in the monetary system. But as soon as there is a market for the shares of the recapitalized banks, private gold can be coaxed out of hiding and made to participate actively in the great task of rebuilding world credit.

Capital stock of the recapitalized banks would pay dividend, in gold, at the rate of one tenth of one percent per annum to stockholders, exempt of all taxes. This would make it possible, even for people of modest means, to acquire gold earning a safe return in gold. The maliciously false propaganda of the past decades that gold is a sterile asset in that it earns no interest is easy to refute. Gold has been lent and borrowed at interest (facetiously called the ‘lease rate’) without interruption, in spite of its so-called ‘demonetization’ by the government. In fact, the gold rate of interest is the benchmark on which all other interest rates are still based, after adding a risk-premium reflecting the risk that the monetary unit may lose its gold exchange value.

The tax-exempt feature of dividends has great merits to recommend it, especially if no other exemptions across the economic landscape are granted. You could look at it as society’s protection of widows and orphans, and other members of society who are unable to fend for themselves in a competitive environment, to live in dignity away from the hurly-burly of the investment world.

What is the use of recapitalizing banks with irredeemable promises to pay? It has been tried for the past 36 years; it doesn’t work.

No chain is stronger than its weakest link

The newly recapitalized banks must offer their old assets for sale to the public, in exchange for the gold shares of capital stock, through competitive auctions. In this way the true value of the old paper assets can be determined, and whatever can be salvaged will be salvaged. The market for bank assets, presently frozen, would be made liquid once more. If a bank wants to retain a part of its old assets in the balance sheet, it must bid for it in the same way as if it were buying from another bank through competitive auction. If an asset cannot be disposed of in this way, then it must be written off. Any delay in validating bank assets through the sieve of competitive auction will only prolong and deepen the crisis.

The ‘securitization’ of bank assets was an idiotic strategy motivated by the fraudulent idea that in lumping sub-prime assets together with valid assets would somehow impart value to the former, and the marketability of the product would be enhanced. This, of course, is just a ploy to cheat the buyer. It is like trying to make a chain containing a weak link stronger by adding any number of strong links. The weak link must be replaced with a strong one. No chain can be stronger than its weakest link.

The re-liquefying of bank assets is a first order of business in the present runaway global credit crisis. We are past the point that the wild-fire can be localized. Mobilization of gold is the only way.

Save the pension funds!

This crisis is a warning, possibly the last one, that the recapitalization of banks with gold cannot be further postponed without risking the total collapse of the financial system. If there was some hope that the Treasury might have a contingency plan to mobilize gold in case of a crisis such as this, the Paulson bailout plan has dispelled it. When the moment for the ‘break-the-glass’ rescue plan has arrived, what did we find behind the broken glass? More irredeemable promises to pay, to augment bank capital. All chaff, no grain.

Global credit collapse would bring enormous hardship in its train for ordinary people who have worked hard and saved hard through a lifetime only to see the fruits of their efforts going up in smoke. The result could be total social chaos and lawlessness. At risk are all the insurance companies, pension funds, money market funds. Also at risk is the taxing power of the government, as a prostrate economy won’t be able to bear the tax burden, but will spawn a grey economy that finds ways to evade taxes. The rejection by the U.S. House of Representatives of Paulson’s bailout plan can be viewed as a taxpayer revolt. Is it the first, with more to come?

Close of Keynes’ and Friedman’s system

Understandably, it will be hard for policy-makers, academia and media, and the accountants’ profession to admit that they have been wrong all along about gold and its essential role in the economic bloodstream and in accounting. They have fallen victim to the charm of John Maynard Keynes, the prankster who invented the idea that gold was a barbarous relic, and the gold standard was a ‘contractionist fetter’ upon the world economy. Now we have proof that the blame for the contraction should be assigned, not to the use but to the misuse of gold. The debt collapse is the burial ground for Keynesianism.

After Keynes was gone, policy-makers, academia and media, and the accountants’ profession fell under the spell of another visionary and adventurer talking with a forked tongue, Milton Friedman. He was fond of posing as a free-market man, but in promoting irredeemable currency he did more than anybody, save Keynes, to destroy the free market. Friedman promoted the spurious idea that gold is superfluous in the international monetary system as floating foreign exchanges rates can mimic the operation of the gold standard and will balance the trade accounts. But as the record shows, Friedmanite nostrums have ruined the dollar, as well as the once flourishing and peerless American productive apparatus.

Politicians, academia and media, and the accountants’ profession must swallow their pride and get the confession off their chests that their prognostication, policies, and advice about gold have been in error. If they fail to do this, and continue to block the way of gold to make a return to the economic bloodstream, then their responsibility for the suffering caused by the credit collapse in this country and in the world will be total. They will be shown as doctrinaire wreckers of human cooperation under the system of division of labor, who muzzled their critics and usurped unlimited power, while paving the way to a world disaster akin to that of the Bolshevik revolution.

After the close of Marx’ system, the close of Keynes’ and Friedman’s system is inevitable. But the wounds they have caused would take a long, long time to heal.

The mission of Gold Standard University Live is to do the research that academia refused or was forbidden to do: find out the consequences of ousting gold from the monetary system by the U.S. government, following its 1971 default on the Treasury’s gold obligations. Unfortunately our sponsor, Mr. Eric Sprott of Sprott Asset Management, Inc., has withdrawn his financial support saying that our “results do not justify the expenditure”. I am forced to terminate the sessions. Our last activity will be a panel discussion on the present credit crisis to be held in Canberra, Australia, on November 15, 2008, under the title: The chickens of 1933 and 1971 are coming home to roost and take out bank capital. I invite you to come and contribute to the success of Gold Standard University Live with your questions and comments. At any rate, the sessions will be taped and the DVD’s made available to the public, along with the conference proceedings.


© 2008 Antal E. Fekete

For Part I of this magnificent analysis please click HERE

Labels: , , , ,

Oct 1, 2008

F.T: Investors start fresh gold rush..

By Javier Blas
Financial Times, London
Wednesday, October 1, 2008

"Fiat money, in extremis, is accepted by nobody," Alan Greenspan, the former chairman of the US Federal Reserve, told lawmakers in Washington almost a decade ago. "Gold is always accepted," he added.

The "in extremis" scenario was for years only a possibility in the mind of die-hard gold bugs, but the financial crisis is leading regular investors -- from the ultra-rich to middle-class savers -- to believe that the environment in which Mr Greenspan said fiat money would be worthless is now around the corner.

The investors' response is a rush into physical gold not seen since the second oil crisis in 1979, bankers say. The shift into gold coins and bars is so extreme that it is causing shortages at refineries and mints around the world.

"This is absolutely unprecedented," says Mark O'Byrne of Gold Investment, a company that sells bullion to retail investors in Dublin and London.

Bankers at the London Bullion Market Association's annual meeting in Kyoto say their clients are not investing in gold just because of its perceived safe-haven status but also because they were able to take physical possession of it.

Veterans of the precious metals industry, such as Jeremy Charles, the chairman of the LBMA who is also head of precious metals at HSBC, say they have not seen a market like this in their 30-year-plus careers.

Gold prices surged this week to a two-month high above $925 an ounce, up more than 20 per cent since the collapse of Lehman Brothers. But betting that the investors' rush into physical assets will spur further gains could fail. Current prices are already depressing the key demand for jewellery, and that alone will cap prices.

The gold industry only forecasts a modest rise in prices, with bullion at about $958.6 a troy ounce by November next year, according to the annual LBMA poll.

On top of that, even if the retail investors' rush into gold coins is dramatic and unprecedented, its impact in gold tonnage terms is relatively small, preventing big price gains. But bankers say the price outlook is not the first consideration among those investors more concerned about "wealth preservation."

These new "gold bugs" were pushing the physical market for coins and small bars to its limits, with manufacturers unable to meet demand, LBMA delegates say.

Jonathan Potts, managing director at FideliTrade, one of the main US gold dealers in coins and investment bullion bars, says its firm has not been able to cope with the extra demand for physical gold in the past few weeks. "There is a lot of scepticism, or even distrust, about the financial system and people are running into gold," Mr Potts says. "The US Mint is doubling its gold coins production but there is demand for triple," he added.

Mr O'Byrne adds that key wholesalers have run out of stocks or are imposing quotas for the most popular one-ounce coins, such as South African Krugerrands, American Eagles and Buffaloes, Canadian Maples, Austrian Philharmonics, Chinese Pandas. and Australian Nuggets.

"They cannot supply one or 10-ounce gold bars either," he said.

* * *

Labels: ,

GATA: Remember, only gold and silver markets are NOT rigged...

Dear Friend of GATA and Gold:

Even though U.S. Treasury Secretary Henry Paulson was quoted yesterday, as in the Bloomberg News story appended here, as saying that the U.S. government would use "'all the tools at our disposal' to protect the financial markets". ...

And even though the U.S. government and most Western central banks are now desperately and openly rigging the currency markets with their swap agreements and the stock markets with short sales regulations and government-brokered mergers. ...

And even though Western central banks have been openly selling, leasing, and swapping gold for years now, often at strategic moments. ...

Please remember that we have the solemn assurances of Kitco Senior Analyst Jon Nadler, Resource Investor's Tim Wood, CPM Group Managing Director Jeff Christian, market analyst Paul van Eeden, and a few other worthies that government is not -- repeat, NOT -- intervening in the gold and silver markets in ANY way. Gold and silver are merely incidental commodities -- NOT what they used to be, money, and not even potentially money -- and their prices are of no more interest to governments than the price of seaweed.

That is, when Secretary Paulson said he would protect the financial markets with "all the tools at our disposal," he meant "ALMOST all tools at our disposal," and would have said so if only Nadler, Wood, Christian, or van Eeden had been present to remind him.

And exactly what does Secretary Paulson mean to protect the financial markets against?

Why, THEMSELVES, of course -- the threat that an actual market price, rather than a government-approved price, might develop somewhere in the fantastic, overarching illusion that crony capitalism and central banking have made of what used to be markets. These days, if you want a market, you're stuck with Ebay -- at least until that too is nationalized.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Paulson to Use 'All Tools' to Protect Financial Markets

By John Brinsley
Bloomberg News
Monday, September 29, 2008

WASHINGTON -- U.S. Treasury Secretary Henry Paulson will use "all the tools at our disposal" to protect financial markets after the House of Representatives rejected his $700 billion rescue plan, his spokeswoman said.

"The secretary will be consulting with the president, the chairman of the Federal Reserve, and congressional leaders on next steps," Treasury spokeswoman Michele Davis said in a statement released in Washington. "In the meantime, we stand ready to work with fellow regulators and use all the tools at our disposal, as we have over the last several months, to protect our financial markets and our economy."

The House voted 228 to 205 against giving Paulson the authority to buy troubled assets from financial companies, in what would have been the biggest government intervention in the markets since the Great Depression. The Treasury chief on Sept. 23 warned it would be "a grave mistake" for Congress to curtail or delay the legislation.

U.S. stocks plummeted and Treasury bonds rose the most in two weeks after the House vote. The Standard & Poor's 500 Index fell as much as 8.3 percent and the Dow Jones Industrial Average dropped as much as 735.8 points or 6.6 percent.

About an hour after the vote failed, Paulson arrived at the White House to talk with President George W. Bush, who had personally lobbied lawmakers to support the measure.

* * *