Saving the Banks and Fabulously Enriching a Few On the Back of the Real Economy

"Give a small number of people the power to enrich themselves beyond everyone's wildest dreams, a philosophical rationale to explain all the damage they're causing, and they will not stop until they've run the world economy off a cliff."

Philipp Meyer


"Wall Street is not being made a scapegoat for this crisis: they really did this."

Michael Lewis


"My daughter asked me when she came home from school, “What’s the financial crisis?” and I said, it’s something that happens every five to seven years."

Jamie Dimon


"The greatest tragedy would be to accept the refrain that no one could have seen this coming, and thus nothing could have been done. If we accept this notion, it will happen again."

Financial Crisis Inquiry Commission (2009–2011)

The US has been in a cycle of bubbles, busts, and crashes since at least 1995, and more likely since Alan Greenspan became the Chairman of the Federal Reserve in August, 1987.

The cycle is the same, only the depth and duration seems to change in a continuing 'wash and rinse' of the public money and the real economy.

It has become a machine for transferring income, wealth, ownership, and power to the very top.

This is not 'the new normal.'   This is financial corruption and the erosion of systemic integrity.

Are there any markets that have not been shown to have been systematically manipulated, for years?

This is just institutionalized looting.

"Price discovery is not a sexy function of markets, but it is critical to the efficient allocation of scarce capital and resources, and to the preservation of the long term wealth of investors and the economy as a whole. If price discovery is compromised by manipulation, then we will all be gradually impoverished and the economy will be imbalanced and unstable."

London Banker, Lies, Damn Lies, and Libor

There are a number of ways to account for it, but this divergence between 'market prices' and real world supply and demand fundamentals is at the heart of a problem that is called 'the mispricing of risk.'  

That same sort of mispricing of risk is what led to the recent financial crisis, as the values placed on Collateralized Debt Obligations began to plummet from their artificially high levels, abetted by a credit bubble caused by the Fed policies, control frauds, and lax regulation.  The mispricing of risk was also at the heart of the LIBOR rigging scandal, and the gaming of the energy markets by both Enron and more recently JPM, as it is alleged.  These paper games always have real world consequences, and they are rarely beneficial except for a few.

While there are some differences between the gold and silver ETFs that purport to own specific amount of gold, and tracking products that own no shares or none of the underlying commodity, there is little doubt in my mind that the pricing mechanisms of the US and UK markets, at the least, have become perversely detached from real world fundamentals once again.

Such detachment is inherently unstable, and increases systemic fragility.

This includes not only the metals markets, but other commodities, stocks, and certainly bonds as well.  The divergence is justified with the notion that the central bank and its associates makes of the market what they will.  Perhaps we should start calling this 'Crowley-nomics' after England's 'the whole of the law is do what thou will' bad boy.

People do not like to stand up and say so when this sort of divergence happens, because rising markets tend to make such warnings look foolish. And economists can find a rationalization for almost anything in the manner of lawyers and other breeds of sophists.

These things run on momentum and bad behavior by some fairly powerful institutions and individuals. And there is a great deal of money to be made in the meanwhile, and a status quo to be protected.  Timing is problematic when trying to determine when a somewhat opaque control fraud is going to be forced to unwind.  They can remain pathological longer than you can remain solvent, to borrow a phrasing.

There will be a reckoning no doubt, and they always take their shenanigans a step too far.  But try not to jump in front of their boots as they have their way in the short term, since it would seem they operate with semi-official sanctions, and plenty of easy money.

My suspicion is that some portion of this market operation we are seeing today is tied to making a point in the ongoing debate about the suitability of precious metals as reserve assets, and their inclusion in the new reserve currency. There is quite a bit of tension abroad amongst the financial groupings of nations, which I have referred to as 'the currency wars.' Perhaps the model of nations is misleading. It may resemble competing crime families amongst oligarchies more closely.

I do also think that some entity or entities were deeply in trouble on the wrong side of some trades that caused the monetary authorities to 'stare into the abyss' once again. Only time will reveal the truth.

But I agree with David, that there will be a 'closing of the gap' between paper and reality once again, most likely triggered by some 'black swan event' that simply no one could see coming.  Except those that the financiers have worked so hard to silence and discredit. 

And then there will be a thunderclap of convergences, and a recognition that we have been led down the same garden path by the irresponsibles once again. 

This is the continuing story of the will to power and the rule of law,  and the rights of individuals to protection of property and liberty against the incursions of powerful moneyed interests.  In history this is marked by an ebb and flow of lessons learned and forgotten.

Related: A Bull Market In Physical Metal - Maguire

Paper gold, Metal gold – When Worlds Diverge

By Golem XIV on May 17, 2013  

 

The price of gold is going down. That is what the charts, newspapers and pundits are all saying. What I think they are deliberately not saying is that the value and desirability, as opposed to the price of gold, is going up and will go up further.

Make no sense?  Well I think it does if you remember there are two types of ‘gold’ for sale. One is metal, the other is paper. It is paper gold that is being dumped not the metal. The metal is being bought at a fair old rate. But because there is so much paper gold around and the major sellers and market makers in paper gold prefer metal and paper to be confused, even thought to be identical (their trade depends on this confusion), no one seems to be pointing out the very different dynamic happening in paper and  metal gold.

Paper gold is being sold. And those selling it are the likes of Soros Fund Management LLC and BlackRock Inc. As Bloomberg reports today,

Filings showed Soros Fund Management LLC and BlackRock Inc. (BLK) were among funds that cut stakes in the SPDR Gold Trust, the biggest gold ETP, in the first quarter.

Does that say Soros and BlackRock no longer want gold? No it does not. It says they don’t want paper gold. They don’t want paper claims of gold. For those that don’t know ETPs (Exchange Traded Products) are very similar to ETF’s (Exchange Traded Funds) and both a paper claims on something rather than the thing itself.

If you buy a gold tracking ETP you are NOT buying gold.  If you by an ETF based on bank shares, for example, you do not own any bank shares. In both cases you own a piece of paper which says it will match the price of the gold or bank shares. It is these paper claims that big players seem to be selling as fast as they can without it looking like they are going for the exit. In fact, I think that is exactly what they are doing.

The fact is there is a vast pyramid of paper claims on gold which dwarfs the amount of actual gold available. Since the trade in gold ETFs took off we have been living in a fiat gold world. There are as many claims on gold as there are bits of paper on which to print them. And this fact confuses a great deal of the punditry about gold as a safe haven.

In the Bloomberg piece we find Mr. James Moore, an analyst at FastMarkets Ltd. in London saying,

The reasons for holding safe-haven assets have abated…Investors are looking again at stronger growth assets.”

I think he is wrong. 180 degrees wrong. I think the reason Soros and BlackRock are selling paper gold is because they know paper claims are not safe. Bits of paper with the word gold printed on them are not gold themselves and their claims in the metal are not safe. I suspect we will find they have sold paper and bought metal.

I think Soros and BlackRock have sold paper gold because, contrary to Moore, the reasons for holding safe haven assets have not abated but are getting stronger. I am not saying ‘buy gold’. I do not offer investing advice. I am not saying gold will save you. I am also not saying that people are not looking for higher yielding investments. Because they are. They are caught in a nasty trap of really needing yield in a world they can also see is getting more volatile and less safe. What is a thrusting city boy to do? Answer, invest other people’s money in risk and keep quiet about what you are investing in yourself.

Of course you cannot get around the fact that the price of gold is going down. Which would seem to make my argument ridiculous. But it doesn’t. The confusion is that the price and value of Gold backed ETF’s not only ‘tracks’ the value of gold but impinges heavily on it. ETF’s are sold as a way of ‘tracking’ the value of a kind of share or commodity of ‘getting exposure to it’. But the whole family of Exchange Traded products has become so large, in some cases much larger than the size of the underlying market they are just supposed to be passively tracking, that they are not longer just tracking they are having a decisive  influence upon it.

Thus as people sell gold ETF paper, that is causing the price of not only paper gold but metal gold to decline as well. And what I think this is doing is creating a buyers paradise – if you have the pockets to take the risk. With one hand you sell paper claims on gold, let people confuse paper and metal and talk about how the price and desire for ‘gold’ is declining, and then with the other hand buy the metal.

End result the amount of paper gold declines but along side that decline some people sell real gold which you buy. You end up, if the game holds together, being able to buy real metal as the price declines, knowing that the price of paper and metal will diverge, at some point, rather drastically.

While Soros and BlackRock have been selling paper gold China, Russia, India and Iran have all been buying it. Last year alone (2012) China bought more than 500 tons of gold which is more than the ECB owns.

I continue to believe as I have for several years now that China and Russia along with India, Japan, Venezuela and Iran are looking seriously at sharing a new reserve currency and have planned to be able to advertise it as being significantly backed by gold. In that article I linked to a series of articles I have written looking at various aspects of the idea. I think the idea looks more and more likely.

For those who wish I have written about ETFs as being the Next accident waiting to happen and a part two in which I looked at the inherent instabilities of the ETF markets just waiting to blossom, especially as they grow larger than the market they are ‘tracking’.

Originally posted today at Golem XIV by David Malone, author of Debt Generation.

The 38 Year Cycle in US Monetary History

I am not a big believer in comprehensive cycle theory. The weakness of cycles is the same as all systems that seek to impose an external order on natural events and occurrences: one can always find something to fit in a less than rigorously defined methodology. This applies from biblical prophecy codes based on the placement of words and letters, to cycle and wave theories with a wide range of alternatives.

However, I also believe in what call 'generational memory.'  People as a group often forget the lessons of the past, and human nature being what it is, events based on bad judgement and reckless behaviour seem to recur at regular intervals.  Or as J.K.Galbraith observed, there are essentially no new financial frauds, just new variations on the established themes.

If there was any 'tell' for the current crisis, it was the general overturning of the safeguards for the financial system that had been put in place in the aftermath of the financial panic of 1929 and the Great Depression that followed, culminating in the eventual overturn of Glass-Steagall and the ascendancy of extreme leverage using exotic, unregulated instruments.

This is why we call this a generational change. This is no slump, and not even a common recession. And it is far from over.

We are experiencing some major changes that are easily lost when one only looks at the day to day moves, listens to the description of events on the mainstream media, and of course, have a lack of memory, a knowledge of history, of things that have happened to their grandfathers and great grandfathers. The arrogant ignorance of so many still in place is a sure sign of greater chastisement to come, until the lessons of history are learned again, and the system is brought back into a sustainable balance.

2009

The story is still being written, and history will have its say over time. But it will likely include the reckless expansion of credit by the Greenspan Fed, the lapses in financial regulation, the overturn of Glass-Steagall, and the financial scandals including LTCM, Enron, Worldcom, culminating in the failure of the US banking system which began in 2007 including the de facto nationalization of the banks.

The loss of confidence in the informal Bretton Woods II arrangement with the dollar as the world's reserve currence with the rise of alternatives, precipitated by the unprecedented expansion of the monetary base by the Bernanke Fed including the monetization of private debts, will be the hallmark of the crisis from a monetary perspective.

1971

Nixon Closes the Gold Window on Bretton Woods

"The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally canceling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.

By the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. The year 1970 was the crucial turning point, which, because of foreign arbitrage of the U.S. dollar, caused governmental gold coverage of the paper dollar to decline 33 percentage points, from 55% to 22%. That, in the view of Neoclassical Economists and the Austrian School, represented the point where holders of the U.S. dollar lost faith in the U.S. government’s ability to cut
its budget and trade deficits.

In 1971, the U.S. government again printed more dollars (a 10% increase) and then sent them overseas, to pay for the nation's military spending particularly in Vietnam and private investments. In May 1971, inflation-wary West Germany was the first member country to leave the Bretton Woods system — unwilling to deflate the deutsche mark to prop up the dollar.

Because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfillment of America’s “promise to pay” - that is, the redemption of their dollars for gold. On 5 August 1971, Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against foreign speculators.

To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 per cent import surcharge, and, most importantly, “closed the gold window”, ending convertibility between US dollars and gold. The President and fifteen advisors made that decision without consulting the members of the international monetary system, thus the
international community informally named it the Nixon shock.

Given the importance of the announcement — and its impact upon foreign currencies — presidential advisors recalled that they spent more time deciding when to publicly announce the controversial plan, than they spent creating the plan. He was advised that the practical decision was to make an announcement before the stock markets opened on Monday (and just when Asian markets also were opening trading for the day). On August 15, 1971, that speech and the price-control plans proved very popular and raised the public's spirit. The President was credited with finally rescuing the American public from price-gougers, and from a foreign-caused exchange crisis." Wikipedia

1933 - 1934

Suspension of the Gold Standard and Dollar Devaluation

"In early 1933, in order to fight severe deflation Congress and President Roosevelt implemented a series of Acts of Congress and Executive Orders which suspended the gold standard except for foreign exchange, revoked gold as universal legal tender for debts, and banned private ownership of significant amounts of gold coin. These acts included Executive Order 6073, the Emergency Banking Act, Executive Order 6102, Executive Order 6111, the Agricultural Adjustment Act, 1933 Banking Act, House Joint Resolution 192, and later the Gold Reserve Act. This set up the devaluation of the dollar. In early 1934 F.D.R. increased the price of gold by 69%($20.67 to $35/oz). This represented a 41% devaluation of the US dollar." Dollar Devaluation in 1934, I. M. Vronsky

1895

Gold Panic: U.S. Gold Supply Running Dry

"The early 1890s were not kind to America's gold reserves...Coupled with declining revenues triggered by various protective tariffs, the reserves plummeted, taking a severe toll on the economy. In 1893, the falling gold supply helped spark a debilitating financial crisis known as the Panic of 1893...By February 8, 1895, the gold supplies had thinned out to a paltry $41 million.

With the U.S. Treasury teetering on the brink of bankruptcy, Cleveland intervened, and using a syndicate led by J.P. Morgan as an intermediary and U.S. bonds as bait, attempted to buy back gold from foreign investors. Cleveland sold roughly sixty-two million dollars worth of bonds, valued at 3.75 percent, to Morgan's syndicate. Morgan and company in turn shopped the issues to foreign parties for a handsome profit. Although clearly borne of desperation, the deal nonetheless provided some badly needed relief: it briefly spelled the gold crunch and saved the Treasury from disaster. " This Day in History

1857

The Panic of 1857

"The Panic of 1857 abruptly ended the boom times that followed the Mexican War. The immediate event that touched off the panic was the failure of the New York branch of the Ohio Life Insurance and Trust Co., a major financial force that collapsed following massive embezzlement. Hard on the heels of this event arrived other setbacks that shook the public's confidence...

Widespread railroad failures occurred, an indication of how badly over-built the American system had become. Land speculation programs collapsed with the railroads, ruining thousands of investors.

Confidence was further shaken in September when 30,000 pounds of gold were lost at sea in a shipment from the San Francisco Mint to eastern banks. More than 400 lives were lost as well as a loss of public confidence in the government's ability to back its paper currency with specie.

In October, a bank holiday was declared in New England and New York in a vain effort to avert runs on those institutions. Eventually the panic and depression spread to Europe, South America and the Far East. No recovery was evident in the United States for a year and a half and the full impact did not dissipate until the Civil War."

1819

The Panic of 1819

"The causes of the Panic of 1819 were the first to largely originate within the U.S. economy. The resulting crisis caused widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. It marked the end of the economic expansion that had followed the War of 1812. However, things would change for the US economy after the Second Bank of the United States was founded in 1816, in response to the spread of bank notes across United States from private banks, due to inflation brought on by the debt following the war.

In the event, President Monroe, interpreting the economic crisis in the narrow monetary terms then current, limited governmental action to economizing and ensuring fiscal stability. He acquiesced in suspension of specie (gold) payments to bank depositors, setting a precedent for the Panics of 1837 and 1857."