Road Map to Sound Money: A Legislative Hearing on H.R. 1098 and Restoring the Dollar

Erste Bank Gold Report

Erste Group Bank's new report on gold as an investment and currency, written by Ronald-Peter Stoeferle and published today, may be the most comprehensive and profound of its type. Its major conclusions include:

• Negative real interest rates are the main driver of the gold price and will continue to be powerfully supportive.

•  The arguments supporting a return to some form of gold standard are strengthening.

• Government debt burdens could be sustantially eased by a higher gold price.

• There is no "bubble" in gold, as the public is hardly invested in it and has little interest in it.

• Increasing dependence on government transfer payments for the public's income works against restoring solvency to government.

• Many paper pledges of gold cannot be fulfilled by real metal, a point credited to GATA.

The report concludes, in part:

"Given that the majority of debt has neither been written off nor paid off but simply transferred, the problem of excessive debt is still waiting to be resolved. There has been no deleveraging, only an adjustment of booking entries from the private to the public sector. The quantitative easing has left monetary stability short on credibility, and it will be very difficult to remedy this situation. In this fragile environment gold will continue to thrive."

ErsteGroupGoldReport-07-04-2011

Gerald Celente and Max Keiser ....at large!!

***

Harry Schultz: 8 of November, a Day to Remember

Yesterday, Nov 8, 2010, was a day I've awaited for 40years, since President Nixon shut down the last vestiges of the gold standard. Yesterday, at last, a respected member of the ruling classes called for a discussion to readopt a modified global gold standard as a lynchpin for the monetary system. Robert Zoellick, World Bank President and a former US Treasury official, says a new system is needed (as called for in HSL for 20 years), using 5 main currencies, with gold as the international reference point for future currency values. He wondrously said "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." I couldn't have put it better and in fact I have put it in those exact words, as has Jim Sinclair and a number of free market analysts.

RZ said "The development of a monetary system to succeed Bretton Wood II launched in 1971, will take time. But we need to begin." Amen, Mr Z and thank you! Also, thanks to the Financial Times for making this the leading page one headline story, despite their traditional aversion to gold. Ethics won! This story broke in the early AM Nov 8th and halted a correction that began in the gold price, after which gold rose to a new high. The story freaked out ruling politicians around the world who despise gold because it acts as a governor on government spending. After Nixon closed the gold window, government spending and deficits rocketed, as the data charts prove, from that exact moment. Germany, the US Fed, and Trichet of ECB all patted Mr. Z on the head, but said it's not practical.

What would you expect them to say dear reader? They will fight a gold-linked system, but in the end they will give in, because the system is dying, fast, as the gold price reflects. How good a new system will be, whether it will have only a symbolic link or a strong one, can't be guessed today, nor how soon. The gold price will tell us. My prediction on Bloomberg TV in Paris a few years ago was that "Gold will force a system change when gold hits $1,650, but that it might need $2,000 to bring a change." That may still come true, because, as you see in the press today, most political leaders tried to discount Mr Z's brave, but wise recommendation.

I shall frame this FT front page and hang it on a wall. It was a watershed day.

Harry Schultz

Crisis: Is it all part of a plan...?

The following excerpt is from the weekly missive of a brilliant Dow Theory market newsletter titled: "The Stock Market Barometer".

It looks at today's economic and financial woes from a truly free minded point of view.

If what you read feels right to you, why not take a subscription to enjoy the real McCoy!

"Sooner or later you have to ask yourself how you got into this predicament and I’ve come to the conclusion that it was all part of a plan, a plan that took a century to play out and cut far deeper than anyone ever could have imagined. To say it was sinister is an understatement. How do you set out to steal the wealth of an entire nation, and not just any nation, but the richest most powerful nation in the world? America was founded by a group of men who were the Socrates of their generation; men of wealth and position who rejected the threats and orders of their leaders because the leaders were fundamentally flawed. So they rebelled, and they won. The republic they formed was not perfect, but it was better than any that had come before. The foundation they laid allowed the United States to become the richest and most powerful nation in the world within a very short time of 137 years, and it did so with a relatively small government, no central bank, and no income tax. It also led to the formation of the largest middle class the world has ever seen, and it was a middle class that was educated.


By 1913 the US possessed the finest public school system in the world, from kindergarten to university, and it helped produce the Ford’s, Edison’s, and Wright brother’s that turned the world on its ear. Life in the US was difficult but it offered benefits and the promise of something better. That’s what caused hundreds of thousands of people to immigrate to the US from 1875 to 1915 as the word spread about America. Great minds who sought freedom of thought came to the US and made great contributions. By comparison the United States now imports Jamaican gangs and Mexican drug dealers, and all the corruption that comes with it.


Did you know that the drug dealers pay out millions of dollars a year to lobbyists in order to ensure that the US never legalizes drugs! They are illegal, pay no taxes, corrupt our system, make no contribution what-so-ever, and yet they have more influence on Congress than you or I do. Is that a great country or what?


Although I can’t prove it, I believe that once the Fed and income tax were implemented in 1913, someone sat down and decided that a nation of thinkers was no longer desirable because they would be too hard to control. Instead what was needed was a nation of mules needed to pull the cart of civilization. Until the early part of the 1900’s the purpose of education was derived from the Latin word educo, meaning to draw out from within. Slowly that began to change and was replaced by a giant babysitting service that produced a slave mentality enhanced by years carrot-and-whip grading. Original thought was frowned upon. You read a book or listened to a lecture and then vomited that back onto a piece of paper, and the best grade went to the student with the best memory. No thinking required. To ensure the illusion of education, quotas were introduced requiring degrees to become mandatory. In order to distract the masses so they wouldn’t know what they were missing, television was introduced with an almost infinite amount of channels. Sports became the end all for many so you could live vicariously through your team. Then came the X-boxes and the video games; all designed to dumb down the masses. Caesar threw bread to the masses at the Coliseum, giving them blood sport and just enough sustenance so they wouldn’t notice the Empire crumble around them.


In order to control an uneducated mass you need a big bureaucracy and that’s why government has expanded so much in the US over the last thirty years. Don’t ever think that Big Brother is there to protect you, Big Brother is there to control you, and if he can’t control you he will suppress you. If you resist he will use “extreme prejudice”. He will try to scare you into submission by telling you that your security is in jeopardy, thereby convincing you to give up little bits and pieces of the freedom that so many Americans fought and died for 200 years ago. I wouldn’t be surprised if Jefferson, Franklin, Adams and Madison were rolling over in their respective graves as they see what we’ve done with their work. The US Constitution has been so disemboweled that what passes for the law of the land today would be unrecognizable to them, and therein lays the problem. How are you going to take back what you threw away? This question goes beyond markets and money, and involves your basic freedom. As things get worse in the US people are going to become upset, they’ll want to assign blame while those in charge will not want to relinquish their grip on power. Conflict will result as the courts will not recognize your rights under the US Constitution. That as I see it is where we are headed and we are now so far down that road that there is no turning back."

Antal Fekete: The New Austrian School of Economics

What follows is tantamount to a historical manifesto that could signal a new era for world economics and modern society as a whole. It is Professor Fekete's proclamation of a truly viable way out of today's global economic impasse a.k.a. "The Greatest Depression".

Please read it carefully...

THE NEW AUSTRIAN SCHOOL OF ECONOMICS

Antal E. Fekete
aefekete@hotmail.com

**

The Hungarian Connection

The Austrian School of Economics dates its beginnings back to the publication in 1871 of a slender volume: The Principles of Economics (Grundsätze der Volkwirtschaftslehre) by Carl Menger. The adjective "Austrian" was meant to be derogatory, introduced by economists of German school of historicism to ridicule Menger's idea of basing economic science on axiomatic foundations, on the pattern of logic and mathematics. The root of the word "Austrian" is "East", so the connotation of "Austrian economics" is "oriental economics" - a kind of voodoo economics.

German economists could just as well have said "Austrian-Hungarian economics", since Hungary lies even further East than Austria, plus the fact that in 1871 Austria-Hungary was a dual monarchy, the two countries sharing not only a monarch but also many important political, economic, scientific, cultural institutions and traditions.

The Hungarian connection is dramatically revived by an unfortunate split in the rank and file of Austrian economists that took place in the 21st century. I have run conferences at the Martineum Academy in Szombathely, Hungary in the Austrian tradition and in the spirit of Carl Menger. I published course outlines under the aegis of the now defunct Gold Standard University on my website www.professorfekete.com. For my efforts I have been roundly denounced by parochial "American Austrians" at the Ludwig von Mises Institute in Auburn, Alabama. I consider this split most unfortunate at the most critical time, when the international monetary system shows signs of advanced senile dementia as well as of physical disintegration. This could have been a most opportune time for students of the gold standard to close ranks, join forces, and demand a return to the only monetary system that makes for economic stability, for peace and prosperity. They should have put their quibbles aside and offer a common platform and blueprint showing the world how it could be done. It was not meant to be.

Because of the urgency of the moment I have decided to make a fresh start and to establish a new school, proudly naming it the New Austrian School of Economics in Budapest, Hungary, where I live. My first act in doing so is to extend a sincere offer of cooperation to the American Austrians as soon as they are ready to look at Adam Smith's Real Bills Doctrine as a valid theory which is very much in the spirit of Menger.

The Quantity Theory of Money

It is a great pity that as a young man Ludwig von Mises embraced the Quantity Theory of Money, and has never during his long life been able to extricate himself from its clutches. For this reason he was alienated from Adam Smith's Real Bills Doctrine, the latter being an implicit refutation of the former. In spite of this flaw I still consider him the greatest economist of the 20th century. But the mortmain of Mises cannot be allowed to guide us in the 21st century when the Quantity Theory of Money is so spectacularly self-destructing, as witnessed by the Second Great Depression that started 80 years after the first, in 2009.

Cleansing of the Temple

The Real Bills Doctrine of Adam Smith states, in essence, that short-maturity bills of exchange drawn on goods in most urgent demand and moving fast enough to the ultimate gold-paying consumer, are capable of spontaneous monetary circulation, without any impetus or props from the governments or the banks. Indeed, bill circulation is possible in the absence of any banks at all. Such a system of financing production and trade sans banques could rise from the ashes of the regime of irredeemable currency before our very eyes. In the first decade of our century the governments and the banks have totally discredited themselves in the public's view as they have run the ship of the world's monetary system onto the rocks. Should the bankers have the temerity to show up after the shipwreck in order to set up shop, people will rise and chase them out - just as Jesus chased out the money changers in the famous scene "Cleansing of the Temple" (Mark 11:15-19; Matthew 21:12-17; Luke 19:45-48; John 2:12-25).

The scriptural teaching, confirmed by all four evangelists, is clear. Social cooperation is still possible in the absence of banks. It was a fatal mistake to ban the spontaneous circulation of bills maturing into gold from financing world trade - thereby promoting the bankers' dishonored promises to pay, and their never maturing but ever burgeoning debt, to the status of money.

Victors disallowing real bill circulation in 1918

The international gold standard did not collapse during the 1930's because of its inner contradictions - as schools inculcate the idea into all students. The truth is that the victorious powers inadvertently caused the collapse of the gold standard (with a 13-year lag) by disallowing its clearing system, the international bill market, to reopen for business after the cessation of hostilities in 1918.

The victors did not want to abolish the gold standard per se. After all, Britain returned to a gold bullion standard at the original parity of the pound sterling in 1925. The victorious allies acted vindictively. They just wanted to punish Germany over and above the provisions of the peace treaty. They forced the world into the straitjacket of bilateral trade, essentially a barter system that had evolved during the war. They refused to entertain Germany's post-war revival, given the benefits of multilateral world trade, epitomized by the international bill market as it operated before 1914. In effect, the victors wanted to perpetuate the wartime blockade of Germany in peacetime. Never mind that this also punished their own people. In their opinion it was a small price to pay for security. Little did the victorious powers realize that they were sounding the death knell for the gold standard. In a complex trading world such as that of the twentieth century the gold standard could hardly survive if it is castrated by cutting off its clearing system, bill circulation. The idea that the world could be coerced to embrace a system barring multilateral trade is akin to the idea that people could be forced back to barter by abolishing money.

History has borne out the truth of this observation. During a period of five years, from September 1, 1931, when Britain, to September 27, 1936, when Switzerland reneged on their domestic and international gold obligations, all other governments have similarly defaulted on their solemn promises to pay their creditors in the form of a fixed quantity and quality of gold. In some countries, so in the United States, draconian regulations were put into effect making the possession of gold a criminal offence in 1933. Such extreme measures had only one explanation: vindictiveness - even to the extent of hurting your own citizens and violating your own Constitution in the execution of an insane monetary policy. Government economists, university professors, financial writers and journalists have "forgotten" to raise the question whether such extreme and vindictive interference with the world's production and distribution of goods and services would ultimately have some untoward effects, even war, as a repercussion. Not one of them thought of suggesting that the legal tender status of bank notes should be declared unconstitutional through an international treaty - as the paramount measure to secure the preservation of world peace.

A Century of Legal Tender

The "forgotten questions" are belatedly being asked now. The present great financial crisis is not the outcome of some recent errors of commission or omission. Its ultimate cause goes back 100 years, to 1909. That was the year when France and Germany, in short succession after one another, enacted legal tender legislation making the note issue of the Bank of France and the Reichsbank legal tender in their respective jurisdictions. Without legal tender bank notes an all-out war could scarcely be fought. Members of the officer corps and procurers of munitions would demand remuneration in the gold coin of the realm. That could have put a speedy end to the war that started in 1914.

The real cause of the great financial crisis that started in 2009 is the inadvertent destruction of the gold standard a hundred years ago through the introduction of legal tender bank notes before World War I, and the vengeful decision to bar the international bill market after. It was these measures that have given rise to the corrosive regime of irredeemable currency, floating exchange rates, gyrating interest rates, and forever growing perpetual debt - a monetary arrangement never before globally embraced.

100 percent Gold Standard (so called)

I am an old man, two years shy of four score. I was looking forward to enjoying the quiet pleasures of retirement. However, the present world crisis calls me out of retirement. I feel it is my duty to do what I can to prevent a disaster, to wit, the establishment of the 100 percent gold standard (so called) and letting it run as the fall guy in a mission that is condemned to fail, as Britain's return to the gold standard was in 1925.

Britain's gold standard of 1925 failed because it did not have a clearing system and so it utterly lacked elasticity that only self-liquidating credit, embodied by real bill circulation could impart to the monetary system. It was doomed to failure from start. The 100 percent gold standard (so called) would repeat the mistake the British made in 1925. Another failure of the gold standard would set the world back another hundred years. In the meantime there would be trade wars, most likely leading to another world war. Our civilization would be put in harm's way.

The Theory of Discount

The 100 percent gold standard (so called) would also deprive the world of the benefits of the discount rate, this sophisticated and versatile instrument to regulate the economy. The economic triumph of the one hundred-year period from 1815 through 1914 is the triumph not only of the gold standard, but also of self-liquidating credit, the bill market, and the discount rate (as distinct from the rate of interest). During that triumphant period such economic maladies as chronic trade imbalance, structural unemployment, foreign exchange crises, unbridled increases in public and private debt were quite unknown. The world economy was on an even keel, delicately balanced by self-correction through the mechanism of the discount rate.

In the 19th century no sharp distinction could be made between "surplus" and "deficit" countries due to the self-correcting mechanism of the discount rate. It would have been unthinkable that balances of pound sterling would keep piling up in one country (as dollar balances do now in China), causing great disruptions in world trade, and leading to the dismantling of whole industries in the deficit countries.

Instead, surplus countries would experience an automatic fall, deficit countries an automatic rise in the discount rate. This would immediately induce a flow of short-term capital from the surplus countries to the deficit countries in the form of consumer goods in the most urgent demand. There is no better way, known to man, to satisfy the world's multifarious and fast-changing needs using the world's scarce resources most economically and efficiently, to the best advantage of all. This great mechanism of economic adjustment, capable of preventing structural unemployment and chronic imbalances in the world economy, the discount rate, was thoughtlessly thrown away by the victorious allies when they decided not to allow the reorganization of the international bill market for reasons of vindictiveness in 1918.

Open the Mint to Gold!

The secret of solution to the great financial crisis of our day is that governments should open the Mint to gold. This means restoring the individuals' right to convert their gold at the Mint, without limit, into the gold coin of the realm free of seigniorage charges. They should also have the right to melt down, hoard or export the gold coin of the realm as they see fit.

The significance of the opening of the Mint to gold is that it would convert idled gold into "gold on the go". Circulating gold coins would revive world trade as nothing else could. Gold locked up in government and private vaults is a curse putting the world economy in a bind (in addition to being a stupid economic waste of a unique scarce resource that has no substitute).

The Most Misunderstood of Metals

Gold is the most misunderstood metal in human history, because of the economists' failure to distinguish between its dynamic and static aspects in representing values. Economists have blithely assumed all along that the value of gold is the same whether it flows freely from one hand to the next, or whether the movement of gold is obstructed, in the worst case arrested, by the government (soon to be aped by banks and individuals). Yet the truth of the matter is that "gold on the go" is far more valuable than "gold locked up". Golden Ages of history were periods characterized by "gold on the go". Man trusted man, and men trusted their governments. Promises to pay gold were routinely made and kept. Gold was paid out without hesitation because men and governments were confident that they can get it back on the same terms any time of their own choosing. Above all, during the Golden Ages of history there was peace because goods and services could be more readily obtained through trade than through theft or conquest.

By contrast, under our present system wherein gold is concentrated in government and private hoards, there prevails a great distrust and widespread misery. Above all, there is perpetual war as goods and services could be more readily obtained through theft and conquest than through voluntary trade.

In rejecting gold our statesmen have rejected reason. Their guilty conscience is shown by their neurotic fear of an open debate on the gold question, and by the fact that they deny academic appointments to solid gold standard men, treating them as if they were cranks. Politicians are wont to erase the very thought of gold from the public consciousness.

The Best Unemployment Insurance Known to Man

The combination of a gold standard with bill trading would produce an economic miracle in the world far greater than the economic miracle of Ludwig Erhardt's Germany in 1949. The curse of trade deficits would disappear. Even if a country suffered a great natural disaster, say, the total loss of its annual crop, trade deficit would not necessarily follow. The discount rate would immediately shoot up in the stricken country. That country would be the best place in the world on which to draw bills. This would instantaneously generate a flow of short-term capital in the form of consumer goods in most urgent demand. No country would ever need to go to other governments begging for charity. Surplus countries would be prompted to expel gold in response to greater demand as demonstrated by the higher discount rate abroad.

Structural unemployment would disappear as it would be prevented before it became chronic by the higher discount rate in areas of falling employment. The higher local discount rate would generate an influx of finished and semi-finished goods from the surrounding areas. The processing and the distribution of these goods would create as many new jobs as necessary. The best "unemployment insurance" known to man is "gold standard plus bill trading". This is how the world economy worked before 1914; this is how it would have worked after 1918 had the victorious powers had the intelligence to allow multilateral trade and real bill circulation to make a comeback.

Hands-off Treasury Bills

All the government needs to do is to open the Mint to gold and to protect real bill trading against fraud. Funds raised through the bill market are public funds that must be protected against misuse just as other forms of public funds must. Let me mention just three types of misuse: (1) drawing more than one bill on the same consignment of merchandise; (2) drawing a new bill upon the expiry of the old on the same unsold merchandise; (3) financing stores of goods in the expectation of a rise in price by drawing bills.

Bills of exchange drawn on goods in most urgent demand and moving fast enough to the ultimate gold-paying consumer are capable of monetary circulation on their own wings and under their own steam, regardless whether or not banks are standing by, ready to monetize them. But if they are, legislation should prohibit banks from borrowing short in order to lend long. In practice this means that the banks would be prohibited from rolling over short term commercial credit at maturity. Commercial banks must also be prohibited from conspiring with the drawer of the bill. Withholding stocks from trade in expectation of a rise in price must be financed by an investment bank, never by a commercial bank. The two types of banks should be strictly separated by law. Commercial banks must also be prohibited from investing in brick and mortar. In practice this means that mortgages are "hands-off ".

Treasury bills are also "hands-off", except on capital account. We know that people will want to eat and to keep themselves clad and shod tomorrow. That's what makes bills the safest earning asset. We also know that people will pay their taxes only after they have eaten, clad and shod themselves. That's why real bills as an earning asset are superior to Treasury bills.

The Curse of Senescence

The demand for gold has a component that is unknown to our generation, although it was ubiquitous a hundred years ago: the demand for yield on gold in gold. Gold used to wear two hats: if you wanted, gold was wealth; but if you wanted, gold was income. Moreover, the switch between the two was as simple as one-two-three, through the agency of the bill market. The possibility of making gold yield an income in gold is missing from the world today. The reason is the neurotic approach to gold promoted by the media and academia.

The discount earned by holding real bills to maturity is the safest way to generate an income in gold. Likewise, the safest way to convert that income back into gold is by selling real bills from portfolio.

But why is switching between gold as wealth and gold as income so important? Well, God created man and made him mortal. Also he made us subject to curse of senescence. Our capacity to generate an income is the lowest just when our need to rely on it is the greatest: when we grow old and frail. This seems unjust; but God has also given us a marvelous tool as a compensation: gold. The young man can hoard gold, maybe to adorn his wife with gold jewelry, thus converting income into wealth, so that they can turn this wealth back into income by dishoarding gold when he grows old and his surplus of income has turned into a deficit. Thus gold is man's tool to convert income into wealth and wealth into income safely. Gold is the catalyst in solving the problem of senescence. That indeed is gold's main excellence.

Exchanging income for wealth and wealth for income

The trouble is that hoarding and dishoarding gold is a laborious and time-consuming process, raising the problem of efficiency and safety. It is important for us to see that the efficiency of converting income into wealth and wealth into income can be greatly enhanced, and the time-consuming process can be telescoped into instant action, if we pass from direct to indirectconversion of income and wealth. That is to say, we pass from hoarding and dishoarding to the exchange of income for wealth and wealth for income.

The Theory of Interest

This leads us to the concept of interest. The interest rate is just the marginal efficiency of exchanging income and wealth (over the zero efficiency of direct conversion: hoarding and dishoarding). We can shape the theory of the origin of interest so as to describe the evolution of direct conversion of income into wealth or wealth into income through the agency of themost hoardable good, gold, resulting in the far more efficient indirect conversion: the exchange of wealth and income.

This closely follows Menger's familiar theory of the origin of money as the evolution of direct exchange (barter) resulting in the far more efficient indirect exchange through the agency of themost marketable good, gold.

Given the possibility of indirect conversion, that is, the exchange of income and wealth, the young man with a surplus of income but a deficit of wealth, who wants to go into business, no longer has to waste his best years to hoard gold in order to raise capital. He will seek out a congenial elderly man who has a surplus of wealth but a deficit of income. The two can go into partnership in exchanging the surplus income of the junior partner for the surplus wealth of the senior. But they can do it safely only if the God-ordained institution of the gold standard and the instrument of the gold bond have not been corrupted by do-gooder politicians, as they in fact have in inflicting the coercive regime of irredeemable currency upon the world.

Today no exchange of income and wealth is safe because we no longer have a reliable unit measuring value. This is a formidable obstruction in the way of forming new capital at a time when great capital destruction is taking place due to fluctuating interest rates. The problem of providing adequate capital for business cannot be solved satisfactorily while assuming the regime of irredeemable currency, under which the central bank can suppress the rate of interest all the way to zero - the main cause of capital destruction in the world today. It can be solved only under the regime of a gold standard, where the rate of interest is naturally stable, as shown by the stable price of the gold bond.

This is a new theory of interest that starts from the concept of the hoardability of gold and from the natural need of man to save for his old age. It enables us to see that old age security can be furnished far more efficiently through the voluntary efforts of individuals than through the coercive schemes of the government.

My Message to the Young

I have established the New Austrian School of Economics in order to spread these unorthodox ideas which are very much in the spirit of Carl Menger. Time has come to go beyond rehashing old truths: we must come up with new ideas on our own.

I hereby invite all young people who feel that regurgitating platitudes is not enough. Come to Budapest and enroll at the New School of Austrian Economics! Let's raise the torch and carry on the great work of enlightenment together! This is no time for cultism or for parochial quibblings. We must forge ahead past the stale criticism of the existing order. Armed with new ideas we are ready to act. I want to lead you and, then, I want you to lead the world!

There is no place anywhere else in the world where you can study the gold standard as it interacts with its clearing system, the bill market, and with the mechanism of the discount rate; where you can learn that legal tender legislation and the elimination of bill trading is invitation to war (first trade war, followed by shooting war); where you can learn that the starting point of the theory of interest must be gold, the most hordable commodity - except here, in Budapest, at the New School of Austrian Economics. The powers that be have expunged gold standard studies from the curriculum. As a consequence the charlatans of at our universities will never be able to come to grips with the theory of interest. There is no way to understand interest without understanding gold first. We shall recreate gold standard studies and advance it together.

See you in August when I shall deliver my first lecture series on the subject of Disorder and Coordination in Economics - Has the world reached the ultimate economic and monetary disorder?

May 12, 2010

***

Calendar of Events

European Bankers Symposium, 9-10 June 2010, Hall, Tyrol, Austria. Professor Fekete will be a keynote speaker on June 9, at 13:30. The title of his talk is: (Gold) Architecture for a New World Finance System. For more information, please see www.financetrainer.com.

ANNOUNCING THE ESTABLISHMENT OF THE AUSTRIAN SCHOOL OF ECONOMICS IN BUDAPEST. The first ten-day, 20-lecture course offered is entitled: Disorder and Coordination in Economics - Has the world reached the ultimate economic and monetary disorder? The lecturer is Professor Fekete, with the cooperation of Mr. Rudy Fritsch (Canada), Peter van Coppenolle (Belgium), and Mr. Sandeep Jaitly (United Kingdom). It will be held in Budapest, Hungary, from August 9-20, 2010. Participation is limited, early registration is advisable. For more information and registration, contact Dr. Judith Szepesvari, the wife of Prof. Fekete at: szepesvari17@gmail.com. Inexpensive dorm-type accommodation is available for students (shared bathroom, shared kitchen); a three-star hotel is next door. Extra-curricular consulting with Professor Fekete can be arranged for an extra fee.

The school is meant for all students (including beginners) interested in the Austrian theory of money, credit, and banking. Its program plans to cover the whole spectrum of Austrian economics, with special emphasis on developments that took place after the death of the greatest 20th century economist, Ludwig von Mises, including the Real Bills doctrine and social circulating capital; the theory of money, credit and banking; and the theory of interest and discount.

Completion of this course will earn participants one credit towards a four-course, four-credit program that has been submitted for accreditation to the Adult Education Accreditation Board of Hungary. Participants will receive a certificate signed by Professor Fekete. The follow-up credit courses will cover these areas:

Adam Smith's Real Bills Doctrine and Social Circulating Capital.

The Austrian Theory of Interest and Discount.

The Austrian Theory of Money, Credit, and Banking.

Some of the follow-up courses may be offered at Martineum Academy in Szombathely, Hungary, where we have had four successful conferences already in the past. A special cordial invitation is extended to all Martineum alumni and their family members and friends!

It is not well-known that Budapest is one of the foremost spas in Central Europe with a dozen or so medicinal thermal springs. Participants of the course could stay on afterwards and savor the superb spa and cultural offerings in the city. Make it a family holiday! Bring the children! Eating and shopping facilities, as well as a swimming pool are nearby. Spectacular excursions can be arranged in the surrounding hills, and boat trips on the River Danube.

www.professorfekete.com

Murray Pollitt: Farewell to all the emperors

In his latest market letter, Murray Pollitt of Pollitt & Co. in Toronto, the grand and not that old man of Canadian mine finance, remarks that the world's policy makers lack the courage to accept the discipline necessary to shore up the world's finances. So, Pollitt writes:

"Our best guess is that markets, not policy makers, will determine the next monetary system. And, as much for lack of alternatives as the traditional reasons, gold will be somehow involved. Meanwhile markets will be characterized by volatility, defaults, lots of uncertainty, and a rush for the hard stuff. Before they get around to a monetary system, governments will wake up to the need for wealth creation and, since the quick fix for wealth creation is competitive devaluation, we expect governments to get at it with vigour. Shades of the 1930s."

Pollitt's commentary is headlined "Farewell to All the Emperors" and he has generously consented to GATA's posting it HERE

Strike a blow at the market-rigging banks by moving your money

You can punish the "too big to fail" elite and its banksters by withdrawing deposits from market-manipulating, derivatives-mongering, bailout-receiving, and grotesque bonus-paying money-center banks and moving them to community banks and credit unions.

This idea has been organized into an Internet site by The Huffington Post's Arianna Huffington and a few friends and is being publicized with a clever video you can find HERE

Bob Landis: The ascent of hooey

GATA's longtime friend Robert K. Landis, partner in Golden Sextant Advisors LLC with another longtime friend of GATA, Reginald H. Howe, brilliantly skewers Harvard Professor Niall Ferguson's popular new economic history, "The Ascent of Money."

Headlining his review "The Ascent of Hooey" Landis condemns Ferguson for rationalizing the vast expansion of state power that was made possible by the murder of the gold standard. What Landis calls Ferguson's "Harvard Theory of Money" actually celebrates not money but infinite credit and infinite power in the hands of an elite even more smug and arrogant than Harvard alumni.

Landis' review can be found at the Golden Sextant Internet site HERE

Antal Fekete: Dress rehearsal for the last contango

By Antal E. Fekete

The Gold Standard Institute

Canberra, Australia

Monday, August 24, 2009

http://www.goldstandardinstitute.com/

I have written about "the last contango in Washington" before. The phrase covers the gold crisis that has been brewing under the surface in the world for 60 years due to the insane gold policies of the U.S. Treasury. As a result all newly mined gold, surpassing the quantity of all gold ever mined prior to 1947, has gone into private hoards, from which it will be next to impossible to coax out. The measure of this act of disappearance of gold is the vanishing of the basis, or the last contango.

In the technical jargon of the futures markets, the basis is the spread between the nearest futures price and the cash price in the same location. The gold market has always been a carrying-charge market -- a contango market -- due to the monetary metal status of gold. This means that the gold spread has always reflected the carrying charge, the opportunity cost, of carrying gold, most of which is foregone interest.

But a strange phenomenon has been manifesting itself for 35 years, since the inception of gold futures trading. Rather than remaining constant, the basis as a percentage of the rate of interest has been vanishing and now has dropped to zero. At the same time gold holdings registered at the Comex-approved warehouses have been dwindling. Both indicators point toward a shortage of monetary gold that appears irreversible.

The support of the paper gold markets is at stake. Without cash gold backing it up, paper gold trading is not viable.

When the gold basis goes negative, that's the end not only to contango but also to gold futures trading as we know it. Permanent backwardation in gold has never ever been experienced -- unless we imagine that there is a gold futures market in Harare. Gold is not available at any price quoted in Zimbabwe dollars. In that sense the last contango has first occurred in Zimbabwe.

Whatever paper trading of gold is still going on in the United States, it is at best a dress rehearsal for the Last Contango in Washington, which will be followed by the regime of permanent backwardation.

The meaning of this is that physical gold cannot be purchased at any price quoted -- this time, yes, in U.S. dollars.

The U.S. dollar rubbing shoulders with the Zimbabwe dollar?

Mainstream economists and financial journalists shrug: "So what? We are not watching the basis of frozen pork bellies trading either when we make monetary policy." These gentlemen betray a lack of comprehension of the nature of the present financial and credit crisis. Whatever else it may be, this crisis, first and foremost, is a gold crisis with an incubation period measured in scores of years. It is about to reach its climax.

The world appears to be totally unprepared for it -- witness the silence surrounding the gold nexus.

Even the so-called sound-money Internet sites misread the situation. They are talking about an imminent breakout of the dollar price of gold from its holding pattern below $1,000 per ounce. Such breakouts have occurred from time to time since 2001, when gold broke through the "resistance levels" of $300, $400, etc. The coming breakout is not distinguished by the fact that $1,000 is an even rounder figure than the previous round figures that have been surpassed. It is distinguished by the fact that we are confronting a world event the like of which has never happened.

It has never happened that gold was unobtainable at any price. It has never happened that all governments have defaulted on their debt obligations simultaneously.

Still, we have to explain the relevance of this to the credit crisis. It is no secret that the bonds, notes, bills, and other obligations of the U.S. government, or any other government, for that matter, are irredeemable. That is, they are redeemable in nothing but more of the same. For example, the bonds of the U.S. Treasury are redeemable in Federal Reserve credit, which is itself irredeemable and is "backed by" the self-same bonds of the U.S. Treasury. Why is it, then, that these Treasury obligations are in demand where one might think that redeemability is a sine-qua-non of issuing them? What makes people participate in this shell game? How can such a crude check-kiting scheme mesmerize the entire population?

Come to think of it, the sight of this Ponzi scheme would shudder the Founding Fathers of our great Republic.

This is not an easy question to answer. But going through all the alternative explanations one by one, we come to the conclusion that the debt of the U.S. government is still redeemable in a sense, however limited or restrictive it may be. The debt of the U.S. government has a liquid market in which it can be exchanged for Federal Reserve credit. In turn, Federal Reserve credit can still be exchanged in liquid markets for physical gold, the ultimate extinguisher of debt, albeit at a variable price.

But if you break that final link, when gold is no longer for sale at any price quoted in U.S. dollars, then the rug will have been pulled from underneath this house of cards, and the international monetary system will collapse like the twin towers of the World Trade Center. And this is the situation that we are confronted with.

Look at it this way. There is a casino where the lucky gamblers can gamble risk-free. Their bets are "on the house." This casino is the U.S. bond market. There is only one catch. The pile of the winning chips in front of each gambler may become irredeemable at the exit when the hairy godfather waves his magic wand.

As the gold markets enter their phase of permanent backwardation, all rational basis for holding U.S. Treasury debt -- or any debt, for that matter -- will disappear. There will be a mad rush to the exits, and holders of debt will trample one another to death in trying to cash in on their winnings.

In July I attended the Santa Colomba Conference 2009 at the Palazzo Mundell near Siena, Italy. There were 50 people in attendance by invitation of Robert Mundell of Columbia University, recipient of the Nobel Memorial Prize in economics 10 years ago. They were mostly officials of various treasuries and central banks, ambassadors, bankers, professors of monetary economics, authors of monographs, and editors of financial journals. Paul Volcker, a former U.S. Treasury official and chairman of the Federal Reserve Board, was present.

Prior to the conferernce I circulated several papers among the participants. I was trying to show that the cataclysmic nature of the present credit crisis could not be understood without trying to understand gold, the ultimate extinguisher of debt. We are all passengers on a runaway train on a down-sloping track, the brakes of which (gold) have been dismantled at the top of the hill. The train is picking up speed beyond any safe limit, and a crash appears inevitable.

Our gracious host and the chairman, Professor Mundell, made two references to gold during the two days of the conference, asserting that, apart from wartime, the gold standard has been the most crisis-free monetary system in history. (Of course, all monetary system have a habit of breaking down during wars.) Yet not one participant picked up the ball dropped by Mundell. They kept talking about "green shoots," the recovery of the stock markets, and coming bailouts and stimulation packages. As to my papers stating that this crisis is a gold crisis, I got just one bit of feedback, in private. Apparently the rest of the participants have been turned off by the four-letter word "gold." It was not worth their while to read the ramblings of this loner on the problem of "putting spent toothpaste back into the tube."

One of my papers was an open letter addressed to Volcker. In it I asked whether there were contingency plans in the Treasury or Federal Reserve to meet the coming crisis of permanent gold backwardation.

Volcker declined to answer my question, in public or in private. I am inclined to think that there are no such contingency plans other than "muddling through," as they have in all previous monetary crises. None of the policy-makers sees the uniqueness of the coming and predictable crisis, or the need to confront it with a comprehensive plan. There is an overwhelming unwillingness to admit that the international monetary system as now constituted has been built on quicksand. It is a mere makeshift that took its origin in the last gold crisis of 1971. Cracks have been papered over as they appeared after every subsequent crisis. Every opportunity to sit down and work out a permanent solution was passed up. This seems to have worked well enough in the past. Policy makers see no reason why it would not work in the future.

Yet the Last Contango in Washington will be different from all previous crises. It will be elemental, devastating, and apocalyptic. It will destroy virtually all paper wealth and render virtually all physical capital idle. It will involve hordes of unemployed people roaming the streets, caring for no law and order, pillaging homes and institutions. It will destroy our freedoms. It may destroy our civilization unless we take protective action.

On the positive side, it will sweep away the complacency of the managers of the regime of irredeemable currency and fundamentally weaken the sway of Keynesian and Friedmanite economics as it has a stranglehold on the teaching of economic science.

The Last Contango in Washington will eclipse the Great Depression of the 1930s. Be prepared.

-----

Antal E. Fekete is an economist and retired professor at Memorial University of Newfoundland. He can be reached at AEFekete@Hotmail.com. This essay first appeared in the Gold Standard Institute newsletter.

* * *

Orlandini talks about the "D" word....

Now here's a piece of what I call straightforward down-to-earth-one-plus-one-makes-two rational economic reasoning. It's from the latest Dow Theory Analysis by Enrico Orlandini:

".. I’ve talked a lot about deflation, so let me give you a simple explanation of how deflation works.

The Fed has been trying to grease the wheels of the economy with liquidity, or so it says, in an effort to get Americans back into stores and spending money. Yet every month 500,000 more Americans are unemployed. The current “official” rate is 9.5% and is projected to surpass 10% before the end of the year. The last thing you are going to do if you are afraid of losing your job is spend money on worthless crap, when you may need it to survive. You will service your debt for as long as you can, spend only on the basics, and save what you can. That’s why the savings rate has gone from 0% to 6% in less than a year. So you cut back on spending and that means store sell less. The store then cuts back on inventory and lays people off. The companies that produce goods for those stores cut back on production, buy less raw materials, lay people off, and in the end pay less taxes because profits fall. Everyone lays off employees and consumes less. This leads to even further cost cutting measures and that causes even bigger declines in consumption, and more jobs are lost and so on...

That’s a deflationary spiral, it takes on a life of its own, and that’s where we are now.

The Fed had one shot to stop deflation dead in its tracks, and failed miserably.

Now they will be forced to do one of two things: write off debt or print even larger amounts of money. Yesterday the administration sent off a trial balloon when Obama’s economic advisor, Laura Tyson, mentioned that we should consider a second stimulus plan. That in itself is misleading because we have already had three, maybe four, stimulus packages of one form or another.

It should be clear to a blind man by now that this is not the answer, but the administration persists, just as Bush and Paulson did. Again, I would love to know why.

The so called bail outs were never intended for the general public, so it should come as no surprise that they had little or no effect on the average consumer. Banks received the cash, but never wrote the bad debts off, so they really can’t loan. Aside from that, the banks never disclosed the amount of bad debt they really hold.

Current economic policy is more in the form of a hope and a prayer, and it’s been my experience that God does not answer that type of request."..

...and may I add, "Allelujah!!"

William Rees-Mogg: In crisis never forget value of gold

The dollar is simply a piece of paper. Gold is a much better store of value and is the best insurance against future shocks

By William Rees-Mogg
The Times, London
Monday, February 16, 2009

Last week was a bad one for bank shares; after the HBOS L8.5 billion loss, Lloyds shares fell by a third and other bank shares fell as well. Yet it was a very good week for the gold price, which closed on Friday at $935 an ounce, after reaching what was nearly a seven-month high of $953.30 on Wednesday.

Barclays Capital commented that gold prices were resuming their long-run bull trend after eight consecutive years of gains. For longer than the past eight years I have been arguing that investment in gold is an essential insurance against financial shocks. Last week was a classic example. Respectable British bank shares have now fallen by up to 90 per cent, while the gold price has risen by more than 200 per cent since Gordon Brown began selling the Bank of England's gold reserve.

I have been following the gold price since I published "The Reigning Error," a short book on inflation, in 1974. I have not consistently advised people to buy gold -- like all other assets, gold can become significantly overvalued, as it did in 1980. However, I have found that the movements of the gold price are one of the most useful pieces of evidence about the health of the world economy. Mr Brown's sale of gold was an avoidable error. My friend the MP Peter Tapsell repeatedly warned him in Parliament not to do it.

People buy gold when they are nervous about the economy, and they are right to do so because gold is a unique commodity. It has to a high degree two qualities that are seldom found together: liquidity and reality. It has strong liquidity; it can almost always be bought, sold, or exchanged. There are other liquid assets, of which the US dollar is probably supreme, but they lack gold's quality of real value.

Dollars do not constitute a real asset, such as property or "real estate." The dollar is simply a piece of paper. Gold has been a much better store of value than the dollar.

In 1873 one of the leading British economists, William Stanley Jevons, published a short book, "Money and the Mechanism of Exchange." By 1887 it had reached its eighth edition. Unfortunately, there are few modern economists who do not suffer from the delusion that new truths make old ones obsolete.

Great mistakes could have been avoided in 2008 if bankers and politicians had studied Jevons, even though his little book was written 136 years ago. Jevons quotes Herbert Spencer as observing that "it is the grave misfortune of the moral and political sciences that they are continually discussed by those who have never laboured at the elementary grammar or the simple arithmetic of the subject." That was true then, and it is true now. Indeed, there are still some people who believe that poverty can be abolished by the issue of printed bits of paper.

Nowadays such people usually call themselves Keynesians, though their doctrine is not to be found in the works of Maynard Keynes, a much less simplistic economist than some of his modern followers. These so-called neo-Keynesians are hostile to gold, usually for two reasons. They see gold as the natural enemy of the paper money in which they put their trust; and they see gold-related systems as imposing a discipline on the unlimited issue of paper money, and they reject that.

World trade depends on the existing global system, which is one of paper currencies, separately managed and largely unconvertible. These currencies float in terms of each other, sometimes with a fixed rate in relation to a larger currency. Since President Nixon closed the gold window in 1971, there has been no fixed-rate convertibility between any of these paper currencies and gold. In the past 40 years the world exchange system has suffered from two periods of high inflation and is now suffering from the worst depression since the 1930s.

In 1873 Jevons could already write: "It is hardly requisite to tell again the well-worn tale of the over-issue of paper money which has almost always followed the removal of the legal necessity of convertibility. Hardly any civilised nation exists which has not suffered from the scourge of paper money at one time or another. ... Time after time in the earlier history of New England and some of the other states now forming part of the American Union, paper money had been issued and had brought ruin."

Daniel Webster's opinion should never be forgotten. Of paper money he says: "We have suffered more from this cause than from every other cause or calamity. It has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemy."

In the 1930s some nations tried to beat the slump by competitive devaluations. In the present crisis, Britain has already experienced a very big devaluation of the pound, taking it down by a quarter against the dollar. Every country, led by the United States, has been issuing money, often in very large amounts, in order to bail out its banks. No one knows the total value of these national injections of cash into the banking systems. As the earlier injections have not restored stability to national economies, further injections inevitably will be made. All will be made in unconvertible currency, and overissue will occur.

Sooner or later the world's governments will have to reconsider Keynes' two real achievements, Britain's low inflation finance of the Second World War, and the world currency system that he negotiated at Bretton Woods.

Both Jevons and Keynes believed in the need for what Jevons called "a worldwide system of international money." Without it, recurrent crises, such as the present one, will be inevitable. Governments need to create a new world system, in which gold, as a stabiliser, should play its part. For individuals, gold remains the best insurance against future shocks and the best store of value.

-----

William Rees-Mogg is a former editor of The Times of London who now writes a column for the newspaper.

* * *

Judy Shelton: Capitalism needs a sound-money foundation

It would be rather unthinkable a few years ago for articles like the one appended here to appear in the mainstream media. The grim present day economic conditions, though, are ripe with new possibilities for the perennial attributes of gold as a monetary metal to shine again with a new brightness through the darkened monetary skies of fiat.
Gold as Money of last resort...

The following article is worth its weight in gold:

By Judy Shelton
The Wall Street Journal
Thursday, February 12, 2009

Let's go back to the gold standard.

If the very idea seems at odds with what is currently happening in our country -- with Congress preparing to pass a massive economic stimulus bill that will push the fiscal deficit to triple the size of last year's record budget gap -- it's because a gold standard stands in the way of runaway government spending.

Under a gold standard, if people think the paper money printed by government is losing value, they have the right to switch to gold. Fiat money -- i.e., currency with no intrinsic worth that government has decreed legal tender -- loses its value when government creates more than can be absorbed by the productive real economy. Too much fiat money results in inflation -- which pools in certain sectors at first, such as housing or financial assets, but ultimately raises prices in general.

Inflation is the enemy of capitalism, chiseling away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities.

In short, inflation undermines capitalism by destroying the rationale for dedicating a portion of today's earnings to savings. Accumulated savings provide the capital that finances projects that generate higher future returns; it's how an economy grows, how a society reaches higher levels of prosperity. But inflation makes suckers out of savers.

If capitalism is to be preserved, it can't be through the con game of diluting the value of money. People see through such tactics; they recognize the signs of impending inflation. When we see Congress getting ready to pay for 40% of 2009 federal budget expenditures with money created from thin air, there's no getting around it. Our money will lose its capacity to serve as an honest measure, a meaningful unit of account. Our paper currency cannot provide a reliable store of value.

So we must first establish a sound foundation for capitalism by permitting people to use a form of money they trust. Gold and silver have traditionally served as currencies -- and for good reason. A study by two economists at the Federal Reserve Bank of Minneapolis, Arthur Rolnick and Warren Weber, concluded that gold and silver standards consistently outperform fiat standards. Analyzing data over many decades for a large sample of countries, they found that "every country in our sample experienced a higher rate of inflation in the period during which it was operating under a fiat standard than in the period during which it was operating under a commodity standard."

Given that the driving force of free-market capitalism is competition, it stands to reason that the best way to improve money is through currency competition. Individuals should be able to choose whether they wish to carry out their personal economic transactions using the paper currency offered by the government, or to conduct their affairs using voluntary private contracts linked to payment in gold or silver.

Legal tender laws currently favor government-issued money, putting private contracts in gold or silver at a distinct disadvantage. Contracts denominated in Federal Reserve notes are enforced by the courts, whereas contracts denominated in gold are not. Gold purchases are subject to taxes, both sales and capital gains. And while the Constitution specifies that only commodity standards are lawful -- "No state shall coin money, emit bills of credit, or make anything but gold and silver coin a tender in payment of debts" (Article I, Section 10) -- it is fiat money that enjoys legal tender status and its protections.

Now is the time to challenge the exclusive monopoly of Federal Reserve notes as currency. Buyers and sellers, by mutual consent, should have access to an alternate means for settling accounts; they should be able to do business using a monetary unit of account defined in terms of gold. The existence of parallel currencies operating side-by-side on an equal legal footing would make it clear whether people had more confidence in fiat money or money redeemable in gold. If the gold-based system is preferred, it means that people fully understand that the purpose of money is to facilitate commerce, not to camouflage fiscal mismanagement.

Private gold currencies have served as the medium of exchange throughout history -- long before kings and governments took over the franchise. The initial justification for government involvement in money was to certify the weight and fineness of private gold coins. That rulers found it all too tempting to debase the money and defraud its users testifies more to the corruptive aspects of sovereign authority than to the viability of gold-based money.

Which is why government officials should not now have the last word in determining the monetary measure, especially when they have abused the privilege.

The same values that will help America regain its economic footing and get back on the path to productive growth -- honesty, reliability, accountability -- should be reflected in our money. Economists who promote the government-knows-best approach of Keynesian economics fail to comprehend the damaging consequences of spurring economic activity through a money illusion. Fiscal "stimulus" at the expense of monetary stability may accommodate the principles of the childless British economist who famously quipped, "In the long run, we're all dead." But it shortchanges future generations by saddling them with undeserved debt obligations.

There is also the argument that gold-linked money deprives the government of needed "flexibility" and could lead to falling prices. But contrary to fears of harmful deflation, the big problem is not that nominal prices might go down as production declines but rather that dollar prices artificially pumped up by government deficit spending merely paper over the real economic situation. When the output of goods grows faster than the stock of money, benign deflation can occur -- it happened from 1880 to 1900 while the U.S. was on a gold standard. But the total price-level decline was 10% stretched over 20 years. Meanwhile, the gross domestic product more than doubled.

At a moment when the world is questioning the virtues of democratic capitalism, our nation should provide global leadership by focusing on the need for monetary integrity. One of the most serious threats to global economic recovery -- aside from inadequate savings -- is protectionism. An important benefit of developing a parallel currency linked to gold is that other countries could likewise permit their own citizens to utilize it. To the extent they did so, a common currency area would be created not subject to the insidious protectionism of sliding exchange rates.

The fiasco of the G-20 meeting in Washington last November -- it was supposed to usher in "the next Bretton Woods" -- suggests that any move toward a new international monetary system based on gold will more likely take place through the grass-roots efforts of Americans. It may already be happening at the state level. Last month Indiana state Sen. Greg Walker introduced a bill -- "The Indiana Honest Money Act" -- which would allow citizens the option of paying in or receiving back gold, silver or the equivalent electronic receipt as an alternative to Federal Reserve notes for all transactions conducted with the state of Indiana.

It may turn out to be a bellwether. Certainly, it's a sign of a growing feeling in the heartland that we need to go back to sound money. We need money that works for the legitimate producers and consumers of the world -- the savers and borrowers, the entrepreneurs. Not money that works for the chiselers.

----

Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

* * *

Jason Hommel: What if They Returned to the Gold Standard?

(They can't, but we can..)

Silver Stock Report
by Jason Hommel, December 10th, 2008


What if the Government went back on a Gold Standard?

Do do that, they would need to use their gold to pay off all their debt.

That would give a price of gold if the U.S. Government backed the dollar with gold.

We only need to know two numbers, and do a simple problem of division.

First number: The national debt.
http://www.treasurydirect.gov/NP/BPDLogin?application=np

The government tells us this is:
$10,656,119,227,403

That's 10.6 trillion dollars.

Second number: The U.S. Gold stock.
http://www.fms.treas.gov/gold/current.html

The government tells us this is:
261,498,899 ounces of gold

That's 261 million ounces of gold.

So $10,656,119,227,403 divided by 261,498,899 = $40,750/oz. of gold.

In theory, if the U.S. government had the restraint to stop issuing any kind of new debt, and if there was a runaway hyperinflation, the government could credibly stop any sort of runaway gold price by offering gold at a price of $40,750/oz.

That's the price that could cap the gold market if the U.S. government sold all their gold to all their bond holders. At that point, all new taxes would have to be levied in gold, not dollars.

It's important to realize that any effort by the government to sell gold below that price will ultimately fail, and will eventually cause the gold price to go even higher than that price, as that would only deplete their limited stock of gold at inappropriate price levels.

The main point is that T-Bills, which are perceived as the safest haven around, are not safe. They are only backed up by gold at a rate of $40,750 per oz. With gold trading today at around $800/oz., the U.S. gold backs less than 2% of the value of the issued bonds, or stated another way, $800 is 2% of the price of $40,750. Gold, at today's prices, is clearly a far superior safe haven.

And silver, which is in short supply, due to relentless industrial demand that has consumed nearly all world silver supplies, is even safer.

Clearly, the government cannot offer gold at $40,750 per oz. today. There would be no buyers. But, over time, the gold price may rise to such levels, and beyond, as a generation of people slowly wake up to the monetary fraud of the last 29 to 95 years, depending on whether you count from 1980 or 1913.

I am not an advocate of a return to a gold standard, where gold backs up paper money. I'm in favor of a return to using silver and gold coins and bars as money, as measured by weight, and traded at their intrinsic value according to the price in an open and free market place.

Sincerely,

Jason Hommel

Mises Institute: Is Gold Money?

From today's Daily Article posted by Robert Blumen at Mises Institute web site:

"... What qualities have made gold (and silver) the winners of the monetary competition in centuries past? The qualities most often cited by monetary historians are durability, divisibility, recognizability, portability, scarcity (the difficulty of producing more of it), and a value-to-weight ratio that is neither too high nor too low. Too low a ratio would make it hard to carry enough for spending, while too high a ratio would make small transactions difficult and prevent the commodity from being sufficiently widely owned in the prior barter economy. Gold still has these qualities today. While fiat money has some of them, it fails the scarcity test: it is too easy to create more of it.

The result of market competition is not necessarily permanent. Market competition is an ongoing process. Even when one commodity emerged as money, there continued to be competition from other nonmonetary commodities. Once the world's money, even gold could have lost its place had a superior alternative emerged. But that is not the reason we no longer use it. Political money did not prove its superiority through a market process. What happened instead was a politically imposed change from a better system to a worse system.

Although the central bankers have used political means to replace gold with paper, they do not have the power to end the competition between their money and commodity money. The "demonetization" of gold by central banks has rigged the competition — but not ended it.

Gold as money may not be over for all time. As the monetary system melts down, gold functions as "shadow money," an alternative that competes with the political money. It remains a store of value because of its potential to become money again. There is continuing demand for gold as a hedge against the breakdown of the fiat system.

Governments cannot force people to use their money beyond a point. The market will only continue to accept fiat money as long as it works well enough (or even, not too badly). If governments debase its currency beyond a point where it maintains some value over time, people will stop using government currency and switch to something else."

Please click HERE for this fascinating article.

I.O.U.S.A.

Indebted Ever After

Scared by National Deficit? You Should Be, Filmmakers Say

By Frank Ahrens
Washington Post
Thursday, August 7, 2008

A private-equity billionaire, a former federal government official, and a Baltimore newsletter editor have made a documentary film that they hope can do what an endless parade of policy papers has not: Persuade Americans that debt has created a looming economic crisis that would make the Great Depression look like a market correction.

The movie, "I.O.U.S.A.," debuting Aug. 21, is an 87-minute alarum on what it calls the tsunami of debt bearing down on the United States' future, caused by the rising national deficit, the trade imbalance, and the pending costs of baby boomers cashing in on entitlements.

Early reviewers have dubbed the film "An Inconvenient Truth" for the economy, meaning it's not exactly the feel-good movie of late summer 2008.

Except for budget wonks in love, it hardly counts as a date movie. The film's thrilling action sequence has a guy going to a refrigerator for a Tab. There are no car chases and nothing blows up.

Except, possibly, for the entire economic future of the United States.

"I.O.U.S.A." offers up as its action hero David M. Walker, former head of the Government Accountability Office. With movie-star looks that scream "accountant" rather than "Terminator," Walker has been the Cassandra --- or Chicken Little -- of America's growing deficit for some time. Last August he compared the United States to the final days of ancient Rome, which he said was militarily overextended and fiscally irresponsible.

Since 2005, Walker has been traveling the country on the catchy-sounding "fiscal wake-up tour," preaching his apocalyptic message to half-empty rooms, at least at the start. The tour picked up steam after Walker's message was featured in a "60 Minutes" piece in March 2007.

In March of this year, Walker resigned from the GAO so he could be even more vocal on the debt crisis, becoming chief executive of the newly formed Peter G. Peterson Foundation, set up by Peterson, billionaire co-founder of the Blackstone Group, a major private-equity player.

Their message: You probably know that the national deficit is $9.6 trillion and rising. What you don't know is how bad things really are. If you include all the unfunded entitlement obligations -- Social Security, Medicare, Medicaid and so forth -- we are actually in a $53 trillion hole, Walker says.

And it will only get deeper as we get older.

In an interview, Walker is full of grim one-liners, such as: "The debt has increased our risk of being held hostage by foreign lenders," "Our situation is serious, and it is deteriorating with the passage of time," and "The financial condition of the U.S. is worse than advertised."

The nation's debt now accounts for 66 percent of the gross national product. But unless things change, the film argues that the cost of aging baby boomers will push that proportion to 244 percent by 2040, twice what it was at the end of World War II, our highest level of national debt. A debt that high, even super-investor Warren E. Buffett says in the film, "could create real political instability."

At this point in the movie, we're wishing we'd rented "The Towering Inferno" instead. Happier ending.

The film generally skirts specific solutions -- it does not recommend one form of Social Security reform over another -- but suggests broad entitlement overhaul, tough budget controls, conservation of energy, and, at the no-duh level, not buying things you can't afford. In the interview, Walker said that tax deductions and exemptions will have to be reduced and a national consumption tax should be considered.

"It's inevitable there will be some tax increases on fat cats like myself," Peterson said in an interview. "But any idea you're going to solve most of this problem with taxes is not realistic."

Not everyone agrees that the United States is headed off a credit cliff.

There's Arthur Laffer, for instance, author of the famous Laffer Curve, which says that if taxes rise too high, people lose incentive to work. Laffer argues that as long as the debt level stays where it is, it can be financed down over time, like a homeowner with a mortgage.

"Arthur Laffer said to me, 'Addison, I'm not a debt guy,'" said Addison Wiggin, executive producer of the film and editorial director at Baltimore's Agora Financial, a research firm and publisher of investment advice.

"But that doesn't take into account everything that's coming down the pike," said Wiggin, co-author of the 2005 book, "Empire of Debt."

Wiggin got the idea for turning his book into a movie while snowbound in a Vermont condo for two days in 2005. He watched "Commanding Heights," a six-hour documentary on the history of the global economy. Three times.

To finance the film, Agora set up Agora Entertainment, whose initial budget was $500,000 raised from investors, a figure Wiggin said was "exceeded by a long shot."

Wiggin knew of Walker's dire warnings and made him the first interview for the movie. He quickly became its star.

As the film began production, it laid out a number of dire economic events, such as the mortgage meltdown and credit crisis, that were predicted in Wiggin's 2005 book. But by 2007 the book's prophesies began coming true, forcing a panicked re-editing of the film in September with the goal of getting the film into the Sundance film festival in January.

Re-editing is expensive and by November, Wiggin's investors pulled out. Agora ended up financing the project. "People were saying, 'This is Addison's sinkhole here,'" he said. No one found it funny that he was deficit-financing a movie that tells people not to buy things they can't afford.

But the film made it to Sundance and got a standing ovation, Wiggin said.

Peterson's foundation, with Walker at the helm, had promised to pay for the movie's distribution. But they liked it so much, they bought it from Agora for $2.5 million.

The film will debut in 400 theaters around the country on Aug. 21, followed by a live video town hall meeting from Omaha, featuring Walker, Peterson and Buffett. The next day, the film opens in 10 cities, including Washington.

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Huffington Post: Seven Predictions for US economy

1) The price of gold and the Dow Jones will reach parity between 4,000 and 5,000 (i.e., gold will trade between $4 - 5,000 as does the Dow Jones Industrial Average).

2) America's sovereignty, as defined as percentage ownership of American financial assets, principally U.S. government bonds (soon to no longer be rated AAA), will be mostly in the hands of foreigners.

3) China will buy Fannie Mae and Freddie Mac and in so doing become America's biggest land lord.

4) Very few of the current Bush administration, family, and close associates will be living inside U.S. borders within 6 months after leaving office.

5) The Presidential election in November will be delayed due to a global financial crisis.

6) The U.S. military in Iraq and Afghanistan will start to run out of money and be left to get out on their own resulting in American mercenaries hiring groups like the Taliban to escort them out of the region, with Bin Laden getting a commission on each deal.

7) Russia will emerge as the new power broker in a post-America world restoring financial order between America, the largest debtor in the world and China, the largest creditor in the world.

...to read the entire mind-boggling, must read article titled "The Black-Scholes Atomic Debt Bomb & 7 Predictions" please click HERE

John Browne: Gold might be shaking off central bank shackles

A Toast to Gold Power

By John Browne
Pittsburgh Tribune-Review
Sunday, April 13, 2008

In 2003 a bottle of 1785 Chateau d'Yquem once belonging to Thomas Jefferson was sold in London for $56,588, making it the most expensive bottle of white wine and earning d'Yquem the title of "liquid gold." What more fitting wine for a toast to the alluring yellow metal that has fascinated humankind for most of recorded time?

Why is it now an appropriate time to drink to gold? Because gold is possibly near to shaking off a sustained and coordinated attack on its monetary credibility by some of the world's most powerful central banks. Investors could win back an asset that offers protection against the financial abuse of governments.

Most wines are priced as commodities on the basis of quality, supply and demand. Others, undrinkable, such as the 200-year-old d'Yquem, are sold as collectors items or investments.

Interestingly, the d'Yquem did not command the highest-ever price. That fell to a bottle of 1787 Chateau Margeaux, also once owned by Jefferson. It had been insured and was broken in a table accident; the insurer paid $225,000!

This episode illustrates another key value of gold -- insurance against catastrophe.

Employed as an industrial metal in jewelry, dentistry, sophisticated electronics, and space hardware, gold is no ordinary commodity. It has a high value-to-weight ratio, making it one of the oldest, most trusted forms of money. It cannot be produced; it must be found and mined. This rarity value gives it credibility as an honest store of wealth.

For centuries the "honesty" of gold has been the bane of financially dishonest governments, which have even diluted the gold content of their coins to deceive holders as to their face value.

Around 1670 London goldsmiths introduced notes as certificates of their clients' ownership of gold. Gradually, the notes were used by goldsmiths' clients to transact commercial business without incurring the expensive and risky transportation of the underlying gold. Eventually these notes became widely accepted, becoming the first effective paper currency.

Soon rulers learned the key advantage of paper money -- leverage! Progressively, and often in return for financing wars, institutions called "banks" were permitted to issue bankers' (shop) notes, each promising redemption in gold, but in multiples of the physical amounts of customers' gold they held on deposit.

Soon national or central banks got in on the act. Economies grew rapidly, based on this new, miraculous "liquidity" of the new "paper" gold standard, a downgrade of the full gold "bullion" standard.

In World War I major governments dropped the gold standard, issuing vast amounts of paper money and debt. Yet post-war economies declined, calling paper money into question.

Meeting in Rome, the Great Powers saw a return to the gold standard as too recessive; what was needed was a paper "reserve" currency, redeemable in gold. Great Britain's currency, Sterling, was selected.

All worked well until after the Great Crash of 1929, when paper money lost credibility. The collapse of the Creditanstalt and a run on Austrian and German banks led to a rush to convert Sterling into gold. Soon the British gold "window" closed. In the absence of credible international money, world trade dropped and recession morphed into depression.

World War II revived economic activity. In July 1944 the Great Powers, nervous that the post-war recession of the early 1920s would be repeated, met at Breton Woods, New Hampshire, to devise a post-war currency system. This time the U.S. dollar was selected as the reserve currency, but convertible into gold only by central banks (the gold "exchange" standard).

All went well until Vietnam. Rather than finance that war by conventional taxation and borrowing, the U.S. government chose inflation. Because the dollar was the world's reserve currency, other nations initially tolerated this dollar inflation. However, some, such as France, sought conversion of their massive U.S. dollar surpluses into gold; President Nixon then closed the gold exchange window.

This unleashed a series of competitive devaluations. The free-market price of gold rose to levels which caused embarrassment to governments that were inflating and debasing their currencies.

It was recognized that the bulk of gold production was used by industry as a commodity and that the portion used for investment was some 500 metric tons a year. Led by America, major governments decided to de-monetize or discredit gold as an investment.

Covertly, the Central Bank Gold Agreement was concluded; under it, certain central banks agreed to pool some 500 tons of gold a year for coordinated market sales via the International Monetary Fund (IMF). While protesting the opposite, the IMF would intervene to maximize price volatility and discourage investment.

So what are the main influences on the price of gold?

Essentially, investors should note that gold is not priced in a free market and is volatile.

Most gold is likely to continue trading as a commodity, with normal speculation. In recession, gold should experience downward pressure.

At the margin, the investment value of gold has two aspects: "store of value" against inflation and "insurance" against catastrophe, such as a systemic financial meltdown or war.

Two weeks ago evidence of looming recession and worldwide contraction mounted, and gold experienced downward commodity price movement.

Simultaneously, the Federal Reserve's March 17 action was seen as averting a financial meltdown -- and "insurance" selling pressure was exerted on gold.

Furthermore, benign government inflation figures -- still believed by some -- led to "store of value" selling.

Acting covertly, the IMF probably moved to exacerbate market uncertainty. Gold dropped by over 10 percent by March 28.

Recent congressional questions posed to the Fed chairman reflected worrying times with recession, serious Main Street inflation and continued risk of financial chaos.

In worsening circumstances, gold's next upsurge could discourage central banks from continuing to squander their citizens' gold to manipulate the price downward. This would allow for a latent, follow-though surge in gold's free-market price.

Gold is unique. No government can challenge its integrity successfully, over time.

The taste of d'Yquem is exquisite. Alas, it will never be as good as gold.

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John Browne, a financial analyst and former member of Britain's Parliament, is a financial and political columnist for the Tribune-Review. He is a frequent commentator on CNBC's "Kudlow & Company." E-mail him at: johndbrowne@yahoo.com.

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