NAV Premiums of Certain Precious Metal Trusts and Funds - Good Morning Fiat Nam!

Good morning, Fiat Nam!

Thanks to Dave and Denali Guide for suggesting that greeting.

In case you were wondering what happened overnight, Kuroda and the Central Bank of Japan decided to significantly increase their Quantitative Easing.

As you may recall, the Fed and the Japanese Central Bank did a tag team of money printing in the 'recovery' in the 2000's as the US pumped up a housing bubble.

The Japanese said that in addition to buying more official debt, almost as much as the government can issue which is an overt money printing machine, the government has also indicated that they will use their substantial pension funds to buy more equities and REITs, including those of other countries.

I think Japan may eventually provide a good test of the theory that a sovereign that prints its own money can never default.   Japan's problems involve significant demographics, but a great portion is some of the worst crony capitalism and opaque government by insiders in the OECD nations.  It is this kereitsu corporatism that put the FU in Fukushima.

One thing that works in the people's favor is a favorable attitude towards the group backed by peer pressure, rather than a dog eat dog economy based on serial fraud, and commensurately a decent public safety net.  Or at least there has been.

Stock futures soared in the US and the Nikkei futures were limit up.  

Overnight the Russia central bank had to raise its interest rates to 9.5% to defend the ruble which was under pressure on the forex markets.  

And in what appears to be a somewhat counterintuitive move despite Dollar strength on Yen weakness, gold and silver were slammed down hard in thinly traded markets.

The pressure from the US and its client states is now shifting heavily to Europe and especially to Germany, to permit a similar move to quantitative easing in Europe.

China remains remarkably quiet for now. Eurasia is large enough I think to break away from the threat of financial repression. One wonders how far they can be pushed before they make that choice. Or perhaps it is already being made.

Interesting times.

 

What Is the Effective Limitation on the Fed's Ability to 'Print Money?'

"There is felt today very widely the inconsistency in this condition of political democracy and industrial absolutism. The people are beginning to doubt whether in the long run democracy and absolutism can coexist in the same community; beginning to doubt whether there is a justification for the great inequalities in the distribution of wealth, for the rapid creation of fortunes, more mysterious than the deeds of Aladdin’s lamp."

Louis D. Brandeis, Speech to Harvard Ethical Society, May 4, 1905

In a purely fiat monetary system the effective limitation on the Fed is the acceptance of the dollar and the bond at value in objective, non-coercive market transactions.

Since the value of a currency can be viewed as 'relative' to other currencies, if one ignores the values of other goods, there is some thought that a group devaluation of money can be accomplished if all the issuing entities devalue at the same time, so that the average person will not notice it.  As if.

When such frauds fail, then there is the result to force.  There are numerous examples of non-objective market transactions being used by failing monetary regimes, where they are guided by a central bank or directly by politicians.

Most recently in the case of satellites of the former Soviet Union,  there was an increasing divergence between an 'official exchange rate' versus a 'black market' exchange rate, even in Russia itself as the old rouble failed.  The bad money crowded out the good,  the good which became the new benchmark of value. 

The notion that a sovereign government issuing their own currency and debt cannot fail flies in the face of history, if not common sense.   The ability of the government to enforce an increasingly arbitrary valuation ultimately comes down to a measure of the oppressive power and reach of the regime.   Therefore the failures tend to begin at the edges, where arbitrary force does not reach as effectively.

This is not to say that the US is at that point. But to say we are not yet at that point is like the drunk who says he has not crashed his car into a brick wall yet.  It is to say that the idea that money can be created endlessly without engaging powerful forces of political and financial hazard is nonsense. It requires increasing amounts of official fraud, fear, and force to maintain, until the system ultimately collapses. I have seen this first hand, and have listed numerous examples of it on this site in prior posts.

One of the reasons that this current scheme of the Fed seems to be succeeding is that instead of increasing the overall money supply by distributing it freely 'out of helicopters' and stimulating aggregate demand to the objective of stimulating a recovery,  they are printing loads of money and then carefully handing it to their cronies in the Banks and other private multinational corporations.

And since they are dealing with the world's reserve currency, the base of their Ponzi scheme is very broad in its number of potential contributors.

The notion is that they will be forced to do productive and constructive things with it, and prosperity will 'trickle down.'  Rather, they prefer to use that money to further enrich themselves, to acquire productive assets, rentals, establish new frauds and rig more markets, and buy other companies to establish monopolies, and to put themselves increasingly above the law.

The resulting distortion does not yet result in a general inflation, but certainly facilitates and promotes a bubble in certain financial paper, and a massive wealth transfer from the public to the privileged in a corrupt and systematized plunder.

This system will not cohere.  But it has become very profitable for the status quo, if one ignores the consequences.  It results in a society turned upside down, a bizarro world where nothing makes sense.

Wars have been fought to sustain such looting, and to distract the people from their misery.  It always ends badly, in social disruption and worse.

Currency War: 140 Years of Monetary History in Ten Minutes

Like most complex subjects reduced to a ten minute summation, there are plenty of nuances lost here, and one might certainly take issue with some of the conclusions. And the perspective of the discussion is largely centered on the US and Europe.

Nevertheless, I like the succinct overview of certain key events in recent world monetary history that lead up to the situation in which we find ourselves today.

Since most people are abysmally ignorant of where we have been, perhaps that is a good place to start once again, for those of you who have not heard this previously.

I would have liked them to have dealt with the gold confiscation and revaluation of 1933, in which FDR used the nation's gold to recapitalize the banking system, and changing the nature of the US currency while devaluing it, but that might have become over complicated. Most do not understand it for what it was, a currency transformation.

People tend to discuss money from an emotional basis, and that is understandable. I don't consider myself a 'hard money' person per se. At this point I would merely wish governments to leave gold and silver alone, and allow them to function as a private market force, co-existing with whatever currency schemes they choose to set up. The monetary authorities struggle with this concept, because they inevitably seem to abuse the currency system and resort to increasing amounts of fraud and force. This is not a facet of government, but of bad government.

I am not in favor of a 'gold standard' for that reason now, because that would merely allow governments to once again monopolize the metals and set the prices artificially in order to control them. Gold cannot cure the corruption in the current political system, and could quickly be turned into a force for more repression. Better that the metals exist as free market alternatives for those who may choose them.

After listening to this presentation, one can surely understand why the central banks both fear and covet gold. It resists their wills, but has a natural tendency to be seen as money.

I do think that the nature of gold, and how it has been used as money over thousands of years, illustrates several important qualities that any sustainable monetary system must emulate and approximate. Those who dabble in monetary theory would do well to understand them.

De Gaulle's words are quite important, and I am glad they include that piece in which Charles de Gaulle speaks to the 'exorbitant privilege' of the US Dollar. The principled objection he is raising is the same question being raised by the BRICs today, and the resolutions being discussed behind the scenes are quite contentious over some of these very issues.

As you know, I suggested one solution would be an SDR, but reconstituted with a more contemporary and inclusive weighting system, together with a mechanism that does not permit the IMF to issue amounts of SDRs at will. The problem is that the IMF is dominated by the status quo and the Banks, and really no single class of people is capable of wielding that sort of discretionary power well for any period of time. So I don't see that happening yet, because an acceptable version of it is being fiercely resisted by the Anglo-American banking cartel. They are content to continue with their looting of the system for the foreseeable future.

Money is power, after all, and greed will too often refuse to relinquish any power or claim willingly, even to its own destruction. The American abuse of financial power for political purposes is causing a bifurcation in global finance, along the expected fault lines, and it will be interesting to see how that develops. 

Gold Daily and Silver Weekly Charts - The Arbiters of Value

"'When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'

`The question is,' said Alice, `whether you can make words mean so many different things.'

`The question is,' said Humpty Dumpty, `to be master -- that's all.'"

Lewis Carroll, Through the Looking Glass

If you look at the metals calendar below, tomorrow is first notice day for June.

It is hard to tell, but I think the worst of the sell off for June option expiration is about done. But let's see what happens.

I must have heard ten times on the financial news, as they discussed the awful GDP revision, that there is no inflation because gold is down. Ron Insana said that since gold is down $35 the last couple of days, that shows that there is no inflation.

Well, this is all perception management. They took most of the damage in the GDP number now. Why didn't they take it in the upfront number? Because it was too close to the fact. In this second revision they took it down dramatically to the negative. But now it is further a long, and the story about the odd winter weather effect has had time to gain traction.

The net result is that the next number is now important, and we are not looking at what just happened because it is so two months ago. And the comparison is set rather low for the next quarterly number, which I predict will come in much higher. All hail The Recovery™, fait accompli, just in time to influence the midterm elections.

Here is a link to a nice, concise description of what the basic tenets that Modern Monetary Theory stands upon.

I think I have made my own analysis of the theory fairly explicit. It has been tried many times. The key phrase is 'a currency issuer can never run out of money.' This is true. They can print all that they want. The critical variable is the 'value.'  And as for value, 'the Jobs Guarantee Wage determines the value of the dollar.' And the Jobs Guarantee Wage is a function of the government.

It is a self-referential fiat standard, in the manner of the Alice in Dollarland  in which we are beginning to find ourselves today.  It will stand only so far as the force of law can reach.  Generally that ends at the borders, but one can always hope for a one world government that is able to dictate the value of everything to everyone at their own discretion.  

It is not that we need better financial engineers, or more virtuous custodians of society, a kind of a priesthood of economic virtue, worthy of the burden of being benevolent tyrants.  There is NO class that is capable of wielding such raw power, without falling into a destructive cycle of self-destruction.

As an elite impoverishes their homeland, they find it necessary to engage in various types of colonialism, to create new markets for their excess supply, since paying living wages to their people creates a blur in class distinctions. 

How can I know I am sufficiently rich, unless many are exceptionally poor?  This impulse to economic expansion and marriage of force and economics was the story of the British Empire.  And it explains much of the otherwise odd behavior of this New American Century, and its many wars and adventures.  They make a desert and they call it peace.

I hate to pick on MMT like this, because so many otherwise nice, sensible people seem to be drawn to it.  But I can see such a revolutionary move is already in the cards from other corners.  Nothing attracts the unworthy like the power to dictate and distribute wealth.  And the more arbitrary it is, the greater the allure.   As Abraham Lincoln said, it is the crux of human society. 

"They are the two principles that have stood face to face from the beginning of time, and will ever continue to struggle. The one is the common right of humanity and the other the divine right of kings...No matter in what shape it comes, whether from the mouth of a king who seeks to bestride the people of his own nation and live by the fruit of their labor, or from one race of men as an apology for enslaving another race, it is the same tyrannical principle."

Abraham Lincoln, 1858

And like most utopian exercises, some of the well-intentioned may promote it, but the worst end up controlling it for their own ends and personal enrichment.  We have seen this tendency so far, at the dawning of the sixth year of The Recovery™ from the Great Recession, which formally ended in June, 2009.  And isn't life grand.

Have a pleasant evening.

Ben Bernanke On Money and the Sophistry of Modern Monetary Theory

soph·is·try (s f -str ). n. pl. soph·is·tries. 1. Plausible but fallacious argumentation. 2. A plausible but misleading or fallacious argument.

I see the Cullen Roche is back at it again, telling us all about the wonders of modern money. The Biggest Myths in Economics

I will take these myths, and comment on them one by one.  Some things make sense, and others, not so much.  But perhaps the discussion will help to shed some light.

I am going to try to do it simply and in straightforward language, because that is often the best antidote to sophistry.

1) The government “prints money”.

The government really doesn’t 'print money' in any meaningful sense. Most of the money in our monetary system exists because banks created it through the loan creation process. The only money the government really creates is due to the process of notes and coin creation. These forms of money, however, exist to facilitate the use of bank accounts.

This is the 'I didn't do it, because the guys who are working for me did it' argument.

As you might recall, the banks in the US, and most other places, operated under a license and regulation of the government. The banks are part of the Federal Reserve System. They create money under the supervision and regulation of the Federal Reserve Bank, which in turn is answerable to the government.

Most of the time the money is created, organically if you will, through economic activity. The Fed exercises quite a bit of direct and indirect control over this process as both actor in the markets and a regulator. This is the very basis of the Federal Reserve.

At other times, the Fed is able to create money on its own volition, by expanding its Balance Sheet. It can create money at will, and uses it to enact its policy objectives. Whether you say 'print' or 'create' money is a matter of usage, as they are both essentially the same in this context unless you are given to splitting hairs.

You want to know the difference here?  If some bank or person started 'printing' its own money apart from the Federal Reserve system or the rules of the government over commercial paper they would shut them down in a Manhattan minute.  Just ask the Liberty coins guy.  The almighty dollar is a jealous god.

There were times in the past when the 'currency of the US' was created by private parties and circulated.   That is not the case now, except in the fevered minds of creative imaginations.

2)  Banks “lend reserves”
  
This myth derives from the concept of the money multiplier, which we all learn in any basic econ course.  It implies that banks who have $100 in reserves will then “multiply” this money 10X or whatever.  This was a big cause of the many hyperinflation predictions back in 2009 after QE started and reserve balances at banks exploded due to the Fed’s balance sheet expansion.  But banks don’t make lending decisions based on the quantity of reserves they hold.

Banks lend to creditworthy customers who have demand for loans. If there’s no demand for loans it really doesn’t matter whether the bank wants to make loans.

This one gets definitionally tricky, because it involves the terminology of bank accounting and its own particular jargon. But let us cut to the heart of it by saying that banks make loans with some regards to their assets. A person cannot just stand up with no money in their pockets and say, I am a bank and am going to start making loans. They need to be licensed by the government, and must adhere to certain requirements from their books.   Those nasty things like leverage, risk, etc.

As for Banks being in the business of making loans, that is nonsense. Banks are in the business of making money, and we should never forget that.  Sitting idly on what in another business would be called working capital does not do them much good. And people tend to mistake 'working capital' for 'reserves' and that's where we go off into the jargon wilderness.

What is a creditworthy loan? This is not some black and white threshold, good or bad, but more like better or worse, an analog measurement of risk and reward. Anyone who has ever funded competing projects in corporations understand this. It is intimately tied to risk return and competing opportunities.

I would certainly think that most people understand that making commercial loans for some meager basis points in return over the long haul is boring stuff compared to the opportunities to be had in gaming hot money markets for outsized gains and large bonuses tied to short term results.

And that is the heart of much of the problems in the financial system today. Speculation is crowding out investment from the commercial banking system due to the repeal of Glass-Steagall, and the laxity of regulating the abusive practices of large and powerful players in the markets.

3) The US government is running out of money and must pay back the national debt.

There seems to be this strange belief that a nation with a printing press whose debt is denominated in the currency it can print, can become insolvent. There are many people who complain about the government 'printing money' while also worrying about government solvency. It’s a very strange contradiction...

As I’ve described before, the US government is a contingent currency issuer and could always create the money needed to fund its own operations. Now, that doesn’t mean that this won’t contribute to high inflation or currency debasement, but solvency (not having access to money) is not the same thing as inflation (issuing too much money).

This is a nice piece of sophistry because while it knocks down a thesis, it does not prove its antithesis.

Because the US government is NOT running out of money, and it does NOT have to pay back the national debt, that does not mean that the national debt has no limit. It just means that we have not yet reached it, whatever that may be.

At some point you have to get off the theoretical merry-go-round and try to exchange some of that money which you declare that you have for real goods. And the perspective of the counterparty weighs in heavily on that transaction I daresay. One only has to look at the many, many failed currencies throughout history, from 'contingent currency issuers,' in order to understand the fallacy of this argument.

Certainly you can force your own citizens to adhere to your commands, as the MMT crowd are often wont to imply.  But it is still a larger world out there, and absent one world government, there are some degrees of freedom in determining currency valuations.

4) The national debt is a burden that will ruin our children’s futures.

The national debt is often portrayed as something that must be “paid back”. As if we are all born with a bill attached to our feet that we have to pay back to the government over the course of our lives. Of course, that’s not true at all. In fact, the national debt has been expanding since the dawn of the USA and has grown as the needs of US citizens have expanded over time. There’s really no such thing as “paying back” the national debt unless you think the government should be entirely eliminated (which I think most of us would agree is a pretty unrealistic view of the world).

This one is almost the same as myth number 3. The national debt is something that will always exist in a debt based system. The pricing of debt in a marketplace is how the Federal Reserve system and Treasury are theoretically restrained from the excessive creation of money.

The very money in your pocket is itself is a 'note' of obligation on the Balance Sheet of the Fed, and overall a debt obligation of the Treasury.  The 'full faith and credit' of the United States if you will.

But that does not mean that the debt cannot become a burden on our children. If the debt is misspent and squandered and allowed to outgrow the capacity to manage it, it can become a very real burden.

But I find that those who make this argument are typically those who have already grabbed a good portion of the money from some financial bubble, and now seek to hold their gains.   Debt must be managed.

To this point Cullen says "All government spending isn’t necessarily bad just like all private sector spending isn’t necessarily good." And I agree with this completely.

5) QE is inflationary 'money printing' and/or 'debt monetization'

Quantitative Easing (QE) is a form of monetary policy that involves the Fed expanding its balance sheet in order to alter the composition of the private sector’s balance sheet. This means the Fed is creating new money and buying private sector assets like MBS or T-bonds.

When the Fed buys these assets it is technically 'printing' new money, but it is also effectively 'unprinting' the T-bond or MBS from the private sector. When people call QE 'money printing' they imply that there is magically more money in the private sector which will chase more goods which will lead to higher inflation. But since QE doesn’t change the private sector’s net worth (because it’s a simple swap) the operation is actually a lot more like changing a savings account into a checking account. This isn’t 'money printing' in the sense that some imply.

Well yeah, it is money printing, although I agree it is not magical. The Fed simply expands its Balance Sheet and creates, or prints if you will, Federal Reserve notes of zero duration, also known as dollars, and exchanges them for assets of various durations and quality at non-market based prices. It is not limited to Treasury debt, but can include almost anything really according to the Fed, whether it be toxic debt mortgages, or common stocks, etc.  

And the Fed is not 'unprinting' anything, until it either writes off the debt, or return it to its issuer.  The Fed is a private corporation.  You can say that the Fed withdraws the liquidity from the market place by keeping it relativelhy inactive because the Fed does not purchase many things, but even that is no longer the case.  The Fed has grown into quite the organization, with its own police force.  It merely surrenders any 'profits' remaining after all its discretionary expenses back to the Treasury.

If this was such a simple and benign swap why else would they do it? It is one of the primary levers the Fed uses to influence monetary policy.

They are increasing and changing the character of the money supply in the course of managing it. It is what they do for God's sake, besides riding herd on their banks who normally create the money for them, but occasionally get derailed by some financial bubble of their own creation.

7) Government spending drives up interest rates and bond vigilantes control interest rates.

Many economists believe that government spending 'crowds out' private investment by forcing the private sector to compete for bonds in the mythical 'loanable funds market.' The last 5 years blew huge holes in this concept. As the US government’s spending and deficits rose interest rates continue to drop like a rock. Clearly, government spending doesn’t necessarily drive up interest rates.

And in fact, the Fed could theoretically control the entire yield curve of US government debt if it merely targeted a rate. All it would have to do is declare a rate and challenge any bond trader to compete at higher rates with the Fed’s bottomless barrel of reserves. Obviously, the Fed would win in setting the price because it is the reserve monopolist. So, the government could actually spend gazillions of dollars and set its rates at 0% permanently (which might cause high inflation, but you get the message).

It is not government spending that drives up interest rates, but that does not mean government spending cannot drive up interest rates. It sure as hell can. 

And I would hope to think that bond vigilantes can help to control interest rates, otherwise the entire Federal Reserve system and the US dollar is based on a fallacy. See what Mr. Bernanke has to say below. This is the confidence on which the dollar rests.

In fact the Fed COULD exercise reserve monopolist powers and print all the money it wishes at zero rates. And the 'vigilantes' could respond by shifting their wealth into other non-dollar instruments, en masse.

What is somewhat confusing is that the relationship is not straightforward, but is a somewhat non-linear dynamic with a lag. You can get away with quite a bit of economic behavior in the short term. But eventually you can reach a tipping point, if there remain enough agents who are free to dissent from the dictates of a central authority that has fallen into error, aka 'vigilantes.'

8) The Fed was created by a secret cabal of bankers to wreck the US economy.

The Fed is a very confusing and sophisticated entity. The Fed catches a lot of flak because it doesn’t always execute monetary policy effectively. But monetary policy is not the reason why the Fed was created. The Fed was created to help stabilize the US payments system and provide a clearinghouse where banks could meet to help settle interbank payments.
...So yes, the Fed exists to support banks. And yes, the Fed often makes mistakes executing policies. But its design and structure is actually quite logical and its creation is not nearly as conspiratorial or malicious as many make it out to be.

This is reductio ad absurdam. The Fed is not a monster or inherently evil. But that does not make it good.

The Fed was created in somewhat extraordinary circumstances, wrapped in political secrecy in the aftermath of a banking crisis.  And it was driven by a small group of powerful men who united to promote a common purpose.  I will not speak to their motives.

There is a long controversy about the proper role of a central bank in the US, going back to its very founding, and this treatment makes light of that.

It is a great power to create and distribute money, that can be used for good or ill. And therefore it must be constrained, and subject to oversight. And history shows that this power is frequently abused.

9) Fallacy of composition.

The biggest mistake in modern macroeconomics is probably the fallacy of composition. This is taking a concept that applies to an individual and applying it to everyone.

Could not agree more, especially if you extend it to anecdotal information. But I would tend to refer to it as the fallacy of reasoning from the particular to the general.  But I would not call it 'the biggest.'

One of the most perennial myths is that a skill in making money, especially through financial speculation, is the sign of wisdom in other things.  Some of the best traders I have known are borderline savants and white collar criminals, whom I would hardly trust to handle my family's future. 

Alas, wealth and beauty are not always companions of virtue in this world.  They become accustomed to obsequiousness, and lose site of their common humanity.  And there is nothing sadder or more tedious than a man who has become wealthy, who decides to grace the public with his wisdom, bad haircut and all. 

I think a more pernicious and prevalent economic myth is the notion that economics can dictate public policy through some appeal to economic laws as if they were physical laws like gravity. Public policy is best decided by determining goals and priorities and then allowing many things, including economics, to shape the implementation of that policy.

But economics has been elevated to a position in our societies which is wholly inappropriate and a source of great mischief, especially when the truly dangerous myths like 'naturally efficient markets' become the basis for policy decisions without proper regard for their effects. The 'austerity for the sake of the public while sustaining corrupt practices' myth is perhaps the most cruel and appalling.

10) Economics is a science.

Economics is often thought of as a science when the reality is that most of economics is just politics masquerading as operational facts.

Economics is a social science, and not a physical science. There are plenty of facts, and somewhat ironically Mr. Cullen has just leaned heavily on quite of few of the ones he tends to favor, whether they are right or not.  

The worst of it is when economics is used by those who claim an 'authority' from it to promote policies that are quackery, as we have seen all too much in the past twenty years in particular with regard to the natural goodness of the power of 'the Market.'

What concerns me though is the follow on to this declaration of  the myth of economics as science. It is that extreme resort of relativism which holds that since economics is all bullshit, why not use it, and shamelessly, to promote a particular point of view, wrapping it in as much jargon and intimidating hoo hah as you can manage?  Since there is no science, there are no necessary consequences, and we may do as we please.  And that is a sophistry of the first order.

And this view is being promoted by the economists themselves, those few members of a 'disgraced profession' like accountants and regulators, who were willing to say and do almost anything for the promise of money, favors, and political connections.

And this deterioration in professional standards has long been my objection to much that has been said and is being said about money by these most modern of thinkers, caught up in the will to power, who believe that since there is no god of consequences, then everything is lawful.  

They lose their grounding in the reality of commerce and risk, and start throwing around harebrained notions like 'platinum coins.'  They bring the childish politics of their academic departments to weigh in on serious policy decisions with serious real world consequences.

Even a few faux Nobel laureates have been seen to join in this Dionysian dance, a filigree of modern monetary contrivance.  Skip the coin, default, and be damned if you will, but a old fish wrapped in silk is still a dead and stinking fish.

Speaking about money, It is worth reading what Mr. Bernanke has written about money in this essay below.  It speaks volumes. 

"What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve.

To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys.

Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic.

One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it.

If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."

Ben S. Bernanke, Deflation: Making Sure 'It' Doesn't Happen Here

Paul Krugman Does Some Injustice to the Thoughts of Adam Smith On Money, Gold, and Silver

Paul Krugman, in making his argument about gold, bitcoins, and paper money,  'quotes' Adam Smith, although somewhat circuitously, as seemingly to deride gold and silver in favor of paper money.

I discuss that column of his here.    And here is Mr. Krugman's quote from Adam Smith.

"I suspect, however, that Adam Smith would have been dismayed.  Smith is often treated as a conservative patron saint, and he did indeed make the original case for free markets. It’s less often mentioned, however, that he also argued strongly for bank regulation — and that he offered a classic paean to the virtues of paper currency.

Money, he understood, was a way to facilitate commerce, not a source of national prosperity — and paper money, he argued, allowed commerce to proceed without tying up much of a nation’s wealth in a “dead stock” of silver and gold."

I looked up quite a few of the references to 'dead stock' in Adam Smith's Wealth of Nations since Paul K does not provide an actual quote, and found plenty of references to 'money' as 'dead stock,' but nothing in particular to gold and silver per se.  

I doubt that Adam Smith thought of them as barbarous relics as Paul seems to imply.  I could be wrong and would be interested in seeing a quote that says what Mr. Krugman implies that Adam Smith says.  Perhaps he can consult his notes and provide an actual quote in context.

Smith goes to great pains to show that 'money' is a medium of exchange, and the wealth of a nation is properly increased by the employment of money in productive ways. Duh.  I wish the Federal Reserve understood that in their trickle down approach to economic recovery and regulation and the support of the financialisation of the economy that produces no wealth, but instead transfers it from the many to the few.

Smith recognizes that gold and silver are a store of wealth that could be needed moreso at certain times, and should be increased during bountiful periods, but he is adamant that 'money' is not the means of increasing wealth.   Wealth is the action of people on resources creating products.  Money is a 'highway' to help to facilitate the transactions.

But this in no way implies that he views gold and silver themselves as inherently 'dead stock' and that paper money is to be preferred in and of itself.  At least not in the areas in which I had read.

He does not specifically condemn 'paper money' either except in passing with regard to risk.

I struggled with the supposed quote given by Mr. Krugman, given that Smith would have been so familiar in the sad case of John Law and his paper money experiment, for example.

I believe that Smith is talking about those domestic instruments that energize a monetary system in transactions. In other words, commercial paper and so forth.  Smith argues that money is best used as it is being gainfully employed in the actual production of things, and not hoarded.   Again, who can argue with that?

Here is what I would daresay is the 'money quote' from Adam Smith on paper, gold and silver:

"The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either.

The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures, and corn fields, and thereby to increase, very considerably, the annual produce of its land and labour.

The commerce and industry of the country, however, it must be acknowledged,though they may be somewhat augmented, cannot be altogether so secure, when they are thus, as it were, suspended upon the Daedalian wings of paper money, as when they travel about upon the solid ground of gold and silver.

Over and above the accidents to which they are exposed from the unskilfulness of the conductors of this paper money, they are liable to several others, from which no prudence or skill of those conductors can guard them."

Adam Smith, Wealth of Nations, p. 262

As you may recall Daedalus was the father of Icarus. He fashioned the wings of wax and feathers on which Icarus soared, but in his hubris flew too high, and close to the sun on his artificial devices, alas, and plummeted quite dramatically back to earth.

I thought Adam Smith's statement on 'paper money' is particularly well formed and well advised in this regard.  And extrapolating what he said and what he thought to somehow craft an endorsement of the current monetary system in all its malformed and highly unproductive serial fraud is a bit of a stretch to say the very least. 

Rather than be dismayed, if a moral philosopher like Adam Smith were to come back and look at what passes for a financial system and the regulation and encouragement of commerce in our world today, I doubt he would be able to stop throwing up.

Paul Krugman On Money: Why Economics Has Become a Disgraced Profession

"I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis.

Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur."

James K. Galbraith

There are several somewhat surprising assertions in this piece below from Paul Krugman, which left me almost speechless. But not quite.

I might be unfair in taking it seriously, or more seriously than one should do with what could be just a politically motivated puff piece. The Western central banks seem to be 'in a jam' as it were, and now is the time for all their men to come to the aid of the financial status quo.

First, Krugman is touting the fiat petro-dollar as somehow humanitarian, as compared to apparently the worst mine he could find, in order to throw stones at the gold industry. Or presumably anything real that comes out of or off of the ground for that matter, including natural resources and agricultural products, because one can find abuse of labour in all of them.

This is so off handed hypocritical as to be mind-boggling.

I think we can stipulate that abuses of capital and power can and do exist in any human endeavor, and the proper but occasionally underutilized role of government is to mitigate them. 

Considering the carnage that the financial industry and the Banks have wreaked on the real economies of the world, I hope the hypocrisy here is obvious to anyone with any sense of current events whatsoever.  Certainly we have no excuse to blind ourselves to the all too recent and terrible role of crony capitalism in destroying lives around the world in the endless pursuit of power, and the supremacy of greed.  And that power is based largely on the dollar.

This is the great failing in Modern Monetary Theory. It assumes that if we make the creation of money easy enough, it will make the people who hold that power naturally virtuous, because it takes less effort to be good and so they will choose to be good.  

This is the Zimbabwe school of public policy, and the John Law Institute of Economic Thought.  The 'scholar-gentry' somehow imagine themselves as nature's virtuous wise men, operating for the objective good, but the serial bubbles and crises in the West over the past twenty years show how this assumption is part of the efficient market hypothesis:  a romantic canard.

Then Paul Krugman takes on Bitcoin. He posits it as based on a great mine located in Iceland that creates bit coins because it is cold there and electricity is cheap. I thought he might be speaking sardonically, but I'm not so sure. 

Engineering students I know and their college friends mine bitcoins and litecoins from their dorm rooms, which are not particularly cold, but where electricity is essentially free.  However the amount of electricity used is so minimal that it really doesn't matter.  But this is besides the real point.

What threw me for a loop was his snarky punch line designed to put the whole idea of Bitcoin to bed.

"we’re burning up resources to create “virtual gold” that consists of nothing but strings of digits..."

If this is not the very description of the modern dollar, except for the burning up resources line, used by Ben Bernanke in his famous speech in which he says that deflation is not a problem for a Fed that 'owns a printing press,' I don't know what is.  I might say misallocating resources to the financial sector rather than burning up resources, but that may be a nicety.

Krugman derides Bitcoin as 'virtual gold' but in reality it is much closer to 'virtual dollars' because both are created out of essentially nothing but a few key strokes and cycles on a computing machine. 

Bitcoin has a limiting factor built in to it.  Gold has a limiting factor in its natural scarcity.

The primary difference is that the dollar is backed by the power of the state, and bitcoins are relatively stateless, which is their weakness.   Gold's power is that the state cannot create it, merely abuse it.

This whole 'progress' concept is just a canard, as is the localizing of the view of gold to a few eccentric gold bugs.  

If China and a few other central banks were not buying gold, and in size, there would be no issue here, and the status quo based on the Western dollar would not feel so threatened.    Are China and these others merely ignorant gold bugs?  Or are they reacting to a situation in a way that people have done throughout history? 

They are seeking a refuge from the abuse of power by a status quo.

There is a classic policy disagreement about the international monetary system underway, which some have taken to calling a currency war, and most establishment economists are ignoring it, or talking it down.  And this is why the next financial crisis is going to hit them smack in the face, like the last two crises which they aided and abetted, if nothing else than by their silent acquiescence.

Fiat money has been tried many, many times in the past, especially over the last few centuries. It has ended in the same manner every time.  

As Bernard Baruch observed, '“Gold has worked down from Alexander's time... When something holds good for two thousand years, I do not believe it can be so because of prejudice or mistaken theory.”'  Baruch the financier understood money and markets.  He was no servile economist, caught in a credibility trap.

Rather than dealing with reality, and understanding why people throughout history seems to be 'voting' in certain ways when there is a choice, and why China and other Asian and Mideastern nations and their central banks are buying gold in sizable quantities, Mr. Krugman just writes this off as some eccentricity, because it does not fit his model of how things should be. 

And this is the stance of a statist, and it requires increasing use of force as people reject its falsity.  It appears to be mere sophistry in the service of power, and it is unworthy.   But this is economics today, cheerleaders for their favorite brand of political power.  It is after all a social science more often used to rationalize rather then explain, except in its most basic elements and in its practical microeconomic applications.

Arguing for stimulus without acknowledging and addressing the flaws and obvious policy mistakes in the system that have led to multiple and increasingly destructive asset bubbles is beyond reckless, and almost wanton.  But it is politically advantageous.

If Mr. Krugman were to honestly study what money is, rather than what he wishes it to be, things might be clearer and his thinking might be richer.  Alan Greenspan has done this, but then he subordinated his knowledge to his careerist aspirations. 

And perhaps this is what exercised me to write this more than anything else.  As an academic economist and 'very serious person,' Krugman is arguing like a Fox news anchor, assaulting knowledge to score his political points.  He is cloaking his policy advocacy in the trappings of his profession, and he thereby cheapens it.  And this is why it has become disgraced.

Let me be clear on this.  I am not proposing that gold become a new monetary standard.  I think that a new international monetary regime will evolve, and that gold will play some part.

But I am saying that the public policy proposals put forward by economists are too often stuff and nonsense, merely rationales used to promote whatever ideology or power group they believe in, or seek to curry favour with, in the first place.   And that the power to create money and distribute it is a deadly power, and has led to failures repeatedly over and over again.  So safeguards must be taken with it.

And if gold is such a dead issue, then why does Krugman need to argue so bitterly against it, resorting to sophistry and ridicule and appeals to authority?    It is because he is trying to force an argument against the will of a sizeable portion of the world's people.  It is a policy battle, with good points and bad points.  But he chooses not to argue it honestly, exposing the good and the bad, but politically and cheaply. 

These economic 'laws' are almost always arguments, but not proofs.  But cloaked as proofs they help to overturn common sense all too often, and this has proven to be a tragedy as is so common with all quack scientific theories.

As I noted a few weeks ago:

"Economics is a profession that succumbed almost en masse, whether by individual actions or the complicit silence of careerism, to the pervasive corruption of financial fraud, and of the persuasive power of Wall Street, the Banks, and big money. The only group that approaches their failure is the national political and financial class, including the accountants and the regulators.

For the most part this has not yet changed because of the unreformed state of the financial system, combined with the snare of the credibility trap. And they cover their shame by calling themselves the 'scholar-gentry' and tut tutting about the failure of the public in much the same tones that the plutocrats of past colonial empires would agonize over the plight of the victims of their perfidy in terms of the white man's burden."

I strongly suspect that some of the Western central banks, led on by the bullion banks, have made some awful policy errors in the disposition of their nation's resources over the past ten years. They have committed resources to what they considered a just cause without sufficient diligence, things that do not rightly belong to them, thinking that they could retrieve them at some future date without too much effort. 

And like any other client of the banks, they have been taken. With the inability to return the national gold to Germany as their people had requested, the bankers were staring into the abyss. So they have sought to cover this up, and thereby keep digging themselves into an ever deeper hole. And this will prove to be worse than the original deed once it is resolved. It will destroy careers.

The would-be ruling class envisions a relatively unconstrained money supply as a tool amenable to the beneficent use of themselves as philosopher-kings.  And it is another romantic falsehood like the efficient market theory.  Whose fiat, who decides?

Such a monetary authority gives the power to determine and distribute value and worth to a relatively small group of people who act on their own authority, and too often in secrecy.   Well, we essentially have had that for some time, and as Dr. Phil might say, 'And how's that been working for you?

The implementation of romantic ideals in pursuit of an ideal paradise would quite likely result in a hell on earth.  The resort to force will become increasingly necessary, predatory, self-serving, and relentless.

Addendum:  I have addressed Paul Krugman's 'quote' from Adam Smith in more detail here.

NYT Times Op-Ed Columnist
Bits and Barbarism
By Paul Krugman
December 22, 2013

This is a tale of three money pits. It’s also a tale of monetary regress — of the strange determination of many people to turn the clock back on centuries of progress.

The first money pit is an actual pit — the Porgera open-pit gold mine in Papua New Guinea, one of the world’s top producers. The mine has a terrible reputation for both human rights abuses (rapes, beatings and killings by security personnel) and environmental damage (vast quantities of potentially toxic tailings dumped into a nearby river). But gold prices, while down from their recent peak, are still three times what they were a decade ago, so dig they must.

The second money pit is a lot stranger: the Bitcoin mine in Reykjanesbaer, Iceland. Bitcoin is a digital currency that has value because ... well, it’s hard to say exactly why, but for the time being at least people are willing to buy it because they believe other people will be willing to buy it. It is, by design, a kind of virtual gold. And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.

Hence the location in Iceland, which has cheap electricity from hydropower and an abundance of cold air to cool those furiously churning machines. Even so, a lot of real resources are being used to create virtual objects with no clear use.  (Paul K. does not understand how Bitcoin works. 

The third money pit is hypothetical. Back in 1936 the economist John Maynard Keynes argued that increased government spending was needed to restore full employment. But then, as now, there was strong political resistance to any such proposal.

Clever stuff — but Keynes wasn’t finished. He went on to point out that the real-life activity of gold mining was a lot like his thought experiment. Gold miners were, after all, going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press. And no sooner was gold dug up than much of it was buried again, in places like the gold vault of the Federal Reserve Bank of New York, where hundreds of thousands of gold bars sit, doing nothing in particular.

Keynes would, I think, have been sardonically amused to learn how little has changed in the past three generations. Public spending to fight unemployment is still anathema; miners are still spoiling the landscape to add to idle hoards of gold. (Keynes dubbed the gold standard a “barbarous relic.”) Bitcoin just adds to the joke. Gold, after all, has at least some real uses, e.g., to fill cavities; but now we’re burning up resources to create “virtual gold” that consists of nothing but strings of digits...

Read the entire op-ed here.

Trickle Down Recovery: PBS Drops Bombshell Analysis on Fed's 100th Birthday

"It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions.

In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society — the farmers, mechanics, and laborers — who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government.

There are no necessary evils in government. Its evils exist only in its abuses."

Andrew Jackson, Veto of the Second Bank of the United States


"Unfortunately, however, trust is becoming yet another casualty of our country’s staggering inequality: As the gap between Americans widens, the bonds that hold society together weaken. So, too, as more and more people lose faith in a system that seems inexorably stacked against them, and the 1 percent ascend to ever more distant heights, this vital element of our institutions and our way of life is eroding."

Joseph Stiglitz, In No One We Trust

As you may recall I remarked on this apparent financial asset bubble policy by the Fed earlier this week here.

What many do not realize is that by printing money and directing it to the inflation of financial assets in a manner favorable to the Banks and the one percent, the Fed and the government are taking from almost everyone, including all holders of US dollars abroad, and redistributing it for the benefits of a few.

This is trickle down economics, and crony capitalism at its worst. And it will be covered up and denied by the usual suspects until the eve of the next financial crisis. And then, like bank bailouts, they will attempt to make the people another offer that they cannot refuse.

PBS Drops a Bombshell on the Federal Reserve’s 100th Birthday Party
By Pam Martens
December 22, 2013

PBS promised a “debate” this past Friday night on the “benefits and dangers” of the Federal Reserve as the Fed marks its 100 years of existence tomorrow. Instead of a debate, two famous stock market historians made the same stunning announcement – that the Fed has decided its job is to push up the stock market.

Consuela Mack’s Wealthtrack program on PBS had invited James Grant, Editor and Founder of Grant’s Interest Rate Observer, and Richard Sylla, the Henry Kaufman Professor of the History of Financial Institutions and Markets at NYU’s Stern School of Business. The opening scene for the program shows Sylla in a party hat lighting the candles on the Fed’s birthday cake while Grant snuffs them out – suggesting that Sylla would be making pro-Fed statements while Grant would take the opposing view.

What happened during the program, however, was that both men made the candid and bold accusation that the Federal Reserve, for the first time in its history, has assigned itself the job of propping up the stock market.

Grant had this to say: “New thing – it is in the business of talking up the stock market…The Fed is manipulating prices, especially on Wall Street.” To another question from Mack, Grant says: “The Fed has presided over the decay of finance.”

Professor Sylla adds more fuel to the fire, stating: “The Fed seems to have, I think almost deliberately, is trying to push the stock market up. I’ve watched this stuff for 40, 50 years now and this is the first time in my memory when it seemed to be official U.S. government policy that the stock market goes up. And the Fed likes this because it thinks that when the stock market goes up, people who own stocks feel richer, they’ll go out and spend more money, and the unemployment rate will come down.”...

Read the entire article with a link to the original video here.

John Law and the Mississippi Bubble

John Law and the Mississippi Bubble by Richard Condie, National Film Board of Canada

India Paying an Equivalent $1,565 Per Ounce For Physical Gold Bullion

“Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of the errors into which great minds have fallen in the pursuit of truth can never be uninstructive...

Hitherto no difficulty had been experienced by any class in procuring specie for their wants. But this system could not long be carried on without causing a scarcity. The voice of complaint was heard on every side, and inquiries being instituted, the cause was soon discovered. The council debated long on the remedies to be taken, and [John] Law, being called on for his advice, was of the opinion, that an edict should be published, depreciating the value of coin five per cent below that of paper.

The edict was published accordingly; but, failing of its intended effect, was followed by another, in which the depreciation was increased to ten per cent. The payments of the bank were at the same time restricted to one hundred livres in gold, and ten in silver. All these measures were nugatory [pointless] to restore confidence in the paper, though the restriction of cash payments within limits so extremely narrow kept up the credit of the Bank.

In February 1720 an edict was published, which, instead of restoring the credit of the paper, as was intended, destroyed it irrecoverably, and drove the country to the very brink of revolution...”

Charles MacKay, Extraordinary Popular Delusions and The Madness of Crowds

When the Reserve Bank of India and the government tried to staunch gold imports by increasing duties and limiting supply in order to help their western central bank counterparts, who were deeply embarrassed by their inability to return Germany's gold, the experiment in currency controls had the effect of making the premiums paid for actual gold jump to 21.6% over western paper 'spot' prices.

What good is a 'spot price' for gold if it is just a construct derived from the paper gold price on the increasingly gold deficient Comex, and not from a physically transacting market?  And what good is a price set on a so-called physically transacting market like the LBMA if it is done in secret, with leverages said to be approaching 100 to 1?

Recent revelations about the manipulation of price benchmarks, from LIBOR to derivatives to basic commodities, seem to have knocked the efficient market hypothesis into a cocked hat, which is where it always belonged, if the dustbin was full.   Markets are naturally efficient to the extent that men act naturally like angels. 

Here is an interview that Tekoa da Silva recently conducted with an Indian gold dealer about the future of demand for physical gold in India, which he believes will be strong, and more importantly, why.

Let's see, if one region of the world is willing to pay, for substantial amounts, a 21% premium for a physical commodity that is easily transportable, what might an astute economist predict would happen?

The 'average person' might expect them to predict a substantial flow of that commodity from west to east.   And that does seem to be the case if one looks at the data which is available.  Gold Seen Flowing East As Refiners Recast Bars For Asia.

These days, however, far too many economists, analysts and pundits see what they have been told to see, by whomever is paying them.  Academia, politics, and the media are not naturally efficient, for the same reasons as markets.

Is it any surprise that in a culture that glorifies personal greed and the arrogance of power, virtue is in scarcity and deceit becomes routine?   Bad behaviour can drive out the good, until a system or culture can become a festival of shamelessness, and a feast for predators.

India is not an isolated example.  The situation is simply worse there for the moment because some Indian officials are historically compliant to Anglo-American interests.  But China, Russia, Latin America, and the Mideast are increasingly less complacent to be so ill-used these days.

Change is happening.  And there may be some significant volatility associated with this historic difference of objectives and opinions about what value is, and how and by whom it is set.

Currency Wars: Salinas-Price On the Changing Tempo and Tenor of the Growth of International Reserves

"The only resource against political disorders that had been known till then was the concentration of power. Solon undertook to effect the same object by the distribution of power. He gave to the common people as much influence as he thought them able to employ, that the State might be exempt from arbitrary government. It is the essence of Democracy, he said, to obey no master but the law. Solon recognised the principle that political forms are not final or inviolable, and must adapt themselves to facts; and he provided so well for the revision of his constitution, without breach of continuity or loss of stability..."

John Dalberg Lord Acton, History of Freedom in Antiquity

My long time friend Hugo Salinas-Price has shared some uniquely interesting observations on the growth of international paper reserves, which have been largely constituted of claims on debt, often pinned to the US dollar because of its international reach. And with all such fertile and insightful thinking it provokes more thought in others.

In this article he observes that the appetite for sovereign Treasury debt, and other forms of private debt such as mortgages and consumer credit, may not be keeping pace with the issuance of these forms of debt.

I think that with respect to price that this is a foregone conclusion in light of the Fed's QE III. The whole point of this exercise is to ensure that the current pricing is not sustainable without a non-market priced subsidy from the Fed, hopefully until some point that the markets reach some sort of self-sustaining equilibrium.

One of my key theses has long been that this equilibrium cannot occur without major systemic reforms.  The factors that created the problem were not incidental, but fundamental to changes that occurred during the 1990's in particular, with deeper roots back to 1980.  There was a decade long effort to overturn the New Deal Reforms that had allowed for the long stability that the financial world largely enjoyed in the post-WW II era.  These reforms were overturned by greed and corruption of power, and so here we are today.  We cannot go forward without returning to more transparent, honest markets that operate with a bias towards justice, and not bowing to right as defined and sanctified by might.

Modern monetary theorists would postulate that none of this is a problem, because the issuance of money based on debt is not necessary in the first place. All the debt can be repurchased through the direct issuance of money by a sovereign at any time. The proposal of the 'trillion dollar platinum coin' illustrates that principle in action.

But while technically true, there are two important facts that impinge on the wonders of such a brave new monetary world, besides the obvious problem of the ability of concentrated power to corrupt such Utopian arrangements, almost from their inception.  I keep asking, 'where is the flywheel' meaning where is the check and balance on the monetary issuance?  Quis custodes custodiet?

The first obstacle is that such money issuance system of almost unrestrained fiat works best where all the market participants are forced to operate according to the centralized rules. They will accept the money at stated value because they simply have no other choice, no other options.  Given Gresham's Law, if you think about this for a while, it becomes very apparent that this is the case. Fiat of this level of discretion must have the absolute force of law, without viable competition or substitute. 

Money is what we say it is, and is worth our stated official price.

I think we have enough historical examples of how well this works in practice. I saw it up close in both Russia and Czechoslovakia before and during the final collapse of the Soviet System.

In the world as it is, there is really no one world currency, issued by a centralized all-powerful entity, that essentially creates money from nothing, distributes it as it pleases, and dictates its value to all.  At least there is no such system yet, although it is certainly the objective of more groups than you might care to imagine.

In the case of a non-self-sufficient economy, there is the inescapable issue of trade and travel with other economies, that are not under the control of the central authority.

So the second great problem is that in the world as we have it today, oil and natural gas and certain essential commodities are significant factors when considering the international currency regime. In quite a literal sense, the US dollar is the petro-dollar, and control of the world's currency regime requires a strong influence over the world's oil and gas supply first and foremost.

If the US was truly energy self-sufficient, then the issue of trade and tariffs and money would be much simpler.  This would not be the case for some other entities without its geographic reach and the rich variety of its resources.

The other imported products are much more discretionary, and the domestic economy would most likely even prosper under a greater emphasis on self-sufficient production. Although the issue of reform would still remain because of the broken system of wealth distribution along lines of unequal power and undue influence over law to the detriment of justice.

It would have repercussions on international relations no doubt, but that is economic power by other means and would be dealt with through the usual alliances and cooperative ventures that could be denominated in other than a domestic currency.   This arrangement calls for the growth of large areas of common interest, or spheres of interest if you will,  that are able to achieve resource self-sufficiency.

The sophists will seek to dismiss what I am saying here as a paean to the gold standard. I wish to state again, categorically, that it is not. I am not proposing any solution at all, but merely attempting to draw up some outlines around the problem, what might be termed a systems analysis and requirements.

Gold does have some remarkable qualities that make it quite suitable for use as money. No one can create it, it is enduring, and relatively stable in terms of growth. As an external standard it is almost ideal. There is little wonder that diverse societies have gravitated towards gold and things like it down the long corridor of time.   And yet it does have one drawback: gold alone cannot enforce honesty on a corrupted system.  The recent growth on paper of the rehypothecated gold supply is one case in point.

There is no secret to creating a workable system.  I know I could do it, and many other people could so as well and perhaps much better.  The problem is that people of power do not wish to have a good system. 

There will be no good and sustainable monetary system easily reached for the same reasons that this generation of leaders can no longer create and put forward fair and workable laws for their own country.  They are overcome by ego and greed.  They wish for a system riddled with loopholes and personal advantage for them and their friends. So this is what is produced.   And until this changes, progress and change will be spattered with misery and blood, as it has so often been in the past. 

If there is any key point I wish you to take and hold in your minds and hearts it is that there is no such thing as a perfect, self-regulating monetary system. There could only be such an ideal model if men and women were angels, perfectly rational and reliably virtuous.

And like wealth the distribution of reason and virtue is very uneven, and so all systems must rely on a continuing effort and bias towards equal justice for all. And this has inescapable requirements for the design of the system.  Among these are transparency and the rule of law.   And the assumption that there will always be those who will be actively attempting to subvert the system, some bluntly, and some quite cleverly.

Money is power, and power corrupts.  So no system can succeed by its own design if its reins are held in the hands of mortal people, with all their weaknesses and failings.   So the system must account for this, and accommodate change and judgement as well as the balance of justice.

This was the great innovation of the US Constitution, the balance of power and its ability to change and evolve through law, with its commitment to justice and equality as an ideal, integrated into its construction, even though imperfectly by imperfect men of their time.  This is what made it such a bright star on the darkened horizon of human endeavour, a hymn to human freedom.  And look what they've done to our song.

It will be fascinating to see how this evolves. Will we see the creation of an SDR like monetary instrument based on a basket of items and currencies not under the control of a single power bloc? 

Will the world evolve into three or four powerful trading blocs, each with their own currency arrangements? Will the current dollar hegemony continue on until the collapses, and the what could have been an evolution will be a more sudden monetary revolution in which great wealth is destroyed, transferred and created anew?

We do live in interesting times.  And inescapably, these questions are now being addressed in the ongoing struggle for monetary power in what some have called the currency wars.

06 September 2013

Stalling growth of international reserves

Hugo Salinas Price

I have kept track of International Reserves (excluding gold) for many years, with data helpfully provided every week by Doug Noland, at prudentbear.com, who obtained the information from Bloomberg.

Here is the graph I have elaborated with data since 1948, when there was still a modicum of reason operating in the financial world.

Lately, I worked out a graph showing in more detail the growth of these reserves in the period from August 2005 to August 30, 2013.

I draw your attention to the slump in reserves which took place during the year 2008-2009. It was an ugly period, financially.

Then, notice the slowdown in growth of reserves during the past two years (24 months).
Finally, notice that growth in reserves has stalled in the last few months of this year. Growth appears to be topping-out. Since April 13, when reserves passed the $11 Trillion mark at $11.082 Trillion, in the four months to August 30, they have only increased by $86 billion – 0.78%

If the growth in reserves registered from August 2009 to August 2011, which averaged $1.5 Trillion yearly, had continued from August 2011 to August 2013, international reserves would now be over $13 Trillion; as it is, they are stalled at just over $11 Trillion. $2 Trillion are missing!
International reserves have two sources of growth:

1. Accumulation of Bonds (mainly Euro and Dollar Bonds) in central banks of the exporting nations, which come about due to export surpluses with which the exporters purchase bonds issued by the importing countries.
2. Accumulation of interest earned on the bonds, re-invested in bonds.

The international reserves are thus a measure of the credit which the exporters are willing and able to grant the purchasers of their exports.

If international reserves are not growing, but stalling out, this means that the exporting countries are not extending further credit, for whatever reasons, to the importing countries, mainly the US and the Euro Zone.

Born of the liberation of the world’s money from the shackles which tied it to gold under Bretton Woods, the world’s great credit-expanding machine is slowing down. $2 Trillion in international reserves have not been generated in the last 24 months. The cause must be a decline in international trade, through which enormous export surpluses of the East were sold to the West on credit, and the East received bonds for the extended credit. The market for government bonds of the West has been the eastern exporting countries, which have used their vast export surpluses to invest in western bonds.

If the exporting countries – the East – are slowing down on bond purchases, it most likely means they have less surplus left with which to purchase the bonds. Of course, they might have generated surpluses and used them to invest in the “Emerging Markets” – another name for what used to be called the Third World. Perhaps they are buying up the underdeveloped and chronically deficit-ridden Third World? That may be, but such a policy could hardly account for a $2 Trillion slow-down in growth of international reserves.

A $2 Trillion market for bonds has not materialized in the last two years; it is no wonder that the Fed has stepped in with QE to purchase the bonds which must be sold to keep the US Government in operation, not to mention to stave off utter collapse if the word were to spread that “There is no market for US and Euro Bonds at the volumes that the sellers require!”

The US and the Euro Zone are finding that they cannot float further credit in the exporting countries. This is a serious condition; the West depends on a market which will accommodate its expansion of credit – a market for its government bonds – for without that continual expansion the whole house of financial cards comes crashing down.

There appears to be no further market where the US and the Euro Zone can float their bonds. The only recourse is to monetize their government debt (QE) and that means monetary inflation.

The consequence of monetizing debt will have to be rising interest rates.

If the government debt were not monetized, US and Euro Zone bonds would have to be thrown on the world market, but – who would purchase them? Interest rates would skyrocket, even if there were possible buyers, which is doubtful.

As it is, the US can only continue to monetize government debt. Higher dollar interest rates are inevitable and will cause further government deficits; the debt overhang in both the US and Euro Zone is so great that a rise of a few points in interest rates will explode the deficits, and so on and so forth.

Bottom line: Stalling growth in International Reserves tells me that a world financial collapse is in the offing.

Please draw your own conclusions.

Rising Margin, Negative Guidance, Madness of Crowds

Early this morning one of my compadre's asked me, 'Is there some reason for this rally?'

And I answered, somewhat glibly, 'Yes, it's rally Tuesday.'

Stocks will have rallied 20 Tuesdays in a row in the US if they rally again today.

And that is as good an answer as any, although the already rallying market 'got some jets' when the Consumer Confidence number came out better than expected at 10 AM.

The Conference Board confidence number is highly correlated, as a lagging variable, to the stock market price. In other words, consumer confidence follows the market, and not the other way around.  It is less a reason for a stock rally than an excuse.   Rising stocks tend to give some people a good feeling about the economic outlook.  And don't think for a minute that the financial planners do not know this.

The underpinnings of this marvelous rally are not substantial to say the least, despite the usual assurances of economists that this is not a stock bubble. Or that there is no bond bubble which is a real howler given the Fed's steady non-market-priced buying of billions of bonds each month.   I suppose that is why the Primary Dealers had to take down 65% of today's two year auction.  Let's not notice the man behind the curtain so we can feel 'confident.'

Bubble or not, new era or not, QE or not, at some point price reverts to the mean, to the fundamental and sustainable market equilibrium, every time.  And it will do so despite the hubris of the modern monetary theorists, from Bernanke to Krugman to Mosler.   Reality is not whatever we say it is, even if one is able to persuade a large number of people to believe it, for a time.

If this falsehood is held in place long enough, even by force, the reversion will occur in extremis through a collapse of the currency.  This is what we saw in the fall of the old Soviet Union.

Here is an interview with Jim Grant that I found to be interesting.   I do find his belief in the efficiency of markets to be curious, if not obtuse, when he says that there can be no manipulation in gold because otherwise everyone would know it.

People have a remarkable ability not to see things when their paycheck depends on their not seeing it.  And a belief in the system remains stubborn amongst those who have basically honest hearts.  They cannot believe in a perfidy so great amongst people sworn to uphold the public interest. 

How else would you explain the fact that so few saw the housing bubble, the widespread fraud in the credit markets, and the mispriced risks and co-dependencies of the insolvent in the financial system that so recently caused world markets to collapse?

The release of gold into the markets by western central banks, through both overt sales and leasing to bullion banks, is beyond all doubt, except for the opaquely hidden details and the refusal to admit them to audit.  And the odd positions in the futures markets are knowable, but also shrouded behind a stonewall of regulatory intransigence. But otherwise he raises a number of excellent things to think about.

All things will be revealed with time.

And here below are two charts that someone sent my way which I found to be disconcerting.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.   Until this is done, neither stimulus nor austerity will have any lasting, meaningful, and positive effect.

Let's File This Email About Greenspan and Replicating the Gold Standard Under 'Irony'

I found this little gem, and added it to my collection of reminders that Greenspan said that fiat money 'worked' because central bankers had learned to 'replicate' the gold standard through their policy actions.  I had said 'emulate' but perhaps that was a quirk of memory.

This is from a publicly published note by Jude Wanniski titled Savings Glut.

From: Jude Wanniski < jwanniski@polyconomics.com
To: Ben.S.Bernanke@ * * * * *.GOV
Subject: Fwd: Re: Savings glut
5:44 pm, 7/21/2005

"Greenspan was plain awful in his testimony this week. But members of Congress don't know any better, so they slobber all over him. He again said we don't need a gold standard, because he has demonstrated since he came to the Fed in 1987 that the central bank could 'replicate' the gold standard.

Take a look at the dollar/gold price from 1987 until today and you will see how terrific he has been in replicating the gold standard. I can't wait for him to leave, Ben, because he now has so much invested in his Fed legacy as a Maestro that he could never admit he screwed up almost all along the way."

Wanniski sent this to Bernanke, who was at that time either on the Fed Board of Governors, or on the Council of Economic Advisors to W Bush.  I can't recall the exact date of the transition.

The note is almost a howler, given the excesses in trickle down helicopter monetization and banking subsidies that Bernanke has engaged in since becoming the Chairman of the Fed, and the manner in which he has haplessly ravaged the quality of the Fed's Balance Sheet, while accomplishing little except extending the unsustainable status quo.  The Fed's performance as a major banking regulator has been almost pathological.

And I also like this note because it helps to dispel the myth that the Fed does not watch and worry about the price of gold, which we have known about for quite some time. It is tied to their aspirations on interest rates, through the management of market perception. Larry Summers wrote about this relationship in Gibson's Paradox.

Well, nothing has changed, the irresponsibles are still in charge, and they are being defended by their economic partisans while they degrade the national currency to support the looting of the system by their cronies from Wall Street and the Banks. 

The idea that stuffing the one percent's already swollen pockets with even more hot money will stimulate the economy would be funny if it was not having such tragic consequences, with even worse to come.

My only regret is that I wasted so much time trying to raise these concerns on economic chat sites with establishment economists who clearly did not wish to hear or see anything but the party line.  This is about when Brad DeLong, in explaining why he had to censor my concerns about Greenspan's monetary policy and the growing credit bubble said, "Greenspan never made a policy decision with which I disagreed."  Well Brad, how did that work out in retrospect? 

And as bad as the neo-Keynesians may be, the Chicago-Columbia austerity crowd are even worse.  Economics is a generally disgraced profession with only a few bright lights.

The stock, bond, and commodity markets are a joke. The Banking System resembles a control fraud.

The manipulation of the metals, equity, and credit markets is approaching a financial war crime, it is so contemptible. Although I am sure it will have its bureaucratic defenders.

At long last, they have no shame.

Another crisis is coming.  They know it is coming, and are attempting to cover it up while they make themselves and their patrons comfortable.  They are trying to stifle all alarms and indicators to the contrary.

The market is whatever we say it is, indeed.  And this time it will be worse.

I am sorry to speak so bluntly.  I keep trying to maintain some optimism, but these jokers are barking at the moon.  This disconnect between reality and the official story is becoming almost unbelievable.