Saturday, May 29, 2010

Open Forum

Gold-dispensing ATMs: Coming to a city near you
By Blake Ellis, staff reporter
May 28, 2010

NEW YORK ( -- As economic fears drive gold prices to new highs, the creator of a gold-dispensing ATM is attracting attention around the globe.

Germany-based GOLD to go, which is currently churning out 50 gold machines a month to meet a recent jump in demand, launched its first ATM in Abu Dhabi's Emirates Palace Hotel earlier this month and opened its second in Germany last week.

The golden ATM's next destinations are the Bergamo Airport in Milan, Italy, all major airports in Malaysia, one of Russia's biggest banks and an undetermined location in Turkey.

By making gold investing as easy as buying a candy bar from a vending machine, GOLD to go hopes to attract average buyers to the gold market.

"We are going to make gold public with these machines," said Thomas Geissler, CEO of Ex Oriente Lux AG, which owns GOLD to go. "The prices are so easy to control that we're going to de-mystify gold and make it easier for anyone to buy it."


Jon Nadler, senior analyst at Kitco Metals [said] that he would be surprised if investors bought into the new invention ... "I would like to see that same machine... spit out cash," said Nadler.

Full story here

Thursday, May 27, 2010


One good thing that has come out of this blog is that new people are discovering ANOTHER and FOA every day. Another positive development is that gold price predictions are no longer capped at $2,000. Of course I don't presume to give credit for this second development to my small blog, but these are just two significant changes that I have observed since starting it in Aug. 2008.

Back then A/FOA were ignored and/or banned everywhere I looked. I found only one other person on the entire Internet who had read the archives and wanted to talk about them. Since then I have found hundreds more while gathering more than half a million total visits from 180,000 unique IP addresses.

Also back then, the highest gold price predictions I could find were $1,650 on JSMineset and $2,000 from Peter Schiff and Eric Janszen. That is, until I read A/FOA's predictions of $10,000 to $30,000 from back in 1997. Today high predictions are not uncommon at all. In fact, just yesterday Ben Davies was on CNBC talking about gold at $36,000 per ounce! (I wonder if he reads my blog! ;)

But as I believe I definitively demonstrated in my post Gold: The Ultimate Un-Bubble, the future price of gold is completely arbitrary. Unlike everything else, it has no economic restraints whatsoever, therefore it can go as high as is needed.

The gold base has always existed and has always been vital to whatever fictional monetary system was layered on top of it. The gold base is the volume of gold times the price of gold (GB=VOGxPOG). And this base is de facto vital on all scales, from global to national to individual.

The gold base not only exerts pressure on monetary systems but it also receives pressure from them. There is a symbiotic relationship between the gold base and monetary systems, whether money is exchangeable for gold at the bank or not.

Of course at one time physical gold and silver were the monetary system, and nothing else was considered money. But today, and for the past several systems the symbiosis between the gold base and money has been very active.

As monetary systems mature, be they a gold standard (pre-1922), the gold exchange standard (1922-1971) or the dollar reserve standard (1971-present), the price and volume of gold (the gold base) is under constant pressure to expand. Concurrently, whenever the gold base is restrained from its necessary and natural expansion (either through mining restriction or price appreciation restriction/fixed or semi-fixed parity) it exerts pressure back on the monetary system.

This symbiotic dynamic becomes a classic feedback loop that always ends in 1) a new or reworked monetary system and 2) an explosive expansion of the gold base. Today is no different.

What I write about here at FOFOA is the very meaning of this inevitable end, this "phase transition". And what this phase transition, or paradigm shift, will look like from the other side. I try to write about it from as many different perspectives and angles as I can come up with to not only share my understanding, but also to test my understanding. And so far so good. Here are a few recommended posts for the newcomers who find this subject interesting...

The 21st Century Bank Run
GOLD & MONEY: More Than Meets the Eye
Greece is the Word
Living in a Powder Keg and Giving Off Sparks
Gold: The Ultimate Hedge Fund
I can feel it coming...
Gold: The Ultimate Wealth Reserve
Gold is Wealth
Gold is Money - Part 1
Gold is Money - Part 2
Gold is Money - Part 3
Fair Value Gold?
Your Own, Personal, Freegold
Say Goodbye to Wall Street
Shake the Disease
The End of a Currency
No Free Lunch
Confiscation Anatomy - A Different View
The Waterfall Effect
The Call of the Century
Bondage or Freegold?
Call Me Contrarian
The Triumvirate of Wealth
Dead End
The Bermuda Triangle of Currency
Mona Lisa or Ben Franklin?
Weimar Reloaded
Taking Delivery of Physical
The Underwater Beach Ball Effect
Worst Case Scenario (12" Remix)
The Judgement of Value
All Paper is STILL a short position on gold
Bankrupt Economics
On "Hyperinflation"

As for price prediction calls, these are most difficult to make, second only to timing. Because once you realize what is actually happening, that paper gold markets like COMEX, the LBMA, GLD and others are the new restraining factor in gold base expansion, you must come to the ultimate conclusion that the next explosive gold base expansion will be a price reset of physical gold only. And that it must be large enough to solve today's biggest problem, infinite debt, or put another way, debt without any limit.

What makes it doubly difficult for the reader of such price predictions is that almost no gold-price prognosticators differentiate between inflation-adjusted and non-inflation-adjusted predictions. And rest assured, they do this for a reason! That reason is that by reserving differentiation, they utilize inflation as a hedge for their predictions. In other words, inflation will ALWAYS prove them correct in the long run.

But I have never taken such liberties. I have always been clear that when I guess at the future price of gold, it is in inflation-adjusted dollars. That is to say, my predictions are in today's dollar's present purchasing power. Non-inflation-adjusted or nominal gold prices in the future are simply impossible to predict. Just look at Zimbabwe. An ounce of gold could easily pay off the US national debt, nominally, if history is any guide.

But perhaps if the debt would have been allowed to collapse and default along with the banking system and a few of the most profligate governments, the marketplace would have only imposed a gold base expansion to somewhere between $10,000-$20,000 per ounce, that is, in today's dollars. But this was never to be.

We cannot know where the market will take the physical-only price of gold in order to solve today's debt problem. But we do know a few things that can give us a clue. 1) It will be a phase transition, or a paradigm shift that will knock your socks off. As someone recently wrote, you can heat water to 99 degrees Celsius and it will not boil. But go one degree higher and matter itself changes form. This is a phase transition. 2) The gold base expansion/phase transition will be completely unrestrained by economic forces, unlike any other physical material like oil, for example. In other words, it will appear completely arbitrary by all rational expectations and past ratios. The only scale on which it will make any sense is that it will solve the global debt problem.

But beware! This "market solution" to the global debt problem may not be as pleasant as you think. It might be, to borrow a fantastic phrase from Dan Amerman, a reluctant state of “Accidental Virtue”, to which we will all be dragged kicking and screaming.

The systemic rise of global imbalance, the creation of massive amounts of new and ever-more-worthless government digits, all to shore up unimaginable debt mountains held at the banks and central banks... all this and more, now demands settlement in very scarce physical gold metal. And with no international "window" to deliver such metal settlement at today's price, it must come from the global gold stock, from the holders of physical gold. The "flow" at today's price is not nearly sufficient. But the "stock" is plenty big... at the right price.

Gold must become free to settle all the massive imbalances that have accumulated for more than 88 years.

Before 1922, domestic debt claims in each nation were the "paper gold" of the day, as they were the only thing other than physical gold that the banks could hold in reserve and issue more credit upon during the gold standard.

After 1922 "paper gold" was expanded to also include British Pound Sterling and US dollars. But the banks receiving these new "paper gold reserves" (dollars and pounds) deposited them back in their banks of creation in London and New York. And as such, these "international paper gold reserves" doubled the money supply in amounts equal to all balance-of-payment deficits run by England and America. New credit was issued upon these reserves in both the surplus-running country and the deficit country of origin and deposit.

So the US and UK deficits never contracted the aggregate purchasing power of those countries after 1922, the way deficit settlements are supposed to. Instead, they exported their monetary inflation outward to the surplus-running countries. This was the very beginning of the US exorbitant privilege that continues to this day.

The collapse of the credit expansion bubble built upon this "double pyramid" contributed to the amplification of a simple recession into the Great Depression of the 1930's. This unforeseen development forced the overnight devaluation of all "paper gold" worldwide.

Following World War II the US dollar became the only "paper gold" accepted as international bank reserves, doubling monetary base in amounts equal to the crescendo that became the US trade deficit for the next 27 years. This "paper gold" pyramid finally collapsed in 1971, sending the price of gold up more than 2,000% in 8 short years.

And from 1980 until today, well, you all know what the modern "paper gold" looks like. And yes, the banks' reserves now consist of domestic debt claims, US dollars, "paper gold", other foreign currency, and yes, even foreign debt claims today. And yes, the recycling of trade deficit payments back to the country of issue continues to multiply the reserve base of the global banking system, the same way it did in 1922.

The "miracle" of modern banking is that all this exponential monetary inflation is cycled directly into assets and "investments". In other words, it is funneled into DEBT! It rarely hits the grocery store, at least not at levels that the people notice. Not yet that is.

But what this all means is that economic growth has no hope of ever keeping up with "financial growth". To stock market investors at certain times in history, like 1999, this seems like a new manna from heaven. Or for those lucky few who bought homes in 2000 and sold them in 2006. What a miracle!

But the reality is that we have a big problem today. And that problem is all the debt that is simply unserviceable on the physical plane of reality, let alone ever paying back the principle on collateral worth half what it used to be worth. This is a really big problem, and it will be resolved in a really big way.

Now, what is not going to happen this time like times in the past is that no one is going to manually reset the gold base at a new level to make things temporarily sustainable again. First of all, there is no gold window like before where they can reset the price. There is no sovereign hoard being dished out for them to protect. In fact, the higher the price goes, the more existing hoards are protected!

So, the way I have started looking at this, from a macro perspective, is; What will market forces do to fix the problem? And the answer is that the market will recapitalize itself through the gold base, just as it has done for thousands of years. This is a free market force I am talking about. It will not be resisted by those in power when it happens because they have bigger problems to worry about than trying to restrain the value of their only true reserves below market value.

This action I'm talking about could come at any moment. It is not something that relies on a specific metric hitting a specific critical number. Like a deep-water oil reserve, the pressure is already there, and the hole has already been drilled. All it will take is an event... any event. Like the forced default of a sovereign nation on its debt service, or a failed auction of new debt from Earth's biggest debtor, or a bad stock market crash, or a failure to deliver physical gold to the wrong recipient... or whatever. The list is long.

And the realization that I have personally come to is that the market wants to recapitalize the world, default some of the global debt and settle the rest of it after recapitalization. This is not a human-managed restructuring I am talking about. It is "the mountain coming down" via gravity. So in very rough terms I am looking for the worst transgressors to have to part with roughly half of their gold after revaluation. This will leave them with enough real capital to rebuild within the new, emergent meritocracy... the reluctant state of “Accidental Virtue”.

So the point of this post, what I hope will sink in, is that the future "inflation-adjusted" price of gold, the price in TODAY'S dollars, can literally be anything. Forget ratios. Forget technical analysis. Focus only on the debt! And this epiphany... this realization... this discovery... should be enough to convince anyone to get on the receiving end of this "very unfair" transfer of wealth. Actually, fair or not matters little. What else is fair in this world? Seriously. I am not here to pass on my moral fortitude, only to share my observations and understanding.

And here is the definitive issue. Does gold's "future price" need to suffice at a "gold window" in exchange for dollars? No. So does it need to relate to the $5T in existing monetary base? No. Does it need to credibly establish convertibility with all existing debt? Yes! And how much of the world's gold needs to establish this credibility? All of it? The stock... the flow? The answer is that the global stock doesn't matter. And present flow is irrelevant. What matters most is future flow and the existing stock of the biggest debtors. This is the incalculable calculation that will lead you to the future price of gold.

I put it most likely around $100K, but at least somewhere between $50K and... well... here's Steve Hickel's take...

Those [nations] with high dollar reserves and low gold reserves are exactly the point of a gold revaluation. By the US divesting itself of one-half of its gold reserves (let’s have an audit first, however) of 261M ounces of yellow at a value of $500K/ounce, it can swap $500K for each ounce of one-half of its reserves. In the end, China and others will not have any (or at least fewer) dollar reserves and much higher gold reserves and the US will (if it has not already divested without our knowledge or consent) still have half of its reserves.

Preferred buyers of US gold are those holding large tranches of US Debt. We have all heard (read) here that $60T appears to be the value of all US debt both internal and external. I would belabor the math again, but to summarize, if the US swapped half of its gold for $60T in debt, it would have to do so at $500K/oz. plus or minus a few 10’s of thousand dollars per ounce.

A one-time quick and unexpected valuation of gold at $500K per ounce, of course, would have unintended consequences. But let’s suppose the US and IMF decided as a measure to support International currencies [and debt] that such a one-time act was warranted (this was one of the measures of the G20 goals — "support international currencies"). It cannot be worse than the unintended consequences were are seeing by adding more debt on debt. Those left out in the cold regarding gold's value would be those countries such as the UK, who under PM Brown, divested most of its gold holdings at the low in the market. It would also leave out non-holders of gold assets in the investor class worldwide.

Again, I point out the absolute ridiculous nature of gold pundits who predict a price of $1600 as a high-mark for gold. It may hit $1600... on its way to $500K/oz... but only for a few seconds. I believe the reason there is the gold battle documented earlier today between Asia and the US gold markets is because there is a line in the sand. If this is breached then as we have heard cited, “we stare into the abyss….” I take this to mean that the dollar will be toast.

The cost of high gold in the eyes of those who spend so much to keep gold down (the Fed and some Banks who act as its agents) is a failed currency. Time does not favor the anti-gold. They who seek to control the paper gold market through outright intervention (manipulation) and secret back-room deals, have already lost the war. It is only a matter of time now that such matters will resolve themselves. Ammunition is running low. We only hope that US gold is not running low too — as I fear they may have tapped the hidden wealth of America to keep Humpty Dumpty propped up on the wall a tad longer.

Time for America to come clean and pay its debts…

Here is one final Thought for you all to ponder. Gold is not an investment. It is not insurance. Gold is the wealth consolidator.

I'll end this post of reflection with what I submitted as my "bio" to a couple spotlight sites. It consists solely of a few poignant quotes from two of the best friends I never met...

A Tribute to the Thoughts of Another and his Friend

Gold is about understanding the events that brought us here, and those still unfolding

"Brokers and traders will show you, "turn your gold into wealth", "put it to productive use, Trade It"! "Sell your gold and buy it again, many times". "Do this and find the value lost from your youth"!

But I say, spend your time in the company of truly wealthy ones, see how they make gold lie very still! Know this now, the world will again, in your time, feel value in gold as never before. And that value will be as the "productive use of holding wealth thru the fire of change". "Yes, you can also walk in the footsteps of giants".

"The economic game is ending! Watch closely as the world currencies and markets fall one by one. Watch in absolute wonder as the demand for oil plunges and its price goes thru the roof. Yes, oil stocks will crash with the markets. And gold? You will never know its price. It will stop all trading as it slices thru $10,000+."

"Sir, the world is going to change, and the rules of engagement will also change. Gold will be repriced, once! It will be enough for your time of life."

"Finally, we will all have a wealth reserve that places our footing in life on equal ground with the giants around us. Gold! Understanding the events that got us here and how they will unfold before us is what the Gold Trail is all about."

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

"What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over valued dollar that we spent without the pain of work."

"Hear me now, what the wealthy and powerful know: real value does not have to always be stated or converted throughout time. It need only be repriced once during the experience of life, that will be much more than enough!"


Wednesday, May 19, 2010


h/t Capt Goodvibes

Thursday, May 13, 2010

Hair of the Dog?

The ever wise Dennis Kneale, in the video below, quotes "most economists" as saying the cure for today's debt crisis is "the hair of the dog that bit me", or "load up on debt", "the hang-over cure".
A shot of whiskey in the morning? Is this the $IMFS in a nutshell?
Yes indeed it is.

Nassim Taleb, on the other hand, calls our mountain of debt a tumor. He says we must remove the tumor and do to everyone, including the US, what we did to the Greeks: force austerity. But he goes on to point out this is impossible in a democracy. It is only possible when you are doing it to someone else.

So, he says, we will proceed into hyperinflation. And this hyperinflation will be brought on one day by people "buying gold", or "running to currencies without a government". Nassim also mentions that "Larry Summers seems to be treating the US economy the way he treated Harvard, with his bogus projections". (Please see: "Harvard Swaps Are So Toxic Even Summers Won't Explain" in Gold: The Ultimate Hedge Fund for more on this perspective.)

Here is the interview...

Did you notice Nassim's body language at the end of the interview? He was leaning far away from the hosts. I think the phrase "don't shoot the messenger" applies well to theoreticians like Nassim Taleb who try to warn us that some big event is coming, unmistakably, unavoidably, inevitably.

Some time ago I wrote, "There is an important difference between practitioners and theoreticians both in science and economics. Practitioners have always ridiculed the warnings of theoreticians and philosophers in almost all areas of human endeavor. Their attacks usually begin by pointing out the lack of practical experience of the theoreticians. But it is a very important role that theoretician play in society, to point out things that have been overlooked by the practitioners.

"The problem today is that our markets are built, run and enforced entirely by former practitioners with a clear disdain for theoreticians and their warnings of low-frequency, high-impact inevitable events. This dynamic sets us up for catastrophic failures every once in a while."

You probably noticed that Nassim is not only a theoretician, but also a practitioner. (Join Nassim's 12,590 followers on Twitter here.)

I would like add that I agree 100% with Nassim Taleb here. I have been following him and writing about him, Benoit Mandelbrot, Black Swans, Chaos Theory, Fractals, hyperinflation and inevitable high-impact events ever since the market crash in 2008. Please note from above that Taleb says things are worse now, and then watch this interview that I first posted on October 24, 2008:

Nassim's job as a theoretician is to take the "Black" out of "Black Swan". It is to show us that the collapse of the entire system is a normal event. This is important. Systemic collapse is normal. Hyperinflation is normal. Resets are normal. In this case, normal does not mean common, it simply means inevitable.

James Aitken in his May 10, 2010 newsletter, "Notes from a Small Island" writes...

In September 1999, Charles Perrow of Princeton published Normal Accidents: Living with High-Risk Technologies.

Mr. Perrow uses the term “normal accident” in part as a synonym for "inevitable accidents." This categorization is based on a combination of features of high-risk systems: interactive complexity and tight coupling.

Normal accidents in a particular system may be common or rare ("It is normal for us to die, but we only do it once."), but the system's characteristics make it inherently vulnerable to such accidents, hence their description as "normal."

A normal accident occurs where systems are sufficiently complex to allow unexpected interactions of failures to defeat the best safety measures, and sufficiently tightly coupled to allow the failures to cascade into an even larger disaster, such as the one still unfolding in the Gulf of Mexico.

Hair of the dog, Dennis, really? Here is something Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank, said during opening remarks at the High-Level Conference on The International Monetary System in Zurich...

“Arguably, much of the debate surrounding the international monetary system boils down to the following question: how sustainable is an international monetary regime, in which one national currency serves as the international reserve asset? Over the past few decades, this question has been examined under different perspectives.

“A first perspective was the so-called “Triffin dilemma”, discussed in the context of the Bretton Woods fixed exchange rate regime. This discussion highlighted that increasing indebtedness of the reserve-issuing country would in time undermine the very confidence that forms the basis for the reserve asset status.

“A second perspective refers to the alleged “exorbitant privilege” of the reserve-issuing country. It highlights the asymmetry in the adjustment to shocks, as the reserve-issuing country has the privilege of not being under much pressure to adjust to current account deficits, at least over the short and medium term…”

I have been saying this for a while now. What the US federal government and the Fed have done is transfer systemic debt risk into the currency, making it more explosive than anyone can imagine. Europe is undergoing this same transfer of risk right now. But there is still a subtle difference between the euro and the dollar. Here is an extract from my post, No Free Lunch...

There are some clever deflationists that will tell you that the dollar is going to rise in value giving Ben, Tim, Barack and the entire DC gang a lengthy free lunch, all because of the giant debt overhang in the economy that backs the US dollar. The thinking goes something like this. The world is full of debt. The dollar is backed by this debt, and is therefore balanced by it. As long as the debt remains, it must be serviced with dollars which drives up the demand for dollars, and therefore the value of dollars. If the service of the debt starts to fail then the dollar will start to fall making the service of the debt easier (with cheaper dollars) and the service will then resume, raising the dollar back up. I call this the see-saw theory...

The problem is, you see, the biggest debtor of all is the very printer of the currency all that debt is denominated in. And this debtor is now picking up ALL of the slack left behind by everyone else. Only his debt service will never fail, because he can print that service with the click of a mouse. And since he doesn't have to seek dollars on the open market, his debt has the OPPOSITE effect of all other debt. Instead of driving up demand for the dollar, it drives it down (and drives up supply at the same time)!

Normal debt = dollar demand up, dollar supply down.
US Fed Gov't debt = dollar demand down, dollar supply way up!

As the dollar starts to fall in value, this has no effect whatsoever on the ability of the world's biggest debtor's ability to service it, and therefore has no see-saw-leverage effect that raises the value of the dollar back up. Instead, it has the exact OPPOSITE effect... once again. Because now this biggest debtor must print even MORE dollars to suck in the same SUBSTANTIAL AMOUNT of the real economy at ZERO cost.

And here is another way I illustrated this effect in pictures...

This first diagram shows how private debt service, private reinvestment and productive enterprise normally act as a counter-cycle to credit-based inflation. But the only way it works under the global dollar reserve system is for the debt hole to grow infinitely deeper while the accumulation of paper bonds and bills is piled infinitely higher. There is no balance or reset mechanism in place. Only catastrophic collapse:

This next diagram shows in a simple picture what happens when the private debtor fails to keep up with infinite expansion. This is Greece as well as your neighbor that lost his house. Once you remove the private counterbalance the Fed must pick up the slack. Notice that there is no longer a counter-rotational flow:

This next diagram shows about where we are today. We are monetizing the failing debt. We are replacing credit money with base money, and the US federal deficit is the enabler of this process. As FOA said:

My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationist get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

At some point soon, in between the above diagram and the next one, the markets are going to repudiate any more dollar debt in recognition of what is unfolding. This event will propel us into this last diagram as the Fed will be forced to print every last dollar spent by the US federal government, and that's a lot of dollars. This diagram represents Weimar Germany in the 1920's, Zimbabwe in the 2000's and the USA in the 2010's:

(The above diagrams came from my post Greece is the Word)

A little "hair of the dog" I'd say. Or maybe a little too much "hair of the dog".

As regular FOFOA readers know, I believe the BIS (the Bank for International Settlements) is prepared to manage the clearing of international trade after the inevitable collapse of the dollar. And the preferred clearing mechanism at the BIS? Gold, of course, at a much higher value than today. A "physical-only" value!

The IMF would of course prefer to be the "global banker", using SDRs which are mostly dollars, but who do you think will win the confidence game this time? The IMF encourages more "hair of the dog", just like Dennis Kneale! What about the BIS?

Here is what the BIS thinks...

The Western world keeps spending its way to disaster
by Neil Reynolds
The Globe and Mail
Published on Wednesday, May. 12, 2010

The Swiss-based Bank of International Settlements (BIS), the oldest international financial institution in the world, has functioned as the central bank of central bankers for 80 years. In a working paper written by three senior staff economists (“The future of public debt: prospects and implications”), released in March, BIS warns that Greece isn't the only Western economy with hazard lights flashing.

Indeed, it names 11 more: Austria, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Britain – and the United States. Without “drastic measures,” BIS says, all of these countries will hit a wall of debt.

When the senior economists at BIS warn 12 of the richest countries on Earth that they must take drastic action to reduce debt, you know that it’s time to check the air bags. The only thing you don't know, that you need to know, is the precise time of the crash. The lesson is already obvious: Governments can't drive recklessly, use only the accelerator for braking and not eventually crash.

The BIS paper notes that the public debt of 30 OECD countries will (on average) exceed 100 per cent of GDP within the next year, “something that has never happened before in peacetime.” But it warns that conventional debt-to-GDP ratios are misleading – missing “enormous future costs” that are already authorized by past fiscal commitments, that will inexorably inflate public debt further still.

By the end of 2011, the BIS economists calculate, U.S. government debt will have risen from 62 per cent of GDP in 2007, not quite three years ago, to 100 per cent. Britain’s debt will have risen from 47 per cent of GDP to 94 per cent. Italy’s debt will have risen from 112 per cent of GDP to 130 per cent. All together, the public debt of the 12 countries will have risen from 73 per cent of combined GDP to 105 per cent.

At this debt level, the risk of sovereign default rises rapidly. But the BIS analysis says this unprecedented debt level will itself increase “precipitously” in coming years. It will not, as each of these countries separately insists, fall.

For one thing, the BIS report says, countries that proclaim spending restraint generally do not actually do it. Normally, they hold the line – temporarily. Normally, they slow the rate of increase – temporarily. All pronouncements aside, the BIS report says, these 12 countries have made such grandiose spending commitments that they are predestined for higher debt. The U.S. debt-GDP ratio will hit 150 per cent in the next decade. Britain’s debt-GDP ratio will hit 200 per cent. Japan’s debt-GDP ratio will hit 300 per cent.

These increases in debt, the BIS report says, are untenable. The financial markets, of course, won't permit them. The only mystery, the BIS report says, is exactly when the markets will intervene. History shows, the report says, that when the markets do rebel, they often do so instantaneously and decisively – often without much warning.

“When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that [these countries] are going to issue to finance their extravagant ways?” the BIS economists ask. “The question is when will markets start putting pressure on governments, not if,” they respond.

When the markets do require a much higher risk premium, the consequences will be felt around the world – on rich and poor countries alike, on the thrifty as well as on the profligate. These consequences will certainly fall on Canada as well. If it takes Europe to save Greece, what will it take to save Europe? Emerging economies have done a better job than the rich countries in controlling debt. Asian government debt stands at 40 per cent of GDP; Central European government debt stands at 28 per cent; Latin American government debt stands at 37 per cent.

In its most spooky, mind-boggling analysis, the BIS economists try to determine the share of GDP that interest rates would require – assuming, across the next 30 years, that the 12 governments kept spending as they are spending now. In the case of the United States, interest payments would cost 22 per cent of GDP in 2040. In the case of Britain, interest payments would cost 27 per cent. For Britain, this would shove the government’s share of GDP close to 80 per cent.

Prime Minister Stephen Harper and Finance Minister Jim Flaherty are right to press the more profligate countries for an exit strategy from stimulus spending. But what the rich economies actually need is an exit strategy from too much spending of all kinds and a return to some pragmatic recognition of the limits of government.

The writers of the BIS report are Stephen Cecchetti, head of the BIS monetary and economic department; M.S. Mohanty, director of the BIS macroeconomic analysis department; and Fabrizio Zampolli, BIS’s senior economist. Their report deserves both attention and action.

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And just because I find it so darn intriguing, I present this excerpt from a letter written by a retired financial analyst in his eighties,
Mr. Johnston of Houston, Texas to his sons and posted on the website back in 1997...

"The BIS, the Central Bank's central bank, was formed in 1930 to handle the collection of German war debt following World War I. Its members are the central banks of the industrial world, such as the Bank of England, the German Bundesbank, the Federal Reserve Bank, the Bank of Japan, and so on. It is almost certainly the most powerful financial institution in the world. Never once in its long history has it ever had to ask for help from any government.

A definite coolness exists between the BIS and the United States. This goes back to the Bretton Woods Conference in 1944, held to set up the machinery for resuming world business after World War II. Even though this conference established the gold-backed U.S. dollar as the only reserve currency, the U.S. did everything it could to torpedo the BIS and give sole power to the American sponsored International Monetary Fund. The war was not over in 1944, but the combatants still got together and defeated this U.S. grab. In the final showdown, the Europeans and Japan never completely trusted the U.S.

As the years went by, the BIS suspicions were justified. The U.S. began to abuse its reserve currency role by simply printing dollars. American companies began to buy control of businesses all over the world. In 1971, President Nixon took the dollar off the gold standard, and introduced the novel idea of floating currencies. Meanwhile, the U.S. national debt began to increase each year, until it now stands at about $5.5 Trillion, an astronomic amount that can ever, ever be repaid. It was clear that the U.S. was out of control.

Along about 1972, I began to spend a great deal of time and effort in studying the BIS and its agenda. The first thing I found was that although the U.S. had turned its back on gold, the BIS were aggressively buying it. By 1990, the BIS were by far the largest holder of gold, with more than one billion ounces. This amounts to an outright corner on gold.

The next thing I learned is that the BIS are extremely closemouthed. It keeps a low profile. Its favorite M/O is the sneak attack. They have their own word for this – "coup". Their ideal coup is one where the victim is taken by surprise, and does not even know what hit him. The BIS tries to leave no fingerprints. Thus their coups often become perfect crimes.

The third thing I learned was that the BIS had two ironclad objectives. Both were so bold that they would take your breath away:

1) To destroy the Soviet Union, as a threat to world peace.
2) To destroy the dollar as the worlds reserve currency.

We all know that the Soviet Union collapsed in 1989. This was done by the BIS without firing a shot. They simply loaned large sums of money to the Soviets, and then called the loans. Just a routine castration! A simple foreclosure. This is how they got the Russian gold.

The second goal, of bringing down the dollar as a reserve currency, has not yet been reached, but I believe it soon will be."

I'll also remind you of this Q&A I posted in "The Gold Man" (not Goldman) at the BIS:

Q: **One other item you might clarify for me is "Who is really behind BIS?**

A: Perhaps, "who control them"?

Q: **The Swiss?

A: Yes.

Q: **The eurocentral banks?

A: Yes.

Q: **Who does BIS really represent?

A: "old world, gold economy, as viewed thru modern eyes" or " way to move from US$ without war".

Q: **Why was Saudi Arabia just included in BIS?

A: answered.

Q: **Has Saudi Arabia gone with Europe?

A: Yes.

As you ponder the above while choking down the bitterness of more "hair of the dog that bit you" being forced down your throat by the politicians, I'll leave you with this tasty morsel from financial advisor and Zero Hedge contributor, Michael Krieger today...

"I feel very bad for the German people. Not only do I feel bad for them but I can empathize. I too am being forced to sit back and watch this comedy of errors as a corrupt, inept and increasingly dangerous class of elitist political and financial oligarchs destroys my nation.

"On Sunday night an ex-client that I have remained in contact with since my days at Bernstein sent me an email with a simple question: “What do you think of the bailout.” I didn’t have time to answer it during trading Monday but when I finally sat down I wrote the following.

"Basically, it’s a total joke as is everything else the politicians have done. No one and nothing is allowed to fail and this relates to the fact that the global monetary and financial system is a complete house of cards. It’s insanely bullish for gold. If Germans rioted they would be in the streets today. They totally got sold out beyond belief. But it doesn’t seem to be in their nature to riot so rather I think they will dump their Euros and buy gold. That’s how Germans riot.

"With every passing day and every new bailout of the global banks (which is all this is, all TARP was, and all everything has been) more and more people awaken to the fact it’s all a total scam. This will just accelerate the process of dumping the paper currencies we use today in favor of hard assets as this system is obviously coming down.

"A lot of people keep asking, is this the same as post Bear Stearns? I mean here is the biggest difference in my mind. Back then people believed in the system, the market and what we have going generally. Not now. Not anymore. Thousands more people every day figure out it’s rigged and it’s a ponzi scheme."


Sunday, May 9, 2010

Open Letter to EMU Heads of State

Dear Angela, Nick, Silvio, Jose, Jan, Yves and the rest of you too,

I was just sitting here thinking about some of your statements this weekend like, "We will defend the euro, whatever it takes," and "When the markets re-open Monday, we will have in place a mechanism to defend the euro. If you don’t think that’s significant, you haven’t been to many EU summits," and that you will "confront speculators mercilessly." Sounds exciting, I thought.

And then I started to wonder, Could they really be ready to use "The Nuclear Option" on Monday? (And by the way, the nuclear option I was thinking about was NOT printing up another 500 bn euros.)

But then it hit me. "Holy Cannoli!", I thought, "they don't even know!"

All of a sudden it hit me that I know something you guys don't! Please bear with me as I try to explain this.

What hit me like 400 tonnes of BOE gold pitched by Gordon Brown was that none of you politicians know what the Central Bankers know. That there is actually another option for saving the euro. You see, unlike Central Bankers, you slick politicians come and go with some regularity (I noticed a couple elections just the other day). And also unlike Central Bankers, you guys have notoriously loose lips and wild-ass socialist political agendas. So chances are they don't fill you in on all the minutiae of everyday central banking. So it would be easy to also leave out a whopper of a secret along with the minutiae.

Now what I'm about to tell you might sound a little "tinfoil-esque", but I'll back it up with a logical proof and some whistleblower testimony. I'm going to tell you about a secret market that maybe only 100 people in the whole world know exists, because they transact in it. And I will also present what I see as a logical proof that this market MUST exist, or else other markets would not be the way they are today.

Every scientist knows that there are invisible objects that can only be observed because of the effect they have on other visible objects. Black holes are a good example. And this secret market is the same kind of thing. It is like a black hole around which all other markets rotate like a giant gravitational galaxy. It exists because it MUST exist for things to be the way they are. And in addition to this logical proof, I'll also point you to a Central Bank insider that leaked this information to a few of us 12 years ago when he predicted something like today's Global Financial Crisis was eventually, inevitably going to happen. More on that in a moment.

The point is, these Central Bankers do have a secret "Nuclear Option" at their disposal (other than printing more euros). And they WILL use it if and when they are backed into a corner. They know it's going to blow up on its own soon anyway, so they have no guilt about it. But in their back pocket they have a secret trigger, just in case. But the question for you, Angela, Nick, Silvi, Jose, Jan and Yves is, Will they use it in time to save your political careers, or will they only use it if it is needed to save their own butts?

Now you might be thinking, "How can this secret help us now if it is so secret and under the control of the Central Bankers?" Well here's the beauty of it: All it will take to deploy this "Nuclear Option" and reset the monetary and financial world back to a sustainable basis is one simple announcement, the revelation of the existence of this market, or even a credible leak will do the trick. (You guys are good at leaking stuff, right?) So here we go.

In case you haven't guessed it yet, this secret market I'm talking about is a gold market. But it is a separate gold market from the LBMA and the COMEX that we all know about. It has a different market-maker and a different price! It is the other half of a two-tiered gold market that has been operating in secret for at least 15 to 20 years.

But this is nothing new, of course. The Central Banks ran a two-tier gold market openly prior to 1971. They traded their CB gold with each other for $35/ounce while the plebes traded gold in the ordinary market at around $44/ounce. But even that $44/ounce price wasn't a totally free market price because the market had to price in the probability that the two-tier system would eventually end and the 'membrane' separating the Central Banks' 30,000 tonnes and the private ~100,000 tonnes would be broken. And apparently the market was right, it was broken!

Alexandre Lamfalussy wrote about this two-tier gold market in 1969 in his paper presented at the IMF titled The Role Of Monetary Gold Over The Next Ten Years:

"Even in the absence of effective purchases or sales on this market by the central banks, this price would only become the “true” price if all the buyers and sellers of the metal acquired the conviction that no central bank will ever connect the two markets in any way. As long as this conviction does not exist--and it does not appear to exist today--the price on the ordinary market will take into account potential purchases and sales by the official institutions. Quite clearly, the market is at the moment discounting possible purchases (rather than sales) by the central banks."

(Incidentally, I should point out that Lamfalussy made the news just this weekend saying, "The euro zone is stable despite the financial woes of Greece.")

What Lamfalussy said the markets were facing in 1969, the rejoining of CB gold and private gold in one market, is exactly what we are facing today. It did happen back then and it will happen again. The only question is the timing. And that's where you come in! More on this in a moment.

So anyway, the two-tier market ended in the early 70's as we all know. But what we don't all know is that it started back up some time later. My best guess is that the BIS started it back up sometime between 1985 and 1995. But why would the BIS do this? The answer in one word... size!

What the gold market evolved into after 1980 was a market based mostly on legal contracts instead of physical gold. Futures contracts, forward contracts, mining contracts, custodial contracts etc, etc... And while this contract gold market worked well for the plebes, it did not have the physical liquidity to supply really big orders, like the ones that come from sovereign entities and central banks. So the choice faced by the BIS was to either let these large entities bid for their gold in the contract market (and bring down the system like almost happened in 1979/80), or to restart the two-tier system where very large orders of physical gold could be transacted without affecting the contract market price. And restart it they did!

Now, since you guys are politicians and probably love the fiat money system, I need to give you a little background on the importance of gold. This is simply factual economic stuff. Trust me, I won't bore you with goldbug gobbledygook.

The first thing you must understand is that gold is the monetary metal precisely because it is NOT scarce. There is misinformation out there about rarity and scarcity giving something a monetary value. Rubbish! The fact of the matter is that gold is valuable as a monetary commodity because its price is STABLE! At least it is supposed to be. All the gold ever mined is mostly still with us. That's about 160,000 tonnes. Most of that is in private hands now, not with the central banks.

The FLOW of gold on the markets is tiny compared to the stocks of gold in the world. Gold is not used up in industry like other commodities. It is just moved around like poker chips on the table. It is this extremely large stock (all the gold ever mined) that makes the price of gold relatively immune to supply and demand shocks unlike other commodities. So if there is EVER a severe supply shortage of physical gold it means only one thing: There is something wrong with the price discovery mechanism!

Now, the effect of the contract gold market on the ordinary price of gold has been to keep it at manageable levels for 30 years now. But physical gold and contracts for gold are different things entirely. New contracts can be produced much faster than new physical gold can be mined. But when demand shifts from contracts to physical (which is happening) this puts great strain on the market that tries to price them as equals. And what must ultimately happen when this strain breaks the parity between physical gold and contract gold is that the membrane separating the BIS' physical gold price from the ordinary market will break.

When this happens, all your debt problems will be reset to manageable and sustainable levels again. In fact, the entire monetary and financial order will be reset. This is going to happen. And the Central Bankers can make it happen whenever they want, when they finally feel the heat of the fire on their own butts.

Jim Rickards, Senior Managing Director for Market Intelligence at Omnis, Inc., made this comment recently:

"One point that does not get enough attention is the impact of size in the physical market. It’s one thing to say that COMEX is $1,100 per ounce and physical might be $1,200 per ounce for one metric tonne if you can find it. But what about 100 tonnes? 500 tonnes? Physical orders of that size are impossible to execute outside of official channels. Size of order is relevant in any market but I have never seen a market (short of a full blown manipulation or short squeeze) with as much price inelasticity as physical gold which is why the buy side overhang keep their intentions to themselves."

Interesting statements, eh? And believe it or not, they actually let this guy on CNBC! "Keep their intentions to themselves." Do they? That would be mighty benevolent of them. Or do they have another place to go for their big transactions?

So here's what's going on: The regular gold market suffices for the general public, some of the "big money" like the ETFs and hedge funds, and the hedging needs of the commercial banks. The majority of this demand for gold is for hedging against a currency crisis like... uh... this one! And the banks are perfectly happy with their contracts to show on paper that they are hedged. Fine. Whatever. But what the regular market CANNOT handle is the really big physical gold transactions. That's where the BIS comes in.

So this is what the BIS is doing, and has been doing for probably 20 years. It is making the market for a second-tier, physical only, sovereign and central bank gold market. This market is totally separate from the LBMA and the COMEX because it has a separate market-maker and... a separate price! More on this in a moment, because we do have a clue as to what that secret price might be!

Now, before you run to your respective national central bankers to verify my story, let me just say that this is a very small secret market. That is, there are only a small number of people in positions of authority that know about it. And I don't know if all the EU member states' national central banks ever participated in the "bid and offer" portion of this second-tier market. It probably started during the run-up to the euro launch and the BIS might have been dealing with EU members differently.

You see, before 1971 central bank gold transfers were part of the monetary adjustment mechanism. And during the run-up to the euro launch it is reasonable to assume that eurosystem gold was returned to this function. So inter-central bank gold transfers within the EMU during the 1990's were likely "managed" by the BIS to smooth the monetary transition, rather than being a free market system of bids and offers. So go ahead and ask them, but if they don't know what I'm talking about that doesn't mean it doesn't exist.

I'll tell you who probably does know... The ECB knows. Trichet. The BIS. The SNB. The PBOC. The Saudis. Probably Russia and maybe even the BOE. I also suspect the IMF knows about it because they refused to sell any of their announced "gold for sale" to the private sector at the COMEX price...

See: Eric Sprott: "That left 191.3 metric tonnes left available for purchase to qualified buyers, which include central banks and sovereign nations. According to Kitco, Eric Sprott bid to buy the remaining 191.3 tonnes and the IMF refused to sell it"
GATA: "Coincidentally, GATA learned this week on the best authority that a financial house far bigger than Sprott also recently tried to purchase gold from the IMF, also was refused, and wasn't very happy about the refusal."

Hmm... strange.

What this tells me is that unlike pre-1971, the second-tier gold price is now actually HIGHER than the regular market price. The opposite situation! And of course this makes perfect sense. Why wouldn't it be higher? How could extremely large orders, so big they would send the price on the ordinary market to the moon, be handled in physical only at a lower price like, say, $42.22/ounce (that's the US Treasury price, in case you didn't know!)? Precisely... they couldn't.

Just because we're talking about central banks and sovereign entities here doesn't mean regular market forces don't apply. They do! And as such, consider the BIS' role as the market-maker in this extraordinary market. From Wikipedia:

A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread... the market maker sells to and buys from its clients and is compensated by means of price differentials and for the service of providing liquidity, reducing transaction costs and facilitating trade.

So here's a big point in the logical proof: This market does exist. If it didn't we would have to accept some very unlikely assumptions about large interests like the Saudis, the Chinese and the Russians. For one thing, that they are benevolent to the outside world when it comes to protecting their wealth. What I'm saying is that a market for very large transactions (buy and sell) of physical gold does exist separate from the LBMA and the COMEX, because they cannot handle the size. The BIS is the market-maker in this market and in that role, it must be discovering a price that would rock the financial world if published!

Now, before I move on to the current price on this second-tier gold market, which I've already shown must be higher than the LBMA paper fix, let's look at how exposing this market would help the EMU and the euro. I'm sure you are aware that, unlike the US Treasury that keeps its gold booked at $42.22/ounce in perpetuity, the ECB marks all eurosystem gold reserves on its financial statements to the market price each and every quarter. What this does to the balance sheet is quite amazing to watch, even at LBMA/COMEX prices! Just imagine what it would look like at BIS prices!!

This is the elephant in the euro chamber that no one wants to talk about. But not so for the dollar. Back in December of 2008, right after the market collapse, none other than former Federal Reserve Governor Lyle Gramley hinted that a big upward revaluation of gold could figure heavily in the Fed's attempt to rescue the U.S. economy and its own balance sheet during an interview with Niall Ferguson on the Business News Network in Canada.

In the interview, Ferguson asked: "I've heard it said that the Fed has turned into a government-owned hedge fund, leveraged at 50 to 1. Do you feel nervous about what this might actually do to the Fed's reputation?"

Governor Gramley replied: "I think you have to reckon with the fact that one of the Fed's assets is gold certificates, which are priced, as I remember, at $42 an ounce, and if we were to price them at market prices, the Fed's leverage would look a lot less than it is now."

The video: BNN interview with Gramley

Here's a thought, what do you think would happen to Greece's reputation (and balance sheet) if its gold were revalued to the physical price at the BIS? I have some trivia (or not-so-trivia) for you:

Did you know that Greece alone has 14 times as much gold per capita as China? Do you realize that your "PIGS" actually have the same amount of gold per capita as the US claims to still have? (PIGS=25 tonnes/million people; US=26 tonnes/million people) And did you know the PIGS combined have 34 times as much gold per citizen as China? Astonishing really. A big gold revaluation should do quite a job on their reputation as swiney muddlers, especially compared to, say, California? I forget. How much gold does California have left?

So, what could I possibly know about this super-secret price on the super-secret central bank and sovereign-entity physical gold market? Well, I have a whistleblower! ANOTHER, we'll call him, since he could get in trouble if we knew his real name...

"...Then, in October of 1997 at the internet's only gold discussion forum of the day, a series of remarkable postings began appearing under the pseudonym "ANOTHER", offering plausible answers to those questions. What followed in a seemingly incongruous stream of thought over many months was, in the fullness of time, seen to blend into a logical whole by many astute readers following the complete text...

"In the final analysis, ANOTHER offers one of the more plausible hypotheses for why the financial markets have acted as they have in the past few years, and therein lies his immense value to the reader, no matter who he is. Again, knowledge as is conveyed in his series of "THOUGHTS!" is rarely to be found outside the highest levels of international finance...

"As explained by ANOTHER, an opportunistic arrangement for massive physical gold acquisition among important petroleum producing and exporting nations could be comfortably facilitated..."

That's part of the introduction to the archives found here and here. Here's the real stuff...

Date: Sat Apr 18 1998 19:18

"What Is The Real Price Of Gold IN The Central Bank World?"

The one that posts using SDRer, has shown many times how "Gold Value" is used in international trade. What cannot be seen is the value of gold in the "INTERBANK" world. Here is the realm of "true valuations" in paper currency terms. It is a real shocker for lesser eyes.

In this modern world, the current value of every asset is formed by a relationship of gold/currencies/oil. This cross relationship is the "very basis of our modern world banking system"!

Through this basis, all currencies are given value as the local government treasuries hold US$ as reserves. The US$ is given backing as its government is guaranteed that all crude oil, worldwide, will be settled in dollars. An oil reserve backing, if you will. And the "value" that the "future supply of" currency traded "oil" imparts to the world economy, is guaranteed by an "INTERBANK paper gold MARKET" that values "physical bullion" in the Thousands!...

But, how can this be, you ask? It is done, "right before your eyes" and we see it not! I ask you, if you have one ounce of gold, and sell it on the market for $300, it is worth $300, yes? Now, what if a CB holds one ounce of gold, and sells it twenty times, that one ounce is now worth $6,000, no? The difference between you and CB? The persons that hold "interbank" IOUs for gold, value them at the multiple of leases/sales made against reserves. This leverage, it is held for performance on bank part. The BIS, it forces performance, on any economy! You ask Korea about gold, yes?

This is why oil can take a small amount of physical gold out of world supply, at current "freely traded", "managed prices", and hold it at a many times valuation. That is what gives this "new world gold market" much value in trade at high levels. Look even at your "Comex", and divide the daily volume by the "eligible stocks for delivery". That number (perhaps three million ounces divided by 150,000 stocks), deliverable, times the spot close gives close, real world price of physical, $6,000. It follows close to paper trade on LBMA.

You see, "physical gold is of much greater value than public traders can move it for"! In your world, this cannot be, but it is, and will show for all to see in your time.

Date: Sat Apr 25 1998 22:55

It is true, that in times past when a currency is inflated (over printed) to a point of only 10% real gold backing, the government could revalue gold upward and the currency was 100% backed again! A terrible blow to the holders of this paper, but at least the money system survived! Today, the world's currency, the US$, by default, would require a gold price of many, many thousands to back it without using its citizens as collateral! The only problem with this is the US gold stock is so small, that even at $10,000/oz, a large deflation would be necessary to decrease the outstanding US currency to this gold backing level!

Now, consider the Euro. It will have much real gold backing from the beginning. Even at 10% to 30%, the Euro will be the equivalent of a 100% gold backed dollar, when the world comes off the dollar standard! The selling of old dollar reserves alone will reprice gold in US$ terms of at least $6,000/oz! Its present interbank reserve value.


The BIS is the gold broker for all interbank sales/purchases. Bullion Banks are for sales to other entities. I think, at first, China was leverage against the oil producers. Then Arabia was allowed into BIS for Euro.


Sir, The history of "Hot" paper money does show it to "burn easily" from " much heat"! If you read my Thoughts in today's replies, we see much "fuel" in dollar derivatives trading in foreign markets. Much of this trading represents a "claim" on physical gold that may become "a transaction for physical gold" as dollar reserves are displaced. The $6,000 valuation of gold can only be true if currency deflation destroys enough dollars to bring it down to that range. Without deflation, the dollar will be devalued much lower than this (higher gold price)! Once the Euro is created and begins to effect world trade (late 1999 perhaps), the gold market will begin a transition as never before! I think it will be interesting to follow the politics of this change, yes?

Your question of Euro gold backing? The Euro will not be backed or fixed in gold. It will be the first "modern currency" to hold true "exchange reserves" in gold. It is important to understand that "exchange reserves" of gold are much more powerful a tool for currency defense than gold backing! In this system, gold must be traded in a "public physical market", in that currency, Euros! As such, the Euro can "devalue gold" (Euro price of gold falls) thereby making it strong in gold! In today's world, this will happen as a "strong Euro physical market" displaces and defaults "the old dollar settlement paper gold market"! The dollar will become"weak in gold"!

I assure you, there is much more where that came from. But the point of these quotes I selected is ANOTHER's implication that $6,000 was the "interbank" --meaning interCENTRALbank-- valuation of gold back in 1998, while the ordinary market price was only $300. What do you think the extraordinary price is today? The market price has gone up 4x. Has the interCENTRALbank value gone up to $24,000/ounce?

Not much has changed since then on the central bank money printing front. At least nothing in the direction that would imply a lower multiplier. Perhaps the BIS price is actually up 5x. Is that possible? $30,000/ounce if you want 200 tonnes of physical gold? Sounds like a lot of money, but it's really not that much if you can print your own money!

The other thing to consider here is the presently thin customer base of the BIS. If this market were to reconnect with the public like it did in the 1970's, meaning if the public were able to buy and sell physical to and from the central banks, where would the price go? Would it plummet? Or would it skyrocket? I think the answer is clear. Even the higher BIS "interbank" price is a false market construct.

So what does this mean for the euro? Well let me ask you this: Why was the euro conceived in the first place? The ECB's own website lists "the road to the euro" as beginning in 1962:

1962 - The European Commission makes its first proposal (Marjolin-Memorandum) for economic and monetary union.

May 1964 - A Committee of Governors of central banks of the Member States of the European Economic Community (EEC) is formed to institutionalise cooperation among EEC central banks.

Link - See pg. 52

I believe Alexandre Lamfalussy, who I mentioned earlier, may have been "on this road" 5 years later in 1969 when he wrote...

"On the one hand, I would like to see gold lose its monetary function; on the other, however, I would not like a national currency to assume the role of a reserve and international currency, that is to say, that the unsteady gold-exchange standard be replaced by the dollar standard. Consequently, I would like that the demonetization of gold takes place alongside with the creation of an international reserve currency. At the risk of repeating myself, I would emphasize that these are my wishes and not my forecasts.

"...It is this same mistrust, which made it impossible for the gold-exchange standard to function properly and which therefore led to the “negotiated” creation of reserves. Seen from this point of view, the establishment of the two-tier system is an act of despair, the survival of which is more than doubtful. Instead of a decline of the monetary function of gold, we are on the road to more frequent monetary crises, to exchange restrictions of all kinds and finally to a collapse of the economy--which could be avoided only by the reestablishment of the gold standard."

Again, from: The Role Of Monetary Gold Over The Next Ten Years

Lamfalussy went on to join the BIS seven years later in 1976 where he remained until 1993. From there he became the founding president of the European Monetary Institute in Frankfurt, forerunner to the ECB. And from 2000 to 2001 he chaired the "Committee of Wise Men on the Regulation of European Securities Markets".

I read a great comment the other day that said, "The only true hope at this stage of the game is some kind of miracle that would produce sufficient real wealth in excess of our compounding debt loads." The revaluation of all the gold reserves in the world at the true price discovered on a physical-only global gold market would be just such a miracle. And with the ECB "Mark to Market" policy and the eurosystem gold in place, the euro is built to receive just such a miracle.

Now I might be completely wrong. I suppose it is possible that all the wealthy sovereigns and overflowing central banks of the world are so benevolent as to withhold their bids for actual physical gold from the LBMA and the COMEX and patiently wait in line for a few scraps from the IMF. It is possible, but is it probable?

It is also possible that ANOTHER was just an Internet crackpot looking for attention. I suppose such a person could persist in capturing people's attention for over four straight years of writing and then have his words carry on for another eight years without being debunked as a complete crank. It is possible, but is it probable?

All I'm suggesting, dear leaders, is that you might want to look into this. Do a little digging, so to speak, while you still have political careers that allow you to dig into extraordinary things. You might be surprised what miracle you will find.


Disclosure: Long physical gold

Thursday, May 6, 2010

The Dukes of Wetton

As he left town, James could hardly believe he now owned the hotel he had just slept in the night before. He thought back to earlier that morning, when he looked out his hotel room window to see the former investment banker in the funny helmet delivering his transportation to the front entrance...

66 Years Earlier

Once upon a time there was an old western town so isolated that it was, for all practical purposes, like a continent unto itself. It looked something like Gunsmoke, but bigger. Maybe like Little House on the Prairie with let's say about 10,000 residents in the vicinity and a long one-street business district called Main Street.

On a hill at the west end of town, in a humongous white mansion (the largest building in town) lived a big fat man. Let's call him Boss Hogg. Boss Hogg owned about half of all the businesses in town including the saloon, the bank, the livery, the foundry and the jail. He was also well known to have the largest stash of gold by far. He made no secret of the fact that he had 22,000 ounces of gold, twice as much as the rest of the town combined!

No one knew how Boss Hogg came into so much wealth, but it didn't really matter. For all intents and purposes, Hogg was the effective "King of Wetton Broods" (that's the name of the town).

One fine day in July Boss Hogg called a meeting on the grassy knoll in front of his mansion overlooking Main Street and the sprawling Wetton Broods. The whole town was in attendance as Hogg had a big announcement to make. He stood there in front of the masses with one large object on his left and a smaller one on his right, both concealed with draped bed linens.

As he spoke, Hogg first unveiled the object on his left by pulling the sheet. It was a large printing press. Hogg announced that he had just purchased the finest press in the world: the Greenben-5000.

He went on to explain that he would begin printing new money for the entire town of Wetton Broods. Never again would the town have to worry about a shortage of money every time one of its wealthy residents left for foreign lands with his gold. Boss Hogg himself would provide all the liquid money the town would ever need!

The people in the front of the crowd stood up cheering and applauding wildly until their Special Ed chaperones motioned for them to sit down and put their safety helmets back on. From the back of the crowd a businessman hollered, "Why would we use your money, Hogg?"

"Ah" replied the Boss loudly, "I knew someone would ask that question." And as he spoke he jerked the cover off a three-foot pile of gold coins to his right. The crowd in front gasped in amazement at the sight of such shininess and started beating their heads with their fists.

"My money," proclaimed Hogg, "shall be redeemable in my gold!"

18 Years Later

As the years went by, Boss Hogg's paper money became very popular in Wetton Broods. Everyone wanted more and more of it, and just as he had promised, there was never a shortage.

Boss Hogg himself amassed almost unbelievable wealth through the success of his money. And incredibly, he was also able to do less hard work in the process. He tore down his magnificent mansion and built an even bigger one. And he bought up other things as well, like the love and adoration of the people. Boss Hogg was living the good life.

Now you can call it jealousy or simply an alert eye, but a few businessmen from the east side of town were not as impressed by Hogg as most of the people were. They made note of a few curiosities and gathered together occasionally to discuss them.

For one thing, it seemed that everyone in town (including themselves) who was really productive and refused to be lazy, was cashing in their HoggBucks for gold. This trend, to the best of their calculations, had already depleted HALF of Boss Hogg's gold. They figured Boss Hogg may now own more than half of the town's businesses, but his hoard of gold was probably down to only 11,000 ounces remaining. And this was in a town with maybe 33,000 ounces of gold total.

And the other troubling observation was that the entire town, now grown to around 12,000 people, was entirely engrossed in this system of HoggBucks. They had literally forgotten that there was ever anything else. This was most disturbing because they realized that with half of his gold gone after only 18 years, there would probably be less than 18 more years until it was ALL gone!

9 Years Later

27 years after his first meeting, Boss Hogg called another one. This time he announced that his HoggBucks would no longer be redeemable in his gold. Instead, he said, they would be redeemable in fancy paper IOUs from he, himself, the richest man in Wetton Broods, Boss Hogg, himself. And that he would print these IOUs on the same Greenben-5000 that he used to print money! And once again, the helmeted crowd went wild. (This time the chaperones were so confused they neglected to calm down their patients.)

By this time the group of business-owners from the east side of town had given themselves a name. They called themselves "The Dukes" in honor of their noble old-world heritage and values.

And at this point, especially after Hogg's new announcement, the Dukes were seriously concerned about what would happen to commerce in their town when the rest of Wetton Broods finally realized what they already knew: That Boss Hogg's HoggBucks were nothing more than a Ponzi scheme, only valuable as long as the false confidence in their value persisted. And they began to discuss buying a Greenben-5000 themselves with the thought of launching a redundant backup currency for the purpose of maintaining economic continuity when the HoggBuck scheme finally failed.

To date the Dukes themselves had accumulated more of Boss Hogg's "redemption gold" than he had left himself. Hogg was down to maybe 8,000 ounces and the Dukes had about 10,000 ounces between them. The rest of the Wetton Broods' 33,000 ounces of gold was now widely disbursed among the people of the town.

In preparation for the possibility of launching their own currency sometime in the future, the Dukes agreed they would continue to accumulate any gold that anyone in town wanted to sell, even though Boss Hogg was no longer selling what he had left.

25 Years Later

For two and a half decades following the closing of Hogg's gold window the town of Wetton Broods grew more and more acclimated to using his "unbacked" money. Those that still wanted gold traded it for HoggBucks amongst themselves. And for 25 years the roughly 15,000 ounces of gold in general circulation seemed to suffice.

Sometimes the price of this "free gold" would spike upward and other times it would fall. Meanwhile the Dukes found it increasingly difficult to accumulate more gold without causing the price to spike.

With Hogg's gold window open at a fixed price they had accumulated 10,000 ounces in 27 years. Now in 25 years they had only added another 1,000 ounces between them. But they also noticed an interesting secondary effect. With the price of "free gold" rising 1,000% in 25 years, so too did the value of their gold hoard. So while they were only able to add 10% more physical gold, their overall wealth went up more than ten-fold during that same timeframe!

This was a curious development for the Dukes, and because they were not flashy with their wealth the way Boss Hogg was with his, it went largely unnoticed by anyone but the Dukes themselves. The Dukes consisted of Bo the stagecoach builder, Luke the tannery owner, Uncle Jesse who owned the local food diner and Daisy who entertained the visitors that came to Wetton Broods.

And for the first time in decades the Dukes could see clearly what they needed to do for the good of the community. They had already ordered their own Greenben-5000 which was being shipped. And now they had a plan for their new currency. If they wanted it to perform as a failsafe for the Wetton Broods economy they would have to correct the flaws in Hogg's HoggBucks that had become very apparent to the Dukes.

The first flaw which was apparent to the Dukes 34 years earlier was Boss Hogg's original gold exchange strategy. By comparing the first 27 years of "redeemable" HoggBucks to the last 25 years of "unbacked" HoggBucks, the solution became clear. As long as Boss Hogg was redeeming his money with his gold, the flow of gold was one direction only, out, and relatively quick. Hogg had lost 14,000 ounces of gold in 27 years and the Dukes had found it quite easy to accumulate 10,000 ounces themselves during that time.

But ever since Hogg's exchange policy was ended and the price of gold floated, the flow of gold was many-directional making it much more difficult to accumulate a large hoard.

The second flaw, and perhaps the more important one, was clearly visible in Boss Hogg's own flashy ways. For 52 years now Hogg had grown more and more fat and lazy. He had sold off most of his businesses in town and he now seemed to rely solely on his Greenben-5000 for maintaining his flamboyant lifestyle.

The common people in town hardly noticed, but the Dukes being business owners themselves could see that with each increase in his own lifestyle Boss Hogg was diluting the value held by everyone else in town. In fact, the only compensation the Dukes realized, the only relief from Boss Hogg's personal profligacy they found was in the ten-fold rise in the value of the gold they had redeemed from Hogg in the early days.

In addition to these two glaring flaws the Dukes also noticed a couple other subtle changes in Boss Hogg's money management strategy, ever since he had given up real work in order to focus solely on the maintenance of public confidence in his Ponzi scheme.

The first had to do with his fancy paper IOUs. 25 years earlier Hogg had replaced his gold exchange window with an "IOU window". This IOU window had been so successful that Hogg literally gave up all productive work just to keep up with demand for his paper IOUs. Part of the reason for their popularity was that Boss Hogg would date each IOU for some time in the future. And the farther off the date, the more money he would promise as a "kicker" on the IOU at maturity.

So the people of Wetton Broods were literally lining up for these high-paying IOUs. Some of the helmeted ones even laughed at the fact that they had ever wanted gold from the same window without any time-related kicker.

But the best part for Boss Hogg was that he never had to deliver anything real to these people that held his IOUs. The more productive people that were earning plenty of HoggBucks would just exchange their mature IOUs for fresh ones with new dates and new kickers. And in this way, they "watched their savings grow." This was Hogg's most popular slogan: "Watch your savings grow!"

For the people that couldn't roll over their IOUs, Hogg would just print them up some fresh HoggBucks, further diluting the wealth of the town. And no one except the Dukes seemed to notice.

And finally, for the people in town that were so poor they couldn't even afford Hogg's IOUs, he started a very special program. He called this program "Change You Can Believe In" and he taught these people how to issue their own IOUs directly to him in exchange for fresh HoggBucks. This was a troubling development.

The second change in Hogg's Ponzi management strategy was even more interesting to the Dukes. Hogg had apparently noticed the rise in the overall value of his remaining gold hoard, the same development the Dukes had noticed. But unlike the Dukes who saw this as a positive result, Boss Hogg apparently saw it as a threat to his IOU business.

What he had found with a simple calculator was that the rising value of his gold actually kept up pretty well with his "Watch your savings grow" program, and actually surpassed it at times. It seemed to the Dukes that Boss Hogg was afraid other people in town would notice this simple math. And that they would then start to question what real things they would ever be able to buy with their IOUs down the road. Perhaps they would find it smarter to take something real now that would rise in value, rather than an IOU with a Ponzi kicker.

Anyway, Hogg decided to do something about it. He wanted to flood the Wetton Broods gold market with his significant gold supply in order to sink the price and conceal the math. But he didn't want to part with the ownership of any more of his gold. So he came up with a brilliant scheme to loan his gold to the town bank which would then sell it into the Wetton Broods marketplace, flooding supply and lowering the price, and the best part was that the bank would still owe the gold back to Boss Hogg at some point in the future! (Years earlier Hogg had sold the bank to "The Chaperones" who now staffed it with "helmet-heads", because "banking is so easy even a caveman can do it.")

So the Dukes now realized what they needed to do. They had identified the two principle flaws in the HoggBucks design as well as two Achilles' heels in Boss Hogg's Ponzi management strategy. In creating their 'Dukes' currency they simply had to design the flaws right out of it and then pretend to engage in and encourage the most unsustainable elements of Hogg's strategy: IOU proliferation and buying up his lent gold from the helmet kids.

5 Years Later

'Dukes' now circulated alongside the HoggBuck. Of course Boss Hogg had not been happy when he found out another Greenben-5000 was in town. But there wasn't much he could really say out loud about it since his own scheme was quite precarious in its maturity. Almost everyone in town now held their savings and their debt in IOUs denominated in HoggBucks, but no one yet held IOUs denominated in the new 'Dukes'. So Boss Hogg rightfully feared that any exposition of his Ponzi scheme might panic the people of Wetton Broods to attempt redemption in 'Dukes' because they didn't carry the baggage of all that debt.

Meanwhile the Dukes themselves had begun issuing IOUs denominated in HoggBucks and even using some of those borrowed HoggBucks to buy some of Hogg's lent gold from the bankers in helmets. Quite a game really. Even Boss Hogg himself didn't catch all the nuance in it.

Also around this time some other curious developments emerged which posed an even greater threat to expose Hogg's Ponzi scheme. The Boss had long ago convinced the people of Wetton Broods that he would no longer print HoggBucks specifically for his own indiscriminate spending habits. Instead, he explained to the masses, his income now relied solely on his booming IOU business which brought in a healthy flow of old HoggBucks for his spending pleasure.

But over the last few years it seemed that everyone in town was issuing their own IOUs, ever since Boss Hogg taught them all how to do it. And now those "townsfolk IOUs" were circulating like hot potatoes among the people squashing the demand for Hogg's own IOUs. More and more frequently he found himself late at night printing up new HoggBucks under the cover of darkness and "buying" his own IOUs -- from himself -- just to have some spending cash.

Another frightening development for Hogg was that he had lent nearly all of his gold to the bank, and now the price was once again rising. So feeling the heat of these two new threats Boss Hogg arranged a meeting with his buddies at the bank and together they hatched a new scheme to bring in a fresh stream of income.

Their scheme entailed opening a new "side business" at the bank. They literally opened a new window on the side of the building (with their heads) and called it a "ride through window". But this new "side business" was more like a casino than a bank.

What Hogg and his challenged friends were selling were bets on whose IOUs in town would fail the confidence test first. Of course he had to take bets against his own IOUs, but because he would be printing the winnings himself this didn't concern him much. Also, he gave three of the slowest bankers the job of rating everyone's IOUs in town to assist in setting the odds for the casino. They were instructed to rate everyone against Boss Hogg's own IOUs which would always carry the highest rating.

7 Years Later

Now there's something I forgot to tell you about the Dukes. Years earlier when they first introduced their new currency, they too held a meeting for everyone on the east end of town. And at that meeting Bo gave a speech in which he laid out for the townsfolk just how the Dukes' currency would be different than the HoggBuck. Here is a bit of that speech:

"What is money? Economists know that money is defined by the functions it performs, as a means of exchange, a unit of account and a store of value. But, just as importantly, money is also defined by the community for whom it performs these functions. Because it is an economic instrument for each of its users, it is also a political and cultural bond between them. Consider this simple fact: we engage in an exchange of goods and services everyday by using money as the means of exchange; and we offer our labor in exchange for money, which, in itself, has no value. We only do this because we believe that we will, in turn, be able to exchange that money for more goods or services. This fact tells us much about the confidence that we place in money itself. And it tells us much more about the confidence that we place in each other. Hence, money is, in essence, a social contract.

"'The Duke', much more than the 'HoggBuck', represents the mutual confidence at the heart of our community. It is different from the HoggBuck in that it will never be linked to gold thereby suppressing the value of your gold savings on the free market, but it also will never be linked to the benefit or enrichment of any single member of our community above another. It is not backed by the durability (or weakness) of any other thing, nor by the authority of a single fat man. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to 'The Duke'."

Back to my story: It was about this time that Boss Hogg's Ponzi scheme reached the pinnacle of its complexity and instability. His casino bet receipts now circulated along with IOUs, HoggBucks and 'Dukes'. But the bet receipts numbered more than ten times the amount of IOUs! And there were also more than ten times as many IOUs as HoggBucks! Doing the simple math, that's 100 times as many bets as HoggBucks. So what began decades earlier as a simple Ponzi scheme had morphed into a very large upside-down pyramid scheme, balancing ever so precariously on its point.

It wouldn't take much to trigger a collapse, and in fact it didn't. The way it actually played out is still being analyzed to this day, and probably will be for many years to come. But basically what happened was an interconnected collapse of confidence as Hogg's own IOU rating crew inadvertently exposed his own system's weakness in no uncertain terms.

What followed was months of social and economic pandemonium and chaos. But somehow Hogg seemed to get it back under control by running his Greenben-5000 24/7 and quantitatively easing the debt-woes of Wetton Broods by air-dropping HoggBucks from his hot air balloon.

Curiously though, he wasn't so kind to the Dukes on the east side of town.

2 Years Later

Poor Daisy ran into a rough patch. What with the pandemonium and all, her tourism business had a tough couple of years. As it turned out she had engaged in Boss Hogg's IOU and casino system the most of any of the Dukes by issuing too many IOUs of her own. She had issued them denominated in both HoggBucks and 'Dukes'. And now she didn't have enough HoggBucks or 'Dukes' to pay off her debt.

Ol' Hogg jumped on this opportunity to not only discredit the Dukes as a group, but their paper 'Dukes' as well. But unlike Hogg and his helmet-heads, the Dukes had vowed not to print their 'Dukes' for the benefit of individuals. This seemed to amplify Daisy's problems, especially when Boss Hogg publicly mocked the Dukes for their "short-sighted policy" of no bailout printing.

Of course Daisy still had all of her gold. She wasn't so foolish as to sell it at a low price or worse, to loan it to the banker-brigade. So the Dukes held a meeting in private to discuss their options. It was clear that Boss Hogg's ridiculous system was coming to an end, but how should the Dukes deal with Daisy's debt crisis?

When they emerged from their meeting the Dukes announced that Daisy's debt problems would be quantitatively eased. Boss Hogg laughed out loud shouting to the whole town that the Dukes had sold out, that they were no better than him. But after the announcement the Dukes just went back inside quietly, confident in the knowledge that it would all soon be over.

Some Time Later

James, the first tourist to visit Wetton Broods in two years, on a tip from his lovely hostess Daisy whom he had paid with gold for a night of excellent hospitality, also paid for his hotel room with gold, receiving the kicker of the deed for the entire hotel itself. Included in this kicker was the hotel's seemingly insurmountable debt owed to Boss Hogg, which was the reason James got it. And as such, the gold paid at the front desk flowed directly back to Boss Hogg himself, extinguishing the debt. And for the first time in weeks, Hogg and his band of merry but hungry ex-bankers ate very well at Uncle Jesse's diner.

Oh, and after paying for the feast with gold, Boss Hogg happily took his change in 'Dukes'. The End.